In an effort to clamp down on tax avoidance by multinationals, the European Commission has announced plans to revive a proposal to unify the corporate tax base across Europe.
Proposals for a common, consolidated corporate tax base were first broached by the Commission in 2011 but never implemented, because member states could not agree on a formula for profit allocation. In June, however, the Commission presented a strategy to relaunch the CCCTB. “It would greatly improve the business environment in the single market by making it simpler and cheaper for companies to operate cross-border,” said the Commission, noting that it could serve as a powerful tool against corporate tax avoidance by removing the current mismatches between national systems and closing loopholes.
The Commission will put forward a new proposal in 2016 to revive the CCCTB, based on two key changes: First, it will propose a mandatory CCCTB, which is designed to prevent “profit-shifting”; and second, it will propose that the tax base be introduced using a step-by-step approach to make it more manageable for member states to agree.
“A common corporate tax base does have some merit,” remarked Kevin Hindley, managing director with Alvarez & Marsal Taxand UK, which provides tax advice to multinational businesses. However, he says setting the transfer pricing allocation between different jurisdictions based on a metric that member states can agree upon is likely to prove just as challenging this time round as it did in 2011, particularly as there is a perception that the proposal is likely to favor larger EU countries like Germany, the UK and the Netherlands, rather than the smaller member states.
Although some believe that the CCCTB would result in a much simpler tax system, Hindley says it could increase tax competition between states that may implement the proposals differently.
Revival of plans for a CCCTB also comes at a time when countries, particularly those faced with large budget deficits, are looking to reform the tax treatment of multinational corporations. The OECD’s Base Erosion and Profit Sharing initiative, for example, looks to reshape international tax rules in the G20 countries by placing a greater emphasis on how larger companies comply with tax rules and report financial information. Hindley says it is unclear how BEPS (corporate tax base erosion and profit shifting) will interact with the Commission’s proposals, which could complicate the new measures.
Despite challenges, Hindley believes there may be more political will this time around.