What do the CCCTB and the movies have in common? Let it go
Picture the scene. You’re sitting in a room full with hundreds of tax consultants (I know, but we’re a fun bunch) from all over planet earth listening to the views of global tax policy makers and shakers. I was an audience member in that scene at the recent Global Tax Policy Conference in Dublin Castle.
One of the panellists was the Head of Company Taxation Initiatives at the European Commission. He explained the recent successes the Commission has had in terms of tax policy but then lamented the lack of progress made on certain structural reforms including the Common Consolidated Corporate Tax Base (CCCTB). Many might had thought this old news, given other proposals out there, but he went on to assure the audience that it hadn’t gone away.
Here’s the thing. Tax is a sovereign concern and still requires unanimity of agreement between EU members before the Commission can get tax harmonisation measures over the European Union line. Ireland has been very clear in our “merci mais non” approach. For example, in February last year the Minister for Finance responded when asked about proposed changes on tax harmonisation that “…we do not support tax harmonisation that undermines a member state's ability to set its own tax rate and to determine its own tax base. We have, however, shown we are willing to agree EU tax directives that seek to implement agreed international best practice in a consistent manner across the EU. This remains Ireland's position."
The Minister for Finance sought to reassert this at the Global conference when he outlined what’s been done over recent years to “to prevent aggressive tax planning” and what’s coming our way. It was a long list:
- Ireland acted unilaterally to abolish the possibility for companies to be “Stateless due to mismatches with US tax rules”.
- We changed our tax residence rules to end the Double Irish structure.
- We were a committed participant in the OECD Base Erosion and Profit Shifting (BEPS) process and introduced Country by Country Reporting in 2015.
- Ireland was among the first countries to sign and ratify the BEPS Multilateral Instrument (MLI) which reduces the potential for tax treaties to be used for tax avoidance purposes. A discussion of the MLI was one of the first articles I wrote for this paper! The MLI enabled the demise of the “Single Malt”.
- We agreed the EU Anti-Tax Avoidance Directives (ATAD) with our fellow Member States to implement a number of the key BEPS actions consistently across the EU. On foot of this, Controlled Foreign Company (CFC) rules and an amended Exit Tax were introduced last year. The CFC rules effectively allows us to tax other countries' money with terms and conditions applying based on the principles enshrined in the Treaty for the Functioning of the EU. The exit tax effectively allows Ireland to tax latent gains within assets held by companies before they leave Ireland.
- We implemented EU Directives on tax transparency so tax authorities can access tax rulings, anti-money laundering information and country by country reports.
- We agreed another Directive to expand rules for mandatory disclosure of tax planning arrangements by tax advisors. We already had one of these for domestic transctions and now we’ll have to disclose cross border ones as well.
- We agreed a Directive to introduce mandatory binding arbitration for double tax disputes among tax authorities.
- The Corporation Tax Roadmap, published last September, set out a plan for future actions including the sci-fi sounding anti-hybrid rules and an interest limitation rule and changes to transfer pricing rules. A company is allowed to deduct interest on debt in computing its profits where certain Ts & Cs are met and that may now be restricted further under the limitation rule.
We’re not alone in that OECD countries are taking similar actions because of that group’s BEPS initiative. The EU Commission sees the CCCTB as a possible panacea for tax avoidance in that all countries will have the same rulebook and the profits computed by reference to that rulebook will be allocated across Europe. The CCCTB’s economic threat to Ireland is substantial with Seamus Coffey (economist and head of the Fiscal Advisory Council) previously noting that it could be bigger than Brexit.
The EU have focused on a two-step process for CCCTB with a view to bringing in the rule book (the common tax base bit) first and then following it up with the allocation of profits across Europe piece (the ‘Consolidation’ bit). Both have issues. The allocation of profits suggests that bigger countries will benefit over smaller countries but even the common rulebook has difficulties.
Countries develop their tax rulebooks to cope with their environmental and economic needs. Some countries will be net exporters, some net importers, some have more natural resources than others, some have economies of scale, ok you get the gist.
That’s why tax sovereignty matters. That’s why tax competition matters. That’s why the Minister’s conference speech explained that “fair tax competition is a legitimate tool for small peripheral countries to balance against size, geographical location or resource advantages other countries enjoy, and this is supported by a wealth of economic research. Competitiveness is not just a prerogative of large countries”. He continued that we’re open to solutions which respect our right to compete fairly and which respect the legitimacy of Ireland’s longstanding 12.5% corporate tax rate. You can see his point.
Bottom line, the EU’s CCCTB has been doing the rounds since it was first proposed in 2001. Countries are moving towards implementing the BEPS agenda, which comprises part of the EU’s ATAD. Given all that, and as I’ve always argued, it’s time the EU adhered to Elsa’s dictum in Disney’s “Frozen” (2013) and “let it go”.
Tom Maguire is a tax partner with Deloitte and his column on tax matters appear in the Sunday Business Post. The above column was first published on 2nd June 2019.