eunbil · GT0N1356 · 2006-06-02 00:00:00 — Tax Balance Sheet/Dependency Structural, technical elements of the tax base Assets & tax depreciation tangible and intangible Capital Gains tangible and intangible Further discussions in Sub-Group Leasing/Economic Ownership Reserves/Provisions/Liabilities Further discussions in Sub-Group Further discussions in Sub-Group Loss carry back, carry forward Waters edge EU/non EU Further discussions in Sub-Group Business Combinations/Mergers Incentive Measures, including R&D Interpretation/courts etc Compulsory/optional application for companies To be discussed outside the technical Restriction size/sector Consolidation method, rules etc Internal Commission work started Not yet started in Overall discussions to link structural elements Additional issues identified during work Impact Assessment of CCCTB Drafting of legislative proposal (1) International Accounting Standards/International Financial Reporting Standards SUMMARY DETAILS OF TECHNICAL PROGRESS TO DATE IN THE CCCTB WG Accounting standards and financial and tax accounting dependency The degree of linkage between financial accounts and tax accounts or the tax base is a perennial issue. Even though many companies now prepare their financial accounts in accordance with International Accounting Standards and International Financial Reporting Standards (IAS/IFRS)4 many are still required to use national accounting standards instead of IAS/IFRS. As not all companies use the same accounting rules, the continuation of 'dependency' of tax accounts on financial accounts and/or 'reversed dependency' is conceptually impossible. Currently there are 25 different sets of national financial accounting rules. Accordingly, financial accounts prepared in accordance with these 25 different sets of rules cannot be directly linked with a single identical common tax base. Some form of reconciliation will be necessary at national level. It follows that the CCCTB legislation will have to explicitly contain definitions which in many Member States are currently simply taken from their national accounting rules and regulations for the purposes of their national tax base. newly developed tax base should be firmly based on established tax principles and at the first meeting of the WG a series of possible principles were discussed. This should form a useful 'checklist' against which to evaluate possible solutions which emerge during discussions on individual elements. However, it was not considered desirable or necessary, at the beginning of the exercise, either to formally agree on a final set of principles, or to prioritise individual principles which may conflict in certain instances. was any decision taken on whether or not a formal statement of principles should be adopted as part of the CCCTB, although it was noted that no currently has such a statement in its legislation. There seems to be a wide consensus that the current flexible approach is the most appropriate and there are no plans to propose formalising a statement on tax principles at this stage. During the discussions on principles it was noted that they are generally discussed in the context of an overall tax system, i.e. including the base and the rate; the company and the individual shareholder. They are therefore not automatically transferable to the current exercise, which concerns the corporate tax base. However, certain elements are clearly relevant, notably the principles of efficiency (also described as neutrality, particularly in relation to different types of investments) simplicity, transparency and certainty. The design of a new tax base creates a 'golden' 4IAS International Accounting Standards: accounting standards issued by , now issued as Financial Reporting Standards. opportunity to satisfy these principles and the Commission wishes to underline in particular the importance of simplicity. Structural elements of the tax base As outlined in the main text, work has already started on four main structural elements: (i) fixed assets and depreciation (including capital gains), (ii) reserves, provisions and liabilities, (iii) net taxable income and (iv) international aspects. Fixed assets and depreciation (including capital gains) In general, discussions on assets and tax depreciation and on capital gains and losses have been fruitful and the sub-group dedicated to this issue has identified common approaches in several areas. These include the definition of a depreciable asset, the need for a uniform definition of when to recognise an asset and the approach to intangible assets, in particular the distinction between purchased and self-created intangibles. A number of relatively detailed issues have also been covered such as assets of very low value, and an approach to legal as opposed to economic ownership. There remain varying views in other areas such as how to deal with major repairs to damaged assets. The discussion and analysis made by the sub-group and main WG will represent valuable input and a starting point for the Commission's eventual proposal but input from outside the WG will also have to be taken into consideration. The main issue on which there are varying views concerns the choice between individual asset depreciation and pooling. Individual asset depreciation requires that the useful life of every asset be estimated when purchased, and depreciated individually over its useful life. In practice, detailed tables of assets and their useful lives are maintained by the tax administrations that follow this practice. Depreciation by pooling assumes that all assets in a pool have a common 'life' and it is the pool that is depreciated, rather than individual assets. It is much simpler since administrations do not need to maintain detailed lists of individual assets and their estimated useful lives, although it may be less accurate. The possibility of a series of pools deserves further examination, in the Commission's view, as a possible compromise solution. The Commission is convinced that pooling is preferable for the CCCTB as it is simple and efficient and believes that a compromise based on a small number of pools should be possible. Simplicity and efficiency are fundamental goals of the CCCTB and the necessary harmonisation of the several existing national tables indicating the useful lives of several thousand individual depreciable assets would represent a very demanding, time-consuming task which, even if it were possible to achieve in a timely fashion, would contribute to neither simplicity nor efficiency. Pooling furthermore has the added advantage that it also addresses a number of linked issues such as the provision of tax relief on the sale of certain assets ('rollover relief'), which under an individual asset approach remain to be resolved. Reserves, provisions and liabilities Granting a tax deduction when a provision is created rather than waiting for the actual expenditure to be incurred 'only' advances the deduction, so the potential loss of revenue to a tax administration is 'only' the time value of recognising a deduction early. However, there is currently a wide range of practices in Member States, and some of the potential provisions, for example those relating to environmental cleanup costs, could be large in relation to the tax base of an individual entity. As regards definitions, good progress has been made, relying heavily on the existing definitions available in IAS/IFRS, such as the definitions that 'provisions are liabilities of uncertain timing or amount' and 'liabilities are present obligations of enterprises arising from past events'. However, reconciling the different methodologies for granting tax deductions currently used by Member States has proved difficult. The Commission believes that the two main approaches discussed (provisions generally tax non-deductible with a list of tax deductible exceptions, or, provisions generally tax deductible with a list of tax non-deductible exceptions) are not as opposed as they may appear. Both techniques should lead to the same results providing the underlying defined principles of what should be tax deductible are the same. The Commission prefers the concept of preparing a general definition of tax deductible provisions supported by a list of non-deductible exceptions as this seems to be the most efficient way of proceeding. specifically, discussions on provisions for environmental clean-up costs have highlighted one of the situations where a company may be legally required by national 'non-tax' legislation to create certain provisions. There now seems to be general acknowledgement at the technical level that a degree of mutual recognition of national legal requirements will be necessary, which has important implications beyond environmental policy, for example where certain expenses are incurred as a result of national legislation. As regards provisions this also seems to satisfy the principle of 'ability to pay' in the sense that deferring the recognition of a provision for clean-up costs until they are incurred which may be when the operations have ceased may leave the company with no profits with which to 'pay' for the clean-up. Other non-tax considerations have also influenced the discussions on this subject. For example, where financial accounts and tax accounts are closely linked and these 'dual purpose' accounts are also used for other purposes, such as defining what amounts can be distributed as dividends to shareholders, changes to existing practices may appear to cause problems in some Member States. However, it is not the aim of the CCCTB to harmonise legislation beyond that related to the calculation of the tax base. Care therefore needs to be taken to ensure that these 'non-tax' considerations do not take on too much significance. For example, it should be possible to define distributable reserves at the national level in such a way that the tax treatment in the CCCTB is either recognised or not recognised, depending on an individual Member State's approach to which reserves may be distributed. Work on defining the structural element 'taxable income' began in . Three main factors have been identified: the definition of income, the definition of expenses and the methodological issue of how the calculations should be carried out. As regards income, one of the initial questions concerned whether or not a distinction should be made between business and non-business income. Although no firm conclusions have been reached there is comparatively support in the WG for creating such a distinction. In general terms there are clear similarities between national tax bases but when detailed transactions are considered the issue is more complicated. For example, the question of timing, as regards the point when a transaction should be recognised as having taken place, is particularly complex. Currently, national civil law generally provides the solution but within the CCCTB it will not necessarily be possible to rely on national civil law as this could result in differences: the fine details of civil law are not harmonised across the EU. Work done on capital expenditure and depreciation will provide a useful reference point for taking discussions further. Similar issues arise in relation to expenditure and it will be important to ensure that the definitions of income and expenditure are consistent, as clearly one company's expenditure generally represents an item of income in another company. In this context the treatment of long-term contracts requires special attention. The provision and use of services, as opposed to goods, represents another 'sub-set' of transactions for which suitable definitions need to be finalised. Lastly, the methodological issue of how the calculations should be carried out will have to be resolved. Here, the issue is to what extent formal reference to the opening and closing balance sheets should be made and whether this should be the main focus of computing income or whether it should be the profit and loss account, which is the primary source of information. In this regard, the concept of the tax balance sheet and whether this should form part of the CCCTB will be addressed. This is linked to a certain extent to the issue of tax and accounting dependency. With no common set of rules for the preparation of financial accounts, if the balance sheet forms a primary part of the tax calculation the CCCTB may have to include specific rules defining elements of the 'tax' balance sheet. National tax systems include rules for the tax treatment of income earned by their residents in third countries, and also for the tax treatment of income earned by nonresidents (companies resident in third countries) which arises within their territory. In order to avoid double taxation, Member States traditionally conclude bilateral double taxation conventions with third countries to provide a set of rules for determining taxation rights. Currently such conventions are also in place between EU Member States. The latter will assume less importance when the CCCTB is implemented but if not all Member States implement the CCCTB a number of issues will arise between these States and 'CCCTB' States. However, at this stage work is concentrating on examining the issues assuming all Member States implement the CCCTB. The territorial scope of the CCCTB is being examined closely. As the consolidated base will be 'shared out' between Member States it is particularly important to ensure that a robust definition of the limits of the CCCTB the 'waters edge' be established that can apply across the EU, and that can be adopted with minimal impact on existing double tax conventions with third countries. Some improvements to conventions may be desirable in the long term but the Commission is keen to ensure that the CCCTB can work within existing conventions as far as possible. Work is still at the stage of identifying the main issues but it is clear that this area is of fundamental importance for the success of the CCCTB. For example, it will be particularly important to ensure that Member States can continue to protect their share of the tax base against potential erosion and avoid the situation where third country losses can be imported into the CCCTB area but profits remain outside. At the same time, if the CCCTB is to bring the expected benefits, some adaptations to existing national approaches will be required in order to provide a uniform base for 'sharing out' between Member States.