DISCUSSIONS have been going on for many years within the EU about the possibility of introducing one tax system for companies which would apply across the whole of the Union. The UK is less than keen on the latest proposals to come out of Brussels.
The system – referred to as the Common Consolidated Corporate Tax Base or CCCTB – will, as the name suggests, be common to all member states. Instead of each country determining the profits of subsidiaries in its jurisdiction on a standalone basis, profits from EU operations of a multinational would be calculated on a consolidated basis. The tax basis so found is then split between the countries where the group operates according to a formula which would give equal weighting to the location of the physical asset and the location of customers and employees (calculated by number and salary cost).
The EU Commission has always been clear that CCCTB does not involve harmonisation of tax rates. Each member state is free to tax their portion of the consolidated profit at whatever rate they chose.
Proponents of the system say it will simplify compliance for companies and make it easier for small and medium sized businesses to expand abroad: instead of having to apply up to 28 different regimes they would only have to apply one. The EU Commission has even estimated it could save groups up to €700m (£499m) per year in compliance costs.
For governments a CCCTB can have a number of benefits. It would stop groups artificially moving profits from one member state to another to take advantage of the lower tax rates, and it would stop structures designed to take advantage of mismatches in different laws – for example by creating hybrid instruments or double deductions. It would also stop member states using preferential regimes to lure away the tax base of other countries. It would not though stop states competing on tax rates so as to attract real economic activity; indeed it has been suggested it may increase such competition as the effective tax cost of doing business in any one country would become much more transparent as the base to which the statutory rate was applied would be the same.
However, the big disadvantage for governments is they would lose the ability to change the corporate tax regime as they wanted, to provide incentives or to respond to commercial developments and business models. A number of countries, the UK included, therefore have refused to support the proposals and the last round of negotiations stalled in 2011.
Resurrecting the CCCTB
Why then has CCCTB been resurrected and why now? There are a number of reasons but the main driver is within the EU Commission and EU Parliament who see it as a way of preventing tax avoidance and unfair tax competition. This is against the background of the ongoing OECD project on Base Erosion and Profits Shifting (BEPS).
While much work has been done to update transfer pricing rules to make them more effective and there has been a work stream on preferential regimes (notably patent and intellectual property regimes) and unfair tax competition, many commentators believe BEPS has not gone far enough and will not solve the most deep rooted problems. Hence when the EU Commission launched its Action Plan in June it stated that the long term goal was a CCCTB.
There are however two big differences in comparison with the original proposals. It is proposed first to introduce a CCTB; the C that is missing is “consolidated”. The idea is all countries should adopt common tax rules but still tax individual companies within their territories. Therefore there is no need to argue about allocation keys to split a consolidated tax base. This would be a first step and once everyone has got used to it the next stage would be consolidation.
The second change is the CCTB is to be mandatory to avoid companies choosing to elect in or out depending on how it would affect their tax profile.
Some of the multinationals I speak to say they would be happy with CCCTB, or even a unitary tax system applied globally if it could be made to work. They could just pay one cheque and tax authorities could then argue how to split it. The problem is it will take 28 member states to agree it and there is the difficulty of agreeing the formula to split the consolidated profits. The problem multiplies if you try to introduce it on a global basis.
A CCTB avoids the need for formulary apportionment but the downside for corporates is the system would not remove the need for transfer pricing rules or stop countries arguing over their share of the tax pie, so leaving the possibility of disputes and double taxation. Furthermore, countries like the UK are even less likely to accept a mandatory system.
In short therefore, a CCCTB or even a CCTB has some attraction – on paper – but faces many hurdles. We are unlikely to see either implemented in the short or medium term.
Chris Morgan is head of tax policy at KPMG in the UK