EU Developments: C(C)CTB and corporate tax reform
On 25 October, the EU Commission published a corporate tax reform package that provides three new proposals:
- To provide for a Common Consolidated Corporate Tax Base (CCCTB) albeit in two stages
- To deal with hybrid mismatches between EU countries and non-EU countries and
- To provide new dispute resolution rules to relieve problems with double taxation for businesses.
The CCCTB proposal is made up of two elements being a Common Corporate Tax Base (CCTB) and a Common Consolidated Corporate Tax Base (CCCTB), both of which are discussed in further detail in our commentary. The CCTB is stage one of a two-stage approach towards an EU-wide corporate tax system and it lays down common corporate tax rules for computing the tax base of large companies and permanent establishments in the EU. The second stage seeks to bring about a fully consolidated corporate tax base, or CCCTB, across Member States. This initiative was previously launched in 2011 as a “big bang” optional approach, as opposed to a staged mandatory approach, which is now being suggested by the Commission; the 2011 approach effectively stalled. The European Commission’s aims for this relaunch are to facilitate business within the EU by subjecting large taxpayers to a “single rulebook of corporate tax legislation” to apply across the internal market and to make the system more robust and “resilient to aggressive tax planning”. Smaller corporate groups would have the option to participate in this regime. The Commission notes that both aims have a decisive and direct impact on the internal market and are aimed at eradicating perceived distortions in its functioning. That said, the costs of maintaining two tax systems (one mandatory and one optional) would have to be factored into this proposal.
Our perspectives in an Irish context
Ireland has always committed to playing fair, but playing to win, in matters of tax policy. In the “Update on Ireland’s tax Strategy document” published by the Department of Finance as part of Budget 2017, the point is made that “Ireland will engage fully in discussions on this proposal while assessing whether it is in our best interests. Taxation remains an area for unanimous decision making at Council, as laid out in the Treaties”. This assessment is necessary because the most controversial aspect of the proposal (albeit the full concept itself could be regarded as controversial) is the consolidation element, which requires that the tax bases of companies within a corporate group are allocated among various Member States by a formula that includes, labour, assets and sales by destination as the distributive factors. As an exporting country, Ireland would be negatively affected by such formulary apportionment, given the latter requirement.
It is important to remember that the proposal does not affect a country’s corporate tax rates, and therefore, Ireland’s 12.5 per cent corporate tax regime is not affected by these proposals. Leaving aside the consolidation element, certain aspects of the proposal are already contained in Irish law, but where there are differences they are substantial (e.g. treatment of R&D expenditure and tax depreciation on certain assets). Such differences serve to decrease Ireland’s competiveness vis-à-vis other Member States and the proposal as currently written attempts a one-size-fits-all approach that does not recognise the needs of a small, open economy like Ireland. Furthermore, given the widely differing economic circumstances of the current 28 EU Member States, and the fact that the right to set taxation policy accordingly resides with the Member States themselves under EU law, very careful scrutiny of the proposed directives and their expected impact is necessary by each Member State. It must be recalled that such proposals, like the previously agreed Anti-Tax Avoidance Directive (ATAD), require the unanimous agreement of Member States.
The provisions regarding hybrids bring about additional complexity in connection with establishing whether a mismatch exists in the first instance. The provision regarding the resolution of double taxation will be relevant to those companies engaged in such differences with foreign tax authorities.
For more information you can download our detailed analysis on the proposals.