Following the Panama and Paradise papers, as well as the tremendous fines imposed on Apple, Amazon and other multinational companies for their tax-avoiding schemes, there is currently a large awareness of tax issues in the European Union. Understandably, the public is enraged to see large businesses hiding their profits from the tax authorities considering they effectively pay only a low percentage of their overall profits in tax. The European Commission has on multiple occasions tried to launch the Common Consolidated Corporate Tax Base (CCCTB), although still without success. The latest political pressure invites wider discussion on what CCCTB actually is and whether it could help combat tax avoidance while simplifying the cross-border taxation for companies.
There have been well-intentioned suggestions on how to tackle the issue of tax avoidance but all seem to be toothless. However, rather than waiting for the best tool to suddenly appear, we should act fast to appease the public and restore order and fairness in taxation. EU’s CCCTB is the best answer coming from Brussels so far. So what is this proposal in short?
CCCTB has started in 2011 when the Commission first presented this idea to the Member States. At the time, such a project proved to be too ambitious and the Commission did not find enough support among the individual Member States. In October 2016, the Commission felt that it was a good time to flag this proposal once again and re-launched the CCCTB. The public discourse has started once again, this time under a more manageable two-step process.
In simple terms, CCCTB is a set of proposed rules that would govern how taxable profits of multinationals are calculated in the European Union. Companies with cross-border operations would no longer file tax returns in each Member State they operate in. They would need to file a consolidated tax return in only one Member State. Under the current structure of the tax systems in the EU, the companies cannot put the profits and losses together and may end up with large profits in one country and losses in another. The one-stop shop created by the CCCTB would allow for a cross-border off-set of losses in one Member State against profits in another. Moreover, the companies would only have to file tax statement in one country and the relevant tax administration would then contact other relevant tax administrations within the EU. The suggested apportionment method would guarantee that the relevant Member States would tax their “share” of the profits at their own domestic tax rate. But rather than the company stating the specific amount in multiple tax returns, the company’s main tax administration would do this through direct communication with other tax administrations.
Using just one EU-wide system for computing the company’s taxable income, the companies would not need to cope with various different requirements and it would significantly reduce their compliance costs. Such a one-stop shop is tremendously important and valuable especially for smaller companies and start-ups. These actors are to be supported in undertaking their innovative activities without unnecessary burdens and red tape. Being able to recognize their activities throughout the whole single market, these companies will be able to expand to countries where they would incur losses from the beginning, for example.
Cutting red tape for businesses in the European Union is an essential prerequisite for an internal market free from obstacles and differing requirements. Such a system would also enhance the single market in the administrative sense and doing business would be easier and cheaper. When it comes to small and medium-sized enterprises (SMEs), which take up to 99% of all businesses in the EU, such a system would allow them to invest fewer resources into administration of tax commitments and more resources would be available for innovation, expansion and employment. EU Recommendation 2003/361 defines when a company is considered to be an SME. Such designation is important for access to finance and other EU support programmes targeted at this segment of the market. Seeing that the Commission and the Member States are interested in supporting such companies, CCCTB would fit well into this agenda. Since the SME’s make up 99% of all businesses in the EU, it would hugely benefit the European economy overall. The Commission also declares that CCCTB would increase investment in the EU by 3.4% and growth by up to 1.2%. Moreover, the newest CCCTB proposal includes a so-called “super-deduction” for companies investing in research and development to encourage growth and employment by the companies.
CCCTB would be mandatory for the largest company groups in the EU. Since the latest Commission’s investigations revealed that these are most likely and most able to employ aggressive tax strategies, CCCTB would make it impossible for a multinational to take its profits from one EU member state and hide it in a tax haven inside the European Union. In order to prevent these companies from shifting profits outside the EU, CCCTB would propose strict anti-abuse measures.
CCCTB would also improve the tax certainty for both the governments and the companies involved. Rather than companies needing to know the rules of many different countries, CCCTB would allow them to settle their tax obligations in one country. On the other hand, the governments need tax certainty as well because they need stable revenues and CCCTB would allow this with much ease.
Something that is not fully and comprehensively covered in the Commission’s proposals is the point that CCCTB would effectively make transfer-pricing obsolete. CCCTB’s apportionment method, mandatory for the largest company groups, would effectively replace the transfer-pricing methods employed by these groups and the relevant tax administrations nowadays. The underlying reason is that these transfer-pricing methods are widely used for shifting profits to avoid taxation. While perfectly legal, the Commission takes interest in protecting the Member States’ revenues from such schemes.
To conclude, CCCTB seems to make it easier and cheaper to do business in the single market within the EU while acting as a powerful tool against tax avoidance. Such a proposal is worth revisiting. If the simple explanation of the system reaches a wider audience, the EU may be able to move forward.