C(C)CTB: Corporate taxation in the limelight

 

On Tuesday (25.10), the Commission released its proposal for revamping the corporate tax system within the EU. With its idea of creating a Common Consolidated Corporate Tax Base (CCCTB), the Commission hopes to not only crack down on tax avoidance and tax evasion, but also to create a more just and efficient tax system.

One of the biggest deficiencies of the current corporate tax system is that the various branches of multinational corporations (MNCs) are treated as separate entities by national tax authorities, a set-up that facilitates shifting profits to low tax jurisdictions. The Commission’s CCCTB proposal wants to curtail this practice by suggesting to look at MNCs for what they are: one entity. The basis for taxation would then be the global profits of enterprises instead of the profits of their national subsidiaries. The taxable base of each jurisdiction would then be more closely related to the real economic activity of an enterprise within its borders.

This approach is known as unitary taxation (UT) with formulary apportionment. Besides it granting the right to tax to those countries where the actual consumption and production activities take place and its potential to limit profit shifting, its proponents claim that it could also greatly reduce the current complexity of the international tax system. The success of a UT system, however, crucially depends on its details.

In this respect, it should be noticed that the CCCTB will not solve the problems of transfer mispricing globally: it simply seeks to address it within the European Union. As the proposals are limited to operations of EU taxpayers in the EU, much of the current problematic system of corporate taxation will remain existent –in the interaction of EU companies with third countries.

Discussing the Commission’s proposal, which in a first step aims at creating a harmonised common corporate tax base within the EU before introducing, in a second step, EU-wide consolidation, on Tuesday, 25 October, MEPs of GUE/NGL pointed to several worrying provisions that need to be addressed.

Irish GUE/NGL MEP and member of the Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion (PANA) Matt Carthy said:

“Tax avoidance is one of the great global injustices of our time and it flows from the limitations of the arms-length principle.”

“But in order for unitary taxation to work as an effective solution it needs to be global. Under this proposal, much of the current system will remain intact. It won’t solve the problem of international transfer pricing, or of profit-shifting to offshore centres. The race to the bottom of corporate tax rates in the EU may intensify if the only tax tool remaining to state governments to adjust is the headline corporate tax rate. Loss offsetting across borders will actually reduce the overall corporate taxation base in the EU.”

Carthy’s concerns were seconded by GUE/NGL MEP Fabio De Masi, Vice-President of PANA. “With its proposal to create a CCCTB the Commission does not yet create tax justice. Rather, the proposal threatens to decrease the tax base even further and to intensify tax competition. On top of that, a CCCTB without the second C for consolidation allows for loss offsetting without apportionment of profits. We shouldn’t have one without the other,” stated De Masi. He also spells out his views more thoroughly in an op-ed with Euractiv (in German).

Similar concerns about tax justice were raised by GUE/NGL MEP Marisa Matias, coordinator on the Committee on Economic and Monetary Affairs (ECON). “The Commission is making this huge propaganda operation telling people that CCCTB is good for Europe. But what they don’t tell us is that by Europe they only mean European corporations – not the citizens. What we need is a CCCTB that puts citizens’ interests above corporate ones,” argued Matias.

The Commission’s proposal for a CCTB and CCCTB can be found here and here, respectively. Below are some of the key points from the proposals, complemented by a critical analysis. For a more in-depth briefing on the two proposals, click here.

  • It’s mandatory for corporate groups with a yearly turnover of more than € 750 million. Smaller groups can opt in. This threshold, which is the same as the criticised threshold for complying with Country-by-Country reporting, can be used for tax avoidance.
  • An entity is considered part of a group if the group either has above 50 % of the voting rights, owns 75 % of the capital or receives 75 % of the profits. Therefore, there is still potential for tax planning between factually related companies as the definition of corporate groups is very narrow. A company can receive just under 75% of profits from a subsidiary or hold 49% of voting rights without that subsidiary being counted as part of the group.
  • Tax rates are set by Member States and there is no minimum rate, allowing the race to the bottom of corporate tax rates in the EU to continue.
  • The proposal includes an R&D super deduction to incentivise investment (and replace patent boxes). It allows for the full deduction of R&D costs, plus on top of that an extra 50 % deduction for R&D costs below € 20 million and a 25 % deduction for costs above € 20 million. This means that, for example, € 30 million of R&D costs would lead to a € 42.5 million deduction.
  • The CCTB proposal allows for loss offsetting across borders. A negative tax base is ruled out and future profits of the loss making entity have to be added back to the tax base to the same amount as previously deducted.
  • The “Allowance for growth and investment” aims at levelling the playing field in tax matters between debt and equity by granting more generous tax deductions for equity. Even when this allowance is better than the notorious Belgian notional interest deduction scheme; it tries to rebalance the debt-equity bias by providing more advantages to equity instead of reducing those attributed to debt financing.
  • Despite the CCTB setting harmonised rules for tax accounting for large EU businesses, there is still a risk of accounting arbitrage due to national transposition and the interplay with different rules for smaller companies as well as those outside the EU.[1]

[1] See Richard Murphy’s comments on CC(C)TB.