#Tax: Commission plans to overhaul corporate tax #CCCTB

Today (25 October) the Commission launched its plans to overhaul the way in which companies are taxed in the Single Market. The new proposals aim at making the system more growth-friendly and fair. The proposal is only mandatory for those companies earning more than €750 million per year.

Originally proposed in 2011, the measure was rejected by member states that were keen to maintain tax decisions as a purely national competence. Since then, much has happened, including popular outrage at tax avoidance via a longer series of scandals (LuxLeaks, SwissLeaks, PanamaLeaks) and decisions that emerged from the leaks and US Senate investigations that led to the Apple decision and a number of other illegal state-aid decisions. The Commission has also been working closely with other OECD members on BEPS (base erosion and profit shifting).

When asked why the Commission was relaunching this proposal, Commissioner Moscovici said: "Why relaunch the CCCTB when the original proposal was never agreed? My response is simple: a lot has changed since 2011 – in our approach, in the proposal and in the political landscape. The CCCTB is more relevant today than ever, and I am confident that we have the right conditions to make it a reality."

In the past, low corporate tax jurisdictions and the UK have resisted any progress in this area. The new proposal may well court controversy, but the new-found support for transparency and fairness will give it greater impetus.

The recent débâcle over Wallonia’s failure to sign the CETA EU-Canada trade agreement captures the mood among some members of the public. In particular, that the Commission is good at arguing for free trade and imposing austerity, but not so willing to pursue tax-justice issues. This view was summarized by Paul Magnette, president of Wallonia, who said that it was a pity the EU’s efforts to fight tax avoidance weren’t as intense at their efforts to reach agreement on CETA.

What is CCCTB?

The Common Consolidated Corporate Tax Base (CCCTB) is a harmonized system to calculate companies' taxable profits in the EU. It establishes a single set of rules for companies to determine their tax base, rather than multiple national ones. This will allow businesses to file a single tax return for all of their EU activities. Companies in the CCCTB system will also be able to offset losses in one member state against profits in another, thereby enjoying the same treatment as purely domestic companies. By having a single system, the Commission hopes that companies will find it easier to operate across the Single Market. It should help cross-border companies cut costs, red tape and to support innovation.

The CCCTB is also a potentially powerful instrument against tax avoidance. Common rules for taxing companies in the EU will remove the loopholes and mismatches in the current corporate tax frameworks which enable aggressive tax planning. They will boost transparency and reduce harmful tax competition.

Super deductions for research

Companies will be given a super-deduction for their R&D costs. To support small and innovative companies that decide to opt-in to the CCCTB, an even more generous super-deduction will be given to start-up companies which will be allowed to deduct up to 200% of their R&D costs, under set conditions.

Encouraging investment and reducing debt

The CCCTB will remove the incentive for debt accumulation. The CCCTB will address the current debt-bias in taxation, which allows companies to deduct the interest they pay on their debts but not the costs of equity. The Commission argues that the debt-bias distorts financing decisions, makes companies more vulnerable to bankruptcy and undermines the stability of the overall economy.

Therefore, the CCCTB has introduced an 'Allowance for Growth and Investment' (AGI), which will give companies equivalent benefits for equity as they get for debt. This will reward companies for strengthening their financing structures and tapping into capital markets. This initiative chimes with the Commission's plan for a Capital Markets Union which seeks to give businesses access to alternative, more diverse sources of funding.

Two further proposals

The Commission will also be proposing new rules on double taxation resolutions, which can occur due to a mismatch in national rules or different interpretations of a bilateral tax treaty with regards transfer pricing arrangements. There are estimated to be around 900 double taxation disputes ongoing in the EU today between member states, under the current dispute resolution mechanisms. Double taxation is a major obstacle for businesses and can be very damaging.

The Commission is also proposing a hybrid mismatches occur when countries treat the same income or entities differently for tax purposes.

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