Last reviewed 17 June 2011
Henrietta Clarke reports
A common system for calculating the tax base of businesses operating in the EU has been proposed by the European Commission. It believes that the only systematic way to address the underlying tax obstacles which exist for companies operating in more than one Member State in the Single Market is to provide companies with a consolidated corporate tax base for their EU-wide activities.
The Common Consolidated Corporate Tax Base (CCCTB) would make it easier, cheaper and more convenient to do business in the EU. It is a single set of rules that companies operating in the EU could use to calculate their taxable profits. So, a company or group of companies would have to comply with just one EU system for computing its taxable income, rather than different rules in each Member State in which it operates. Companies active in more than one EU Member State would only have to file a single tax return for the whole of their activity in the EU.
Reducing the burden and costs for businesses
The aim is significantly to reduce the administrative burden, compliance costs and legal uncertainties that businesses in the EU currently face in having to comply with up to 27 different national systems for determining their taxable profits and filing returns with the tax authorities in each Member State in which they are active. They are also faced with a very complex system for determining how intra-group transactions should be taxed (transfer pricing) and cannot offset their losses in one Member State against profits in another.
So, larger businesses are faced with huge costs and complexities while smaller companies are often put off from expanding beyond their domestic market.
The Commission estimates that the CCCTB will save businesses across the EU €700 million in reduced compliance costs and €1.3 billion through consolidation (allowing businesses to offset losses in one Member State against profits elsewhere in the EU for tax purposes). Businesses looking to expand cross-border would benefit from up to €1 billion in savings.
Currently it costs a large company over €140,000 in tax-related expenditure alone to open a new subsidiary in another Member State. The CCCTB will reduce these costs by 62%. Medium-sized companies stand to gain even more with their average tax-related costs of expanding within the EU dropping from €127,000 to €42,000, a decrease of 67%. If even just 5% of small and medium-sized businesses decided to expand on this basis, overall savings would be of the order of €1 billion.
The CCCTB would make the EU a more attractive market for foreign investors and would be good for the EU’s global competitiveness. The overall aim is to remove obstacles to the Single Market and stimulate growth and job creation within the EU. According to a KPMG study in 2007, 80% of businesses came out in support of the CCCTB.
Corporate tax rates
Member States would maintain their full sovereign right to set their own corporate tax rate. The CCTB will, however, create more transparency with regards to the effective corporate tax situation in Member States, thus creating fairer tax competition in the EU.
The CCCTB would be optional for companies. Those that felt they would benefit from a harmonised EU system could opt in, but companies could also choose to continue working with their national systems. Companies that have no intention of expanding beyond their national borders will therefore not have to shift needlessly to a new tax system. Companies that do opt in would have to do so for a minimum of five years.
How the CCCTB works
The CCCTB would offer companies one single set of corporate tax base rules to follow and the possibility of filing a single, consolidated tax return with one administration for their entire activity within the EU. The single consolidated tax return would be used to establish the tax base of the company (the amount of a company’s profit that will be taxed) after which all Member States in which the company is active would be entitled to tax a certain portion of that base, according to a specific formula based on three equally weighted factors: assets, labour and sales.
This would all be done through the tax authorities of the company’s principal Member State. Member States would tax their share of the company’s tax base at their own corporate tax rate. They would continue to set their corporate tax rate at the level they choose.
Clear procedural rules are set out in the proposal on how companies should opt in to the CCCTB, how they should submit their tax returns, how the relevant forms should be harmonised and how audits should be co-ordinated. The tax authorities of the company’s principal Member State would be responsible for co-ordinating the appropriate checks and follow up on the return.
Consolidation is an important aspect of the CCCTB because it means that a company’s cross-border activity within the EU can be recognised. At present a group can add the profits of one subsidiary in Member State A to the losses of another subsidiary in the same Member State A to arrive at a net profit or loss. However, the same group cannot take into account losses it may accrue in another Member State B.
This means that even if the group’s losses in one Member State are bigger than its profits elsewhere in the EU (ie there was a net loss), it would still have to pay tax in the Member States where any profits were made. There is no cross-border loss relief.
Under the CCCTB the group could add its profits and losses from all subsidiaries in the EU together to reach a net figure. Tax would then be paid on the group’s net profit for the whole of the EU.
The apportionment formula and depreciation
Once the company’s tax base is determined, it will then be apportioned to all Member States in which the company is active on the basis of a fixed apportionment formula. The formula is based on the following three factors.
Assets: all fixed tangible assets, including buildings, aircraft and machinery will be covered. The costs incurred for R&D, marketing and advertising in the six years prior to a company entering the CCCTB will also be included as a proxy for intangible assets for five years.
Labour: 50% payroll costs and 50% the number of employees.
Sales: this will be calculated on the basis of where the goods are dispatched to or destined for. For services, this will be where the service is physically carried out.
Depreciation (the declining value of an asset over time) is taken into account as a deduction for tax purposes. There are different depreciation rules in each Member State, some spread out the deduction over a longer period such as 5% over 20 years, while others condense the deductions into a shorter space of time such as 20% over 5 years.
The aim is to spread the costs of assets over the appropriate number of years and not distort the profits. There will be one set of depreciation rules laid down within the CCCTB which is 25% over 4 years for companies that opt in. For companies outside the CCCTB, national rules will continue to apply.
The proposal now has to be discussed by Member States in Council after consultation of the European Parliament. The Commission hopes it can be adopted in 2013.