Introduction

Since 2001 the European Commission has been pursuing a project to remove what it sees as underlying tax obstacles that arise when companies do business in more than one Member State.

The Commission's Directorate-General responsible for Taxation and the Customs Union continues to work on comprehensive approaches to remove these tax obstacles, principally the Common Consolidated Tax Base (CCCTB).

This document constitutes an update on our November 2007 paper “Companies – A Harmonised Tax System for Europe?” in which we discussed the CCCTB proposal in detail and presented the views of various stakeholders and interested parties.

We concur with the Commission's view that there are tax obstacles where companies do business in more than one Member State. Much good work has been done on formulating approaches to overcome these obstacles. However, we must also make reference to the genesis of this viewpoint since the policy was established in 2001. Since then:

• The number of Member States has grown from 15 to 27
• Specific technical issues which were of concern at the time – an example is the treatment of “trapped” losses across borders – have been resolved through practice and the jurisprudence of the European Court of Justice
• Individual Member States have further developed their tax treaty networks
• Anti Transfer Pricing procedures have become systematised and homogenised in the major economies of the European Union

These and other developments challenge the policy which required a “comprehensive” approach to corporation tax reform. Accordingly there remains in the view of Chartered Accountants Ireland a significant risk that, if implemented, the CCCTB will damage Irish and EU businesses alike.

We state this primarily because:

• The introduction of another set of tax rules does not constitute simplification.
• In terms of deciding matters such as residence, permanent establishment and the claim to tax, we cannot simply dismiss the value of existing case law, practice and precedent. Businesses need certainty in these areas.
• The CCCTB will damage Europe's capacity to attract foreign investment. Tax payable by multinationals in any one EU Member State will no longer be determined by the law of that State alone, but by reference to a complicated formula which can only be computed in retrospect. This will make accurate prediction of tax charges by such companies almost impossible and will act as a disincentive to establish in the EU.
• The corporation tax regimes of Member States can be influenced by domestic legislation and circumstances as well as by economic factors. Similar anomalies will arise in the areas of company law, employment law, contract law, intellectual property rights and health and safety legislation. At its most fundamental, there will be different views between Member States as to what constitutes a company operating within a CCCTB group. Therefore it is not reasonable to discuss a CCCTB method without recognising the need to achieve commonality in the commercial environment.
• A CCCTB will only be effective if Member States can agree the same effective date, not only for changes to the CCCTB, but for domestic changes in tax law which might have an impact on Corporation Tax liabilities which in turn will have an impact on domestic exchequer returns and accounting.
• Administrative arrangements should not be permitted to impede the commercial activities of companies. We point to items arising from due diligence, verification that taxes were paid, and the issue of tax clearance certificates to secure government contracts which operate in many Member States. We believe that the CCCTB arrangements will hinder these processes.
• The administration and collection of corporation tax cannot be seen in isolation. Many Member States operate payment offset rules, for example corporate taxes against VAT. The CCCTB must not diminish or impede these cash flow advantages.

Whilst there undoubtedly still remain cross-border taxation issues needing resolution, we believe a focused pan-European approach to specifically targeted areas via either a specific Directive or a Commission Recommendation would serve Member States better than further CCCTB endeavors.

We note that in October 2009 the EC issued a Recommendation aimed at demonstrating to EU Member States how they could simplify the procedures that they currently apply to verify investors’ entitlement to relief from withholding taxes suffered on cross-border securities income.¹

In this particular area the EC believes a non-legally binding Recommendation to be the appropriate tool. We agree that an individual approach to the remaining areas of difficulty is the way forward.

Other Commentary Points on the CCCTB Framework as Currently Envisaged

The CCCTB would not lead to Simplification

Implementation would result in the existing 27 Tax Bases within the EU becoming 28 in number. The EU Commission has stated that “targeted solutions would not address the fundamental problem of dealing with up to 27 different tax systems” – it is our view that CCCTB would only exacerbate the issue.

The Consolidated Tax Group composition is not the same as a Consolidated Accounting Group (as defined by Generally Accepted Accounting Principles).

This will result in additional administrative and other costs to business in having to prepare two sets of consolidated accounts.

Because it is suggested that standard accounting principles should be by and large rejected, a new set of rules will have to be applied when consolidating group results for tax purposes.

These suggestions are not fully developed, but the CCCTB would not include any profits or losses on transactions between members of the consolidated group such as profits or losses on the disposal of stocks, fixed assets, shares in consolidated companies or other tangible or intangible assets. However it is unclear whether the sale of a company that is part of a CCCTB would be treated as such for tax purposes, or instead treated as a sale of a business with quite different tax implications.

There would be no withholding taxes or other source taxation on payments of any kind made between companies within the same CCCTB group.

The profit chargeable to corporation tax (PCTCT) under CCCTB is not simply “profit per accounts”

The CCCTB will require a separate computation of PCTCT for each country before CCCTB consolidation even begins. Once again this places an additional unnecessary administrative and cost burden on the businesses involved.

While the tax base may be common, the rules for arriving at it will be particular to each Member State. Each Member State will have a new set of add-backs and deductions, a revised tax depreciation (capital allowances) regime, and separate chargeable gains computations to arrive at figures as defined by the CCCTB.

Transfer Pricing

Whilst the removal of transfer pricing considerations is laudable, unfortunately it will not remove the need for pricing arrangements and revisions as required by virtue of both legislative and accounting requirements.

This would result in revisions becoming necessary to existing accounting systems, with once again an additional cost and administrative burden.

A pan-European Revenue Authority

The CCCTB cannot possibly work without a pan-European Revenue Authority. But accountable to who?

Comitology

The suggestion of an EU committee making decisions on tax by qualified majority removes tax from national policy makers, and hands it to a central group which would be unable to move quickly to deal with local challenges. The process is known as “Comitology”. Does this effectively mean taxation without representation?

For example how will domestic trade taxes be properly and fairly handled?

Self Assessment

What will be the impact of the CCCTB on domestic self assessment processes? Can the CCCTB work without the abolition of self assessment in those countries where it is to apply? Once again, more bureaucracy means more administration and cost for taxpayers.

Jurisdiction of the Tax Courts

Domestic Courts will lose their jurisdiction in tax matters. How can a tax decision of the Irish High Court for example be sustained if its ruling impacts on German tax yields? Uncertainty will arise.

Ring Fencing of Corporation Tax

Corporation Tax will become ring fenced, and therefore offsets between Corporation Tax and other taxes which are permitted in certain jurisdictions would disappear. This will have huge cash flow impacts for business which in the current economic climate is simply not acceptable.

Economic Outturn

The volume of material generated by the project to date on matters of design, tax apportionment and administration is not perhaps matched by economic studies on the likely outturn from the CCCTB. We note the following studies.

“Is EU Coordination Needed for Corporate Taxation” originated in the Netherlands Central Planning Bureau, and is accompanied by a response from an Irish perspective²

In summary, the research concludes that there would be little, if any, gain in terms of economic efficiency at European level from the implementation of a CCCTB. According to the report – “The gains from a reduction in compliance costs and the elimination of transfer pricing are offset by the efficiency losses from reallocation. Corporate tax revenues decline on average by about 2 per cent due to the expansion of firms in member states with low tax rates and/or narrow tax bases.”

A similarly focused study earlier in 2007 by the Oxford University Centre for Business Taxation concluded that an optional CCCTB mechanism would result in an overall decline in tax revenue across the EU in the order of 1%.³ By contrast, this study notes that if companies are forced to participate, total tax revenues are likely to increase by more than 8%, leaving most European countries, and most notably Spain, Sweden and the United Kingdom better off.

However a more recent discussion paper by the Netherlands Central Planning Bureau found as follows:-

• “We find that the consolidation is likely to yield a small aggregate welfare gain in Europe, but that not all countries benefit. A coalition of winning countries reduces the welfare gain and may induce a process of adverse selection which destroys the possibility of cooperation. We find that a coalition of similar countries (in terms of the size of their multinational sector) is more feasible in achieving agreement and is actually preferred by those countries over a European-wide reform.”⁴

The paper concludes that “consolidation with formula apportionment in the EU will exert a small aggregate welfare gain of approximately 0.1% of GDP. For individual countries, the benefits from consolidation and formula apportionment are diverse and depend on the formula choice. Indeed, the formula determines the distribution of the corporate tax base across countries and, thereby, the revenue implications of the reform.”