COMMISSION STAFF WORKING PAPER SUMMARY OF THE IMPACT ASSESSMENT   Accompanying document to the    Proposal for a   COUNCIL DIRECTIVE  on a Common Consolidated Corporate Tax Base (CCCTB)   {COM(2011) 121 final} {SEC(2011) 315 final}
Date: 2011-03-16
Institutions: European Commission
Subjects: approximation of laws, basis of tax assessment, competitiveness, corporation tax, tax system

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EUROPEAN COMMISSION 

Brussels, 16.3.2011 
SEC(2011) 316 final 

. 

COMMISSION STAFF WORKING PAPER 

SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying document to the 

Proposal for a  

COUNCIL DIRECTIVE 

on a Common Consolidated Corporate Tax Base (CCCTB) 

{COM(2011) 121 final} 
{SEC(2011) 315 final} 

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1. 

PROBLEM DEFINITION  

Globalisation  has  reshaped  the  economic  landscape.  Not  only  the  geography  of  production, 
but also the internal organization of firms operating in international markets has dramatically 
changed. The framework of steadily progressing market integration changes radically when it 
comes to corporate taxation. With 27 different tax systems that co-exist and often clash, the 
EU  market  remains  indeed  highly  fragmented.  This  situation  places  the  EU  at  a  significant 
disadvantage  vis-à-vis  its  major  trading  partners,  the  United  States  and  Japan,  each  being 
perceived as one single market by businesses. 

Firms  currently  operate  through  schemes  structured  to  accommodate  increased  mobility  of 
capital  and  frequent  cross-border  transactions  between  associated  companies.  Consequently, 
concepts defined for tax purposes, such as source and residence, traditionally used to address 
the needs of relatively closed economies, often prove inappropriate to tackle the challenges of 
commercial  activity  within  an 
the  coexistence  of 
heterogeneous, frequently changing tax rules represents an obstacle for businesses competing 
in international markets. Further, national tax systems become increasingly vulnerable to tax 
avoidance schemes. In fact, income shifting and treaty shopping are naturally facilitated in a 
context of high mobility of productive factors.  

integrated  market.  Specifically, 

Against this background, a number of tax obstacles remain for companies with cross-border 
operations in the EU, namely:  

I. 

II. 

III. 

Additional compliance costs, which arise from compliance with different national tax 
systems  and  with  transfer  pricing  rules.  According  to  evidence  reported  in  the 
Company Tax Study published by the Commission in 2001, tax related compliance 
costs are in the range of 2-4% of the corporate income tax revenues. In the context of 
the EU27, this could be translated into an average figure of more than €10 billion for 
2008. 

Double taxation, which takes place when comparable taxes are imposed on the same 
income in two or more states.  

Over-taxation,  which  occurs  when  cross-border  activities  create  tax  liabilities  that 
would not occur in a purely domestic context (e.g. associated companies of different 
Member  States  or  their  permanent  establishments  are  not  entitled  to  share  losses, 
whereas  loss  consolidation  for  companies  established  only  in  one  Member  State 
reduces their taxable profits and tax burden).  

2. 

ANALYSIS OF SUBSIDIARITY  

The  current  framework  with  27  different  national  corporate  tax  systems  impedes  the  proper 
functioning of the Internal market. Member States cannot provide a comprehensive solution to 
this  problem.  Non-coordinated  action  –  planned  and  implemented  by  each  Member  State 
individually – would replicate the current situation, as taxpayers would still need to deal with 
as  many  administrations  as  the  number  of  jurisdictions  in  which  they  are  liable  to  tax. 
Community  action  is  necessary  in  view  of  establishing  a  juridical  framework  with  common 
rules.  The  Commission  has  taken  the  initiative  having  in  mind  that,  under  the  principle  of 

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subsidiarity, Member States retain sovereignty in setting their corporate tax rates. Therefore, 
they are free to determine the desired size and the composition of their tax revenues.  

3. 

OBJECTIVES OF EU INITIATIVE  

The specific policy objectives of the EU initiative are to eliminate the remaining tax obstacles 
in  the  Internal  market  outlined  above,  that  is  additional  compliance  costs  related  to 
international activity, as well as instances of double taxation and over-taxation. As a result, a 
general objective of improving economic efficiency in the allocation of productive capital in 
the  EU  could  be  attained  by  means  of  reduced  tax  distortions  to  investment  decisions  and 
increased opportunities for cross-border investments. As such, the envisaged improvement in 
the simplicity and efficiency of the corporate income tax system in the EU can significantly 
contribute  to  achieving  the  objectives  of  the  EU2020  strategy,  and  to  strengthening  the 
Internal market, in line with the initiatives advocated in the Single Market Act.  

The operational objective is to establish a common set of rules to calculate the taxable base 
for the relevant companies in the EU.  

It should be stressed that the effects on the size and the distribution of corporate taxable bases 
across  the  EU  are  not  an  intended  aim  of  the  policy  initiative  per  se.  No  objectives  are 
therefore defined in terms of revenue distribution or revenue neutrality for MS.  

4. 

POLICY OPTIONS 

The report considers four main policy scenarios, which are compared with the "no action" or 
status-quo scenario (option 1):  

•  The adoption of an optional Common Corporate Tax Base (CCTB), i.e. the replacement, 
for the relevant companies, of the 27 different company tax codes by a common tax base, 
calculated using a single set of rules (option 2).  

•  The compulsory introduction of a Common Corporate Tax Base (CCTB) for all EU-based-

companies (option 3). 

•  Under an optional Common Consolidated Corporate Tax Base (CCCTB) companies could 
opt for a common (eg, calculated using a single set of tax rules) EU-wide consolidated tax 
base  that  would  replace  the  current  27  different  company  tax  codes  and  the  separate 
accounting mechanism (option 4).  

•  The  same  rules  would  be  obligatory  for  all  EU-based  companies  under  a  compulsory 

Common Consolidated Tax Base (CCCTB) (option 5).  

Under all possible options, common rules would be established only for the calculation of the 
tax  bases,  whereas  Member  States  would  be  left  with  fiscal  sovereignty  in  deciding  the 
applicable tax rates.  

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5. 

ASSESSMENT OF IMPACTS  

5.1. 

Impact on the size and on the distribution of the tax base 

The  policy  options  entail  changes  in  the  size  and  the  cross-country  distribution  of  the 
corporate tax bases that is worth quantifying, although such effects are not objectives per se 
of the tax reforms under analysis. Importantly, no general conclusions should be drawn on the 
final  effect  on  revenues  or  on  the  budgetary  position  of  the  different  MS,  as  these  will 
ultimately depend on national policy choices with regard to possible adaptations of the mix of 
different tax instruments or applied tax rates. 

The  findings  indicate  that  the  introduction  of  the  common  tax  base  provisions  unrelated  to 
cross-border  loss  consolidation  (CCTB)  could  lead  on  average  and  for  most  EU-based 
companies to broader tax bases than the current ones. However, the magnitude of this increase 
seems  to  depend  essentially  on  the  depreciation  rules  applied.  In  any  case,  the  common  tax 
base would reduce the current substantial variation in tax bases across European countries. 

The  CCCTB  provisions  would  allow  for  cross-border  consolidation  of  profits  and  losses. 
Calculations  on  a  sample  of  EU  multinational  groups  based  on  the  Amadeus  and  ORBIS 
databases show that, on average every year approximately 50% of non-financial and 17% of 
financial multinational groups in the respective samples could benefit from immediate cross-
border  loss  compensation.  Weighting  the  separate  results  for  the  different  sectors  indicates 
that on average for the groups involved the taxable base under the CCCTB scenario would be 
around 3% lower than in the status-quo scenario1.  

Under the CCCTB, the question arises on how the overall tax base should be divided among 
the Member States in which the multinational group operates, and thus requires the definition 
of ad hoc apportionment mechanisms. Using data from financial accounts to proxy for taxable 
profits of multinational groups shows that the formula with employee costs, assets and sales 
by  destination  equally  weighted  would  lead  to  increases  in  the  bases  mostly  in  the  MS  in 
Central and Eastern Europe, as well as in Germany, Spain, France, Greece and Italy. Survey 
results  indicate  that  changing  the  weighting  of  the  apportionment factors  has  little  effect  on 
the relative distribution of the tax base between countries.  

5.2. 

Impact on compliance costs  

According to survey evidence, the main corporate  compliance  cost drivers for multinational 
enterprises  are  directly  or  indirectly  related  to  transfer  pricing  tasks  (transfer  pricing 
documentation,  clearances  and  rulings  and  mutual  agreement  procedures).  Moreover,  the 
compliance burden due to transfer pricing has been increasing over time, mainly as a result of 
two  factors:  (i)  more  demanding  documentation  requirements  from 
tax  authorities 
accompanied by tax authority reviews; (ii) adjustments and changes of the type and scope of 
business operations around the world2.  

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2 

Overall,  in  the  sample  used,  the  combined  effect  of  the  new  tax  base  provisions  unrelated  to 
consolidation (which tend to broaden the tax base) and the introduction of immediate cross-border loss 
consolidation (which tend to shrink it) realised in the CCCTB scenarios tends to keep the aggregate tax 
bases roughly constant compared to the current ones (for the companies concerned). 
Ernst & Young Transfer Pricing Survey. 

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According  to  a  study  commissioned  to  Deloitte,  the  CCCTB  is  expected  to  translate  into 
substantial savings in compliance time and outlays in the case of a multinational setting up a 
new subsidiary in a different Member State. On average, the tax experts participating in the 
study  estimated  that  a  large  enterprise  spends  over  €140,000  (0.23%  of  turnover)  in  tax 
related expenditure to open a new subsidiary in another MS. The CCCTB will reduce these 
costs  by  €87,000  or  62%.  The  savings  for  a  me dium  sized  enterprise  are  even  more 
significant, as costs are expected to drop from €128,000 (0.55% of 
decrease  of  67%.  Additional  evidence  gathered  from  a  sample  of  existing  European 
multinationals  (PWC  study)  points  to  more  moderate  but  still  significant  reduction  in  the 
compliance burden for recurring tax related tasks. The savings expected from the introduction 
of the CCCTB would amount to 8 percentage points of the compliance time.  

turnover) to €42,000 or a 

5.3. 

Economy wide impacts  

The  CGE  model  CORTAX  is  used  to  assess  the  economy-wide  impacts  of  the  different 
reforms. The model, conceived to simulate tax policy changes for the EU Member States, has 
been  extended  and  refined  for  the  purpose  of  this  impact  assessment3.  However,  like  any 
general  equilibrium  model,  CORTAX  includes  simplifying  assumptions  and  specifications 
that  are  not  undisputed,  and  cannot  take  away  the  uncertainty  about  the  strength  of  certain 
behavioural effects of tax policies. More importantly, CORTAX does not capture the long run 
dynamic gains from further integration in the Internal Market, e.g. in terms of an increase in 
the  number  of  internationally  active  firms.  The  removal  of  cross-border  tax  barriers  is 
expected to translate into reduced distortions in the allocation of capital, as it will increase the 
substitutability between domestic and cross-border investment, on the one hand, and enhance 
the attractiveness of the EU as whole for multinational investors, on the other. The increased 
allocative  efficiency  is  expected  to  translate  into  productivity  and  employment  gains, 
stemming also from the economies of scale that can be exploited in the larger market.  

The four different policy options – optional CCTB, compulsory CCTB, optional CCCTB and 
compulsory CCCTB – are compared to the status quo scenario. In the optional scenarios it is 
assumed  that  all  multinationals,  but  no  domestic  companies,  opt  for  the  alternative  tax 
systems, whereas in the compulsory scenario also domestic companies need to apply the new 
tax provisions. This assumption might lead to an underestimation of the welfare gains in the 
optional scenarios as it can be expected that in practice multinational firms would opt in the 
new  system  only  if  that  would  not  lead  to  lower  net  profits  than  dealing  with  the  different 
national  tax  systems.  In  all  scenarios  it  is  assumed  that  corporate  tax  revenues  are  kept 
constant  ex-ante  adapting  the  tax  rate,  so  that  the  government  budget  is  balanced  before 
companies react to the new policy environment. 

The  important  economic  mechanisms  in  the  CGE  analysis  of  the  CCTB  is  the  trade-off 
between a low effective marginal tax rate (result of a narrow base and high statutory tax rate), 
which  minimises  distortions  in  investment,  and  a  low  statutory  corporate  tax  rate  (coupled 
with  a  broad  base),  which  reduces  multinational  profit  shifting  to  outside  locations  and 
improves  the  attractiveness  of  a  location  in  the  case  of  discrete  investment  choices.  Base-

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The  extensions  concern  the  inclusion  of  (i)  tax  havens,  to  capture  the  opportunity  for  profit  shifting 
outside the EU, (ii) loss probabilities, to precisely quantify the economic effects of loss consolidation, 
and  (iii)  discrete  location  choices,  to  model  the  infra-marginal  choices  of  firms  on  where  to  invest, 
preliminary to the decision on how much to invest. 

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broadening implied by the new definition of the common tax base -, and the consequent rate 
reduction are found to decrease aggregate welfare in the EU4.  

On  the  other  hand,  the  main  positive  effect  of  the  CCTB  reform  stems  from  the  assumed 
reduction in compliance costs. All in all, a compulsory CCTB leaves welfare at a European 
level  nearly  constant  while  the  introduction  of  a  CCTB  optional  for  multinationals  renders 
slight welfare gains. 

Compared to the CCTB, the welfare effects of the CCCTB options are more favourable under 
any of the analysed scenarios. The overall final impact is a small net positive welfare gain of 
around 0.02% of GDP in aggregated terms for the EU, which amount to roughly € 2.4 billion 
(2009 figure). Disentangling the effects of the different elements of the reforms shows that:  

•  The  lion's  share  of  the  positive  economic  impact  of  consolidation  and  formula 

apportionment is due to lower compliance costs. 

•  The move from separate accounting to formula apportionment exerts a negligible effect on 
GDP  and  welfare.  It  is  the  result  of  different  offsetting  effects:  fewer  incentives  to  shift 
profits  and  capital  from  high  tax  countries,  but  additional  distortions  in  the  allocation  of 
formula factors to low tax economies.  

•  Loss  consolidation  tends  to  shrink  the  tax  bases.  Hence,  given  the  model  assumptions, 
certain increase in corporate tax rates may be required to balance the government budget. 
The combination of a lower tax burden via loss consolidation and a higher tax burden due 
to higher rates may raise overall the cost of capital. Accordingly, investment slightly falls 
but  employment  expands  due  to  lower  labour  costs.  On  balance,  GDP  slightly  falls, 
whereas the net effect on welfare is negligible. 

6. 

COMPARISON OF OPTIONS  

The removal of all the three types of identified corporate tax obstacles – possible under the 
CCCTB  policy  options  –  would  allow  business  to  make  sounder  economic  choices  thus 
improving  overall  economic  efficiency  in  the  EU.  On  the  basis  of  the  quantified  economic 
impacts,  the  optional  CCCTB  and  the  compulsory  CCCTB  are  preferred  to  the  alternative 
options  given 
the 
macroeconomic evidence points to the optional CCCTB as the overall preferred policy option 
of the scenarios analysed.  

they  can  generate.  However, 

in  compliance  costs 

the  savings 

The  reforms  under  analysis  are potentially  associated  with  important  dynamic  effects  in  the 
long  run.  The  reduction  in  uncertainty  and  in  the  costs  (actual  and  perceived)  that  firms 
operating in multiple jurisdictions incur is the main channel through which these effects are 
expected to materialize. Ultimately, this will translate into increased cross border investment 

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In  the  model  a  policy  of  base-broadening  cum  rate-reduction  results  in  welfare  gains  when  applied 
separately by individual countries, and particularly by high-tax countries that suffer from profit shifting. 
However,  a  generalized  implementation  of  such  policy  at  the  European  level  reduces  the  beneficial 
effects of lower corporate tax rates. In fact, the comparative location advantage of a country does not 
improve  if  all  other  Member  States  reduce  their  tax  rate  too.  Only  location  choices  vis-à-vis  third 
countries  will  be  affected.  On  balance,  a  multilateral  policy  of  base  broadening  and  rate  reduction  is 
therefore less likely to be welfare improving than a unilateral policy. 

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within the EU, stemming both from further expansion of European and foreign multinationals 
and from de novo investment of purely domestic firms into other Member States. By the same 
token, to the extent that the current fragmented landscape of corporate tax systems acts as a 
barrier to entry into international markets, small and medium sized enterprises (SMEs) might 
be  particularly  advantaged  by  the  level  playing  field  created  by  the  reforms  under  analysis. 
The elimination of additional compliance costs associated with having to deal with different 
tax rules and the introduction of the 'one-stop shop' principle in tax administration is likely to 
enhance SMEs' capacity to expand cross-border.  

7. 

MONITORING AND EVALUATION  

The  proposed  policy  intervention  will  exert  effects  on  a  number  of  variables  that  should  be 
monitored. At the microeconomic level, the effects of the policy options on firms' tax related 
compliance  costs  and  on  their  investment  behaviour  across  national  borders  should  be 
assessed.  To  overcome  the  well-known  difficulties  in  obtaining  reliable  estimates  of  actual 
and perceived compliance costs, ad hoc surveys should be designed, and particular attention 
devoted  to  the  representativeness  of  the  selected  samples.  Propensity  to  expand  abroad  by 
SMEs might be particularly revealing on the expected long term impacts of the policy options. 
Such effects can be gauged both by means of surveys among the relevant companies and by 
analysing observed changes in actual investment choices.  

At  the  macroeconomic  level,  consistent  with  the  general  objectives  of  improving  the 
allocation  of  productive  capital  in  the  EU,  evidence  should  be  gathered  on  foreign  direct 
investment flows directed to the EU and among EU countries.  

The  evaluation  of  the  consequences  of  the  application  of  the  legislative  measure  could  take 
place  five  years  after  the  entry  into  force  of  the  legislative  measures  implementing  the 
Directive. The Commission could then submit to the European Parliament and the Council a 
report on the technical functioning of the Directive.  

The  content  of  such  a  report  would  vary  according  to  the  scope  of  the  Directive  as  finally 
agreed in the Council.  

Table 1: Ranking of policy-options (1 = best option) 

Option 
status-quo 

1: 

2: 

Option 
Optional 
CCTB 

Option 
3: 
Compulsory 
CCTB 

Option 
Optional 
CCCTB 

4: 

Option 
5: 
Compulsory 
CCCTB 

PWC-study (compliance costs) 

Deloitte-study (compliance costs) 

CORTAX-study (macroeconomic variables ) 

2 

3 

4 

3 

2 

1 

1 

3 

5 

1(2) 

2(1) 

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