EUROPEAN COMMISSION Strasbourg, 25.10.2016 SWD(2016) 341 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposals for a Council Directive on a Common Corporate Tax Base and

a Common Consolidated Corporate Tax Base (CCCTB) {COM(2016) 683 final}

{SWD(2016) 342 final}



Table of Contents 1.Introduction 2.The problem and why the European Union should act 2.1.Problems with corporate taxation in an international context 2.2.Corporate taxation and its impact on financing and investment decisions 2.3.How the problems affect stakeholders 2.4.Baseline scenario based on recent developments 2.5.Subsidiarity and proportionality, EU added value 3.Objectives 3.1.General objective: Enhancing the fairness of the tax system 3.2.General objective: Stimulating growth and investment 4.Policy options 4.1.Option 1: No further EU action 4.2.Option 2: CCCTB with a scope definition 4.3.Option 3: Solutions to address the debt bias 4.4.Option 4: Options to incentivise R&D 4.5.Option 5: Staged approach 5.Analysis of impacts of the options

5.1.Baseline vs CCCTB 5.2.Scope of the common consolidated base 5.3.Addressing the debt bias 5.4.Treatment of R&D expenses 5.5.The staged approach 5.6.Impact on SMEs 5.7.Social and environmental impacts 5.8.Conclusion on the preferred option 5.9.Choice of the corresponding policy instrument 6.Monitoring and evaluation 6.1.Monitoring arrangements 6.2.Evaluation 7.Glossary 8.References 9.Annexes Annex I: Procedural Information Annex II: Stakeholder Consultation – Synopsis Report Annex III: Who is affected by the initiative and how Annex IV: Analytical Models used in preparing the Impact Assessment Annex V: Formula apportionment

Annex VI: The Anti-Tax Avoidance Package Annex VII: Compliance Costs Annex VIII: The 2011 Proposal for a CCCTB Annex IX: Impact of the CCCTB on intra-group profit shifting Annex X: Measuring the cost of capital and effective average tax rates Annex XI: Existence and design of R&D tax incentives in the EU Annex XII: The impact on tax revenues Annex XIII: Sensitivity analysis on the AGI and the ACE



1.Introduction The taxation of multinational companies has come under scrutiny by tax administrations, tax experts and the general public in recent years. More and more evidence suggests that considerable amounts of corporate income generated in cross-border activities find ways to avoid taxation. The business models of multinational companies have become more complex, intra-group transactions have multiplied and multinationals' integrated value chains make it difficult to determine where profits are created. Governments struggle to determine within the current set of international tax rules which country should tax a multinational's income. Smaller businesses are put at a competitive disadvantage and citizens perceive tax systems as unfair since some corporate taxpayers might be able to avoid taxation by exploiting tax planning strategies. This perceived lack of fairness threatens the social contract between governments and their citizens and may impact overall tax compliance. More generally, the international tax rules suffer from inefficiencies and are non-transparent. On the other hand, companies still face a very complex patchwork of 28 national systems with high compliance costs and risks of double taxation. The Commission announced in June 2015 to re-launch the proposal for a common consolidated corporate tax base (CCCTB) to address these issues. This report presents the main findings from the impact assessment for this re-launch. The CCCTB was previously proposed by the European Commission in 2011, based on an impact assessment concluding that it would greatly improve the business environment in the single market, making it simpler and cheaper for companies to operate cross-border. Since 2011, new issues have come into light that reinforce the need for a common approach to corporate taxation in Europe. First, aggressive tax planning strategies of multinational corporate groups have become more prevalent. As outlined above, these tax avoidance activities undermine the very principle of a deeper and fair single market and generate frustration among honest taxpayers who in recent years had to make additional efforts to consolidate public finances after the economic and financial crisis. Second, the financial crisis has shed light on tax-induced corporate financing structures that weaken the resilience of businesses and put at risk the financial system and more generally the economy. Ideally, an efficient corporate tax system should be neutral with regard to the financing and investment decisions of companies. Third, European growth and investment remain subdued and businesses in the EU are not investing enough in R&D activities in comparison to other major economies. European businesses need to remain competitive and innovative in a globalised world. The corporate tax system can play an important role in ensuring effective taxation while minimizing negative impacts on investment and growth. The introduction of a CCCTB is central to those issues, as it aims to fundamentally reform corporate taxation and provide a European solution to the current challenges in the international tax policy arena. It has been recognised that the CCCTB can serve as a powerful tool in the fight against corporate tax avoidance by removing exploitable differences and mismatches between national systems. To safeguard the CCCTB against profit shifting to third countries, it also needs to be equipped with common anti-avoidance provisions, as spelled out in the June 2015 action plan. A single set of corporate tax rules will not only remove tax obstacles in the single market, but will make Europe more attractive to domestic and foreign investment. By making EU tax law simpler and reducing regulatory costs, it is expected to contribute to a clear, stable and predictable regulatory framework and improve tax certainty. At the same time, it provides for the opportunity to address existing financing and investment distortions and ensure sufficient R&D incentives. The CCCTB would hence contribute to the Commission's top priority of creating jobs, growth and investment. Accordingly, the June 2015 action plan identified the CCCTB as a potentially effective tool to make corporate taxation fairer and more efficient. The action plan announced the re-launch of the CCCTB, while clarifying that it needed to be strengthened to address the current challenges in taxation. In that respect, the action plan referred to the fact that the CCCTB should be made compulsory, at least for multinational corporations, and that R&D incentives and measures to address current distortions would be considered. Developing a staged approach to implementing the CCCTB was recommended, focusing first on the common corporate tax base (common base henceforth) and in a second stage on the consolidation. The action plan also recalled the detrimental impact on European competitiveness of the current heavy compliance costs and administrative burdens created by the patchwork of 28 different national tax bases. The re-launch of the CCCTB has been included in the 2016 Commission Work Programme under the priority of creating a deeper and fairer single market. The work programme has also announced the withdrawal of the 2011 proposal. The 2016 re-launch builds on the 2011 proposal and adds the new elements as described above. The analysis conducted in 2011 showed that the CCCTB has the potential to bring simplification and reduce costs for companies. It therefore contributes to the Commission's regulatory fitness and performance programme (REFIT). The CCCTB initiative has also been identified as one of the important milestones for building a capital markets union (CMU). In this context, the Commission committed to address the issue of the debt-equity bias as part of the re-launch of the CCCTB. The preferential tax treatment of debt represents an obstacle for creating a stronger equity base in European companies.

The CCCTB is a major reform proposal to address the current challenges in corporate income taxation, but experience so far has shown that its negotiation in Council will need time. To address the most pressing issues in fighting aggressive tax planning the Commission committed in the June 2015 action plan to other actions aimed at ensuring in the shorter term effective taxation where profits are generated, a better tax environment for business, greater tax transparency and strong EU tools for coordination. As a result, the Anti-Tax Avoidance Package followed in January 2016. It includes legally-binding anti-avoidance measures necessary to reduce aggressive tax planning. Tax transparency has been boosted by the Commission's proposals on tax rulings and on country-by-country reporting. The Anti-Tax Avoidance Package complements existing initiatives and forums to ensure effective taxation and transparency, such as the Code of Conduct or the Joint Transfer Pricing Forum. Compared to the more short-term measures, the re-launched CCCTB offers a holistic solution, which allows tackling important root causes of the tax avoidance problems. The CCCTB defines the rules for calculating the taxable profits of a company. The tax base definition would be the same in all Member States under a CCCTB. However, the CCCTB does not seek to harmonize the national corporate tax rates. The level of taxation as determined by the statutory tax corporate rate remains a national decision. The CCCTB does not change either the domestic corporate tax systems for companies that are not captured by the scope of the directive or have not opted in. Also, the CCCTB does not replace bilateral tax treaties and transfer pricing rules which are still needed vis-à-vis third countries. This impact assessment and the new CCCTB proposal build on the extensive work done by the CCCTB working group, the 2011 impact assessment and the technical work done in collaboration with Member States following the 2011 proposal. The impact assessment presented in this document should thus be seen as part of a wider package of technical studies on the subject, complementing the existing material with further evidence, with a focus specifically on the new elements and objectives. Due to the CCCTB's potential to considerably simplify the corporate income tax system in the EU, this document was prepared as a regulatory fitness project of the European Commission. The impact assessment is based on the following logic: The analysis starts with the withdrawal of the 2011 proposal. The absence of a CCCTB proposal coupled with the introduction of recent anti-tax avoidance initiatives is the baseline scenario. The impact of introducing a CCCTB as envisaged in 2011 is assessed and the analysis is further developed by studying the impact of possible new proposed elements to the CCCTB: a compulsory requirement for some companies, a solution for the debt bias, a tax incentive for R&D and a staged approach for its introduction to facilitate the political process. The analysis concludes that the preferred option would be a CCCTB that is mandatory for very large multinational companies and optional for others, that includes an allowance for growth and investment (AGI) with well-designed anti-avoidance measures and that contains an additional allowance for R&D expenses. Box 1: The 2011 proposal for a CCCTB The Commission has highlighted the issues and challenges of corporate tax systems in an Economic Union as well as their role for competitiveness vis-à-vis third countries for many decades. In 2001, the Commission presented a communication identifying concrete steps to eliminate tax obstacles to cross-border trade in the EU. This was followed by 10 years of technical preparation, culminating in the Commission's 2011 proposal for a CCCTB. The Commission tabled in March 2011 a proposal for a directive on a CCCTB which lays down common rules for the calculation of the tax base applicable to companies operating in the EU. This EU tax framework comprises a full set of corporate tax rules to calculate the individual fiscal results of companies and permanent establishments which are tax resident, or situated, in the EU. The system includes rules for consolidating those results (profits and losses) when there are other group members and to apportion the consolidated tax base to all relevant Member States if it is positive. In other words, a qualifying company or group of companies would have to comply with only one set of rules for computing its taxable income, rather than different rules in each Member State where it operates. The consolidated tax base would be apportioned on the basis of a fixed formula comprising three equally weighted factors: sales (by destination), labour and assets. Each Member State would apply its own tax rate to the share of the tax base apportioned through the formula. Only the calculation and apportionment of the tax base would be harmonised. Member States would retain the power to set their own tax rates. The CCCTB was proposed as an optional system. All companies, irrespective of size or whether they had cross-border operations, would be entitled, but not obliged, to apply the system, provided that they fulfilled the eligibility requirements of the Directive. The proposal also includes anti-abuse rules and stipulates how Member States should administer the CCCTB under a 'one-stop-shop' approach. In 2011, the CCCTB was primarily envisaged as a tool for removing tax obstacles which companies occasionally suffer when they operate cross-border within the internal market. Companies would thus benefit from cross-border loss relief, which is an automatic outcome of consolidation (i.e. no more paying tax on profits in one Member State to the extent that unrelieved losses are being made at the same time in another Member State). The apportionment of the tax base through a formula would remove the requirement for lengthy and costly recording and negotiating of intra-group transactions at notional arm's length prices (i.e. no more transfer pricing within a CCCTB group). Accordingly, compliance costs would be reduced by providing for a single set of tax rules for calculating the tax base. Having a common set of rules would also reduce the possibility of double taxation or double non-taxation and mismatches in general. Intensive technical discussions followed in Council. After a first reading was completed, the High Level Working Party (HLWP) agreed in March 2013 that work on the proposal should be structured as a step-by-step approach and Member States should prioritise the matters related to the tax base. Accordingly, consolidation would have to be addressed in a second step once the work on the base would have been sufficiently advanced. At the time, Member States also stated that the proposal was not yet ready for a political discussion. After technical work on the elements of the tax base was accomplished, attention shifted towards highlighting the link between the CCCTB and the OECD initiative against Base Erosion and Profit Shifting (BEPS). In this framework, discussions focussed on the international aspects of the tax base as well as certain elements of the CCCTB system, such as controlled foreign company (CFC) legislation and the interest limitation rule. Both are closely linked to the OECD BEPS work. At the informal ECOFIN of October 2014, the Council discussed how to make concrete progress on the CCCTB in the short to medium term. It was concluded that future work should primarily be centred on the international aspects of the system. On 28th January 2016 and while work on the re-launched CCCTB proposal was progressing, the Commission tabled a proposal for a directive against tax avoidance practices. As a matter of fact, the proposed instrument included most of the elements of the international and BEPS related aspects of the CCCTB in an effort to lay down a coordinated approach to implementing certain common minimum standards against tax avoidance in the EU. 2.The problem and why the European Union should act 2.1.Problems with corporate taxation in an international context Drivers The taxation of multinational companies has increasingly come under scrutiny in recent years. The business models of multinational companies have become more complex and increasing evidence suggests that considerable amounts of corporate income can avoid taxation. The root of the problem stems from current international practices for the distribution of taxable profits in combination with the increase in capital mobility over the last decades. Capital mobility within the EU has been fostered by the increased economic integration following key achievements towards a single market and the implementation of a common currency in the euro area. While this has helped businesses in their cross-border activities and increased welfare of citizens, the increased capital mobility conflicts with the lack of coordination of tax policies at the international level. Not only do tax obstacles still exist in the single market, but tax authorities also struggle to determine which country should own the rights to tax which share of a multinational's income. Figure 1: Problem tree Source: European Commission The interplay between these factors creates incentives for governments to compete for highly mobile tax bases, notably accounting profits as well as income related to intangible assets. In fact, the economic literature shows that governments have reacted to increased mobility by reducing the statutory corporate tax rates while broadening the tax bases to lower the risk of profits being shifted outside the country. Governments have also implemented specific regimes to attract highly mobile tax bases such as royalty and license payments. This form of tax competition increasingly replaces tax competition based on headline statutory tax rates and opens up new non-transparent tax planning opportunities. Recent evidence points to tax competition being particularly strong within the EU due to the high economic integration and low trade costs within the EU (Streif, 2015). The continued strengthening of the single market with respect to goods, capital and labour in the absence of tax harmonisation has intensified this effect (Redoano, 2014). While incentives for tax competition have increased, there is at the same time a tendency to protect domestic tax bases through anti-avoidance rules. Introducing anti-abuse measures by Member States is a valuable short-term solution to fix the most pressing issues. However, the uncoordinated implementation of such measures can create new barriers to cross-border investments and thereby hamper the overarching goals of the single market, the creation of a capital markets union and the overall attractiveness of the EU at the global level. Moreover, they render the international corporate income tax (CIT) system ever more complex, which in itself may exacerbate the tax avoidance problem. More generally, uncoordinated national actions contribute to creating new tax mismatches and loopholes that can be exploited by multinational firms. Problems Improvements in the tax area to the functioning of the single market have brought some key advantages to multinational companies active in several EU countries. Notably, they benefit from withholding tax exemptions on intra-group interest, royalty and dividend payments and from tax-neutral cross-border reorganisations, as well as a fairly narrow application of controlled foreign company (CFC) rules between most EU Member States. In short, they are treated as if they were operating only domestically. At the same time, their multinational group structure allows them to exploit mismatches in the interaction of national tax systems, locate intellectual property where they achieve the most attractive tax savings and treaty-shop in the EU for the most attractive withholding tax regimes vis-à-vis a specific third country. The existence of tax avoidance in the form of profit shifting and base eroding practices is demonstrated in many academic studies. Although the extent of these practices and their impact on total tax revenues is hard to measure, the existing evidence suggests it is considerable. The OECD/G20 BEPS report on Action 11 for example estimates the revenue loss at the global level at 4-10% of CIT revenue, i.e. USD 100-240 billion annually at 2014 levels. In a study covering 51 countries, the IMF concludes that "the (unweighted) average revenue loss is about 5 per cent of current CIT revenue – but almost 13 per cent in non-OECD countries". Additionally, a recent study commissioned by the European Parliamentary Research Service finds that the revenue loss from profit shifting amounts to about EUR 50-70 billion in the EU, equivalent to 17-23% of CIT revenue in 2013. Other studies have not attempted to measure the total revenue loss, but are nonetheless indicative of the potential size of the problem. Lee et al. (2015) find that 22% of companies in their sample have a 'large tax gap', meaning that their tax payments correspond to at most 90% of the taxes they would theoretically owe according to where they generate their revenues. Furthermore, there is evidence of the sensitivity of affiliates' profits to CIT rates: reported profits are higher in low-tax jurisdictions than in high-tax jurisdictions. Synthesizing 25 studies, Heckemeyer and Overesch (2013) find that an increase in the CIT rate by 1 percentage point leads to a lowering of affiliates' pre-tax profits by 0.8% on average.

An important cross-border tax obstacle for companies active in several Member States is having to deal with up to 28 different rulebooks and up to 28 different tax administrations. They also have to deal with international rules set by bilateral tax treaties between Member States. In addition, they are faced with an extremely complex system for determining how intra-group transactions should be taxed (transfer pricing), and often cannot offset their losses in one Member State against profits in another. The result is that most businesses are faced with high costs and complexities, while smaller businesses are often completely deterred from expanding within the EU. This could be particularly detrimental for young companies that foster innovation dynamics and are an engine of job creation. Cross-border obstacles hindering the functioning of the single market motivated the 2011 proposal for a CCCTB and most of the 2011 findings on these obstacles are still valid today. A majority of companies find the current regimes difficult to operate, particularly transfer pricing requirements and dealing with audits in various Member States. The latest available statistics under the EU arbitration convention show that the number of pending disputes has further increased since 2008 and the number of requests to resolve disputes has also gone up in recent years. Moreover, the growing number of anti-avoidance regulations adds to the complexity of the international corporate tax system, potentially creating additional double taxation cases and leading to higher administrative costs for both businesses and administrations. Consequences The negative consequences resulting from corporate tax avoidance, the complex international tax system and other tax obstacles are manifold, but they particularly raise issues of fairness among taxpayers and may constitute barriers to cross-border investment. Tax avoidance leads to a poor congruence between the jurisdiction where the value is created and the one where corporate profits are taxed. This contributes to an unfair distribution of the tax burden, alongside a tendency of national governments to respond by tapping less mobile tax bases, an additional benefit for multinational businesses. In the light of fiscal adjustment needs following the economic and financial crisis (public debt levels have increased in the EU from around 58% of GDP in 2007 to an estimated 86% of GDP in 2017), many governments have cut expenditures and increased taxes, notably on consumption, to consolidate public budgets. This has raised a question about multinationals and their fair contribution to government budgets. There is clear evidence for an uneven playing field between multinational entities and domestic firms. A recent study by the ZEW (2016c) has shown that the use of cross-border tax planning in the EU can considerably reduce effective taxation levels ( Table 1 ). Tax planning reduces both the mean effective average tax rate (EATR) in the EU as well as the minimum and maximum EATRs. The average reduction is substantial. Lower effective taxation levels for multinational entities have also been evidenced empirically. For instance, Egger et al. (2010) compare the tax liabilities of multinationals with those of domestic firms and find that foreign-owned affiliates in high-tax European countries pay 32% less tax than domestically owned companies. A similar study by Finke (2013) for Germany finds a gap of 27%. Table 1: Impact of tax planning on effective average tax rates % Mean Min Max Average EU-28 percentage reduction Effective average tax rate domestic case 21.1 9.0 38.3 n/a Effective average tax rate after cross-border tax planning via Hybrid financing 13.7 4.3 26.6 -36.3% Intellectual property box (patent box) -1.6 -3.7 1.8 -108.3% Financing via offshore treaty 15.9 6.4 28.6 -25.0% Source: ZEW (2015, 2016c) and own computations Notes: Hybrid financing: A parent located in the EU or the US finances an intermediate company located in an 'EU average' country which grants a 'hybrid loan' to a subsidiary located in the EU. The hybrid loan is treated as equity in the EU average country and as a loan in the subsidiary country.

Intellectual property box: A parent located in the EU finances both, an intermediate company in an EU country that has an attractive intellectual property box regime and another subsidiary in the EU or the US. The intermediate company licenses the intellectual property to the subsidiary and receives royalties from the subsidiary. The figures show the extreme case where the intellectual property is the only productive asset of the multinational. .

Financing via offshore treaty: A parent located in the EU or the US finances an intermediate company located in a zero-tax country which has concluded tax treaties with EU countries. The intermediate company grants a loan to a subsidiary located in the EU and receives interest payments from the subsidiary.

Mean: In the domestic case the mean is the simple EU-28 average, while in cross-border cases, the mean is the average over all possible combinations of parent-subsidiary locations in the EU-28 and the US. Aside from the harmful perception of the tax system being unfair, including its negative impact on taxpayer morale (see discussion in Section 5.1), the resulting competitive distortions weigh negatively on the economy. Tax avoidance and aggressive tax planning by multinational companies distort price signals in the single market and thereby the allocation of resources. A recent study by the OECD estimates that mark-ups of multinational entities are on average 10% higher than those of domestic groups with similar characteristics while the mark-up of a tax-planning MNE is up to 23% higher. For multinational groups with links to zero-tax countries or operating in a large number of countries the mark-ups are estimated to be even higher. Multinational enterprises are also found to operate in more concentrated industries. Companies which use tax avoidance are more profitable and face lower capital costs compared to domestic companies. Higher mark-ups weigh on growth and are detrimental to equality. In addition, important economic resources are wasted on unproductive tax planning activities. On the other hand, the negative consequences highlighted in the 2011 impact assessment remain: high tax compliance costs and double taxation risks coupled with few possibilities for cross-border loss offset constitute an important barrier to cross-border investment and impede the EU's attractiveness as an investment destination. The main findings on tax compliance costs for firms from the 2011 impact assessment were that they are high and significant, mostly due to frequent changes and complexity of tax laws, and that they are regressive: The estimate for large companies is about 2% of taxes paid, while for small and medium sized enterprises (SMEs) the figure is about 30% of taxes paid. These findings are confirmed in a survey of empirical estimates by Eichfelder and Vaillancourt (2014) for the period between 1984 and 2014. Research also shows that those compliance costs do not appear to be diminishing over time. Evidence on cross-border tax compliance costs remains scarce, even though they are arguably higher than in the domestic case since the rules of two countries have two be applied in addition to international tax rules which have to be considered (double tax treaties). In line with this, the 2011 impact assessment finds that compliance costs increase with cross-border activity and with increasing number of subsidiaries. Early contributions such as the 1992 Ruding report provide a first survey of cross-border compliance costs for EU companies, which were found to be at around 3% of total income of the surveyed companies. A more detailed overview of the main findings on tax compliance costs is provided in annex VII. 2.2.Corporate taxation and its impact on financing and investment decisions Implementing a European corporate tax base offers the opportunity to create a more neutral and investment friendly tax system. This would contribute to a successful capital markets union, attract inward investment to the EU, and result in a more resilient corporate sector by removing financing distortions. Taxation is indeed a key component of the business environment. It influences companies' investment and innovation decisions through its impact on the cost of capital. Two issues stand out in particular: the debt bias and the tax treatment of R&D expenditures. 2.2.1.Debt bias Drivers and problems Most corporate tax systems favour debt over equity because interest expenses for debt are largely tax deductible in contrast to equity costs. The result is a difference in effective taxation between investments financed by debt and those financed by equity. The debt bias has been recognized by the European Commission and other relevant international organisations as a major problem. Figure 2: Cost of capital - difference between new equity and debt financing Source: ZEW (2015, 2016a)

Note: The graph shows the cost of capital at the level of the company for new equity and debt as well as the difference between them for each Member State in 2015. The indicator takes into account the ACE provisions in Belgium and Italy. The assumption is that the notional interest rate granted is equal to the market interest rate in the model. This results in full financing neutrality. Because of this different tax treatment, an equity financed investment needs to earn a pre-tax return that is higher than the one required by a debt financed investment. In a concrete example this means that if the investing company has an alternative safe investment that earns 5%, the investment financed by debt would need a pre-tax return of only 4%, while equity needs to earn 6.1%. Figure 2 presents this 'required return' - also called cost of capital - for Member States in 2015. It shows that the bias is present in nearly all countries, as the cost of capital for investment financed by new equity is larger than the cost of capital for investment financed by debt. Consequences There is ample empirical evidence that the corporate debt bias significantly affects financing decisions of companies, both in the financial and the non-financial corporate sector. In the non-financial sector, de Mooij (2011b) finds that a 10 percentage point higher corporate tax rate increases the debt-asset ratio by between 1.7 and 2.8 percentage points. The result is an increased indebtedness of non-financial companies due to the debt bias. The debt bias encourages non-financial corporations to use more debt than equity. The higher leverage makes companies more fragile and less resilient and may result in an increased volatility of the business cycle and disproportionate levels of bankruptcy costs. Indeed, Sørensen (2015) estimates that the debt bias leads to a debt-asset ratio which is about 2-3 percentage points above the socially optimal level. This is partly attributed to the fact that firms do not account for the welfare costs of financial distress when choosing their debt levels. The debt bias also has a negative impact on growth. According to research conducted at the Bank for International Settlements, debt levels exceeding 90% of GDP for the non-financial corporate sector become deleterious for growth. This negative effect of debt on growth is also identified by the European Central Bank (2014, p. 112). In 2014 the non-consolidated non-financial corporate debt level in percent of GDP was above that level in 18 of the 28 Member States and was above 150% in six of them. The debt bias misallocates capital and may hamper the growth of stock market capitalization, the latter being associated with higher GDP per capita. In addition, the debt bias is particularly detrimental for young and innovative firms, whose access to external funding is more difficult. Thus it puts at a disadvantage exactly those firms that are important for economic growth (including by slowing down the exit of highly-indebted low-productivity firms). As a consequence the welfare costs associated with the lack of deductibility of the cost of equity for young and innovative firms may be particularly relevant. Overall, the welfare impact is not negligible. Recent research has also shown that despite stricter capital requirements for banks, the debt bias also plays a significant role in the financing structure of financial institutions, in clear opposition with the aims of regulations strengthening the equity base. For banks with an amount of equity larger than the minimum regulatory requirement, the responsiveness of the debt-asset ratio to corporate tax rate increases is similar to the one for the non-financial sector. Moreover, the adverse impacts in the non-financial and financial sectors reinforce each other to the extent that the sectors provide funds to each other. By discouraging firms from building a strong equity base and tapping capital markets, the debt bias has contributed to excessive leverage also in the financial sector and potentially magnified the negative effects of the financial crisis: Langedijk et al. (2014) and de Mooij et al. (2014) find that eliminating the debt bias could decrease both the likelihood of financial crises and their costs for public finances. The potential gains from the reduced probability and cost of crises are estimated by both studies to be between 0.5 and 11-12% of GDP (reflecting the low and high range of tax elasticities). Finally, the preferential tax treatment of debt generates opportunities for aggressive tax planning. At a cross-border level, the deductibility of interest expenses creates opportunities to decrease reported profit via debt-shifting – for example by using hybrid instruments (considered as equity in one country, but as debt in another). Figure 3 summarises the different drivers and consequences of the debt bias. Figure 3: Problem tree – Debt Bias Source: European Commission 2.2.2.The tax treatment of R&D expenditures Drivers R&D investment is a key driver of productivity and economic growth. However, private companies do not sufficiently invest in R&D from a welfare perspective. The reason is that companies do not take into account the positive externality from knowledge spillovers which benefit the whole economy. Indeed, the social returns from R&D investment are estimated to be two to three times higher than the private returns of firms on the investment. In addition, the risk and the uncertainty of returns are much higher for R&D investments and their returns are highly skewed, which again leads to lower investment. The IMF (2016) shows that fully internalizing the externalities of R&D would lead to 40% higher investments compared to the status quo. Such an increase could lift GDP in individual economies by 5% in the long term - and globally by as much as 8% due to international spillovers. Figure 4: Evolution of business R&D intensity, 2000-2014 Source: DG Research and Innovation, based on Eurostat and OECD data. Business R&D spending in % of GDP Notes: Business R&D intensity measured as business R&D expenditure in % of GDP.

(1) South Korea: break in the series between 2007 and the previous years.

(2) USA: business enterprise expenditure on R&D (BERD) does not include most or all capital expenditure.

(3) China: break in the series between 2009 and previous years. Problems and Consequences

The underinvestment in business R&D is particularly pronounced in the EU. While the world is becoming more R&D-intensive, the relative weight of the EU is decreasing, mainly due to the rapid rise of China. The EU is moreover not on track to reach its target of investing 3% of GDP in (total private and public) R&D by 2020. The underinvestment in business R&D is one of the reasons behind the widening of the EU's productivity gap compared to the US. The shortfall mainly reflects a deficit in business R&D expenditure. Business in the EU spend far less on R&D than businesses, e.g. in the US and Japan, and the latest figures show a further increase of the gap (Figure 4). To reach the 3% R&D target, large additional R&D investments are needed. Assuming that two thirds of the investment should come from the private sector, the business R&D investment gap was EUR 98 billion in 2014. Figure 5: R&D intensity and business R&D intensity projections for the EU Source: DG Research and Innovation, DG Eurostat Notes: R&D intensity is measured as R&D expenditure in % of GDP.

(1) The projections based on trends are derived from compound annual growth in R&D intensity and business R&D intensity between 2007 and 2014.

(2) R&D intensity: the projection is based on R&D intensity target of 3% for 2020.

(3) Business R&D intensity: the projection is based on a business R&D intensity target of 2% for 2020. R&D tax incentives are an important policy tool, which is now used by the majority of EU countries (and beyond). In response to the challenging economic environment, almost all Member States widened their R&D tax incentives and five other countries have introduced new measures. The OECD (2016) estimates that R&D tax support accounted for at least 43% of fiscal support for business R&D in 2013. However, not all measures are effective. The diversity of schemes could result in an increasingly complex landscape for R&D tax treatment in Europe hindering trans-European collaboration. In its 2006 Communication on the more effective use of tax incentives in favour of R&D, the Commission already encouraged Member States to improve the use and coordination of R&D tax incentives. Figure 6 summarises the different elements discussed above in a problem tree which relates drivers, problems and consequences. Figure 6: Problem tree – R&D Source: European Commission 2.3.How the problems affect stakeholders Multinational enterprises are negatively affected by the problems outlined above to the extent that they have to deal with numerous national tax systems which creates high compliance costs and uncertainty. On the other hand, some companies do benefit from the tax planning opportunities generated by the current international tax architecture. SMEs face high costs of investing and growing abroad due to differences across national tax systems. There is no level-playing-field since SMEs cannot reduce their tax burdens by tax planning measures which leads to distortions in the internal market and raises fairness issues. The current tax systems provide incentives for Member States to possibly engage in harmful tax competition to attract highly mobile tax bases. As a consequence of such tax competition, some Member States will lose tax bases, while others gain from adopting tax provisions that are advantageous for attracting mobile tax bases. Citizens perceive the fairness of tax systems being hampered by the fact that some taxpayers have means to reduce their tax burden significantly by playing with the rules. This perception can reduce overall tax morale and more broadly damage the social contract between citizens and governments. 2.1.Baseline scenario based on recent developments The baseline scenario assumes that the CCCTB as tabled in 2011 is withdrawn. It reflects the latest initiatives to clamp down on corporate tax avoidance and ensure fair and efficient taxation in the EU. The June 2015 action plan acknowledged that the CCCTB is a very ambitious proposal that would require time to be completed. It identified several actions aimed in the shorter term at enhancing effective taxation where profits are generated, creating a better tax environment for business, enhancing tax transparency and strengthening EU tools for coordination. Following the crisis and the increased revenue needs, the OECD proposed an action plan on base erosion and profit shifting (BEPS) to reinforce the current international tax rules and stabilise national tax bases. The BEPS project focuses on the interaction of different (national) tax rules and tries to detect and close loopholes in the current tax architecture. The action plan laid the basis for developing an EU approach to implementing some international aspects of the common base that are linked to the OECD/G20 BEPS project. As a result, the Commission proposed in January 2016 the Anti-Tax Avoidance Package, made up of four proposals to ensure that tax is paid where the value is generated and that tax information is effectively accessed. The elements of the package are detailed in annex VIII. Its central element is the Anti-Tax Avoidance Directive, which was politically agreed by the Council on 21st June 2016 and legally adopted on 12th July 2016. It puts forward tax rules aimed at preventing that income goes untaxed (or taxed at very low level), inter alia an interest limitation rule, controlled foreign company rules, and rules on hybrid mismatches. The other elements of the package consist of: (i) an Amendment to the existing Directive on administrative cooperation to implement automatic exchange of information on country-by-country reports of multinational companies with consolidated revenues of at least EUR 750 million; (ii) a Recommendation on Tax Treaty issues; (iii) a Communication on External Strategy for Effective Taxation setting out a coordinated EU approach against external risks of tax avoidance and to promote international tax good governance. The Anti-Tax Avoidance Package complements existing initiatives and forums to ensure an effective taxation, enhance tax transparency and address the risk of double taxation. The proposal for an automatic exchange of information on tax rulings was adopted by the Council in December 2015. A proposal to introduce public reporting requirements for multinational entities with turnover above EUR 750 million was adopted by the Commission in April 2016. In line with the action plan of June 2015, the Commission is currently exploring various options for a coordinated EU approach to improve dispute resolution mechanisms, following a public consultation. The Commission is also willing to respond to the invitation for tabling a proposal on hybrid mismatches involving third countries, as this arises from the statement which accompanied the political agreement on the Anti-Tax Avoidance Directive.

Thus the baseline scenario, against which all policy options will be evaluated, is one in which there is no CCCTB, but the Anti-Tax Avoidance Package and public country-by-country reporting are implemented. 2.2.Subsidiarity and proportionality, EU added value Subsidiarity Although the problems and market distortions explained in the previous subsections have distinct origins, it seems that their harmful effects can be tackled effectively only through a common solution: that is, the approximation of corporate tax regimes in the EU would mitigate distortions in the market by creating a fairer and more coherent tax environment for businesses. For this objective to come into fruition, action is necessary to be taken not separately by Member States in an uncoordinated fashion, but at the level of the Union instead. Initiatives, planned and implemented by each Member State individually, would only perpetuate, or even exacerbate, the current situation, as taxpayers would still need to deal with 28 diverse and sometimes, conflicting tax systems. The envisaged re-launch of the CCCTB aims to respond to the need for increased growth and job creation in the post-crisis EU, as well as countering aggressive tax planning practices. All these objectives essentially seek to tackle problems beyond a single Member State which by nature require a common approach. In this light, any measures could only bring results if the rules were applied in a uniform fashion across the single market. If not, the landscape in the field of corporate taxation would remain fragmented and the current situation would persist, allowing fiscal obstacles and unfair tax competition practices to continue to flourish. What is more, tax avoidance practices are nowadays primarily set up in a cross-border context. It is indeed the interaction between different tax systems that generates opportunities for abuse or facilitates taking advantage of mismatches in the interaction of national corporate tax rules. In addition, the fact that the EU is an internal market with a high degree of integration presumes enhanced cross-border activity, which underscores the significance of agreeing to coordinated solutions. More specifically, most key features of the CCCTB system, such as relief for cross-border losses, tax-free internal group restructurings, the elimination of complex intra-group transfer pricing as well as the apportionment of revenues by a formula at the level of a group have a cross-border underpinning and could only be addressed within a context of common regulation. Thus, the EU added value follows from the fact that a certain degree of uniformity is necessary for the purpose of effectively tackling identified distortions in the market caused by mismatches, double taxation or non-taxation. Common rules are also a prerequisite for creating a 'one-stop-shop' for companies or groups of companies operating across the EU. Considering the scale and effects of the envisaged CCCTB, its objectives would be better achieved at Union level, to attenuate the distortions resulting from the current interaction of 28 national tax regimes and create more favourable conditions for cross-border investment in the single market. Proportionality The envisaged measures are both suitable and necessary for achieving the desired end. They do not go further than harmonising the corporate tax base, which is a prerequisite for curbing identified obstacles that distort the single market. Furthermore, the explored initiatives do not restrict Member States' capability to determine the composition and desired amount of tax revenues that they collect in order to meet their budgetary policy targets. In this regard, they do not affect Member States' sovereignty over setting their own corporate tax rates. Although the Commission has consistently promoted the coordination of national tax practices, coordination alone is not sufficient for eradicating tax-related distortions in the single market. Experience has shown that coordination is a slow process and the results of such exercises have hitherto been modest. Moreover, tax coordination typically addresses only specific, targeted issues and cannot cater for the wide variety of problems faced by companies in the single market. The rules would contribute to improving the functioning of the single market through a more efficient way for collectively managing problems that emerge from the interaction of disparate national corporate tax systems. EU added value The taxation of multinational companies in a framework of national corporate tax systems and bilateral tax treaties faces considerable challenges. While the integration of markets has made progress and generates benefits for companies as well as for citizens, the taxation of income from corporate activities across the EU remains a national task. This can lead to frictions in the single market due to tax obstacles. In this context, the value-added of EU action is to maintain and further improve capital mobility within the Union by decreasing compliance costs and tax obstacles. At the same time, EU action ensures that the activities of multinational companies within the EU do not avoid a fair level of taxation. An integrated EU approach to the taxation of corporate income allows Member States to tax the income generated within their boundaries with the corporate tax rate they consider appropriate. A common approach to an EU tax base therefore helps to re-establish the link between taxation and value creation. Acting at EU level would not only replace the current mechanism of taxing corporate profits with a system based on attributing income where the real economic activity takes place, it would also eliminate the costly transfer pricing procedures since the tax base would be consolidated at EU level. 3.Objectives The June action plan announced the CCCTB as a proposal to strengthen the single market by ensuring a fair, efficient and growth-friendly corporate tax system which is immune to aggressive tax planning practices and based on the principle that companies should pay taxes in the country where profits are generated. Work on this impact assessment has led to the identification of the following general and specific objectives, which are consistent with those of the action plan. 3.1.General objective: Enhancing the fairness of the tax system A first important aim is to enhance the fairness of the tax system by addressing some of the root causes of corporate tax avoidance by multinational companies. The specific objectives supporting this general goal are to (i) significantly reduce cross-border tax planning possibilities;

(ii) create a more level playing field between domestic and multinational companies; (iii) ensure that companies pay a fair share of the tax burden; and (iv) enhance general tax payer morale, which is currently seriously undermined by a strong perception that international players are largely escaping taxation. 3.2.General objective: Stimulating growth and investment The improvement of the business environment by removing single market tax obstacles was the central objective of the 2011 CCCTB proposal. This objective remains important in order to maintain or even enhance the competitiveness of companies in the EU and is reflected in the 10 Commission priorities which put an emphasis on strengthening jobs, growth and investment as well as the single market. The specific objectives to support this goal are to (i) significantly simplify within the EU the currently highly complex international system of corporate taxation to reduce compliance costs and administrative burden; and (ii) eliminate double taxation risks within the EU and remove still existing discriminations and restrictions. Supported by lessons learned following the financial crisis and given the still modest and uneven economic recovery, two more objectives have been identified that a reform of the corporate tax system for the EU should deliver: (iii) provide an approach to profit taxation that does not distort investment and financing decisions; and (iv) create more incentives to invest in the EU, inter alia by supporting R&D and innovation to safeguard and enhance current welfare levels. In light of the current underinvestment in business R&D (compared to its importance for innovation, productivity and economic growth), a minimum requirement should be that the preferred option maintains the current tax incentives for R&D expenses. Incentives going beyond the current levels in the EU need to be balanced against the revenue costs for providing such incentives. One should note that there is a trade-off between the general objectives. Notably, reducing costs for companies and fostering investment by more attractive allowances and deductions could in some cases be difficult to reconcile with ensuring effective taxation by reducing tax planning opportunities. In addition, it can also impact tax collection. Therefore the two general objectives need to be balanced. The objective to stimulate growth and investment needs to be put in coherence with the objective of enhancing the fairness of the tax system and should not result in more tax planning opportunities. Notably, experiences with some of the measures taken at national level to tackle the debt bias and to promote R&D point to the need for a specific anti-abuse design. Provided that due attention is given to the design and anti-abuse framework, reforms in these areas would actually provide for an opportunity to tackle specific tax avoidance channels. For example, addressing the debt bias could remove opportunities for groups operating cross-border to shift profit via the debt instrument. 4.Policy options In line with the action plan of June 2015 and the existing CCCTB proposal, the main option for a policy proposal will centre on the CCCTB as proposed and discussed in the Council since 2011 (see Box 1). This is in the following referred to as the 'central scenario'. The impact of having an interim stage without consolidation and apportionment, but with the possibility of some form of cross-border loss relief has also been examined (Sections 4.5 and 5.5). A key element within the options for a CCCTB is its scope (Sections 4.2 and 5.2), determining which taxpayers should be subject to mandatory application of the CCCTB and which taxpayers could be allowed to opt into the system. Further, there are naturally many different options to choose from for the design of the CCCTB. Most of the relevant design elements have been evaluated thoroughly in the preparations for the 2011 proposal. Discussions have subsequently progressed in Council. The present impact assessment therefore focusses on assessing options for new elements that were not yet discussed in the earlier proposal: measures to tackle the debt bias (Sections 4.3 and 5.3) and R&D tax incentives (Sections 4.4 and 5.4). Table 2 gives an overview of the intervention logic by linking problems, objectives and policy options as well as providing the context for the initiative. Table 2: Intervention logic Source: European Commission The analysis focuses on the new elements that are added to the original proposal, but all comparisons are always made against the 'no CCCTB' baseline scenario. Note also that the additional options (debt bias solution, R&D incentives, etc.) are analysed here as separate policy interventions, whereas they are in reality provisions of the corporate tax base included in the CCCTB proposal and not separate proposals on their own. 4.1.Option 1: No further EU action In case of no further EU action, the expected evolution of the current situation is as described in the baseline scenario. Notably, the CCCTB would not be implemented, but the Anti-Tax Avoidance Package is implemented and eventually public country-by-country reporting by large multinational entities will be in place. The root problems linked to current international practices for the distribution of taxable profits will largely remain. Differences in the treatment of debt- and equity-financing are likely to continue to push up indebtedness and bear on growth. Differences in the treatment of debt and equity across Member States will continue to offer tax planning opportunities. Differences in R&D tax incentives will continue to prevent the emergence of a single market for research, and promote tax competition strategies for the location of intellectual property, without increasing R&D activities. As a consequence, socially-inefficient levels of R&D may remain. Overall, as the internationalisation of the global economy is expected to continue, it is likely that tax avoidance strategies will continue to be sought after. In the long term, a shift to those avoidance strategies that are not at the centre of the more recent policy proposals can be expected. Even new strategies might be created, circumventing the new anti-avoidance rules and other measures that most likely will be in place in the near future.

4.2.Option 2: CCCTB with a scope definition To keep the exposition reasonably simple, only the main options for the scope are outlined below. Where relevant, sub-options on various design questions will be discussed in Section 5. 4.2.1.Option 2a: Optional for all firms Under this option, the CCCTB would be fully optional. Given the magnitude of tax savings that are currently achievable for those companies that use tax avoidance strategies most aggressively (see evidence in Table 1), it is unlikely that potential CCCTB benefits such as reduced compliance costs, enhanced R&D benefits or cross-border loss offset suffice to make these firms opt into the CCCTB. Consequently, a fully optional approach would not effectively fight tax avoidance and is thus not suited to enhancing the fairness of the tax system. This option is therefore not considered further in the analysis of impacts in Section 4. 4.2.2.Option 2b: Compulsory application for a defined set of firms and possibility to opt in for all others This option would make the application of the CCCTB compulsory for a defined set of companies, while giving all others the option to apply the CCCTB. The criteria for defining the compulsory element should ideally capture companies which are most relevant in the corporate tax avoidance context to comprehensively address corporate tax avoidance in the EU and not introduce any undue selectivity. Several criteria can theoretically be envisaged, alone or combined: (i) a sectorial approach, (ii) an approach targeting multinational entities via a definition of cross-border groups and (iii) a size approach. 4.2.3.Option 2c: Compulsory application for a defined set of firms without possibility to opt in for other firms This option would make the application of the CCCTB compulsory for certain companies, but would not allow other companies to opt into the CCCTB system. While such an approach would be in line with the objective of fighting tax avoidance in the EU, this option is clearly problematic vis-à-vis the equally important objectives of stimulating growth and investment and creating a level playing field. If the CCCTB delivers on its promise to provide for a simple corporate tax system which would reduce compliance costs and double taxation risks in the cross-border context, preventing some companies from applying the system is not appropriate. Indeed, to the extent that the CCCTB could provide more attractive design and compliance features than national tax systems, such an approach may imply granting an advantage on a selective basis which would be contrary to State aid principles. It may also raise concerns in terms of discrimination under the fundamental freedoms. Finally, stakeholders who expressed their views widely support a possibility to opt in. About 60% of respondents are in favour and only 9% reject the idea. Some of the opponents explain their rejection with concerns about tax planning possibilities. Not granting the possibility to opt-in is therefore not retained as an option in the analysis of impacts in Section 5. 4.2.4.Option 2d: Compulsory application for all firms This option would replace all existing national CIT systems with the single set of rules provided by the CCCTB. Member States would continue to determine tax rates at national level. Thus all corporations in the EU, irrespective of their size, group structure or cross-border activity would have to apply the CCCTB. 4.3.Option 3: Solutions to address the debt bias 4.3.1.Option 3a: No debt bias action The no-action case assumes that the CCCTB does not provide any specific measure to comprehensively address the debt bias. This implies that, as in the 2011 proposal, equity costs are not deductible while interest expenses remain deductible, though with limitations (notably those included in the Anti-Tax Avoidance Directive). 4.3.2.Option 3b: Non-deductibility of interest expenses Disallowing the deductibility of interest expenses would align the treatment of debt and equity costs. With full non-deductibility of interest expenses, interest limitation rules would become obsolete. 4.3.3.Option 3c: Allowance for corporate equity (ACE) An allowance for corporate equity grants a defined return for equity which is deductible from the tax base. The defined interest rate is usually close to or linked to a risk-free reference rate such as the interest rates of government bonds. Since the allowance is computed by multiplying a defined rate on a definition of equity, an ACE does not necessarily achieve full financing neutrality between debt and equity, but moves in any case the system closer to neutrality. The allowance can be designed in several ways. First, the allowance can apply to the total stock of equity (stock-based) or to the difference between current equity and equity at a specific date in the past (incremental-based). Second, the level of the defined rate can vary with the reference interest rate. Third, the design can include anti-abuse measures to avoid cascading of the benefits along the ownership structure of the corporate group. 4.3.4.Option 3d: Allowance for growth and investment (AGI) The allowance for growth and investment is one specific version of an ACE. The AGI is incremental with a moving reference date in the past. This means it is granted only for the sum of equity increases over a specific period (e.g. 10 years in the past). Also, the AGI foresees rules so that new capital can only benefit once from the deductibility.

4.3.5.Option 3e: Allowance for corporate capital (ACC) Under this option, companies may deduct a defined return on total capital, i.e. the sum of debt and equity. At the same time, it is no longer permitted to deduct actual interest expenses. Since there is only one rate applied to debt and equity, this option achieves full financing choice neutrality. The need for a limitation rule for the allowance would have to be examined. So far, it has not been implemented in practice. The same considerations in terms of stock versus incremental, the reference rate and the possible anti-abuse measures apply as for the ACE and the AGI. 4.3.6.Option 3f: Cost of capital allowance (CoCA) The cost of capital allowance combines a defined interest on capital at the corporate level with the inclusion in the profit of the shareholder of an amount equivalent to the ACE deduction obtained by the corporation and instead of actual dividends and interest. The CoCA is a far-reaching proposal that includes changes in the taxation of capital income at the level of individuals. The option for a CoCA is not retained in the analysis of impacts in Section 5 as it is too far-reaching. At corporate level, the effects of the CoCA are identical to those of the ACC. The same considerations in terms of stock versus incremental, the reference rate and the possible anti-abuse measures apply as for the ACE and the AGI. 4.4.Option 4: Options to incentivise R&D R&D tax incentives reduce the tax burden on R&D activities. They can target R&D inputs by supporting R&D related expenditure. Such measures either reduce the tax base by granting a deductible allowance or they directly reduce the amount of tax to be paid in form of a tax credit. Support measures can also be based on output, i.e. income generated by R&D outcomes such as patents. The latter offer reduced rates on R&D income. 4.4.1.Option 4a: No further action on R&D The no-action option assumes that, as in the 2011 proposal, all R&D expenses would be expensed immediately for tax purposes. However, to reflect concerns expressed by Member States in Council, it is also assumed that capital expenses on R&D buildings would not be expensed immediately, but depreciated in the same way as other buildings. No national R&D tax incentives would apply any more for companies applying the CCCTB. 4.4.2.Option 4b: Granting tax incentives for R&D expenses Under this option, the CCCTB would offer additional allowances or tax credits on R&D expenses, replicating tax incentives applicable under the national systems. 4.4.2.1. Additional allowance for R&D expenses An additional allowance decreases the tax base by deducting more than 100% of R&D expenditure. For example, a company could deduct an additional allowance of 50% of their R&D expenditure on top of the full deductibility of R&D costs, i.e. 150% in total. The effective level of generosity of the additional allowance varies with the applicable corporate tax rate. 4.4.2.2. Tax credit for R&D expenses Tax credits and additional allowances are economically very similar. The operational difference is that tax credits reduce directly the tax bill and therefore do not vary with the tax rate. However, tax credits go beyond the scope of the common base. Member States would give a tax credit after the computation of the tax liability which would be in opposition to the spirit of the CCCTB. By granting a tax reduction after the application of formula apportionment they would not ensure a level playing field for R&D in the EU and could induce harmful competition between Member States. Therefore this option is not retained. 4.4.3.Option 4c: Granting tax incentives for income from intellectual property Output-related incentives apply reduced rates to income generated by R&D, i.e. earned from exploiting intellectual property (patent boxes). The empirical evidence suggests that input-related incentives are more effective than patent boxes in stimulating R&D investments. Moreover, patent boxes have in recent years given rise to concerns of harmful tax competition. First, intangible assets play an important role in profit shifting as their location can be tax sensitive and can lead to large revenue losses. Evidence from ZEW (2016c) as summarised in Table 1 shows the considerable decrease in effective tax rates that multinational groups can achieve by exploiting patent box regimes. Second, patent boxes do not stimulate increases in R&D activity. Third, there is no clear rationale for using patent boxes as a means of stimulating innovation, as they do not appear to address any specific market failure. Instead, they award additional tax benefits to a successful innovation that already enjoys intellectual property protection. Research efforts that are not patentable with potentially higher social spillovers are less attractive and thus become indirectly discriminated. Finally, the compliance costs required to directly link R&D expenses to individual patentable efforts are significant and extremely complex for businesses and tax administrations. All in all, this option does not only go contrary to the objective of reducing tax avoidance and improving the fairness of the tax system, but also against the objective of stimulating additional research and innovation and simplifying the tax system. It is therefore not retained for further analysis. 4.5.Option 5: Staged approach Recognising the likely difficulties to adopt the CCCTB in one step, the June 2015 action plan announced that consolidation and formula apportionment would be postponed until the common base has been agreed and implemented. This impact assessment therefore assesses the implications of such a staged approach. The key question concerns the granting of some form of cross-border loss relief in the absence of consolidation.

It is useful to note here that there will be no differentiation between stage 1 (CCTB) and stage 2 (CCCTB) regarding the scope and the definition of the tax base (including the debt bias solution and the R&D incentives). The directive on a common base would be implemented as a first step and then be amended in stage 2 via a CCCTB directive to incorporate consolidation and formula apportionment. The base definitions as such do not change in stage 2. 4.5.1.Option 5a: Common base without cross-border loss relief This option focusses on securing the common tax base at a first stage. This would involve agreeing to a common set of corporate tax rules for computing the tax base of companies without possibility for multinational entities to offset losses in one Member State with profits in another Member State. 4.5.2.Option 5b: Common base with cross-border loss relief With the aim to strengthen EU competitiveness, the common base could include a mechanism of (partial) cross-border loss relief with subsequent recapture. Taxpayers would be entitled to temporarily take into account the losses incurred by their immediate subsidiaries and permanent establishments situated in other Member States. Table 3: Options retained for further analysis Option 1 Basic choice for action Options 2 Scope Options 3 Addressing the debt bias Options 4 Ensuring incentives for R&D Options 5 Staged approach No action (baseline scenario, i.e. assuming implementation of ATAP / CbCR) Tax treatment of equity as currently in place in Member States; interest treatment aligned with ATAP R&D tax regimes as they currently exist in Member States CCCTB Optional for all firms No action (treatment as in the 2011 proposal) No action (treatment as in the 2011 proposal) CCTB without cross-border loss relief Mandatory for some set of firms; opt-in for others No interest deductibility Enhanced allowance for R&D expenses CCTB with cross-border loss relief Mandatory for some set of firms; no opt-in for others Allowance for corporate equity Tax credit for R&D expenses Mandatory for all firms Allowance for growth and investment Tax incentives for income from Intellectual Property Allowance for corporate capital Cost of Capital Allowance Source: European Commission Note: ATAP = Anti-Tax Avoidance Package;

CbCR = Country-by-Country Reporting;

strike-through marks options which are not retained. 5.Analysis of impacts of the options This section assesses the options outlined above in terms of their effectiveness and coherence in reaching the specific objectives, which contribute to the general objectives of enhancing fairness and stimulating growth and investment. Fairness of the tax system is measured mainly against the effectiveness of the option to limit tax avoidance in the future. The assessment involves a qualitative evaluation on the suitability of options to prevent the most relevant cross-border tax planning strategies, as well as a quantification of the impact on profit shifting in the EU. Stimulating growth and investment is assessed vis-à-vis the specific objectives outlined in Section 3.2. Simplification is achieved to the extent that complexity is effectively reduced. The impact on financing distortions is assessed in terms of the change in the debt bias, which is measured here as the difference in the cost of capital of an investment if financed by equity or debt. Investment distortions are measured in terms of the impact on the average cost of capital of investments. The main options are also assessed in terms of their impact on the economy in a general equilibrium model. Main variables looked at include GDP, investment, employment and wages and welfare. Finally, the section discusses the expected impact on tax revenues and on the burden for companies and administrations as a result of implementing the different options. The coherence assessment focusses on evaluating whether fairness and tax avoidance objectives are indeed not achieved at the expense of stimulating growth and investment and vice versa. To reduce complexity, the assessment is presented in sequential steps. This separation of option dimensions is justified as there are no relevant interdependencies between them. Other possible interdependencies are discussed whenever appropriate; otherwise the independence between different option dimensions is explained in the following subsections. Sections 5.1 and 5.2 focus on the basic choice of 'no action' versus implementation of a CCCTB and the options on the scope of the application. Assuming implementation of the CCCTB with the preferred scope option, Sections 5.3 and 5.4 assess the open design issues related to debt bias and R&D incentives. Finally, Section 5.5 assesses the impact of introducing the CCCTB in two steps, with an initial period without consolidation, but possibly with some form of cross-border loss relief. Box 2: Formula apportionment The distribution of revenues based on a formula is an important element of the CCCTB proposal and its impact was analysed in the 2011 impact assessment (see also annexes V and VIII). It concluded to allocate the consolidated tax base to a 'group member A' according to the following formula: Aside from the extensive work by the CCCTB Working Group and consultations with stakeholders, three specific pieces of analysis were included in the impact assessment in order to compare the impact of different formulas: (i) a survey of multinational entities on compliance costs: (ii) impact of variations in the formula on the distribution of tax bases across countries, using the Amadeus and ORBIS databases; and (iii) the CORTAX study, which examined formula apportionment within the context of a wider analysis aiming to quantify the impacts of alternative policy options. The formula was evaluated against four criteria: 1. Simplicity for taxpayers and administrations; 2. Difficult to manipulate, i.e. no easy relocation of factors to exploit tax-rate differentials across the EU; 3. Fair and equitable distribution of the tax base; 4. No negative impact on tax competition. More details on the rationale for the formula that was chosen can be found in Annex V: Formula apportionment . Figure 7 shows the sequence of the analysis. To justify this sequential approach it is required that the preferred options for the scope, for the debt bias solution and for R&D incentives do not change if the choice of options changes for the other dimensions. Based on the available analytical evidence and qualitative arguments this can be assumed with relative confidence. For example, the choice of a solution for addressing the debt bias seems independent of the choice for the scope or of the choice for the R&D incentives. In contrast, this does not mean that the choice of each dimension does not affect the final outcome. In other words, the economic impact of a preferred option (for example to address the debt bias) might very well change if options in another dimension change (for example the mandatory scope). For example, implementing an AGI for all companies or only a selection of them will have different economic impacts. However, the important point is that the ranking of the preferred options seems to be independent from the choices made elsewhere. Figure 7: Analytical approach – sequence of analysis Source: European Commission

5.1.Baseline vs CCCTB This section compares the CCCTB (option 1b) with the baseline scenario (option 1a), assuming that the CCCTB will be either (i) mandatory for some set of firms with the possibility to opt in for others or (ii) mandatory for all firms. To keep the exposition reasonably simple, this section discusses the case of a CCCTB without any specific measures to address the debt bias or to ensure sufficient incentives for R&D. Since there is a certain degree of overlap of the present assessment with the impact assessment of the 2011 proposal, the main conclusions of the 2011 assessment have been summarised in annex VIII. 5.1.1.Fairness impacts Despite the progress at EU level in coordinating a stronger anti-abuse framework, it is clear that these new rules alone do not address comprehensively the roots of the problem, particularly in the long term. The inherent conflict remains between corporate taxation rules determined at national levels on one hand and an increasingly integrated economy and mobile profits on the other hand. As such, there is a risk that the new anti-abuse framework addresses only a selection of avoidance strategies, so that companies over time would adjust their behaviour towards other planning strategies. Not only would this entail the need for new anti-abuse rules and an ever more complex system, it would also mean that tax planning multinational entities will keep their undue advantages vis-à-vis purely domestic firms. Due to the common rules for determining the tax base combined with full consolidation, the CCCTB would by and large eliminate profit-shifting possibilities within the EU for those companies subject to mandatory application. Notably, aggressive tax planning by exploiting mismatches and making use of patent boxes would no longer be possible, provided that due attention is given to definitions of central concepts such as debt, interest expenses, profits and dividends. Whereas exploiting tax differentials via intra-group loans or transfer pricing would no longer be beneficial. Effectively, the most relevant aggressive tax planning strategies would be addressed within the EU. Incentives for tax planning remain however relevant vis-à-vis third countries. Therefore, the CCCTB is equipped with a broad set of anti-avoidance measures. As discussed above, many of these measures are already adopted with the Anti-Tax Avoidance Directive. Hence, anti-abuse rules addressing tax avoidance involving third countries would be harmonised with a CCCTB which leaves companies with less room to shop for the most attractive regime(s) in the EU. Limited opportunities would remain in relation to differences in withholding tax regimes between EU Member States and third countries, with respect to factor allocation under the formula apportionment regime and, if the mandatory application is not extended to all firms, with respect to those companies or parts of a company group that are not subject to the CCCTB. Also, transfer pricing remains an issue between the EU and third countries. In the general equilibrium model used to analyse the economic impacts of a CCCTB reform, multinational entities have the possibility to shift profits within their group via transfer pricing. Table 4 below compares the impact of profit shifting on tax bases in the baseline case and in the CCCTB case (compulsory for multinational entities). The table shows the percent changes in the tax base due to intra-group profit shifting from and into EU Member States. The starting point is the hypothetical tax base that would occur if transfer pricing was not available to multinational entities. In the model, which covers the EU-28, the US and Japan, the CCCTB results in the complete elimination of any outward shifting of profits from EU Member States. Inward shifting is also largely eliminated although some inward shifting from the high-tax countries US and Japan remains. CORTAX currently cannot simulate other aggressive tax planning techniques. To the extent that these are no longer possible or beneficial within the EU under the CCCTB, notably strategies using mismatches, intra-group loans and patent boxes, similar relative impacts can be expected. Overall, in terms of effectively addressing tax avoidance, the CCCTB has very clear advantages compared to the 'no action' scenario. Table 4: Impact on intra-group profit shifting Baseline CCCTB Change Outward Inward Outward Inward Outward Inward Average* EU-28 -1.51% 5.51% 0.00% 0.96% -100% -82.5% Source:Joint Research Centre of the European Commission (2016) Note: The values indicate changes in percent to the theoretical tax base without intra-group profit shifting.

*Average refers to the weighted EU average of the individual country values. Due to the reduced tax planning opportunities, governments will face fewer difficulties in ensuring a fair contribution to tax collection from the corporate sector. Under a formula apportionment mechanism as described in box 2 (but in the absence of rate harmonisation) planning opportunities may still theoretically arise because of the incentive to relocate the apportionment factors included in the formula and hence attribute the largest possible share of their profit to low-tax Member States. For instance, multinational entities may engage in 'factor shifting' operations by structuring sales through 'independent' distributors located in low-tax Member States. However, the literature confirms that the envisaged formula apportionment system is much less prone to such artificial arrangements than the current system because shifts of real factors are generally more difficult and costly to do than shifts of book profits. The application of anti-abuse and related provisions in the CCCTB further reduces this possible avoidance issue. Moreover, the optimal location of factors depends on many determinants other than taxes (such as infrastructure quality, availability of skilled work). In addition, the possibility to opt into the system for companies outside the mandatory scope mitigates risks of tax rate competition, as a country that lowers the tax rate applicable to the CCCTB would risk a larger deterioration of revenues as more and more companies would opt in. It is therefore expected that the problems that Member States face today with mobile tax bases and the ensuing tax competition will not persist within the EU under the CCCTB with formula apportionment. The effective reduction of tax planning activities is expected to have a positive impact on taxpayer morale. Over the past years, more and more large-scale tax avoidance cases have become publicly known. This is damaging as it may impact taxpayer compliance more generally. It is known that social norms may influence the compliance behaviour of taxpayers. To the extent that tax avoidance cases reveal poor tax ethics, i.e. a poor sense of responsibility for contributing a fair share to society, this might negatively impact on the ethics of other taxpayers. Moreover, taxpayers without tax planning opportunities may perceive this as unfair and feel a moral justification to not fully comply with their obligations. Indeed, several studies support the view that a perception of unfairness in taxation negatively impacts tax compliance behaviour or at least the willingness to cooperate with tax authorities. 5.1.2.Economic impacts To assess the economic impact of various options, the CORTAX model was used. CORTAX is a computable general equilibrium model, allowing state-of-the-art analysis of corporate tax reforms by incorporating key features such as multinational profit shifting, investment decisions, loss compensation and the debt-equity choice of firms. The model includes the direct and indirect effects of all domestic labour and capital markets. It covers the 28 countries of the European Union, the U.S., Japan and a tax haven. The CORTAX simulations assess the impact of the CCCTB on a set of main economic variables such as investment, employment and wages, GDP and welfare. It is assumed that the CCCTB is implemented in a budget-neutral manner, notably by compensating changes in the corporate tax base by changes in the CIT rate. Results can be made available for two basic assumptions on the set of firms applying the CCCTB: either all firms or only multinational entities. The assumption that all multinational entities apply the CCCTB fits, within the logic of the model, to a wide range of possible definitions for the mandatory scope as long as domestic firms are not included. Table 5 shows the results of implementing the CCCTB for multinationals only and for all firms (both compared to the baseline scenario). Whether applied to multinational entities only or to all firms, the CCCTB has positive effects on key economic variables. The cost of capital decrease and as a result investment increases. Employment and wages are also positively affected, as is GDP and welfare. The results for CCCTB for all firms are generally more positive, albeit the differences are marginal. Table 5: Economic impact of the CCCTB (GDP-weighted EU average) CCCTB –

only multinational entities CCCTB –

all firms Cost of capital (change in percentage points) -0.04 -0.07 Investment 0.57 0.74 Wages 0.40 0.44 Employment 0.19 0.19 GDP 0.16 0.26 Welfare (change in % of GDP) 0.07 0.10

Source: Joint Research Centre of the European Commission (2016) Notes: Changes are in % unless noted otherwise. All simulations are changes compared to the baseline scenario of no CCCTB As a caveat, CORTAX does not permit a proper assessment on the level playing field between domestic firms and multinational entities. On the one hand, the closing of the most important cross-border tax planning channels is not properly reflected in the model. CORTAX captures profit shifting in a stylised way through transfer pricing via intra-group sales, but does not feature multinational entities exploiting mismatches, making use of patent boxes or saving taxes via intra-group loans. On the other hand, multinational groups in the model benefit considerably from consolidation. This is mostly because they are all active in all 28 Member States, which makes it very likely that a loss occurred in one Member State can be offset against profits in other Member States. Thus, the model tends to capture more the positive features for multinational entities while the loss of tax planning opportunities is reflected only partially. In contrast, the possible positive impact on domestic firms is not captured in the model. This is because CORTAX does not feature the opt-in choice of firms. In the 'only multinational entities' case, domestic firms are assumed to stay in their respective national system, which is broadly consistent within the logic of the model. In the 'all firms' case, domestic firms are all forced into the CCCTB. In both cases, there may be reasons that domestic firms would rather opt into/stay out of the CCCTB. For example, if for a domestic firm the CCCTB tax base is smaller compared to the national tax base and this advantage is not fully eliminated by a larger CCCTB tax rate, a domestic firm might choose the CCCTB. The CCCTB may also be attractive as it may be simpler to administer than the national system, notably due to the depreciation regime, which allows depreciating short-life assets in a pool rather than individually. Hence, the model may over-emphasise the positive impacts of the reform for multinational entities, whereas it may underestimate them for domestic firms. Moreover, this relative difference in the impacts is reinforced to the extent that domestic firms and multinational entities compete against each other. As a result, the CORTAX simulations show a large increase in production of multinational entities and a large decrease in production of domestic firms, as reported in Table 6 . Due to the caveats explained above, and notably since the model does not feature the possibility to opt in for domestic firms, the magnitude of the estimated impacts on production cannot be considered realistic. It therefore does not seem justified to reject the proposal based on this result alone. Table 6:Impact on production by category of firm Category of firm CCCTB –

only multinational entities CCCTB –

all firms Domestic* -9.89 -12.22 Multinational headquarter 9.59 11.03 Multinational subsidiary 19.39 25.95 Source: Joint Research Centre of the European Commission (2016) Note: Impact is given as EU-28 weighted average of the change in %. All simulations are changes compared to the baseline scenario of no CCCTB. *Domestic firms in the 'only multinational entities case' are assumed to not opt in, even if in reality they may prefer to do so. A sensitivity analysis based on a number of variations in the assumptions has been conducted. The variations that have been considered include different depreciation regimes, variation in the capital-labour substitutability, reduced compliance cost savings under the CCCTB and compensating changes in tax bases by modifying labour taxes instead of corporate income tax. All variations yield similar results as in the central case, pointing to the robustness of the findings, namely positive economic impacts. Impacts on tax revenue The CORTAX simulations also allow for some first considerations on the impact on tax revenues although the model cannot simulate all transmission channels. The available simulations point to a small decrease in total tax revenues for the EU-28 of 0.08% of GDP, corresponding to about EUR 11 billion. This results from a decrease in EU-28 corporate tax revenues by about EUR 36 billion partly compensated by increases in the collection of other taxes by about EUR 25 billion. These tax increases are due to increased economic activity and better employment that respectively boost consumption and labour tax bases. These figures should be put in perspective with the potential gain in corporate tax revenues due to the reduction in several forms of corporate tax avoidance. As discussed in the previous subsection, the CORTAX model captures the impact from reduced transfer pricing activities (which are eliminated in the model), but it does not capture the removal of patent boxes, the removal of hybrid mismatches and the elimination of profit shifting via intra-group debt shifts. A recent study commissioned by the European Parliamentary Research Service finds that the corporate tax revenue losses due to tax avoidance would amount to about EUR 50-70 billion in the EU. It is however difficult to assess the share of this amount due to transfer pricing and the share due to other channels. Moreover, interpreting these values is difficult as a number of factors impact on revenues. Most importantly, the model assumes that governments set the CIT rate for the CCCTB in order to compensate for changes in the rules to compute the corporate tax base. This is a technical assumption as national governments would be free to adjust tax rates in other ways. More details and a discussion of other factors that drive the impact on tax revenues are provided in annex XII. Impact on administrative burden The effectiveness of the CCCTB in simplifying the currently highly complex international system of corporate taxation, reducing compliance costs and double taxation and removing discriminations and restrictions in cross-border situations, has been demonstrated in the 2011 impact assessment. To which extent the CCCTB would be made mandatory is of little relevance for these impacts as companies or company groups which would gain the most from reduced compliance costs are expected to opt into the system. The differences in national R&D incentives schemes (as illustrated in annex XI) are a good example to illustrate the potential for simplification. These differences can lead to high compliance cost for businesses that conduct their R&D cross-border or engage in transnational cooperations on R&D projects for example through joint ventures. As explained in annex VII, tax compliance costs remain an important burden for businesses and their reduction is a major advantage of the CCCTB compared to the baseline. The 2011 impact assessment estimated compliance costs for large companies to amount to about 2% of taxes paid, while for SMEs the estimate was about 30% of taxes paid. In absolute terms, compliance costs were estimated to increase with cross-border activity and with increasing number of subsidiaries. The compliance cost levels and their structure do not seem to have changed considerably in recent years. A recent review of compliance tax studies (Eichfelder and Vaillancourt, 2014) shows for the period from 1984 to 2014 that compliance costs remain largely stable over time. Existing differences between different estimates are rather due to different methodologies applied to measure the costs. One could expect that compliance requirements have rather slightly increased since the 2011 assessment. In fact, tax reform data show that numerous CIT reforms took place after the crisis and many measures were directed at reinforcing the international anti-abuse framework. In the light of this, the reduction of compliance costs when setting up an additional subsidiary under the CCCTB remains a major advantage: Time costs for setting up a new subsidiary in a Member State were estimated to decrease 62-67% for the CCCTB. Focussing on recurring costs, i.e. ignoring one-off switching costs, the 2011 impact assessment estimated a decrease in time spent on compliance activities by 8% for the CCCTB. Based on these time reductions one could endeavour a rough calculation of the order of total cost savings that would result under the CCCTB. If 5% of medium-sized companies expand abroad, a one-off cost saving of around EUR 1 billion could be expected. If all multinational entities apply the CCCTB recurring compliance costs could go down by about EUR 0.8 billion. Tax administrations will benefit from reduced dealings with transfer pricing issues and a reduced 'case number' to the extent that the tax affairs of a company group is mainly dealt with by the administration of the Member State where the parent resides. However, if the CCCTB is not made mandatory for all firms, the burden for national administrations may go up slightly due to the required maintenance of two parallel systems. Also, there might be requirements to set-up new IT and communication systems between Member States to ensure a consistent enforcement and application of the CCCTB. 5.1.3.Stakeholder views Most of the stakeholders (38%) believe that the CCCTB can be an effective tool against aggressive tax planning and at the same time retain attractiveness to businesses. This includes a majority of enterprises, driven by the views of SMEs, 54% of which agree with this view. Another 22% of stakeholders have a more nuanced opinion. A number of them give a qualified approval, i.e. attaching certain conditions; others point to the original motivation of removing single market barriers, which in their view should remain the main focus. Some 17% of respondents do not believe in the effectiveness of the CCCTB against aggressive tax planning. Often they point to other initiatives against tax avoidance and/or do not find the CCCTB to be a proportionate measure.

5.1.4.Preferred option Overall, the CCCTB (option 1b) is preferable over the alternative of taking no action (option 1a). The anticipated effects of enhancing fairness via reduced corporate tax avoidance, ensuring a fair tax contribution from the corporate sector, a more level playing field among companies and the expected positive impacts on taxpayer morale are critical, even if not all of them are quantifiable. This is also in line with the views of a majority of stakeholders. In addition, small positive economic impacts are expected through the removal of single market tax obstacles. Both the business environment and the labour market are positively affected. Overall, welfare is expected to increase slightly. The removal of tax obstacles is also expected to remove existing distortions between domestic and cross-border investments and enhance incentives for cross-border investments within the EU and form outside the EU. Moreover, the administrative burden for companies operating cross-border is expected to reduce significantly. The burden for national administrations is expected to go down if the CCCTB is made mandatory for all firms. If not, the required maintenance of two parallel systems in case the CCCTB is not made mandatory for all companies could raise the costs for administrations. Table 7 assesses the performance of the CCCTB vis-à-vis the no action scenario. The CCCTB performs better on most of the objectives. Table 7: Assessment of impacts of the CCCTB (Option 1b) Options CCCTB central scenario Enhancing the fairness of the yax system Reduce cross-border tax planning opportunities ++ More level playing field for domestic and multinational companies ++ Companies pay a fair share of the tax burden ++ Enhance general taxpayer morale ++ Stimulating growth and investment Simplify within the EU the currently highly complex international system of corporate taxation ++ Eliminate double taxation risks within the EU and remove still existing discriminations and restrictions ++ Approach to profit taxation that does not distort investment and financing decisions +/- More incentives to invest in the EU + Reduction in administrative burden for companies and administrations + Source: European Commission Note: The evaluation is based on a scale of five steps from very negative (- -) to very positive (++).

"0" indicates no change (i.e. neutrality). 5.2.Scope of the common consolidated base This section will examine the options for the scope of the mandatory application, keeping in mind that it is motivated by the new objective of enhancing the fairness of the tax system by comprehensively addressing corporate tax avoidance. The available options are to make the application compulsory for all firms (option 2d) or to make it compulsory for some firms (the scope of which will be discussed) and to grant the possibility to opt in for other firms (option 2b). Full optionality (option 2a) as well as making the CCCTB mandatory for some set of firms without granting the possibility to opt in for other firms (option 2c) have been discarded in Section 4.2. 5.2.1.Fairness impacts To determine the mandatory set that is effective in capturing tax avoiders but proportionate at the same time, i.e. not imposing unjustified obligations, it is helpful to think of three mutually exclusive sets of firms. First, there are those firms that prefer the CCCTB over the current national systems. It is irrelevant whether the mandatory application applies to these firms as they will in any case benefit and therefore opt into the CCCTB. Second, there are firms that prefer the current national systems, not because they are currently employing tax avoidance strategies but because the net impact from the CCCTB is not positive for them, in the sense that it would increase their tax burden and they would not benefit sufficiently from reduced compliance costs. Third, there are firms that prefer to continue applying the current national systems because they benefit from tax avoidance strategies and this benefit is larger than any potential benefits from reduced tax compliance costs and the net impact of other changes. It is not relevant whether the definition of the mandatory set covers firms in the first set, which in any case would opt-in. However, the aim should be that the definition captures the third set of firms and should only capture firms in the second set if there is a valid justification for requiring them to apply the CCCTB. Many firms in the second set are likely to be micro and small corporations. These smaller firms are unlikely to engage in tax avoidance practices. Since a large share of them are active only domestically, they would also not be able to reap any of the potential benefits of the common base. In addition, 14 Member States currently apply specific regimes for the smallest corporations, not only in the form of reduced statutory rates,