Commission proposes major corporate tax reform for the EU

Strasbourg, 25 October 2016

The Commission has yesterday announced plans to overhaul the way in which companies are taxed in the Single Market, delivering a growth-friendly and fair corporate tax system.

The objective of the Common Consolidated Corporate Tax Base [CCTB] is to provide a unified platform for taxation of companies operating within the EU thereby simplifying cross border taxation and acting as a strong deterrent against tax avoidance.

The CCTB was first tabled in 2011 but Member States where unable to reach a final agreement and after a period of consultation with principal stake holders, this revised version seeks to address areas of contention by focusing on the facilitation of cross border business, the reduction of red tape and the creation of a level playing field for multi-nationals by reducing opportunities for tax avoidance.

Two additional proposals will focus on methods that are designed to improve the system for resolving disputes on double taxation between EU member states and to further reinforce anti-abuse provisions.

Vice President Vladis Dombrovskis said “Tax policy should support the EU’s goals of economic growth and social justice. Today’s proposals aim to boost growth and investment, support enterprise and ensure fairness. The current corporate tax system treats debt financing of companies more favourably than equity financing. Reducing this debt-equity bias in the tax system is an important element of the Capital Markets Union Action Plan and underlines our commitment to deliver on this project.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said “With the rebooted CCCTB proposal, we’re addressing the concerns of both businesses and citizens in one fell swoop. The many conversations I’ve had as Taxation Commissioner have made it crystal-clear to me that companies need simpler tax rules within the EU. At the same time, we need to drive forward our fight against tax avoidance, which is delivering real change. Finance Ministers should look at this ambitious and timely package with a fresh pair of eyes because it will create a robust tax system fit for the 21st century.”

In order to facilitate adoption by the various member states the CCTB has been broken down into two phases. The first phase will be the adoption of the common tax base with consolidation introduced soon afterwards.

1. The Common Consolidated Corporate Tax Base (CCCTB) 

With the CCCTB, companies across the EU shall, for the first time have a single rulebook for calculating their taxable profits. The new corporate taxation system will:

  • Be mandatory for large multinational groups which have the greatest capacity for aggressive tax planning, making certain that companies with global revenues exceeding EUR 750 million a year will be taxed where they really make their profits.
  • Tackle loopholes currently associated with profit-shifting for tax purposes.
  • Encourage companies to finance their activities through equity and by tapping into markets rather than turning to debt.
  • Support innovation through tax incentives for Research and Development (R&D) activities which are linked to real economic activity.

The CCTB does not include the imposition of a common, corporate tax rate which shall remain an area of national sovereignty. However, the CCCTB will create a more transparent, efficient and fair system for calculating the tax base of companies operating within multiple member states which will substantially reform corporate taxation throughout the EU.

The CCTB will facilitate interpretation and application of the Rules
Companies will now be able to use a single set of rules and work with their domestic tax administration to file one tax return which will cover all their EU activities. CCTB is expected to reduce the time and cost spent on compliance with multiple rules as well as significantly reducing the costs for a company to establish a subsidiary in another jurisdiction. This should make it easier for companies, including SMEs, to set up in other member states.

R&D investment and equity financing will be incentivised, supporting the wider objectives of reviving growth, jobs and investment. Once fully operational, the CCCTB is expected to raise total investment in the EU by up to 3.4%.

Companies will also be able to offset profits realised in one member state against losses in another. Tax obstacles such as double taxation will be removed and the CCCTB will increase tax certainty by providing a stable, transparent EU-wide system for corporate taxation.

The CCCTB will help to combat tax avoidance

The CCCTB will eliminate mismatches between national systems which aggressive tax planners currently exploit. It will also remove transfer pricing and preferential regimes, which are primary vehicles for tax avoidance today. It also contains robust anti-abuse measures, to stop companies shifting profits to non-EU countries. CCCTB will be mandatory for the biggest multinational groups operating in the EU which are those most at risk of aggressive tax planning.

The CCCTB will support growth, jobs and investment in the EU

The CCCTB will provide simple, clear rules allowing for a fair and level-playing field, reducing tax administration costs. This will make the EU more attractive and is expected to stimulate growth and investment. The re-launched CCCTB will also support R&D, a key driver of growth. Companies will be allowed a super-deduction on their R&D costs, which will particularly benefit young and innovative companies which choose to opt-in to the new system.

Finally, the CCCTB will take steps to address the bias in the tax system towards debt over equity, by providing an allowance for equity issuance. A set rate, composed of a risk-free interest rate and a risk premium, of new company equity will become tax deductible each year. Under current market conditions, the rate would be 2.7%. This will encourage companies to seek more stable sources of financing and to tap capital markets, in line with the goals of the Capital Market Union. It would also provide benefits in terms of financial stability, as companies with a stronger capital base would be less vulnerable to shocks.

2. Resolving Double Taxation Disputes

The Commission has also proposed an improved system to resolve double taxation disputes in the EU. Double taxation is a major obstacle for businesses, creating uncertainty, unnecessary costs and cash-flow problems. There are currently around 900 double taxation disputes in the EU today, estimated to be worth €10.5 billion. The Commission has proposed that current dispute resolution mechanisms should be adjusted to better meet the needs of businesses. In particular, a wider range of cases will be covered and Member States will have clear deadlines to agree on a binding solution to double taxation.

3. Addressing Mismatches with non-EU Countries

The third proposal contains new measures to stop companies from exploiting loopholes, known as hybrid mismatches, between Member States’ and non-EU countries’ tax systems to escape taxation. Hybrid mismatches occur when countries have different rules for taxing certain income or entities. Companies can abuse this to avoid being taxed in either country. The Anti-Tax Avoidance Directive, agreed in July, already addresses mismatches within the EU. Today’s proposal completes the picture by tackling mismatches with non-EU countries and is being made at the request of the Member States themselves.

The Package also contains a Chapeau Communication, outlining the political and economic rationale behind the proposals, as well as impact assessments on the CCCTB and the dispute resolution mechanism.

These legislative proposals will now be submitted to the European Parliament for consultation and to the Council for adoption.

For more information contact Nicky Gouder Tax Partner at Capstone Group.