EN Official Journal of the European Union C 24/63

Opinion of the European Economic and Social Committee on the ‘Proposal for a Council directive on a Common Consolidated Corporate Tax Base (CCCTB)’

COM(2011) 121 final — 2011/0058 (CNS)

2012/C 24/12

Rapporteur: Mr WUERMELING

On 6 April 2011, the Council of the European Union decided to consult the European Economic and Social Committee, under Article 115 TFEU, on the

Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB)

COM(2011)121 final — 2011/0058 (CNS).

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 4 October 2011.

At its 475th plenary session, held on 26 and 27 October 2011 (meeting of 26 October 2011), the European Economic and Social Committee adopted the following opinion by 137 votes to 22 with 15 abstentions:

1. Conclusions and recommendations

1.1 The EESC supports the proposal for a common consolidated corporate tax base (CCCTB) as a big and important step in the European single market. Completing the single market requires more substantial alignment of the principles of corporate taxation.

1.1.1 The Commission's draft directive is a success because the CCCTB creates . In their entirety, the proposed rules make it possible to levy corporate taxation according to economic performance, to avert distortions and to prevent circumvention of the system. However, the draft directive requires further clarification in its details and a few changes.

1.1.2 Most of the within the EU could be reduced or even eliminated with a CCCTB. These include limited cross-border loss relief, complicated calculation of transfer prices, and double taxation and unequal treatment of permanent establishments and subsidiaries within the EU and according to their localisation within or outside the national borders.

1.1.3 The EESC expects that even in the mid-term the draft directive will lead to a significant for businesses and to lower administrative costs for the Member States.

1.1.4 The CCCTB will effect the . With the CCCTB, business decisions in the single market will no longer be based on tax considerations. In this way, the CCCTB should promote fair, sustainable competition and has a beneficial effect on .

1.2 The EESC recognises that there is concern that CCCTB would entail a , limiting of tax policy choices, a fall in tax revenue, or other unintended consequences. In particular, there is a danger that in the rapidly changing and fiercely competitive global economy, the European Union in operating a CCCTB system for 27 Member States, does not have the structures to respond quickly to global tax changes or incentive packages (for example for R&D) which could result in a loss of Foreign Direct investment.

1.2.1 The CCCTB must take appropriate account of concerns about curtailed tax sovereignty and lower tax revenues. At a time when public finances are under considerable pressure across the EU, it is vital that Member States do not suffer undue negative impact on their revenues and are able to predict the impact on their national accounts. on their share of the tax base. It is true, however, that only the European level will be able to take economic policy measures in tax legislation relating to the CCCTB. There is a concern that this will make Europe less flexible and competitive in competing for FDI, which will result in losing investment to countries such as Switzerland or Singapore.

1.2.2 Whether, and in what measure, the CCCTB will have adverse in terms of where businesses choose to establish themselves is difficult to gauge, since corporation tax is only one of several important factors feeding into this decision. that on this.

1.2.3 The tax base proposed is broader than the current average across the Member States. This will lead initially to higher tax revenues. On the other hand, cross-border offsetting of losses may lead to a lower tax burden. The EESC believes that these differences should average out over the years and that need be feared in the Member States.

1.2.4 The EESC believes that the CCCTB should be . It therefore supports the possibility provided for in the directive that the Member States adapt tax rates so that the tax burden is neither raised nor lowered.

1.2.5 Naturally, taxation policy and taxation systems are at the forefront of the debate that is currently underway. However, the EESC suggests that when making an overall assessment of the plan the European Parliament and the Member States should also heed the that a CCCTB offers by creating free and fair terms of tax competition for all Member States.

1.2.6 would be more with the CCCTB. In the EESC's view, the CCCTB would not eliminate the importance of national tax rates for businesses' choice of location, because tax rates would continue to differ between the Member States even after its introduction. What happens in essence in the present tax competition situation is that profits and losses are shifted between Member States that tax comparatively lower or higher. With the CCCTB, tax competition would be concentrated on those factors included in the formula for apportioning the tax base.

1.3 The EESC in different Member States (or consolidation) as the heart of the CCCTB rules. Only consolidation will eliminate current transfer pricing problems, make EU-wide tax-neutral restructuring possible and avoid double taxation. Since consolidation is the essential economic benefit of the CCCTB, the common tax base should include this element from the outset.

1.4 Regarding the scope of the CCCTB, the EESC no longer insists on its immediate mandatory application, but would during the introductory phase. In the long term, however, it should be mandatory, initially above a certain threshold. If the CCCTB were to remain optional for ever, this would create considerable red tape for the Member States, as existing corporate tax structures would have to continue to operate in tandem with the new CCCTB system.

1.5 The EESC welcomes the fact that the draft directive provides for the CCCTB to be used by , regardless of whether they operate across borders or only nationally. The option of the CCCTB offers , since the increased compliance costs involved in cross-border operations are markedly reduced. This is not the case, however, for the many SMEs that, being partnerships or sole proprietorships, are not subject to corporation tax.

1.6 The avoidance of double taxation of income earned outside the EU through across-the-board application of the exemption method is to be welcomed and should be developed further. The EESC .

1.7 , is needed with regard to individual rules. This is needed application of rules between countries. In particular, definitions are missing and insufficiently clear legal concepts are used. This jeopardises uniformity of application.

1.8 The EESC considers the for determining the tax base to be useful so as to simplify tax procedures, especially for small and medium-sized enterprises, and to ensure uniform application of the rules to all taxpayers but this assumes enhancing administrative cooperation between Member States, which does not exist at this stage particularly as regards automatic notification of information on the consolidation area. The EESC, however notes that there is considerable scope for disputes between national competent authorities of Member States and the principal tax authority concerning requests for an opinion by the competent authority, revenue audits and formula apportionment issues.

1.9 The EESC considers that the European Commission should give further consideration to the proposed system of apportionment. The current proposal, by giving equal weight to the sales by destination factor as to assets and labour factors may favour larger consuming Member States simply because of their size, and the almost total exclusion of intellectual property considerations in the formula would make this a system based on an outdated vision of the modern European economy which would not encourage or support the development of the smart economy.

1.10 The EESC believes that plans by two or more Member States to align the corporate tax base, by means of intergovernmental cooperation, promote tax convergence. However, these initiatives must be designed in such a way that they do not create new hurdles for European harmonisation or seek to establish preconditions for the EU-wide project.

2. Content of and background to the proposal

2.1 On 16 March 2011, the Commission adopted a Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) (COM(2011) 121/4; IP/11/319). Currently, businesses have to calculate the tax base in accordance with the rules of up to 27 different national systems. This leads to significant administrative costs, especially for small and medium-sized enterprises, and to distortions in competition in the single market.

2.2 The idea of the CCCTB is to eliminate or at least reduce the within the EU that are hindering the completion of the single market:

— the administrative costs for computing taxes (tax compliance costs) would be significantly reduced;

— the complex question of transfer pricing within a business would become obsolete, as tax treatment would be identical everywhere;

— cross-border losses could be offset;

— the problem of double taxation would be uniformly resolved across Europe.

2.3 According to the Commission's estimates, the CCCTB will enable businesses in the EU to save EUR 700 million a year in compliance costs, a further EUR 1.3 billion through consolidation and up to EUR 1 billion for cross-border activities. In addition, the CCCTB is intended to make the EU more attractive to foreign investors.

2.4 As the directive is framed, it will ultimately be Member States' decisions regarding the level of tax rates that determine whether or not the introduction of the CCCTB has a negative impact on the level of tax revenues. According to European Commission models, no adverse effects on revenue are to be expected for several years, particularly since the CCCTB tax base is on average broader than that under national provisions.

2.5 In the case of cross-border loss compensation, the would, however, tend to be reduced. This should be offset at least in part by a drop in compliance costs and greater appeal of the EU to investors from third countries.

2.6 are the rules on its scope, on computing the tax base, on cross-border offsetting against profits (consolidation), on apportionment of the tax base between the Member States, and on a single point of contact for businesses.

2.7 The is limited to legal entities liable for corporation tax in the EU. The CCCTB does not, therefore, apply to partnerships, natural persons or investment funds.

2.8 Eligible corporations have the right to choose taxation in accordance with the CCCTB (Article 6 of the draft directive); this will then apply for an initial period of five years and subsequently for periods of three years (Article 105 of the draft directive).

2.9 The draft directive contains all the arrangements for calculating the base. It makes no mention of a particular set of accounting standards, although individual rules do embody the principles of the IFRS. Taxable income is determined based on a profit and loss account and is in line with usual international practice.

2.10 opting for the At present, this is only possible – if at all – to a limited degree, which results in significant tax disadvantages for parts of the company outside the country where it is domiciled.

2.11 In terms of which entities are covered, the scope extends to all company groups domiciled and all establishments located in the EU. Subsidiaries are included where a parent company controls more than 50 % of voting rights and owns more than 75 % of the capital. The material scope includes income from all of companies of the group. The territorial scope is limited to the European Union.

2.12 Profits, computed in accordance with the uniform rules, are apportioned among the Member States where the company operates according to the amount of (business) activity (measured by labour, assets and sales). Apportionment is carried out using a formula based on these three value-added factors (labour, sales and assets). These factors are adjusted to take account of special cases (such as, in the financial sector, financial institutions and insurance companies). The specific level of tax is arrived at in each Member State by applying the national tax rate to the apportioned profits.

3. General observations

3.1 The EESC for a CCCTB as an important measure for overcoming taxation obstacles in the single market: double taxation will become obsolete, unfair treatment of establishments in the single market will be eradicated, cross-border losses can be offset, and the problem of transfer pricing will disappear.

3.2 The EESC has in the past called for free and fair terms of competition to be introduced, including in tax legislation, to promote cross-border activities (1). More recently, on 14 February 2006, the Committee issued a detailed opinion on the Creation of a common consolidated corporate tax base in the EU (2).

3.3 However, the evidence presented by the Commission is conflicting. While the Impact Assessment on the one hand instances a study by Deloitte showing that compliance outlays in the specific case of a multinational setting up a new subsidiary in a different Member State could fall by over 60 %, a PWC study of a sample of established multinationals groups estimated compliance cost would fall by only 1 %. Another study by Ernst and Young estimated that compliance costs would rise by 13 % as a result of the additional costs of preparing and filing the tax return and the associated tax administration outweighing the expected savings in costs due to the reduced need for transfer pricing. Administration costs by taxing authorities will rise because of the need to run a national system side by side with the CCCTB system.

3.4 For businesses, the draft directive leads to ; for the Member States, it lowers administrative costs, although outlay will initially be incurred in the changeover.

3.5 At present, business decisions in the EU are not taken exclusively on the basis of competition criteria. Instead, ‘tax optimisation’ considerations are often critical. For example, investment in research is carried out where costs are tax deductible, or high-risk activities are located where losses can be offset against tax. It goes against the fundamental principle of the single market that business decisions should be distorted by tax considerations and this has a detrimental effect on growth and job creation.

3.6 However, the EESC does not underestimate the concerns expressed by many, in particular national parliaments from nine Member States (3) that believe the proposal does not comply with the principle of subsidiarity, that this would entail a loss of national sovereignty, limiting of tax policy choices, a fall in tax revenue, or other unintended consequences.

3.6.1 It is true that the Member States will no longer have recourse to in respect of companies that opt for the CCCTB, since the tax base is established at EU level. On the other hand, such measures can now be taken at EU level to intensify competitiveness and create jobs – which will benefit the entire single market – without different conditions arising for individual businesses.

3.6.2 Over the mid and long term, CCCTBs may lead to a where these have been the result of national tax incentives. In fact, these are the very distortions of competition through tax advantages that the CCCTB is intended to avoid. However, the EESC believes that the Commission should examine these aspects more closely in a so that the EU institutions and other stakeholders can better assess such consequences.

3.7 , the CCCTB preserves the Member States' , as they are free to set the level of taxation on the share of the tax base that falls to them. It is the tax base – not tax rates – that is harmonised with the CCCTB. Member States will still be able to set national tax rates in accordance with their budgetary policy preferences. For a transition period, however, there may be drops in revenue that can only be corrected for the future by raising the tax rate.

4. Detailed comments

4.1 The draft directive is a great achievement for the Commission, but . As a whole, however, the proposed rules make it possible to levy corporate taxation according to economic performance, to avert distortions and to prevent circumvention of the system.

4.2 The EESC welcomes the fact that the draft directive provides for the CCCTB to be used by , regardless of whether they operate across borders or only nationally – although it is aimed primarily at business or groups that do operate across borders. It will, however, also help small and medium-sized enterprises to expand their cross-border activities, because it offers substantial cost benefits compared with taxation under several national systems. The CCCTB option holds advantages for SMEs that are established as limited liability companies – not, however, for the many small and medium-sized sole proprietorships and partnerships, which are not subject to corporation tax.

4.3 With this in mind, the Committee no longer insists on the immediate mandatory application of the CCCTB, but would endorse an during the introductory phase. In the long term, the CCCTB should be mandatory, at least above a certain threshold, for business operating across borders. If it were to remain optional for ever, this would create considerable red tape for the Member States, since they would have to continue to operate their existing corporate tax structures alongside the new CCCTB system.

4.4 Aggregating the total profits and losses of the eligible members of the group (or ) constitutes the key to eliminating tax obstacles within the single market and . Only through consolidation can the following benefits be obtained: cross-border loss relief, avoidance of transfer pricing problems, the possibility of an EU-wide tax-neutral company structure, avoidance of double taxation, and equal treatment of EU subsidiaries and EU permanent establishments. Consolidation thus deserves unequivocal support. It constitutes a ‘big’ solution that is preferable to the ‘small’ solution of a common corporate tax base without consolidation.

4.5 The scope of the CCCTB is correctly defined in terms of . Using formal criteria to define the type of entities eligible has the advantage that these criteria are easy to apply, verifiable and less pliable. From the perspective of companies, the criteria are also easy to apply and legally certain, although this is only true in part for the rules on joining and leaving the group. The broad definition of the material scope, covering all income, makes sense in order to avoid difficulties with deciding what should be included. Limiting the territorial scope to the European Union is also appropriate. In the absence of worldwide provisions on computation of profits, to go further and bring in global income would require very costly reconciliation.

4.6 The EESC considers that the between the Member States according to the value-added factors of labour, assets and sales, given their relevance to the real economy, makes more sense than a calculation based on key macro-economic indicators.

4.6.1 . The possibility for taxpayers to assign factors to a Member State with the lowest possible tax rate is significantly limited by the fact that several factors are taken into account. Use of an alternative apportionment method should be subject to unambiguous limits and special justification. These are necessary, for example, for the financial sector (banks and insurance companies) because of its specific business model.

4.6.2 There is still a that individual Member States may and that the sum of the shares of the tax base will therefore be greater or smaller than the actual total income to be apportioned. This would lead to multiple taxation or under-taxation of the total income to be apportioned. The European Commission must address this by promptly adopting implementing legislation.

4.6.3 Regarding the in the , a more precise definition is required with respect to economic ownership and effective use and consideration should be given on how to include intellectual property. For the , which is in two halves, apportionment based on the number of employees is simple and feasible, though it could prove problematic, especially if an activity is performed ‘under the control and responsibility’ of a group member. Studies have revealed that apportioning profits based on the labour factor can have adverse economic effects on the labour market. In view of the differing social security and pensions systems in the EU, the inclusion of social and pension provision could harbour further potential for conflict between the Member States. The is market-oriented and could unduly favour large Member States simply because of their size. Its deletion or re-weighting within the apportionment formula should be considered.

4.7 The tax base is broader than the current average across the Member States. This will initially lead to higher tax revenues. On the other hand, cross-border offsetting of losses may lead to a lower tax burden. The EESC believes that . It therefore supports the possibility provided for in the directive that the Member States adjust tax rates so that the tax burden is neither raised nor lowered.

4.8 The is in line with international standards, in particular with those in 25 out of the 27 Member States. The EESC considers this to be appropriate. The draft directive makes no reference to IFRS rules on company accounts, since the CCCTB provides a distinct regulatory framework for independent computation of profits for taxation purposes. However, the IFRS principles, which have continued to evolve over the many years of CCCTB planning, are present in some individual provisions.

4.9 , is needed in certain rules so as to avoid fragmentation resulting from application by Member States. In particular, and insufficiently specific legal concepts are used (e.g. ‘fixed assets’ or ‘acquisition and construction costs’). A lack of detailed rules for individual sectors, e.g. the treatment of financial assets, or insufficiently detailed regulations, e.g. regarding the definition of the economic owner, jeopardise the .

4.10 The general included is questionable in its current form. The draft directive stipulates that artificial transactions carried out for the sole purpose of avoiding taxation are to be ignored for the purposes of calculating the tax base (Article 80 of the draft directive). The application or interpretation of such a general anti-abuse rule will cause considerable difficulties, since ECJ case law has determined that abuse must be demonstrated in each individual instance.

4.11 The EESC welcomes the avoidance of by applying a blanket exemption of such income from tax. In this way, EU businesses are only subject to the tax of the third-country market. The EESC sees no reason why there should be an exception to this, as the Commission proposes, if the third-country tax level is very low. The EESC finds that the in cases where the level of foreign tax is too low is questionable, since this would affect not only abusive arrangements, but also normal business activities.

4.12 In the view of the EESC, the possibility of creating provisions is excessively curtailed.

4.12.1 Provisions may be created only for activities and transactions relating to legal obligations. This rules out . This is not, in the EESC's opinion, economically justified, since business performance, and hence taxable profits, are also constrained by purely business obligations.

4.12.2 With regard to provisions for legal obligations, the need to be clarified. Similarly, the criteria for a reliable estimate are not adequately determined. For want of specifics, the detail of how provisions for contingent losses are treated remains unclear. Provisions for pensions are not mentioned in the rules either, but should be taken into account, otherwise the specific assessment rule would be without effect.

4.12.3 The draft directive contains no specific information, nor delegation of implementing powers to the Commission, regarding the that are recognised by EU law. There is only a special rule on the deductibility of technical provisions of insurance undertakings, where Member States are given the option to allow deduction of equalisation provisions.

4.12.4 Detailed rules are needed for the in particular, in order to take proper account of risk-specific peculiarities (against the background of the financial crisis). Specifically, there is a lack of detailed rules for the treatment of derivatives and leasing. In addition, it is probably necessary to adopt rules that either provide for banks' provisions (for general banking risks) to be deductible or for depreciation of financial assets. The draft directive itself should, as in the case of the special rule for insurance, include the detailed rules for the financial sector.

4.13 It is right that corporation tax itself and similar taxes not be deductible. In any event, the list of non-tax-deductible national taxes in Annex III of the draft CCCTB directive (which refers to Article 14) must be re-examined with a critical eye. Insurance tax, for example, which is to be non-tax-deductible only with regard to tax levied nationally, is not comparable with corporation tax. If insurance tax on the insurance premium is paid and classed by the insurance company as income, a deduction as a business expense should also be possible.

4.14 Specifying a seems appropriate as regards tax equity, since choice in the matter would allow too much room for discretion. The fact that agreed interest rates may be used by way of exception is thus not without its problems.

4.15 The proposal provides for the possibility of . This makes sense. The pool depreciation method provides businesses with self-financing opportunities. At a depreciation rate of only 25 %, however, a large portion of total depreciation would only be offset at the moment of replacement investment. The depreciation rate for pool depreciation should therefore be raised accordingly.

4.16 Limiting exceptional deductions to non-depreciable fixed assets where a permanent decrease in value can be demonstrated places excessive limits on what losses can be taken into account. There is also a lack of clarity as to what constitutes a permanent decrease in value. Specifically, no exceptional deductions may be made in respect of assets whose disposal proceeds are tax-exempt, for example shares in companies. This could put holding companies and venture capital businesses at a disadvantage.

4.17 The EESC considers the introduction of a for determining the tax base to be useful so as to simplify tax procedures, especially for small and medium-sized enterprises, and to ensure uniform application of the rules to all taxpayers but this assumes enhancing administrative cooperation between Member States, which does not exist at this stage particularly as regards effective monitoring of the scope of consolidation (companies, subsidiaries, permanent establishments) which will change each year. The automatic communication of information should become the norm as is the case for VAT within the EU.

4.18 It is worth mentioning that all communication with the tax authorities is intended to take place solely between a so-called principal taxpayer of the group and the principal tax authority to which it is assigned. This makes coordination with various national tax authorities unnecessary. The EESC welcomes the associated reduction in red tape for taxpayers and tax authorities.

Brussels, 26 October 2011. The President of the European Economic and Social Committee Staffan NILSSON

(1) EESC opinion on Tax policy in the European Union – Priorities for the years ahead – OJ C 48, 21.2.2002, p. 73.

(2) Exploratory opinion requested by the Commission, OJ C 88, 14.4.2006, p. 48.

(3) Pursuant to Article 6 of Protocol (No. 2) on the Application of the Principles of Subsidiarity and Proportionality, National Parliaments of Bulgaria, Ireland, Malta, Poland, Romania, Slovakia, Sweden, the Netherlands and the United Kingdom sent Reasoned Opinions to the European Parliament, the Council and the European Commission.