The EU Corporate reform package (II) – Introduction to the CCCTB

On October 2016, the EU published its corporate reform package proposal. The following is the second of a series of articles aimed at taking a closer look at the some of the more salient features of this project and will review the most relevant aspect of the Common Consolidated Corporate Tax Base (CCCTB) project.

After having summarised in our previous article some of the key aspects of the CCTB (Common Corporate Tax Base) Proposal for a Council Directive, we will presently have a look at the CCCTB (Common Consolidated Corporate Tax Base) Proposal for a Council Directive. This second proposal covers both the consolidation of individual tax bases and the mechanism for allocating such consolidated tax base to the respective Member States (formulary apportionment). It is worth noting that the Commission intends, very ambitiously, for this second tier of the CCCTB package to enter into force as from January 2021. Moreover, this proposal will obviously have a major budgetary impact on Member States and important administrative consequences for taxpayers.

Consolidation

Consolidation is effectively the cornerstone of the EU proposal. It should provide for automatic cross-border offsetting of income and losses across the companies of the group, elimination of intragroup transactions and substantial relief from transfer pricing constraints.
Taxpayers which are within the mandatory scope of the CCTB proposal would also be required to automatically “upgrade” to the CCCTB when the provisions come into force. Note that all the companies fulfilling the requirements to be part of the group would be included within the scope of the CCCTB (“all in or all out” proviso).

Very generally, consolidation would therefore only be mandatory for large groups and would be effectively limited to EU-resident companies and PEs situated in the EU. A group may be defined by reference to its non-EU resident companies, but only their EU PEs would be included in group for CCCTB purposes. Groups which do not meet the size threshold may apply CCTB rules and would be allowed to opt in or out of the CCCTB rules. Group subsidiaries (direct or indirect) are defined by reference to control (broadly speaking, 50% of voting rights, and a 75% holding over capital or profits).

The consolidated tax base is then calculated by aggregation of all the tax bases of the group companies, determined in accordance with CCTB rules. As mentioned, intragroup transactions are eliminated from the consolidated tax base. Should this aggregation exercise result in a positive tax base, it will allocated to the competent Member States on the basis of the formulary apportionment provisions, described further below. A negative consolidated tax base, on the other hand, may be carried forward and set off against the next positive consolidated tax base, although carry-back is not permitted. Additionally, specific rules are provided to address pre-consolidation tax losses.

Formulary apportionment

The CCCTB Directive proposal provides for the consolidated tax base to then be shared between the different group companies on the basis of a fixed formula. The portion allocated to each group company would then be taxed at the national rate applicable in the state of residence of such group company.

Apportionment is carried out on the basis of three equally-weighed factors: labour, assets and sales. The labour factor has been defined with reference to both payroll and employee headcount, so as to allow for different wage levels to also be factored-in. As with the 2011 proposal, the asset factor would only take into account tangible assets, since the allocation of both intangible and financial assets seems to be too prone to abuse. In the case of intangible assets, moreover, valuation may also be seen as easily controversial. Finally, the sales factor would seem to be designed to achieve a certain “balance” in comparison with the effect of the asset and employee factors, since sales would be aimed at apportioning results at destination rather than at origin.

The principle guiding this apportionment formula is to establish a corporate tax system favouring taxation in the jurisdiction where value is created. With this objective in “mind”, the proposal includes a safeguard clause whereby, should the results of the apportionment formula not lead to a fair representation of where the profits are generated, the taxpayer or even the tax authorities may request an alternative method. This clause, however, will be difficult to enforce in practice, since consent of all the Member States involved would be needed.

One-Stop Shop

The Proposal has attempted to address the administrative burden which multinational groups must currently face and provides, as a general rule, for the group to deal only with the tax authorities from the State of residence of its ultimate EU parent (known as the “Principal Taxpayer”). The CCCTB tax return would then be filed in such State, within 9 months following the end of the tax year. Such tax return, together with any supporting documentation, should then be accessible to tax authorities from other competent Member States.

Final comments

The CCCTB proposal is undoubtedly a very ambitious project. However, given the need for unanimity for its approval and the significant practical difficulties for reaching such a consensus within the EU, final approval is far from being guaranteed. The EU seems to rely on the current backdrop of economic difficulties, sluggish growth and concern as to what is seen as overly aggressive tax planning to create a context in which would facilitate such approval. Whether this will be sufficient to raise Member States’ appetite for this overhaul to their national systems remains to be seen.