While it appears highly unlikely that the European Commission (the Commission) will be able to advance its two-stage proposal toward a Common Consolidated Corporate Tax Base (CCCTB) as quickly as it originally anticipated, multinational companies (MNCs) should nevertheless seriously evaluate the proposal and consider how it could impact their European Union (EU) operations.
“There is still a strong appetite among certain stakeholders to put in place further corporate transparency measures beyond BEPS, and it is clear that the Commission sees the CCCTB as the only way forward to achieve a stable, fair and competitive corporate tax system.“
Following the 25 October 2016 publication of the Commission’s two proposed directives — the first would establish the rules for a common corporate tax base (CCTB), and the second would introduce the consolidation elements of the CCCTB itself — it seemed like the Commission stood a better chance of reaching political agreement on an EU-wide CCCTB than it did in 2011, when the Commission published a CCCTB proposal as a single proposition. EU Member States’ negotiations on the 2011 proposal stalled because of disagreements over the tax consolidation provision.
Since that 2011 effort, however, the political climate has changed dramatically — governments are under enormous pressure by tax activists, the media, politicians and other stakeholders to tackle perceived aggressive tax planning and make certain that MNCs pay their fair share of tax.
Given the global momentum around reforming the international framework for taxing MNC profits, which culminated in the G20 Leaders’ endorsement of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) Action Plan in November 2015, it would appear that the Commission is in a better position this time around to advance a CCCTB proposal, particularly as the Commission has repackaged the CCCTB as an anti-BEPS initiative.
Indeed, the Economic and Financial Affairs Council of the European Union (ECOFIN) has already held several working group meetings to discuss the technical aspects of the 25 October 2016 proposals. While those technical discussions will continue behind the scenes, more recent developments — such as the timing of Brexit negotiations and the impasse over reaching agreement on a hybrid mismatch directive — suggest that there will be little, if any, time during 2017 or 2018 for holding serious political negotiations around the CCCTB proposals.
That, in turn, means that realistically it is highly unlikely that the Commission will be able to keep its very ambitious timetable of having a CCTB Directive enter into force on 1 January 2019, and the CCCTB Directive enter into force on 1 January 2021.
Of course, no one can predict whether future developments might further alter that timetable, but, given the strong appetite among some of the EU institutions, particularly the Commission and the European Parliament, to tackle aggressive tax planning and corporate tax avoidance, MNCs should take the CCCTB proposals seriously and assess their impact, should they become law.
Weighing the impact — the pros
The proposals have some features that MNCs would find desirable. The most important is that the CCTB directive would provide a uniform set of legal provisions and terms across the EU, which in turn should increase MNCs’ legal certainty for a longer period.
If all Member States were to adopt the CCTB directive, it would be much more difficult for them to change basic principles or the interpretation of certain legal terms, since any changes to the directive would require unanimous approval. In effect, for the first time in EU tax history, Member States would be unable to make changes, via their annual budgets or tax laws, to the basic structure of the corporate tax system.
The proposed R&D super deduction could also be a big plus for some MNCs. Under this proposal, R&D costs would be fully expensed in the year incurred. In addition, businesses may claim an additional 50% deduction for R&D expenditure up to €20 million and an additional 25% on costs over that.
Small, stand-alone entities that are less than five years old could potentially claim a 100% extra deduction on R&D expenditure up to €20 million. However, on the flip side, the CCTB would not allow Member States to have in place a patent box or innovation box, a prohibition that would be particularly disadvantageous to smaller Member States.
The proposed Allowance for Growth and Investment (i.e., a notional interest deduction on equity) is another feature that should be welcomed by MNCs. Some Member States, including Belgium and Italy, have already introduced such measures. To have it implemented across the EU would be quite attractive for MNCs.
The provisions allowing temporary cross-border loss relief are another big plus. Currently, most Member States do not allow such relief because of the principles set out by the Court of Justice of the European Union in its 2005 judgment Marks & Spencer plc v. David Halsey (C-446/03).
That the CCTB and CCCTB would be mandatory for groups with consolidated worldwide revenues greater than €750m in the preceding year (whereas, under the 2011 proposal, the rules were to be optional) is clearly the biggest drawback for MNCs. The costs of transitioning into the new system would likely be very large.
In addition, assuming that Germany would still have in place a municipal trade tax (which is levied by municipalities on trade income at rates ranging from 7% to 17%), then German MNCs would have to contend with two systems.
Overall, the Commission’s goal of reducing tax competition via the CCCTB and other elements of the corporate tax reform package will create a concomitant disadvantage on the part of MNCs. Their ability to access tax incentives like patent or innovation boxes will be extensively restricted, although tax rate competition would be still available since harmonization of corporate tax rates is not foreseen by the CCTB and CCCTB Directives.
The next steps
In terms of timing, one should consider the priorities of the upcoming EU presidencies, who will be writing the agenda for the ECOFIN meetings. The order of EU presidencies is as follows:
Malta: January–June 2017
Estonia: July–December 2017
Bulgaria: January–June 2018
Austria: July–December 2018
Before the CCTB proposal can be seriously discussed, the way must be cleared from currently pending tax initiatives, including the proposed directive amending the Anti-Tax Avoidance Directive (ATAD) to address hybrid mismatches with third countries (the proposal is known as ATAD 2) and the proposed directive on mandatory dispute resolution.
Both of those proposals were included, along with the CCCTB proposals, in the corporate tax reform package published by the Commission on 25 October 2016.
Regarding ATAD 2, the Member States were unable to reach political agreement before the end of 2016. They finally agreed on a compromise proposal at the ECOFIN meeting held on 21 February 2017. ECOFIN will formally adopt the ATAD 2 once the European Parliament has given its opinion.
The proposed directive on mandatory dispute resolution is another high-priority item, as the Commission proposes that Member States should transpose the directive by 31 December 2017 at the latest.
Given the amount of time and attention that will be devoted to finalizing and adopting ATAD 2 and the mandatory dispute resolution directive, it is likely that serious political discussions around the CCTB proposal will not begin until the second half of 2017, under the Estonia presidency.
However, there may not be much progress made under the subsequent two presidencies. In light of the significant political and economic issues facing the EU, it seems unlikely that Bulgaria (which will hold the presidency from January through June 2018) will view the CCCTB dossier as an urgent action item. Similarly, Austria (which takes over from July through December 2018) will be preoccupied with Brexit matters.
There was some surprise after Michel Barnier, the EU’s chief negotiator for Brexit negotiations, said at a 6 December 2016 news conference that the period of actual negotiations will likely be shorter (around 18 months) than the two-year period provided under Article 50 of the Lisbon Treaty, to allow time for the European Parliament, Member States and UK Government to ratify an exit agreement.
Assuming the UK Government triggers Article 50 by the end of March 2017, the parties will need to reach an agreement by October 2018. Under this timetable, Austria will hold the EU presidency when the Brexit negotiations come to a head, and will likely be unable to devote any time to the CCTB proposal.
While the Commission may be unable to advance the proposals as quickly as they originally planned, that does not mean that MNCs should put this on the back burner. There is still a strong appetite among certain stakeholders to put in place further corporate transparency measures beyond BEPS, and it is clear that the Commission sees the CCCTB as the only way forward to achieve a stable, fair and competitive corporate tax system.
MNCs should therefore familiarize themselves with the proposals, assess the potential impact to their operations and tax planning strategies, and continue to monitor EU developments around the proposals.
Read more: Global Tax Policy and Controversy Briefing