The Common Consolidated Corporate Tax Base relaunched

Giovanni Caccavello, Research Fellow at EPICENTER // 03.11.2016

 

The European Commission has rebooted its proposal for a Common Consolidated Corporate Tax Base. The CCCTB aims to tax multinationals operating in more than one Member State on an EU-wide basis, with taxable profits allocated to national treasuries according to a pre-set formula.

 

In the words of Commissioner Pierre Moscovici, “the rebooted CCCTB proposal, [addresses] the concerns of both businesses and citizens in one fell swoop. […] Companies need simpler tax rules within the EU. At the same time, we need to drive forward our fight against tax avoidance, which is delivering real change.”

 

Previous attempts at passing the CCCTB floundered under opposition from national governments. Yet, it is an open question whether the proposal will obtain Member State support this time around. In fact, in the recent past, several EU countries, such as Denmark, Ireland, Poland, Sweden and The Netherlands have voiced concern about the redistributive and centralising character of the proposed system.

 

Given the CCCTB’s apportionment formula – which ignores intangible assets – the proposed system can be expected to have a considerable impact on the tax take of some Member States. Looking at the Commission’s own stylised model (which makes the important and limiting hypothesis that governments change ex-ante the corporate tax rate for the CCCTB), corporate tax revenues are expected to decline by 0.27% of GDP across the board. The largest decrease would amount to over 1% of GDP for Luxembourg, whereas at the other extreme corporate income tax revenues would increase by 0.19% of GDP in Croatia. Other states that will experience a significant negative impact on their own corporate tax revenues are, namely, the United Kingdom (-0,88% of GDP), Spain (-0,61%) and Germany (-0,24).

 

Two further aspects of the new proposal are noteworthy:

 

  • 1. The system will be mandatory, rather than optional as was foreseen in earlier versions, for all multinational companies with global sales of more than €750 million a year. To give an idea of the potential reach of the CCCTB, around 1.6% of EU corporate groups have a consolidated turnover of, at least, €750 million.

 

  • 2. Following controversy over the redistributive effects of consolidating the EU’s corporate tax base, the Commission now proposes to implement the CCCTB in two stages. First, the rules around the tax base in each Member State will be harmonized – with, for instance, common rules for asset depreciation and expensing – and thus a common tax base will be established. Consolidation, i.e. the allocation of corporate profits according to the proposed formula, will only occur later.

 

If the Commission was confident that the proposal was to the benefit of enterprise in Europe, it would be satisfied with making it optional and letting firms choose whether to pay taxes under the old system or the new one. But the attempt to make it mandatory suggests otherwise. This is not surprising, since the CCCTB removes the commonly accepted link between profit generation and tax paid – i.e. taxes are due where value is created – replacing it with an arbitrary formula. No longer will Member States be able to improve their economic prospects by attracting capital from abroad through a favourable tax and policy climate. Such a turn away from tax competition is concerning, because it was at the heart of, most prominently, Ireland’s economic boom from the late 1970s.

 

Furthermore, the proposal will do little to assuage fears of further tax harmonisation in the future. If enacted, and despite its alleged benefits, it would put an end to tax autonomy in EU countries. Tax centralisation is wholly unnecessary for economic convergence and trade expansion, as the experiences of fiscal federalism in countries as varied as Canada, Germany, Switzerland and the United States demonstrate. On the other hand, centralised tax systems are harder to reform no matter how inefficient.

 

Finally, it is worth noting that, in 2011, the Irish government (among other critical Member States) passed a motion denying the legality of the proposal due to its failure to meet with Lisbon Treaty subsidiarity requirements. Given tax matters require the unanimous consent of Member States, it is difficult to see how low-tax like Ireland, Cyprus and Bulgaria could agree on this “new” CCCTB proposal.

 

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