The European Union has announced plans to overhaul the way in which companies are taxed inside the single market.
The latest attempt to establish a Common Consolidated Corporate Tax Base (CCCTB) comes after failed efforts in 2001, 2007 and again in 2011.
The controversial project aims to harmonize how taxable profits are defined across EU member states and to set up a system to redistribute corporate tax revenue between EU countries.
The profit shifting by multinationals to low-tax jurisdictions to minimize the tax that is due is one of the reasons corporate tax reform has come under the spotlight of tax administrators in Europe.
These practices have become ever more complex, making it difficult to pinpoint where profits are generated and harder for governments to raise revenues from corporate activities.
The Joint Research Center of the European Union has prepared an analysis of the common consolidated tax base and impact assessment, which, according to the European Commission, suggests “that a fairer and more efficient tax system can be introduced whilst maintaining, and perhaps even improving, GDP growth and welfare in the EU.”
The latest proposals provide a single set of rules for private companies to calculate their taxable profits. This would simplify their cross-border operations while making EU corporate tax systems more transparent and growth-friendly, the Commission said.
Currently, there are 28 different systems in Europe for calculating a company’s taxable earnings, making it costly and burdensome for businesses to operate in several member states. The Commission says creating a single tax base will encourage cross-border activities and investments.
“The successive scandals – Luxleaks, the Panama Papers, the Bahamas Leaks – proved the extent to which this rethink was necessary,” said Commissioner Pierre Moscovici, who presented the new reform in Brussels last week. Companies need simpler tax rules within the EU, he said. “At the same time, we need to drive forward our fight against tax avoidance, which is delivering real change.”
“Using the same definition of what constitutes taxable profit across the European Union is hardly a revolutionary idea. Nor is it a new objective. The principle was laid down nearly 20 years ago by all the EU governments, including the Brits,” French Republican MEP Alain Lamassoure said at the presentation of the new text in Strasbourg.
While the new proposal is in large parts the same as the one put forward in 2011, the Commission hopes that public anger over various scandals around tax evasion and tax avoidance, such as LuxLeaks and the Panama Papers, will force an agreement.
Under the plans, the common tax base will apply to businesses with revenues of more than 750 million euros (US$829 million) per year and will be compulsory.
Agreeing a common definition of taxable profits is expected to be much easier than determining a fair way of sharing CCCTB revenue between the member states.
The aim is to distribute the tax revenue depending on where the taxed corporation’s activities effectively take place, to counter arrangements that artificially move taxes to countries with the lowest tax rates.
The Commission has also proposed an improved system to resolve double taxation disputes in the EU and a proposal to extend the rules against hybrid mismatches as provided for in the Anti-Tax Avoidance Directive agreed in June, to hybrid mismatches involving non-EU countries.
Hybrid mismatches result from a difference in the characterization of an entity or arrangements under the laws of two or more countries. In practice, hybrid mismatches can allow a tax deduction for one entity without creating a corresponding taxable income for another, or they provide two taxpayers with tax deductions for the same payment.