EU Revamp of Consolidated Base Includes Pro-Business Breaks

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By Joe Kirwin

Oct. 19 — The European Commission’s revised plans for a Common Consolidated Corporate Tax Base—a single set of rules for multinationals to calculate taxable profits within the European Union—will include a formula for consolidation that takes into account a company’s labor, assets and sales by destination.

A draft version of the proposal to be published Oct. 26—a copy of which has been seen by Bloomberg BNA—states that “each group’s taxable share will be determined by applying a formula that apportions the consolidated base to the eligible group members on the basis of three equally weighted factors, i.e. labor, assets and sales (by destination).”

The commission proposal is part of efforts to boost the European Union single market by reducing cross-border accounting costs and transfer pricing disputes.

Practically, if the plans go ahead, a company would have to comply with just one EU system for computing its taxable income, rather than different rules in each EU country in which they operate.

The commission is expected to call for a phased-in approach over two stages, with the first involving only a common corporate tax base (CCTB). The second phase will focus on the controversial “consolidation” of the common tax base, which requires a cross-border share-out formula designed to match profits with economic activity.

Mandatory compliance, meanwhile, is in the cards for multinational companies with an annual turnover equaling approximately $750 million. This will be inclusive for companies in an intra-EU group arrangement. Companies with a lower threshold would also be eligible to use the new system.

Consolidated Formula

According to the European Commission, the consolidated formula will be different from the previous CCCTB, as it will no longer be based on the size of country and its GDP, as initially proposed in 2011.

A draft version of the proposal, seen by Bloomberg BNA, states that “Each group’s taxable share will be determined by applying a formula that apportions the consolidated base to the eligible group members on the basis of three equally weighted factors, i.e. labor, assets and sales (by destination).”

Another key provision concerns a temporary cross-border loss relief, which will be available for multinational companies after the first phase CCTB is agreed and until the full CCCTB can be approved.

“The cross-border loss relief mechanism is aimed at balancing out the absence of the benefits of consolidation during the first step as way to promote business interest and support for the CCCTB,” said Uwe Ihli, a head of sector for the commission’s corporate tax directives and CCCTB, and one of the chief architects of the CCTB-CCCTB proposal.

Pro-Business Tax Incentives

The proposed legislation will include a mechanism to put equity financing on equal terms with debt financing, tax incentives for research and development and a temporary mechanism to offset cross-border losses that will kick in once the first-phase CCTB is approved.

“The primary goal is to strengthen the single market by making it easier and cheaper for companies to operate cross-border in the EU,’' commission spokeswoman Vanessa Mock told Bloomberg BNA on Oct. 17. “They will be able to file a single tax return for all their activities in the EU through one tax authority rather than having to file a tax return in every country where they operate.”

Mock added that the new proposal will also aid in the effort to combat tax avoidance and complement the recently approved Anti-Tax Avoidance Directive. “It will be a framework within which member states can implement many of the new international tax standards, including those already approved in the EU,” Mock said.

Switchover Clause

The upcoming proposal will include a controversial anti-avoidance measure in the form of a switchover clause, that would allow EU countries to tax foreign income from dividends if it is taxed at a rate 40 percent lower than in an EU member state.

The commission previously proposed the switchover clause as part of the ATAD but it was dropped in June during the final stages of ATAD negotiations.


Companies and tax practitioners have raised concerns about intangibles such as intellectual property and royalties licensing , which have become far more prevalent in relation to company assets and profits in the past decade.

“This will be a key concern, especially when it comes to defining the tax base and dealing with consolidation if the proposal is going to reduce transfer pricing disputes,” Stefaan De Baets of PricewaterhouseCoopers LLP told Bloomberg BNA during an Oct. 18 telephone interview.

“Overall, intangibles are just one difficult issue. There are numerous others. I am afraid there are some in Europe that are underestimating the challenges ahead,” De Baets said, adding that if there is going to be an CCCTB agreement, it is going to be “a very long-drawn” out process.

New Political Climate

Despite the revised approach, it is unclear whether countries opposed to the initial 2011 proposal—which had stalled due to the scale of the plans—will now be more receptive.

The commission, however, insisted that member countries will be less resistant since corporate tax avoidance is now a high-profile political issue, beyond the EU, at the level of the G-20.

“It took nearly 10 years for EU countries to agree to the Parent-Subsidiary Directive that involved important corporate tax measures and the same for the Interest and Royalties Directive,” Ihli told Bloomberg BNA Oct. 17 in a telephone interview. “In both of those pieces of legislation there was a lot of initial opposition. We believe a similar change in the political climate when it comes to tax issues will now make it possible for the CCCTB to gain approval.”

Brexit Impact?

Some political observers also believe the CCCTB has a better chance in the wake of the Brexit vote in June since the United Kingdom, along with Ireland, was one of the most outspoken opponents of the initial proposal.

“I think there is more political impetus now for finding a consensus,’' Fabian Zuleeg, the director of the European Policy Centre, told Bloomberg BNA in an e-mail Oct. 18. “In addition, with Brexit, one of the traditional opponents of EU action on tax issues no longer has the ability to veto developments. But they could still delay them.”

Ireland Cautious

Zuleeg added that resistance from Ireland will likely remain due to concerns the consolidated tax base would reduce the nation’s competitive advantage generated by its low corporate tax rate of 12.5 percent.

The key issue for Ireland—and other low-tax countries such as the Baltic nations or those in Eastern and Central Europe--concerns proposed consolidation of the tax base. Low-tax countries have opposed any formula that will require them to share out tax revenue with another EU member state, especially the larger ones such as Germany, France and Italy where corporate tax rates are much higher.

Currently, the Irish Ministry of Finance remains cautious, with relations strained under the cloud of the commission’s $14 billion Apple Inc. state aid ruling.

“Ireland will critically analyze proposals that may not be in Ireland’s long-term interest,’' Irish Ministry of Finance spokesman David Byrne told Bloomberg BNA Oct. 18 in an e-mail.

Opposition to Two-Stage Approach

However, most European and U.S.-based multinationals remain uninterested in the temporary cross-border relief and are opposed to the two-stage approach, preferring only the CCCTB proposal.

In a submission to the commission early in 2016, BusinessEurope, a lobby group for more than 10,000 of the largest EU-based companies, indicated the initial stage of the re-launched CCCTB—without consolidation—would be of limited interest for businesses “because it will not provide stability and certainty.” The group added that it is only when the second stage is properly enacted that it would have a positive impact for businesses, investments and growth.’

BusinessEurope said it is “crucial that the second stage is addressed already from the outset.’'

AmCham EU, the EU-based chapter of the U.S. Chamber of Congress, also opposes a two-stage approach over concerns that getting an agreement on the second phase is unlikely.

It is also said that making the CCTB-CCCTB mandatory would be a mistake that inevitably will lead to a rise in double taxation disputes for U.S.-based multinationals, especially if the proposal departs from the arms-length principle concerning the calculation of the tax base and determining the consolidation share-out formula.

“We believe that a mandatory CCCTB will result in disagreements over the formulary concept with countries outside the EU leading inevitably to mismatches and double tax in third-country situations including with the U.S.’,’ Amcham said in its submission.

Following the Oct. 26 proposal, EU member countries will take up the plan in the Council of Economic and Financial Affairs.

Unanimous consent of all EU countries will be required for approval. The European Parliament will have a consultative role but doesn’t have co-decision powers when it comes to EU tax legislation.

To contact the reporter on this story: Joe Kirwin in Brussels at

To contact the editor responsible for this story: Penny Sukhraj at

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