As part of a Corporate Tax Reform Package, the EC has published four proposals for Council Directives.
1. Proposals to relaunch the Common Consolidated Corporate Tax Base
First, the European Commission (“EC”) has announced that it is relaunching its proposal to introduce a Common Consolidated Corporate Tax Base (“CCCTB”), aimed at creating a single rulebook for calculating taxable profits throughout the EU.
In this regard, the EC has released two proposals:
The main objectives are to create a powerful tool to combat tax avoidance, as well as to make it easier and cheaper to do business in the Single Market for affected companies, according to the EC.
Furthermore, the relaunched proposal for a CCCTB addresses some of the key actions of the OECD initiative on Base Erosion and Profit Shifting (“BEPS”).
Having already issued a proposal for the establishment of a CCCTB in March 2011, the idea had been rejected by several Member States, forcing the EC to row back.
The newly proposed corporate taxation system differs substantially from the March 2011 proposal in that it shall:
be mandatory for large multinational groups that have the greatest capacity for aggressive tax planning, ensuring that companies with global revenues exceeding EUR 750 million a year shall be taxed where they really make their profits;
tackle loopholes currently associated with profit shifting for tax purposes;
encourage companies to finance their activities through equity and by tapping into markets rather than turning to debt; and
support innovation through tax incentives for research and development (“R&D”) activities that are linked to real economic activity.
While corporate tax rates would not be impacted by the CCCTB and would therefore remain an area of national sovereignty, the CCCTB would substantially reform corporate taxation throughout the EU.
According to the EC, the proposed corporate taxation system shall achieve the following objectives:
Improve the Single Market for businesses
Companies shall be able to use a single set of rules and work with their domestic tax administration to file one single tax return for all of their EU activities.
Growth-friendly activities such as R&D investment and equity financing shall be incentivized, supporting the wider objectives of reviving growth, jobs and investment.
Companies shall be able to offset profits in one Member State against losses in another. Tax obstacles such as double taxation shall be removed and the CCCTB shall increase tax certainty by providing a stable, transparent EU-wide system for corporate taxation.
Combat tax avoidance
The CCCTB aims to eliminate mismatches between national systems, which aggressive tax planners currently exploit.
It shall remove transfer pricing and preferential regimes, which are seen as primary vehicles for tax avoidance today.
The CCCTB also contains robust anti-abuse measures, aimed at companies shifting profits to non-EU countries. As the CCCTB shall be mandatory for the biggest multinational groups operating in the EU, those companies shall be prevented from attempting large-scale tax avoidance.
Support growth, jobs and investment in the EU
The CCCTB shall offer companies stable and predictable rules, a fair and level playing field, reduced costs and easier administration. Also, as it provides for an enhanced deduction on R&D costs, it could motivate innovative companies to opt in to the new system.
Finally, the CCCTB aims to address the bias in the tax system towards debt over equity, by providing an allowance for equity issuance. A set rate, composed of a risk-free interest rate and a risk premium, on new company equity shall become tax deductible each year.
These measures shall motivate companies to seek more stable sources of financing and to tap into capital markets, corresponding to the objectives of the Capital Market Union. Further, they shall offer added financial stability, as companies with a stronger capital base would be less vulnerable to shocks.
2. Proposal to complement the existing rule on hybrid mismatches
Further and with a view to bolstering existing anti-abuse rules, the EC
has published a proposal to amend Directive (EU) 2016/1164 on tax avoidance practices that directly affect the functioning of the internal market in regard to hybrid mismatches with third countries.
In order to provide for a comprehensive framework consistent with the OECD BEPS aimed at preventing taxpayers from exploiting remaining loopholes, the proposal includes rules on:
According to the EC, the amendment shall create a minimum level of protection against corporate tax avoidance throughout the EU, while ensuring a fairer and more stable environment for businesses.
3. Proposal on Double Taxation Dispute Resolution Mechanisms in the European Union
With this proposal, the EC aims to adjust the current dispute resolution mechanisms in order to meet the needs of businesses, by covering a wider range of cases and imposing on Member States clear deadlines to agree on binding solutions in cases of double taxation.
Depending on its acceptance by Member States, this package could be a major step forward in harmonizing the EU tax system. Corporate entities within the EU will have to keep a close eye on its development, especially considering the potential impact of Brexit, as the United Kingdom is considered to be one of the Member States most hostile to regulation of direct taxation on an EU level.