EU Commission's corporate tax package

The EU Commission has released a further package of measures in relation to corporate taxes in the EU, including a re-launched CCCTB proposal, a proposed dispute resolution mechanism for double taxation disputes and a proposed extension of the hybrid mismatch rules to mismatches with non-EU countries.

As tax measures, each of these measures will require unanimous approval from all Member States to be adopted. At this stage, it is unclear whether the revised CCCTB proposal will be universally welcomed by Member States and, if not, whether there will be sufficient support to progress the measures through the use of the enhanced cooperation procedure. The CCCTB proposals are wide-ranging and prescriptive and, as such, much negotiation of the detail can be expected before any consensus is achieved.

Background

The EU Commission’s 2015 Action Plan on corporate taxation envisaged a relaunch of proposals to introduce a mandatory common consolidated corporate tax base (CCCTB) within the EU and this was followed by a public consultation on the proposals. The Commission proposed to take forward the CCCTB in two steps: the first involving agreeing the common corporate tax base provisions; and the second will add the elements dealing with tax consolidation for corporate groups. In addition, the Commission changed the focus and rationale of the proposal from one largely based on administrative simplification to one based on the need to address aggressive tax avoidance.

The Commission’s October 2016 announcements take forward these proposals together with further measures addressing hybrid arrangements and dispute resolution for treaty disputes.

CCCTB

The CCCTB is intended to provide a harmonised system to calculate companies' taxable profits in the EU. It will, if implemented, provide one set of rules for companies to determine their tax base, rather than multiple national ones. Ultimately, it will enable businesses to file a single tax return for all of their EU activities. Companies in the CCCTB system will also be able to offset losses in one Member State against profits in another. Corporate tax rates are not covered by the CCCTB, as these remain an area of national sovereignty.  It is proposed that the CCCTB will be mandatory for large multinational groups which with global revenues exceeding  €750m a year.

However, recognising that the original 2011 proposals for a CCCTB would not be implemented in one step, the re-launched CCCTB is split into two proposals which can be implemented in two stages. The first stage requires Member States to agree on the CCTB base first, before working on the more complex consolidation aspect as the second stage.

The Commission’s proposal for the CCTB puts forward a mandatory common corporate tax base for EU companies (including PEs in EU Member States) belonging to a group with consolidated group revenue exceeding  €750m a year. There is a voluntary opt in for other companies. The proposal is for a very broad tax base taxing all revenues unless expressly exempted, such as dividends/gains from qualifying participations of 10% or more. Super-deductions would be allowed for certain Research and  Development (R&D) expenditure.

One of the most interesting aspects of the CCTB proposal is an “allowance for growth and investment” (AGI). This allowance, based on a notional yield on its equity base, is designed to redress the balance between equity and debt financing.

The CCTB proposal envisages that Member States should transpose the CCTB Directive into domestic law by 31 December 2018 with the provisions becoming effective from 01 January 2019.

The second stage is dealt with by the Commission’s proposals for full consolidation of EU group entities. The group definition for consolidation would be based on (i) control (more than 50% of voting rights) and (ii) ownership or rights to profits (more than 75% of equity/profits). Full consolidation of groups would entail consolidation of income, gains and losses across the group and also ignoring intra-group transactions.

Consolidation would result in a net profit or loss for the entire EU group,  based on the rules in the CCTB. The group would deal with one tax authority in the EU where the parent of the group is based, using a single tax return.  Once the tax base of the group has been established, the group’s taxable profits will be shared out between the Member States in which the group is active using an apportionment formula (based on location of labour, assets and sales). Each Member State would then tax their share of the group’s profits at their own national rate.

The CCCTB proposal envisages that Member States should transpose the CCCTB Directive into domestic law by 31 December 2020 with the provisions becoming effective from 01 January 2021.

Hybrid mismatches with third countries

This proposal seeks to extend the provisions of the Anti-Tax Avoidance Directive dealing with hybrid mismatches to hybrid mismatches with third countries by including rules to determine which of the two jurisdictions concerned should deny the deduction or (as appropriate) tax the corresponding income. It is envisaged that the provisions should become applicable from 01 January 2019.

Dispute resolution directive

The proposed Council Directive on Double Taxation Dispute Resolution Mechanisms in the EU seeks to lay down rules to resolve disputes between Member States on how to eliminate double taxation of income from business and the rights of taxpayers in this context.

The proposed Directive provides for the elimination of double taxation by agreement between the Member States including, if necessary, by reference to the opinion of an independent advisory body. It builds on the existing Transfer pricing and the Arbitration Convention, which already provides for a mandatory binding arbitration mechanism, but broadens the scope to areas which are not currently covered and adds targeted features to address the main shortcomings identified, such as enhancing enforceability and effectiveness of this mechanism.

It is envisaged that Member States should give effect to the proposed Directive by 31 December 2017.