EU Members Narrowing in On Common Tax Base Agreement

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By Joe Kirwin

European Union member nations have agreed to analyze the tax revenue impact of a stripped-down version of a common corporate tax base (CCTB) for the bloc as way to ensure there are no “winners and losers” because of the reform.

The 28 EU member nations will analyze the tax income from companies with a 750 million euro ($929 million) doing EU cross-border business.

“The important point of this exercise is to give member states confidence that the terms of the proposal is not going to result in corporate tax revenue loss,” said an EU diplomat, who spoke to Bloomberg Tax April 18 on the condition of anonymity. “As this proposal requires unanimity in the Council of Ministers it is necessary to ensure all national capitals that there will be no winners and losers.”

Agreement on the CCTB would move the European Union a step closer to allowing multinational companies to file one tax return for all of their business operations within the bloc, instead of a separate return for each. The EU has long said the CCTB is a vital counter-offensive to U.S. tax reform.

The Analysis

According to a confidential document seen by Bloomberg Tax, key elements the member nations will review include:

  •  use of a transactional versus a balance-sheet approach in determining profit or loss;
  •  exempt revenues; and
  •  individually depreciable assets, and non-deductible items.
The review will also include analysis of whether a qualifying subsidiary should have the right to exercise more than 50 percent of company voting rights.

Bulgaria, which holds the rotating EU presidency, has worked the last three months to find common ground on the CCTB. To ease disagreement, it had to strip out several elements which the European Commission added when it re-launched the legislation in 2016. Those included a super tax deduction for research and development, an elimination of debt financing bias via equity financing, and a temporary cross-border allocation of revenue.

“The three new elements from the Commission have not been accepted by most EU member states large and small,” another EU diplomat, speaking on the condition of anonymity, told Bloomberg Tax April 18.

On the Defensive

The legislation has taken on new political importance in the wake of the U.S. corporate tax reform which lowered the corporate tax rate to 21 percent from 35 percent.

The European Commission and a host of EU member states led by France, Germany, Spain, and Italy have urged reluctant EU countries such as Ireland, Hungary, and the Baltic countries to consider the CCTB has a counterattack to the U.S. tax reform.

Ireland, with its 12.5 percent corporate tax rate, has blocked the plan along with other low-tax countries.

CCTB proponents insist that establishing one corporate tax base will reduce costs for multinational companies in the EU because they will only have to complete one tax revenue declaration instead of a different form for every member state in which they do business. If and when the CCTB is approved, EU member states will take up a second component, which calls for the consolidation of profits.

EU member states will also consider new elements to the CCTB in order to address digital taxation. This includes a recently proposed “virtual permanent establishment” plan in order to tax digital companies where profits are earned.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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