Assessing the impact of the CC(C)TB

GUE/NGL MEPs who are members of the European Parliament’s PANA Committee – Fabio de Masi (PANA Vice-president until October 2017), Matt Carthy (GUE/NGL co-coordinator in the PANA Committee),  Patrick Le Hyaric (GUE/NGL co-coordinator in the PANA Committee), Miguel Urban Crespo (GUE/NGL’s shadow rapporteur in the PANA Committee), Miguel Viegas, Marina Albiol, Stelios Kouloglou and Takis Hadgigeorgiou – have commissioned a new study (GUENGL TJN – Assessing the impact of the CCCTB).

The study is entitled: ‘Assessing the impact of the CC(C)TB: European tax base shifts under a range of policy scenarios’, and it was written by Alex Cobham, Petr Janský, Chris Jones and Yama Temouri (Tax Justice Network)

The study analyses the impact of the European Commission CCTB and CCCTB proposals that are currently being discussed in the European Parliament and will be voted on in the ECON Committee February next year.

The CCCTB proposal is an application of a unitary taxation approach with formulary apportionment in the European Union.

The Unitary Taxation approach

A unitary approach treats the multinational group itself as a profit-maximising unit, and the group’s profits as the tax base to then be allocated between jurisdictions.

Separate accounting, in contrast, rests on a treatment of individual entities within a multinational group. Based on this separate entity criterion, countries have been applying the so-called arm’s length principle (ALP) for the pricing of transactions between related parties. The ALP stipulates that contracts between related parties should be comparable to contracts between independent parties.

The underlying problem of the ALP is that related and unrelated parties are simply not comparable when it comes to the negotiation of contracts. Both prices and conditions of contracts are internally determined and are never the result of an independent negotiation.

This results, as expressed in GUE/NGL’s study, in profit-shifting amounting in total to a material distortion to global economic accounts in the order of 5% or more.

Tax administrations cannot effectively tackle multinationals’ tax avoidance because of the complexity of the system and their relative lack of resources. International reform efforts, mainly in and around the OECD/G20 BEPS Action Plan, have recognised some of the weaknesses and the extent of profit shifting and base erosion taking place today, but have not moved beyond the ALP.

The European Commission has proposed a Common Consolidated Corporate Tax Base (CCCTB), and a first step without full consolidation (the CCTB). For more information, click here.

The Commission’s proposal lays out a two-stage process. Stage one endeavours to establish a common corporate tax base (CCTB) across the EU. The second stage aims at introducing a common consolidated corporate tax base (CCCTB) at EU level. The CCCTB will be negotiated as soon as the CCTB is politically agreed in the Council.

This paper presents a new analysis of the likely impact on EU member states’ multinational corporate tax bases, for a range of scenarios. For such reasons, its results are of particular relevance in the context of the current negotiations in the European Parliament.

The CCTB and CCCTB proposals (For an in-depth briefing on the two proposals, click here)

Due to limitations in the information currently available, not all aspects of the CCTB and CCCTB proposals can be addressed in a study of this type. Some of the issues that were addressed by this study are:

Treatment of losses (Chapter V of the CCTB):

  • Losses in a given year can be carried forward indefinitely to subsequent years unless the taxpayer is bought up by another company or changes substantially its activities. Losses cannot be carried back.
  • Losses carried forward cannot lead to a negative tax base. When carrying losses forward, the oldest losses are always considered first.
  • Losses from immediate subsidiaries or permanent establishments (PEs) can be offset at parent level cross-border. As soon as the subsidiary of a PE subsequently makes profits, those are also attributed to the parent. If no profits are made within 5 years or the subsidiary is sold or wound up, hitherto deducted losses are added again to the parent’s tax liability.

Consolidation and apportionment:         

The CCCTB proposal uses rules laid down in the CCTB and adds consolidation and apportionment of profits across member states where a group operates. Intra-group transactions are ignored for consolidation purposes.

  • The apportionment formula consists of three equally weighted factors: assets, labour and sales. Each comprise one third in the apportionment formula. An alternative apportionment method can be used in exceptional circumstances and if all involved member state (MS) authorities agree.
    • The labour share is equally subdivided into headcount and payroll.
    • The asset share only comprises tangible assets and excludes intangibles and financial assets.
    • The sales share is based on the destination of sales. If sales are made in a MS or third country without group member, the respective shared is split among all other group members according to their respective asset and labour shares.
  • Consolidated losses are not apportioned but set off against future consolidated profits.

Main results of GUE/NGL’s study:

The main findings of GUE/NGL’s impact assessment on the CCCTB are:

1) Unreliable data: Any impact assessment conducted today can only be based on unreliable data. The dominance of EU entities in the Orbis database makes it difficult to observe the impact of the aggressive profit-shifting of US multinationals. Collating the data using country by country reporting would allow a precise analysis of the impacts of the CCCTB and CCTB proposals. However, this data is not ready yet; going ahead with the CCCTB and CCTB proposals without such analysis would be deeply irresponsible.

2) Inevitable losses for EU tax havens: Major EU profit-shifting jurisdictions such as Luxembourg, Ireland and The Netherlands would inevitably experience revenue losses due to the unwinding of their deliberately engineered positions (the three countries exhibit very low average effective tax rates of 1.9 and 1.6 % in comparison with the other countries’ 26.8 and 13.4 % according to the two main sets of data sources respectively). The CCCTB would result in a very substantial redistribution of tax base among member states – at the expense of those members positioned aggressively as profit-shifting hubs.

3) Huge tax base reduction due to loss consolidation: The European Commission’s proposal allows for cross-border transfer of losses. The study shows that this could lead to a potentially dramatic reduction in tax base across the EU as a whole – especially if this is done separately from the introduction of a unitary approach, or if consolidation is not envisaged at the global level but rather at EU level (since the latter would leave profit-shifting out of the EU untouched). The simulation results suggest that the sum of positive profits would decrease by 21% as a consequence of the loss consolidation. For some countries, including Austria, the Netherlands and Luxembourg, the estimations suggest that the decrease in the corporate tax base due to the loss consolidation would be in the region of 50%. International loss consolidation facilitated by a global switch to unitary taxation would reduce the overall tax base by around 12%.

4) Need for a worldwide approach: An application of a unitary approach at an EU level only (as is the proposal of the European Commission) would overlook the extent of profit shifting out of the EU, and could lock in unnecessary revenue losses. It could lock in any current EU member losses to the rest of the world; or it could contribute to continuing the current exploitation of the rest of the world by some other member states, such as the three misalignment jurisdictions of Ireland, Luxembourg and The Netherlands. Extending the approach to a worldwide one through full-inclusion controlled foreign corporation (CFC) rules appears to offer the best prospect for revenue-positive, welfare-enhancing reform.

5) Choice of apportionment formula: The European Commission’s proposal uses a formula based on sales, capital and employment. The tax bases of Germany, Spain, United Kingdom and Italy would all increase by around 10-20% (when compared to the tax base after the consolidation of profit and losses), but also that of The Netherlands and Ireland (17% and 1%, respectively) if their tax bases were apportioned according to the three-way CCCTB formula. While when applying a formula based on sales and employment, big EU corporate tax havens such as Ireland, The Netherlands and Luxembourg would see their tax base reduced. Therefore, results of the study show that adopting a formula for profit apportionment based on sales and employment seems preferable.

On the recent vote in the PANA Inquiry Committee

Some of these concerns have already been included in the draft recommendations of the PANA Inquiry Committee voted in the Committee on October 18, 2017:

  1. Stresses that for unitary taxation to work as a means to end profit-shifting it needs to be global, and that implementing the CCCTB at an EU level runs the risk that current losses from EU members to the rest of world could be locked in, as could the exploitation of the rest of the world by some Member States; notes that an EU-only approach could eliminate the incentives to shift profit within the EU, but exacerbate the incentives and opportunity to shift profit out of the EU;
  2. Believes that in proceeding with the CCTB and CCCTB proposals, it is vital that the accounting base is consistent in calculating the tax base within a group – otherwise accounting arbitrage will just replace existing tax tricks;
  3. Stresses the importance of strengthening the anti-tax avoidance provisions of the CCCTB to eliminate transfer pricing to third country jurisdictions leading to a reduction in the taxable base of companies in the Union;

However, the adoption of the PANA report still awaits the Plenary vote in December, when the support of other progressive political groups will be needed. The inclusion of such paragraphs in the PANA report will be useful for the negotiations of the CCTB and CCCTB that are currently being held in the European Parliament.

See Alex Cobham’s video on the CCCTB impact assessment study.