The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
July 29 — The U.K.'s surprising vote to disconnect with the European Union has given some hope that the body's 15-year project to harmonize its tax rules and implement a formulary tax system will get a shot in the arm.
It still has a long way to go.
The common consolidated corporate tax base—a tax plan that has been debated in the EU since 2001, and was formally proposed in 2011—would, if fully enacted, do something many academics and activists argue should happen worldwide: end the separate accounting of legal entities and subsidiaries and tax corporations on a unitary, comprehensive basis from a universal, agreed-upon formula.
It would end the need for arm's-length transfer pricing within the EU, and implement a formula for allocating a company's tax base not dissimilar from the three-factor formula currently used by U.S. states under the Multistate Tax Compact. Just like U.S. states, the EU member countries under the CCCTB would consider sales, assets and payroll in determining the allocation of taxable income.
Aside from the goal of stamping out tax avoidance and easing barriers to investment, the plan would mark a big step toward making the EU a single economic unit with a common tax policy and administration.
While the project has been debated in Europe since 2001, the latest push began in July 2015, when the European Commission announced it would relaunch its campaign for a CCCTB (24 Transfer Pricing Report 743, 10/15/15).
However, the commission also announced that it would delay the guts of the proposal—the formula for apportioning taxable income—until it is able to implement a common set of rules based largely on the recent Organization for Economic Cooperation and Development's project to combat tax avoidance.
The notion of a common approach for companies to compute the taxable base for all their EU operations has been around since at least 2001, when it was mentioned in the commission's communication “ Towards an Internal Market without tax obstacles.”
Unlike under the Multistate Tax Compact, the calculation for payroll—or, to use the European parlance, “labour”—would be a split between employee head count and payroll costs, the result of a compromise between Europe's large and small countries.
The sales formula is destination-based, and includes the physical location where services are carried out.
Unlike the U.S. formula, the CCCTB would also try to include intangible assets, using costs for research and development, marketing and advertising looking back six years as a proxy.
“These three factors mean that the formula draws on data which is ready available, will be difficult to manipulate and will be representative of where profit is really created in a business,” the commission said in a question-and-answer page released in 2011.
In addition to base erosion concerns, the commission promoted the concept as a way to simplify the EU's tax rules and level the playing field.
“The CCCTB opens up the possibility of expansion within the EU for small and medium enterprises that may, up to now, have thought it too costly and complicated to do so,” the commission said. “As SMEs do not tend to have the same resources (tax lawyers and experts; consultants and advisors) as larger enterprises, the obstacle of having to deal with divergent rules for calculating the tax base in other Member States is often insurmountable.”
The 2011 legislation was eventually blocked by the Council of Economic and Financial Affairs. The re-launched version in 2015 committed to a mandatory version of the proposal, whereas the earlier proposals would have allowed companies to opt in or out of the concept.
Making the CCCTB mandatory “would improve its capacity to prevent profit shifting—an optional system is unlikely to be used by companies that engage in aggressive tax planning to avoid taxes,” the commission said.
The U.K.'s departure from the EU, if finalized, removes one of the biggest opponents to the plan.
“The U.K. played a powerful role in the Council of Ministers when it came to countering the French-German axis in favor of enhanced corporate tax harmonization and possibly rates,” Stefaan de Baets, a Brussels-based corporate tax lawyer with PricewaterhouseCoopers LLP, told Bloomberg BNA in June. “That was especially true with the CCCTB” (25 Transfer Pricing Report 281, 6/30/16).
Any tax proposal requires unanimous support from EU member states—a difficult bar to pass, with many countries looking at possible revenue losses should it be enacted.
However, the EU rules might allow for the issue to be considered under an “enhanced cooperation” procedure, in which nine or more EU members could pursue the plan if it is approved by a “qualified majority,” or a vote weighted through a formula considering population.
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