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)
Date: 2016-10-25
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: European tax cooperation, approximation of laws, basis of tax assessment, corporation tax, cross-border cooperation, single market, tax harmonisation, tax law, tax system, transnational corporation

EN 

   EN 

   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 ....................................................................................................... 4 

2.  THE PROBLEM AND WHY THE EUROPEAN UNION SHOULD ACT .............. 8 

2.1.  Problems with corporate taxation in an international context ........................... 8 

2.2.  Corporate  taxation  and  its  impact  on  financing  and  investment 

decisions .......................................................................................................... 12 

2.3.  How the problems affect stakeholders ............................................................ 19 

2.4.  Baseline scenario based on recent developments ............................................ 19 

2.5.  Subsidiarity and proportionality, EU added value .......................................... 21 

3.  OBJECTIVES ........................................................................................................... 22 

3.1.  General objective: Enhancing the fairness of the tax system .......................... 23 

3.2.  General objective: Stimulating growth and investment .................................. 23 

4.  POLICY OPTIONS ................................................................................................... 24 

4.1.  Option 1: No further EU action ....................................................................... 25 

4.2.  Option 2: CCCTB with a scope definition ...................................................... 26 

4.3.  Option 3: Solutions to address the debt bias ................................................... 27 

4.4.  Option 4: Options to incentivise R&D ............................................................ 28 

4.5.  Option 5: Staged approach .............................................................................. 30 

5.  ANALYSIS OF IMPACTS OF THE OPTIONS ...................................................... 31 

5.1.  Baseline vs CCCTB ......................................................................................... 33 

5.2.  Scope of the common consolidated base ......................................................... 40 

5.3.  Addressing the debt bias .................................................................................. 48 

5.4.  Treatment of R&D expenses ........................................................................... 56 

5.5.  The staged approach ........................................................................................ 63 

5.6. 

Impact on SMEs .............................................................................................. 66 

5.7.  Social and environmental impacts ................................................................... 66 

5.8.  Conclusion on the preferred option ................................................................. 67 

5.9.  Choice of the corresponding policy instrument ............................................... 69 

6.  MONITORING AND EVALUATION ..................................................................... 69 

6.1.  Monitoring arrangements ................................................................................ 69 

6.2.  Evaluation ........................................................................................................ 71 

7.  GLOSSARY .............................................................................................................. 72 

8.  REFERENCES .......................................................................................................... 76 

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9.  ANNEXES ................................................................................................................ 86 

Annex I: Procedural Information .............................................................................. 87 

Annex II: Stakeholder Consultation – Synopsis Report ............................................ 89 

Annex III: Who is affected by the initiative and how ............................................. 107 

Annex IV: Analytical Models used in preparing the Impact Assessment ............... 109 

Annex V: Formula apportionment .......................................................................... 119 

Annex VI: The Anti-Tax Avoidance Package ........................................................ 127 

Annex VII: Compliance Costs ................................................................................ 130 

Annex VIII: The 2011 Proposal for a CCCTB ........................................................ 139 

Annex IX: Impact of the CCCTB on intra-group profit shifting ............................ 144 

Annex X: Measuring the cost of capital and effective average tax rates ................ 145 

Annex XI: Existence and design of R&D tax incentives in the EU ........................ 147 

Annex XII: The impact on tax revenues ................................................................. 149 

Annex XIII: Sensitivity analysis on the AGI and the ACE ..................................... 155 

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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.1  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 

1  The Commission laid the groundwork for action on aggressive tax planning with its June 2015 action 

plan for a fair and efficient corporate tax system in the EU (COM/2015/302). 

4 

 
 
                                                 
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.2  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).3 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-

2   COM(2015) 215 final. 
3   As  described  in  the  action  plan  on  building  a  capital  markets  union,  COM(2015)468final, 

30 September 2015. 

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country  reporting.4  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.5  The  impact 
assessment presented in this document should thus be seen as part of a wider package of 
technical  studies  on  the  subject6,  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.7 

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. 

4   COM(2016) 198 final. 
5   The  analysis the  2011  proposal  and  impact  assessment  was  based on  many  years  of work  and  input 
from  within  the  Commission,  external  contractors  and  Member  States  (CCCTB  Working  Group)  as 
well as other stakeholders. The CCCTB Working Group produced 68 papers and summary records of 
their meetings between 2004 and 2010. All material is published on a dedicated DG TAXUD website: 
http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm.  

6   Annex  VIII  gives  an  overview  of  the  2011  proposal,  the  underlying  impact  assessment  and  the 

subsequent technical work. 

7   COM(2015) 215 final and SWD(2015) 110 final. 

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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. 

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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 

8 

 
 
 
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.8 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).9 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 reorganisations10, as well as a fairly narrow 
application  of  controlled  foreign  company  (CFC)  rules  between  most  EU  Member 
States.11  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 

8   Evidence for tax competition and the evolution of tax rates and bases in the EU have been summarised 
in  the  Staff  Working  Document  accompanying  the  June  2015  action  plan  (European  Commission, 
2015b). 

9   Low  trade  costs  have  two  effects:  (1)  they  tend  to  concentrate  foreign  direct  investment  from  third 
countries  in  one  Member  State,  from  where  other  Member  States  are  reached  via  exports  instead  of 
investing more evenly in the EU; (2) with decreasing trade costs, foreign direct investment within the 
EU might become relatively less attractive compared to intra-EU exports. 

10   According  to  the  rules  laid  down  in  the  Merger  Directive,  the  Parent-Subsidiary  Directive  and  the 

Interest and Royalty Directive. 

11   Following the European Court of Justice Decision, the fundamental freedoms imply that CFC rules in 
the  EU  only  apply  to  wholly  artificial  arrangements.  The  situation  is  slightly  different  in  Denmark 
(where CFC rules also apply to domestic cases), Lithuania (which applies a white list for EU countries, 
but subject to conditions) and the UK (which has not implemented a specific clause for the EU) (see 
page 58 of ZEW (2016c) for a discussion). 

9 

 
 
                                                 
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.12  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.13 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  CCCTB14  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.15  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.16 
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 

12   See Sullivan (2004) and Clausing (2011). 
13   Denmark is one exemption, where corporations can opt for international joint taxation for the group.  
14   Corporate taxation has been recognised much earlier as a fundamental component of the single market. 
See e.g. the 2000 report by the CEPS Tax Task Force, Radaelli (2000) and the discussion in annex X.  
15   These  findings  are  based  on  a  2013  review  of  methods  to  compute  compliance  costs  (Ramboll 

Management Consulting, The Evaluation Partnership and Europe Economic Research, 2013). 

16   The  EU  arbitration  convention  establishes  a  procedure  to  resolve  disputes  where  double  taxation 
occurs between enterprises of different Member States as a result of an upward adjustment of taxable 
profits by one Member State. 

10 

 
 
                                                 
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).17 Tax planning reduces both the mean effective average tax rate (EATR) in the EU as 
well  as  the  minimum  and  maximum  EATRs18.  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 

 

Intellectual property box (patent box) 

  Financing via offshore treaty 

13.7 

-1.6 

15.9 

4.3 

-3.7 

6.4 

26.6 

1.8 

28.6 

-36.3% 

-108.3% 

-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 
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. 

the  EU  and  receives 

interest  payments 

to  a  subsidiary 

located 

from 

in 

17   The  possibilities  for  hybrid  loan  financing  by  corporate groups  and  the  ensuing  double-non  taxation 
have  been  reduced  due  to  the  2014  amendment  of  the  Parent-Subsidiary  Directive,  effective  as  of 
2016. 

18   Effective average tax rates are driven by the respective statutory CIT rate in each country, which partly 

explains the wide spread.  

11 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
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.19 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.20  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.21 

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.22 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 

19   See OECD (2015d), p. 169. 
20   See Ilzkovitz and Dierx (2016) for a discussion. 
21   See Lignier and Evans (2012) and Lignier, Evans and Tran-Nam (2014). 
22   The summary of compliance cost issues in annex 2 of the 2001 Communication on tax obstacles in the 
internal market provides a summary of the results of the Ruding survey as well as a discussion of the 
literature available at the time. 

12 

 
 
                                                 
corporate sector by removing financing distortions.23 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.24 

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 

23   This is in line with the tax recommendations in the European Semester. 
24   See  for  example  the  various  Annual  Growth  Surveys  published  by  the  European  Commission  in  the 
context of the European Semester, the action plan on building a capital markets union, the publications 
of  the  International  Monetary  Fund  (IMF,  2009,  2010;  de  Mooij,  2011a)  or  the  Organisation  for 
Economic Cooperation and Development (OECD, 2015a), and the Financial Stability Board (2015). 

13 

 
 
 
                                                 
only 4%, while equity needs to earn 6.1%.25 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.26  The  result  is  an  increased  indebtedness  of  non-financial  companies  due  to  the 
debt bias.27  

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 level28. 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.29  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.30  

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 

25   Annex X explains the underlying model. 
26   This result could be a lower bound: recent studies that rely on tax return data rather than commercial 
balance sheets find that the estimated tax effect on capital structure using financial statements is likely 
to be biased downward. Devereux et al. (2015) show that the external leverage of domestic stand-alone 
companies and of multinational companies responds strongly to corporate tax incentives. 

27   Taxation  is  not  the  only  driver  of  indebtedness  but  econometric  techniques  allow  disentangling  the 

respective effects of the various drivers and point to a large role for taxation. 

28   The socially optimal level is defined as the one that  maximises total rent to society generated by an 

investment. See also equation 3.1 in Sørensen (2015). 

29   See Cecchetti et al. (2011). 
30   Source: Eurostat. Latest available data. The instruments that are taken into account to compile debt of 
non-financial  corporations  are  Debt  securities  (F.3)  and  Loans  (F.4).  Data  are  presented  in  non-
consolidated terms, i.e. including transactions within the same sector. 

14 

 
 
                                                 
lack  of  deductibility  of  the  cost  of  equity  for  young  and  innovative  firms  may  be 
particularly relevant. Overall, the welfare impact is not negligible.31  

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.32  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).33  Figure  3 
summarises the different drivers and consequences of the debt bias. 

31   See Fatica et al. (2013, p. 11) for a discussion. 
32   Empirical  evidence  for  the  debt  bias  in  the  financial  sector  is  among  others  provided  by  Gropp  and 

Heider (2010), Hemmelgarn and Teichmann (2014) and Keen and de Mooij (2012). 

33   Huizinga et al. (2008) provide empirical evidence for this type of profit shifting. 

15 

 
 
                                                 
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.34 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.35  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. 

34   See Parsons and Phillips (2007), Sveikauskas (2007), Bloom, Schankerman, and van Reenen (2013). 
35   See Scherer and Harhoff (2000). 

16 

 
 
 
                                                 
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. 

17 

0.5 %1.0 %1.5 %2.0 %2.5 %3.0 %3.5 %2000200520102015South Korea(1)JapanUnited States(2)China(3)EU 
 
 
  
 
 
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.36  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.37  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. 

36   See Garnier et al. (2014) for an overview of tax reforms in the EU. 
37   Governments can draw on several experiences with the design of R&D tax incentives given that such 
schemes  have  been  deployed  in  most  advanced  economies  over  the  last  decade  or  longer.  These 
experiences are evaluated in a study by CPB (2014) carried out for the European Commission in 2014 
which also benefited from exchanges with Member States representatives and concluded with a list of 
good practices in terms of the design of R&D tax incentives. 

18 

Trend (1)Target (2)R&D intensityTrend (1)Target (3)Business R&D intensity0.51.01.52.02.53.03.52005201020152020 
 
 
   
 
 
                                                 
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. 

2.4.  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 

19 

 
 
 
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  approach38  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  Directive39,  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.   

38   This  would  allow  for  a  coordinated  implementation  of  the  new  international  standards agreed  in  the 
package. The Treaties require that the fundamental rights – including the freedom of establishment – 
be respected. Reforms must therefore be tailored for the EU content and fix inconsistencies on an EU-
wide basis. 

39   10426/16 FISC 104 ECOFIN 628 

20 

 
 
                                                 
2.5. 

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.40 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 

40   For an overview of the elements of the CCCTB mentioned here see also annex X. 

21 

 
 
                                                 
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.  

22 

 
 
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.41 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.42  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. 

41   The 10 priorities are summarized here: https://ec.europa.eu/priorities/index_en.  
42   This is in coherence with the Commission's objective to stimulate more investment and jobs in Europe 

under the Investment Plan. 

23 

 
 
                                                 
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  

impact  of  having  an 

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 
interim  stage  without  consolidation  and 
scenario'.  The 
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. 

24 

 
 
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. 

25 

 CCCTBScope (mandatory CCCTB)Debt bias solutionR&D incentivesGeneral Objective 1: Enhancing the fairness of the tax system xReduce cross-border tax planningxLevel playing field between domestic and multinational companiesxEnsure that companies pay a fair share of the tax burdenxEnhance general tax payer moralexGeneral Objective 2: Stimulating growth and investmentxxxxReduce compliance costs and administrative burdenxEliminate double taxation risks and remove still existing discriminations and restrictionsxDebt bias in taxationTaxation neutrality for investment and financing decisionsxUnderinvestment in R&DCreating more incentives to invest in the EUxxPolicy optionsCross-border corporate tax avoidanceContext: Globalization, changing business models with increasingly mobile profits and tax bases, current international tax rules struggle withdetermining the place of taxation, little tax coordination at the international level creates incentives for governments to engage in tax competition, impact on distribution on tax burden and fairnessSingle market: tax obstacles, compliance costsProblemsObjectives 
 
 
 
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 

26 

 
 
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.43  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.44  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 

43   This option resembles a 1992 proposal from the U.S. Department of Treasury, called a Comprehensive 
Business  Income  Tax  (CBIT).  However,  the  CBIT  is  more  far-reaching  as  it  complements  the  non-
deductibility  of  interest  expenses  with  the  non-taxation  of  interest  income,  an  element  which  goes 
beyond the EU's legal power to act. 

44   The  proposal  goes  back  to  a  contribution  by  Devereux  and  Freeman  (1991).  It  has  been  tested  in 
practice  and  with  different  designs.  Currently,  Belgium,  Italy  and  more  recently,  Cyprus  apply  an 
ACE. Austria, Latvia and Croatia also experienced an ACE. Portugal has an ACE for its SMEs (under 
eligibility  conditions)  and  is  considering  extending  its  scope.  Other  countries  such  as  Turkey  also 
currently have an ACE. 

27 

 
 
                                                 
expenses. Since there is only one rate applied to debt and equity, this option achieves full 
financing choice neutrality.45 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.46 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.47  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.48 For example, a company could deduct an additional allowance of 50% of 

45   An ACC was first analysed by Boadway and Bruce (1984). 
46   This system was proposed by Kleinbard (2015). 
47   R&D expenses on buildings and land account for only a small share of total business R&D (around 5% 
according to OECD estimates) and are therefore not expected to materially affect incentives to invest 
in  R&D.  The  largest  part  of  R&D  spending  is  for  skilled  labour  which  also  generates  the  highest 
spillovers. 

48   Note that the term "additional allowance" in the context of R&D refers to the amount of tax incentives 
granted on top of immediate expensing of R&D expenditures, i.e. an immediate deduction of 100%. In 

28 

 
 
                                                 
 
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.49 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.50  

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.51 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.52 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.53 

the literature different terms are used to describe this additional allowance, e.g. enhanced allowance, 
bonus allowance, super allowance or super deduction. In the following, the term additional allowance 
will be used. 

49   A detailed description of the formula apportionment is provided in annex VII. 
50   See CPB (2014). 
51   See Griffith et al. (2014). 
52   See Alstadsæter et al. (2015). 
53   To prevent the harmfulness of these schemes, an agreement was reached in the OECD and in the EU 
on the approach to be taken to ensure that there is a clear link between the tax advantage being granted 

29 

 
 
                                                                                                                                                 
 
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.  

under the patent box and a firm’s R&D activities ('nexus approach'). However, this does not mean that 
these schemes are effective in raising R&D efforts. 

30 

 
 
                                                                                                                                                 
Table 3: Options retained for further analysis 

Option 1 

Options 2 

Options 3 

Options 4 

Basic choice for action 

Scope 

No action (baseline 
scenario, i.e. assuming 
implementation of 
ATAP / CbCR) 

Addressing the debt 
bias 

Ensuring incentives 
for R&D 

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) 

Mandatory for some 
set of firms; opt-in 
for others 

Mandatory for some 
set of firms; no opt-
in for others 

No interest deductibility 

Enhanced allowance for 
R&D expenses 

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 

Options 5 

Staged 
approach 

CCTB without 
cross-border loss 
relief 

CCTB with 
cross-border loss 
relief 

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. 

31 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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: 

Share A =  

1
3

𝑆𝑎𝑙𝑒𝑠 𝐴
𝑆𝑎𝑙𝑒𝑠𝐺𝑟𝑜𝑢𝑝 +  

1
3

1
2

+

𝑃𝑎𝑦𝑟𝑜𝑙𝑙𝐴
𝑃𝑎𝑦𝑟𝑜𝑙𝑙𝐺𝑟𝑜𝑢𝑝 +

1
2

𝑁𝑜 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝐴
𝑁𝑜 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠𝐺𝑟𝑜𝑢𝑝  +

1
3

𝐴𝑠𝑠𝑒𝑡𝑠 𝐴
𝐴𝑠𝑠𝑒𝑡𝑠𝐺𝑟𝑜𝑢𝑝  .

∗ 𝐶𝑜𝑛′𝑑 𝑇𝑎𝑥 𝐵𝑎𝑠𝑒                                         

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.54  

54   However, it should be made clear that it is not possible to quantify in all cases the exact impacts due to 
the  limitations  of  the  analytical  model,  even  if  this  latter  is  considered  state-of-the-art  in  corporate 
taxation  analysis  in  an  international  context.  Based  on  the  partial  analysis  that  is  available  on  the 
combination of certain options and based on additional quantitative arguments outlined in the analysis 

32 

 
 
 
                                                 
 
 
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 

below, one can be confident that the principal choices (i.e. limiting the mandatory scope to large firms, 
opting  for  an  allowance  for  growth  and  investment  to  address  the  debt  bias,  providing  additional 
allowance for R&D expenses) would not change even if a complete model that could capture all the 
interactions were available. 

33 

 
 
 
 
                                                                                                                                                 
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.55 

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.56 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.57  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,58 multinational entities have the possibility to shift profits within their group via 
transfer pricing.59 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 

55   See Ramboll et al. (2015) for a description of those tax planning strategies. 
56 The relevance of this point is underlined by the findings in ZEW (2016c). 
57   See annex V for a discussion. 
58   See annex IV (part 1) for a detailed description of model. 
59   CORTAX  does  not  model  other  tax  planning  strategies,  which  are  often  based  on  specific  regimes 
offered in national tax systems or certain mismatches between national systems. Therefore the analysis 
of the profit shifting impact  is stylised and summarised via the transfer pricing channel. In addition, 
the  analysis  only  covers  profit  shifting  within  the  EU,  the  US  and  Japan.  Consequently,  the  figures 
presented  here  are  not  comparable  with  the  estimates  presented  in  Section  2  on  the  possible  tax 
revenue costs of tax avoidance. 

34 

 
 
                                                 
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.60 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 

60   See Annex V: Formula apportionment. 

35 

 
 
 
 
 
                                                 
taxation  negatively  impacts  tax  compliance  behaviour  or  at  least  the  willingness  to 
cooperate with tax authorities.61 

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.62 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.63 

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) 

Cost of capital (change in percentage points) 

Investment 

Wages 

Employment 

GDP 

Welfare (change in % of GDP) 

CCCTB –  
only multinational entities 

CCCTB – 
 all firms 

-0.04 

0.57 

0.40 

0.19 

0.16 

0.07 

-0.07 

0.74 

0.44 

0.19 

0.26 

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 

61   See  the  contributions  by  Fortin,  Lacroix  and  Villeval  (2007),  Weber  et  al.  (2014),  Kirchler, 

Niemirowski and Wearing (2006) and Torgler et al. (2008). 

62   In more detail, the model adjusts ex-ante the corporate statutory tax rates to ensure ex-ante revenue-
neutrality when the corporate tax base changes. The adjusted CIT rate is subject to an upper bound for 
of 37.5% and a lower bound of 10%. In addition, budget neutrality is ensured ex-post by a change in 
lump-sum transfers to the citizens (see JRC (2016) for the details). 

63   More  details  on  the  model  and  the  study  that  was  performed  by  the  Joint  Research  Centre  of  the 

European Commission (2016) are available in annex IV. 

36 

 
 
 
                                                 
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 

Domestic* 

Multinational headquarter 

Multinational subsidiary 

CCCTB –  
only multinational entities 

-9.89 

9.59 

19.39 

CCCTB –  
all firms 

-12.22 

11.03 

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. 

37 

 
 
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.64  

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.65  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 

64   Available studies on the tax revenue impact from transfer pricing do not give a clear indication. The 
staff  working  document  accompanying  the  June  action  plan  includes  a  summary  discussion  of  the 
available studies (SWD/2015/121). 

65   See annex VIII for an overview. 

38 

 
 
                                                 
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.66  

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.67 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.68 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 

66   The  Commission  services  commissioned  a  study  (Ramboll  Management  Consulting  et  al.,  2013)  on 
methodologies  to  measure  compliance  cost in  2013  which explains  in detail  the  existing  methods as 
well as the related caveats.  

67   The  Tax  Reform  Report  2015  describes  the  very  recent  anti-avoidance  measures  taken  by  Member 
States  in  the  2014  and  2015  (Section  1.5.2  of  the  report).  For  example,  several  Member  States 
introduced  or  strengthened  general  or  specific  anti-avoidance  provisions.  Four  Member  States 
reinforced  their  transfer  pricing  rules,  in  particular  by  extending  reporting  requirements.  Controlled-
Foreign-Company rules were introduced or tightened as were interest limitation rules. 

68   See annex VII for a more detailed analysis of compliance costs. 

39 

 
 
                                                 
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) 

Enhancing the fairness of the yax system 

Reduce cross-border tax planning opportunities 

Options 

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). 

CCCTB 
central scenario 

++ 

++ 

++ 

++ 

++ 

++ 

+/- 

+ 

+ 

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 

40 

 
 
 
 
 
 
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 4.2.69 

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 domestically70, 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, but in 11 of them also via 
modified tax bases and/or relief from other taxes.71 The mandatory for all option would 
harmonise the tax treatment across all firms. It is not clear whether this would necessarily 
create a level playing field to the extent that special regimes are justified to compensate 
undue  competitive  disadvantages.  The  results  from  the  CORTAX  study  for  the 
'mandatory  for  all'  option  presented  in  Table  7  indicate  that  in  the  aggregate  domestic 
firms (which may be small or not) do not benefit uniformly from the application of the 
CCCTB.  

Overall, option 2d to make the CCCTB mandatory for all firms appears disproportionate 
to  the  extent  that  it  would  unnecessarily  oblige  these  small  and  micro  corporations  to 

69   To keep the structure of the assessment of various option dimensions consistent throughout the report 
the impact analysis in this section is divided into fairness impacts and economic impacts, even though 
the separation is not always clear-cut. 

70   According to a survey conducted in 2015, only 4% of European SMEs had invested abroad at that time 
(European  Commission  (2015c)).  Similarly,  Navaretti  et  al.  (2011)  find  a  clear  positive  correlation 
between firm size and propensity to invest abroad in seven EU Member States (AT, FR, DE, HU, IT, 
ES, UK). Notably, the share of firms with foreign affiliates is several times larger for large firms than 
for SMEs. 

71   See VVW (2015) and ZEW (2015). 

41 

 
 
                                                 
apply the CCCTB. Proportionality is also an important aspect of the EU Better regulation 
agenda  and  in  particular  its  programme  for  regulatory  fitness  (REFIT),  according  to 
which  legislation  should  avoid  any  unnecessary  burden.  In  line  with  this  approach,  the 
intention  is  thus  not  to  place,  in  the  absence  of  any  real  benefits,  a  burden  on  smaller-
sized  companies  of  limited  finances,  which  may  not  have  the  intention  of  expanding 
abroad. While this would come at the administrative cost  of  maintaining two corporate 
tax systems in parallel, it would also allow national corporate tax systems to stay more 
flexible and respond to domestic circumstances. 

There  are  in  principle  three  main  criteria  that  could  be  used  to  select  firms  into  the 
mandatory  set:  (i)  a  sectorial  approach,  (ii)  an  approach  targeting  multinational  entities 
via a definition of cross-border groups and (iii) a size approach. 

Sectorial approach 

One could argue that some sectors, such as the financial sector, would be more suitable 
candidates  than  other  sectors  to  the  application  of  a  CCCTB,  notably  because  the  far-
reaching  harmonisation  in  regulation  and  supervision  makes  taxation  one  of  the  few 
discriminating elements between companies of different Member States.72 However, the 
sectorial  approach  is  not  retained  here  as  the  problems  identified  in  Section  2  are 
common  to  all  sectors,  albeit  to  possibly  varying  degrees,  and  as  it  is  difficult  to 
apprehend how an adequate and efficient solution to those problems can be achieved by 
applying a sectorial approach.  

Cross-border criterion 

Firms  that  currently  benefit  from  cross-border  tax  planning  have  by  definition  a  cross-
border  structure.  This  is  therefore  a  natural  requirement  for  the  inclusion  into  the 
mandatory  set.  It  may  be  considered  as  the  'minimum  criterion',  leading  to  the  widest 
mandatory  scope  that  is  justifiable.  However,  mandating  firms  with  cross-border 
operations into the CCCTB while domestic firms (even of a comparable size) are given 
the  possibility,  but  are  not  obliged,  to  opt  in,  could  be  challenged  on  discrimination 
grounds.  In  addition,  if  not  complemented  by  further  criteria  a  cross-border  criterion 
would capture about 4-5% of SMEs that are active cross-border (Table 8 below). On this 
basis, it is not suggested to focus on a cross-border criterion alone.  

Size criterion 

There  is  a  clear  correlation  between  size  and  propensity  to  operate  in  a  cross-border 
structure (Table 8 below). Therefore, applying a size criterion might be a good alternative 
way  for  capturing  those  –  essentially  cross-border  –  businesses  which  have  higher 
possibilities  of  engaging  in  tax  avoidance  practices.  Furthermore,  relying  on  a  size 
criterion  would  better  fit  the  necessity  to  avoid  discrimination  since  it would  not  make 
any difference between a member of a multinational group and a member of a domestic 
group  that,  even  just  potentially,  want  to  grow  internationally  or  do  business  through 
permanent establishments. Finally, a size criterion would be consistent with the approach 
followed  in  the  recently  agreed  amendment  to  the  Directive  on  administrative 

72   See e.g. Bénassy-Quéré, Trannoy and Wolff (2014). 

42 

 
 
                                                 
cooperation  to  implement  the  country-by-country  reporting.  The  reporting  requirement 
will apply to groups with total consolidated revenue of at least EUR 750 million.  

Different  size  thresholds  could  be  envisaged  above  which  the  CCCTB  would  be 
mandatory. In that respect, the following elements serve as guiding principles. 

First, as explained above, the threshold should aim at the right balance between the risk 
of tax avoiders falling below the CCCTB threshold and the risk of imposing the CCCTB 
to companies that do not engage in tax avoidance and would get little or no benefit from 
lessened  compliance  costs  as  they  do  not  operate  cross-border  (i.e.  threshold  set  too 
low).73 

The available evidence on the link between a firm's size and its likelihood to engage in 
tax planning would point, if anything, to a rather high threshold. It is difficult to establish 
a clear direction for this link. The empirical literature finds evidence for both positive and 
negative relationships, pointing to a possible non-linear relationship. A recent meta-study 
by  Belz  et  al.  (2016)  finds  the  overall  effect  to  be  rather  positive.  However,  they  also 
point  to  a  changing  picture  based  on  studies  that  use  more  recent  samples.  Moreover, 
studies  focussing  on  samples  with  larger  firms  show  a  significantly  lower  consensus 
estimate, indicating that these firms might indeed achieve lower effective tax rates. Data 
for  the  US  show  that  average  implicit  tax  rates  (i.e.  the  tax  payment  divided  by  the 
taxable  profit)  increase  with  increasing  firm  size,  except  for  the  5%  largest  firms. 
Examining this upper 5 percentile more closely shows that there is no significant trend in 
one  or  the  other  direction  for  the  95-99  percentile  but  that  effective  tax  rates  are 
significantly  lower  and  decreasing  in  size  for  the  99-100  percentile  (Bao  and  Romeo, 
2013).  

Analyses of the structure of tax compliance costs of companies suggest that spending on 
tax planning increases with firm size which could be interpreted as economies of scale in 
tax  avoidance  techniques.  Eichfelder  and  Vaillancourt  (2014)  summarise  the  tax 
compliance cost literature of the last three decades and conclude that tax planning costs 
seem to be relatively unimportant for micro and small enterprises. The results could be 
interpreted  in  the  sense that  the  fraction  of  planning  costs  increases  with  business  size. 
This evidence has to be used cautiously due to the many weaknesses of the methods to 
estimate compliance costs and the exact definition of tax planning costs. Data provided 
by  Slemrod  and  Venkatesh  (2002)  show  that  the  share  of  tax  planning  costs  in  total 
compliance costs increases with firm size measured by the value of assets from 4% for 
companies with assets smaller than USD 5 million to 15% for companies with an asset 
size of more USD 1 billion. 

Second,  by  setting  a  threshold,  a  trade-off  might  emerge  for  some  companies  that  may 
want to scale down or refrain from growing in order to remain outside the scope of the 
CCCTB. Such an effect is likely to be more acute if the threshold is low. The direction of 

73   In the OECD/G20 BEPS Report on Action 13, the following elements were put forward: the general 
filing  requirement  for  MNE groups with  annual  consolidated  group  turnover  of  more  than  EUR 750 
million is believed to "exclude approximately 85 to 90 percent of MNE groups from the requirement to 
file the country-by-country report, but that the country-by-country report will nevertheless be filed by 
MNE  groups  controlling  approximately  90 percent  of  corporate  revenues.  The prescribed  exemption 
threshold  therefore  represents  an  appropriate  balancing  of  reporting  burden  and  benefit  to  tax 
administrations." (OECD, 2015b) 

43 

 
 
                                                 
the  distortion  would  be  that  some  firms  above,  but  close  to  the  frontier  would  stay 
smaller than they would choose to be otherwise.74 Unless at the outset firms are already 
larger  than  optimal,  this  would  imply  an  efficiency  loss.  The  lower  the  threshold,  the 
larger is the number of firms facing such a trade-off. A similar issue concerns the level 
playing field between companies below and above the threshold. Due to the possibility to 
opt in, firms below the threshold may be able to benefit from an advantage compared to 
competitors  above  the  threshold.  This  concern  is  less  pronounced  for  higher  thresholds 
simply because there will be fewer instances of direct competitors being below and above 
the threshold. 

Third, a very high threshold may give rise to concerns of creating a beneficial tax regime 
for the most mobile segment of the tax base, which would in turn harm taxpayer morale. 
In principle, Member States would have incentives to make the CCCTB regime attractive 
to  attract  mobile  base.  There  are  two  reasons  why  this  concern  is  of  limited  relevance. 
The notion of mobility will change under the CCCTB as shifting tax base requires the re-
allocation of factors. Furthermore, the possibility for companies to opt in implies that a 
country that lowers the CCCTB tax rate would risk a larger deterioration of revenues as 
more and more companies would opt in.  

Table 8 gives an overview of the estimated scope of the CCCTB (in terms of number of 
companies and share of corporate revenues) for various thresholds. 

Table 8:   Estimated shares of groups, turnover and domestic groups  

for different size thresholds 

Consolidated 
turnover  

Share of groups, compared 
to total number of groups 

Corresponding share of 
unconsolidated turnover 

Share of groups active 
only domestically 
compared to total number 
of groups in this bracket75 

<= EUR 50 million 

> EUR 50 million 

> EUR 500 million 

> EUR 750 million 

96.1% 

3.9% 

1.9% 

1.6% 

19.9% 

81.1% 

68.6% 

64.2% 

95.2% 

51.0% 

24.5% 

19.2% 

Source:  ORBIS and ORBIS Historical Ownership (December 2014) 

It is clear that corporate groups with consolidated turnover up to EUR 50 million, which 
corresponds  roughly  to  SMEs,  are  overwhelmingly  present  in  a  single  Member  State 
only.  Therefore,  capturing  the  small  share  of  SME  groups  active  in  more  than  one 
Member State would come at the expense of imposing a change to the CCCTB on a very 
large number of domestic firms. This would clearly not be a targeted measure. Moreover, 
even  within  the  large  groups  with  consolidated  turnover  of  more  than  EUR 50  million, 
slightly more than half of the large groups have a purely domestic structure. The share of 
domestic  firms  becomes  significantly  smaller  only  for  considerably  larger  thresholds. 
Overall, the thresholds of EUR 500 million and EUR 750 million seem to produce fairly 

74   Hasegawa et al (2013) find evidence for such effects based on experience with corporate transparency 

requirements in Japan. 

75   This ratio has been computed for groups that have their global ultimate owner (GUO) in the EU. In 
other words, groups active in the EU but with GUO outside the EU are not reflected in this ratio. This 
ratio therefore gives an upper estimate of the share of purely domestic groups. 

44 

 
 
 
                                                 
comparable  results,  capturing  respectively  68.6%  and  64.2%  of  turnover  of  all  groups. 
They imply that a fraction of 19.2% and 24.5% of groups under mandatory application 
would be active only domestically. 

5.2.2.  Economic impacts 

Results for the economic impacts using the CORTAX study have been obtained for two 
different  assumptions  on  the  set  of  firms  that  apply  the  CCCTB,  namely  either  only 
multinational  entities  or  all  firms.  As  the  results  summarised  in  Table  4  and  Table  5 
show, the overall impact on key economic variables is very similar for the two options. 
However,  the  CORTAX  model  is  not  built  to  capture  in  a  meaningful  way  the  opt-in 
decision of a firm. The assumption that all multinationals opt into the CCCTB, whereas 
domestic firms prefer to stay out is consistent with the other assumptions in the model,76 
but in reality a number of elements influence the opt-in decision.  

In  principle,  one  would  expect  economic  impacts  to  be  maximised  if  firms  have  the 
largest possible flexibility to choose the CCCTB. They would then self-select depending 
on  whether  the  CCCTB  or  the  respective  national  system  better  fits  their  needs,  even 
though  this  would  also  entail  a  certain  burden  due  to  the  required  cost-benefit  analysis 
preceding such a decision. 

Impact on administrative burden 

The  main  impacts  on  the  compliance  burden  for  companies  have  been  discussed  in 
Section  5.1.  In  principle  it  is  expected  that the CCCTB  reduces the  compliance  burden 
for  companies,  at  least  for  those  that  are  active  cross-border  or  wish  to  expand  cross-
border.  There  may  be  cases  in  which  a  company  finds  the  respective  national  system 
easier to deal with. If companies have the possibility to opt into the CCCTB, they would 
factor in the compliance burden in their opt-in decision. In this respect a wider optional 
application would be better to reduce compliance costs. On the other hand firms would 
have  to  conduct  a  cost-benefit  analysis  before  they  decide.  Since  such  cost-benefit 
analysis is a one-off cost, it is overall more beneficial from a compliance cost perspective 
to leave companies a choice. 

Tax administrations, however, would benefit the most if the CCCTB is made mandatory 
for all firms, even though they would also incur one-off costs for switching to the new 
system.  In  terms  of  recurring  costs,  the  burden  for  national  administrations  may  go  up 
slightly if the CCCTB is not mandatory for all firms due to the required maintenance of 
two parallel systems. In this case, they could still benefit from reduced case numbers due 
to  the  one-stop  shop  approach  by  which  multinational  companies  deal  with  the  tax 
administration of only one Member State. 

5.2.3.  Stakeholder views 

Stakeholders were asked whether they support making the CCCTB obligatory for all EU 
groups.  Roughly  one-third  of  the  respondents  are  in  favour  and  the  same  fraction  is 
against.  Another  13%  express  a  neutral  stance  while  15%  opted  for  'other'.  Among 
companies, slightly more than half of SMEs support a mandatory application for all EU 

76   This  is  why  in  the  2011  impact  assessment  the  'optional  for  all'  option  was  translated  into  the 

assumption that all multinational entities would opt into the CCCTB.  

45 

 
 
                                                 
groups, whereas only 20% of the large companies are in favour. The absolute number of 
respondents  representing  respectively  large  companies  and  SMEs  is  relatively  small 
though and the results should be interpreted cautiously. Comments given along with the 
replies  suggest  a  wide  range  of  nuances  within  each  of  the  reply  categories.  Some 
consider it more appropriate to apply cross-border or turnover criteria and/or to exclude 
SMEs,  and/or  believe  that  a  mandatory  application  should  only  be  considered  after  an 
initial  optional  phase.  The  range  of views  is  particularly  wide  for  the  opponents.  Some 
prefer  the  CCCTB  to  be  mandatory  for  all  firms  to  ensure  a  level  playing  field.  Some 
suggest  size  thresholds  or  an  opt-out  possibility.  Others  are  in  principle  against  the 
CCCTB. 

5.2.4.  Scope preferred option 

Table 9 shows a summary of the performance of the two main scope definitions for the 
CCCTB  against  the  baseline.  Column  (1)  summarises  the  impacts  of  a  mandatory 
application  for  all  firms.  Column  (2)  shows  the  impacts  for  the  case  of  a  limited 
mandatory application. Evaluated on their merits in reaching the objectives, both scope 
options  improve  the  situation  when  compared  to  the  baseline  scenario.  The  option 
'compulsory for all firms' is expected to perform slightly better in reducing tax planning 
opportunities and has the advantage to eliminate all national corporate tax systems which 
reduces costs for tax administrations  in  comparison to a limited  mandatory application. 
Otherwise,  the  two options are expected to  be similarly  effective in  stimulating growth 
and investment. However, the advantage of a full compulsory application in reducing tax 
planning opportunities is small if compared to a mandatory scope definition that captures 
the most relevant companies engaged in cross-border tax planning. At the same time, a 
fully  compulsory  approach  would  also  force  companies  into  the  CCCTB  system  that 
have  no  tax  planning  opportunities  and  generally  fewer  benefits  to  reap  from  the 
CCCTB. This is not a proportionate approach to achieve the objectives. Instead, granting 
the  possibility  to  apply  the  CCCTB  to  such  companies,  which  are  often  active  only 
domestically and tend to be smaller, creates a more level playing field between them and 
multinationals. Thus 'compulsory for all' is rejected.    

It  is  proposed  to  make  the  CCCTB  compulsory  only  for  a  subset  of  firms  (option  2b), 
based on their size. A size criterion proves to  be a good proxy for capturing, in  a non-
discriminatory  manner,  companies  that  are  likely  to  engage  in  tax  avoidance  practices. 
Defining  the  actual  threshold  implies  a  trade-off  between  the  risk  of  not  capturing  tax 
avoiders and the risk of targeting companies that do not ordinarily engage in cross-border 
activities  and  would  therefore  not  present  a  substantial  tax  avoidance  risk.  In  addition, 
this second category of companies should be expected to operate business structures that 
would derive only little or no benefit from lessened compliance costs, given that they do 
not operate cross-border. It seems at the very least appropriate to exclude SMEs from the 
mandatory application as they are by and large not active internationally, hence unlikely 
to  engage  in  tax  avoidance.  The  link  between  size  and  likelihood  to  engage  in  tax 
planning being more robust for the very large firms, and taking into account the risk of 
adverse threshold effects (disincentives to grow), would point to a rather high threshold. 
Moreover, domestic firms do not seem as a whole to benefit from the CCCTB or from 
staying out. To account for their different needs and to ensure a more level playing field, 
it may be important to not oblige them to apply the system. This, too, points to a rather 
high threshold, considering the shares of purely domestic groups captured by the various 
thresholds displayed in Table 8.  

46 

 
 
Limiting  the  compulsory  application  to  groups  with  a  consolidated  turnover  above 
EUR 750  million  would  serve  the  purpose  of  capturing  the  vast  majority  (ca.  64%)  of 
turnover generated by groups while limiting the risk of including purely domestic groups. 
Furthermore,  such  a  threshold  would  be  coherent  with  the  approach  taken  in  other  EU 
initiatives to counter tax avoidance.  

Table 9:   Assessment of impacts of scope options 

Options 

(1) 

Compulsory  
for all firms 

(2) 

Compulsory 
application for a 
defined set of firms 

Enhancing the Fairness of the Tax 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 tax payer 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 

++ 

+ 

+ 

+ 

++ 

+ 

0 

+ 

+ 

+ 

++ 

+ 

+ 

++ 

+ 

0 

+ 

+ 

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). 

Importantly, the assessment should be contrasted with the proportionality of each option. 
A  'compulsory  for  all'  approach  would  put  an  unnecessary  burden  on  some  firms,  in 
particular small and micro corporations. Those companies would not necessarily be able 
to  benefit  from  reduced  recurrent  compliance  costs  and  may  no  longer  have  access  to 
specific tax regimes. This is disproportionate to the extent that including those companies 
would not much advance any of the two general objectives. 

5.2.5.  Independence  of  the  preferred  scope  option  with  other  option 

dimensions. 

The choice for the mandatory scope does not change  with respect to the preferred debt 
bias  and  R&D  options.  In  relation  to  the  debt  bias,  this  relies  on  the  AGI  being  the 
preferred option, as developed below.77 The level of generosity of the R&D options has 
no critical implications for the scope question either. The more generous and the larger 

77   If  instead  the  preferred  choice  had  been  disallowing  interest  deductibility,  which  is  a  disadvantage 
compared  to  national  systems,  this could  have  changed  the  considerations for  the  set  of  firms  under 
mandatory application. 

47 

 
 
  
 
 
 
 
 
 
                                                 
the  set  of  firms  that  would  opt  in,  the  more  limited  the  risk  of  not  capturing  all  tax 
avoiders. However, it is not obvious how to translate this effect into an exact amount for 
the threshold. 

5.3.  Addressing the debt bias 

This  section  examines  how  to  address  the  debt  bias  in  the  CCCTB  with  the  most 
effective and efficient option vis-à-vis the objectives. The available options are: 

 

 
 
 
 

'No further action', which is equivalent to maintaining the situation as foreseen in 
the  2011  CCCTB  proposal  but  aligned  with  the  requirements  by  the  Anti-Tax 
Avoidance Directive (option 3a),  
the non-deductibility of interest payments (option 3b),  
the allowance for corporate equity (option 3c),  
the allowance for growth and investment (option 3d), and 
the allowance for corporate capital (option 3e).  

The cost of capital allowance (option 3f) has been discarded in Section 4.3. In line with 
the intervention logic, this section starts out with presenting the economic impacts, which 
are more relevant for the options for the debt bias. The same sequence is applied in the 
following section on R&D tax incentives. 

5.3.1.  Economic impacts 

Impact on the financing decisions of firms 

Current tax systems in the Member States usually provide a significant tax advantage to 
debt (see also Section 2.2.1). They indeed favour debt-financed investments by allowing 
a deduction of interest paid from the tax base, whereas there is no equivalent deduction 
for the cost of equity.  

For the analysis of the economic impacts of this differential treatment, it is necessary to 
adopt an indicator that expresses the financing costs of a company for different sources 
of financing. The indicator used here is the cost of capital (this concept is explained in 
annex X). In most tax systems, the cost of capital is lower for debt-financed investment 
due  to  the  favourable  tax  treatment  of  debt.  A  profit-maximizing  company  will  exploit 
this difference and use more of the (cheaper) debt financing. Ideally, the cost of capital 
for  debt  and  equity  should  be  equal.  In  this  case  the  tax  system  would  be  neutral  with 
regard to financing decision (i.e. debt and equity face the same tax wedge). 

ZEW (2016a) analyses the impact of various tax reforms to address the debt bias on the 
cost  of  capital.78  The  reforms  simulate  revenue  neutrality  to  avoid  that  the  results  are 
driven by changes in revenue levels. Table 10 presents the results of the study.79 Column 
(1) shows the required cost of capital in the current tax systems assuming a real return on 
a safe alternative investment of 5%. 

78   Details on the concept and the underlying model are available in annexes IV and XII. 
79   It should be noted that our model does not distinguish between the ACE and the AGI, which have here 

the same macroeconomic effects. 

48 

 
 
                                                 
Table 10: Effect of revenue-neutral debt-bias reforms on the cost of capital (EU average) 

Source of financing / 
Reform 

(Cost of capital in %) 

(1) 

(2) 

Current tax 
systems 

No interest 
deductibility 

Retained Earnings 

New Equity 

Debt 

Mean 

Debt Bias* 

6.7 

6.8 

4.7 

6.0 

2.1 

6.5 

6.6 

6.5 

6.5 

0.1 

(3) 

ACE 

4.5 

4.6 

4.5 

4.5 

0.1 

(4) 

AGI 

4.5 

4.6 

4.5 

4.5 

0.1 

(5) 

ACC 

4.5 

4.6 

4.5 

4.5 

0.1 

Source:    ZEW (2016a). 
Note:  *Debt Bias: This is computed as the cost of capital for new equity minus the cost of capital for debt. Revenue 
neutrality is achieved by adjusting the statutory CIT rate to achieve the same effective average tax rate. For 
ACE,  AGI  and  ACC,  the  defined  interest  rate  assumed  is  7.1%,  corresponding  to  the  long-term  nominal 
interest rate on a risk-free bond. The analysis is not qualitatively affected by the assumed rate (ZEW, 2016b). 

The  analysis  shows  that  reform  options  to  address  the  debt  bias  largely  eliminate  tax-
induced  financing  distortions  by  equalizing  the  cost  of  capital  of  debt-financed 
investments and equity-financed investments. 

Implementing the non-deductibility of interest increases the cost of capital for debt up to 
the  level  for  equity.  Non-deductibility  of  interest  leads  to  a  broader  tax  base,  which 
allows reducing the CIT rate to achieve revenue neutrality. Due to this lower tax rate, the 
cost of capital decreases slightly also for equity. Overall, the reform leads to an increase 
in the mean cost of capital from 6.0 to 6.5%, despite the decrease in the CIT rate. 

The  allowance  for  corporate  equity  (ACE,  option  3c),  allowance  for  growth  and 
investment  (AGI,  option  3d)  and  the  allowance  for  corporate  capital  (ACC,  option  3e) 
show identical results. They differ only with respect to their tax treatment of debt, with 
the ACC providing  a defined deduction  whereas ACE and AGI  generally allow for the 
deductibility of actual interest  paid.80 This  design difference does  not matter  here since 
the  assumed  defined  rate  is  identical  to  the  nominal  market  interest  rate.81  All  reforms 
reduce  the  tax  base  and  thus  require  an  increase  in  the  CIT  rate  to  keep  revenue 
neutrality.82 Despite the increase in the tax rate to guarantee revenue neutrality, the cost 
of  capital  for  equity  decreases  considerably.83  Overall,  the  cost  of  capital  decreases  by 
25%, from 6.0% to 4.5%. The reason for this result is that the cost of capital measures the 
cost  of  an  investment  at  the  margin,  i.e.  the  tax  burden  on  the  last  euro  invested.  The 
three reforms reduce this marginal burden thereby fostering investment. In contrast, the 
tax burden on the economic rent, i.e. the profit above the normal market return is taxed 
higher.  From  an  economic  point  of  view  this  type  of  taxation  is  efficiency  enhancing 
since it leads to fewer distortions in the investment decision of companies. 

80   The  model  can  simulate  neither  the  effects  of  specific  corrections  done  under  the  AGI  nor  its 

incremental features. Hence it cannot differentiate between the ACE and the AGI.  

81   Irrespective  of  the  defined  rate,  the  ACC  always  achieves  financing  neutrality.  In  contrast,  full 
financing  neutrality  for  the ACE  and  the AGI  is achieved  only  if  the  rate  equals  the  market  interest 
rate.  

82   Note,  however,  that  for  the  ACC  the  impact  on  the  base  depends  on  the  level  of  the  defined  rate 

chosen. For sufficiently low rates, the tax base may be broader than in the status quo.  

83   Due to the deductibility of interest the tax base for a 'marginal investment' (see annex XII) is small. 

Therefore changes in tax rates have little impact and changes in the tax base dominate. 

49 

 
 
                                                 
In  the  central  scenario,  the  CCCTB  (option  1b)  is  implemented  without  specific 
provisions to address the debt bias but there would still be certain limitations on interest 
deductibility  (as  following  the  implementation  of  the  Anti-Tax  Avoidance  Directive, 
interest deductibility limitations will be part of the CCCTB). Such limitation  rules have 
already  been  discussed  in  Council  after  the  2011  proposal.  They  would  deny  interest 
deductibility  partially  either  with  respect  to  debt  that  leads  to  'thin  capitalisation' 
(meaning an insufficient equity base relative to debt) or with respect to interest expenses 
that  exceed  a  certain  percentage  of  gross  earnings.  These  rules  would  overall  imply  a 
strengthening of deductibility limitations currently applied in Member States.84 They are, 
however,  not  designed  to  achieve  financing  neutrality  of  the  corporate  tax  system  and 
they tackle tax-induced indebtedness only partially.  

Based on the results on the impact on cost of capital, all reform options are expected to 
increase the share of equity in corporations. The introduction of an ACE in Belgium in 
2006  and  in  Italy  in  2011  offer  the  possibility  to  assess  empirically  their  effect  on 
leverage.85 For Belgium, a number of studies find a reduction in leverage of non-financial 
Belgian firms after the introduction of the ACE.86 Schepens (2015) finds similar effects 
for the financial sector. For Italy, Panteghini et al. (2012) find evidence of a significant 
decrease in the leverage of firms following the introduction of the ACE. 

As  no  country  has  applied  full  non-deductibility  of  interest  or  an  ACC,  there  is  no 
empirical  evidence  on  their  effects.  Some  research  found  that  partial  limitations  of 
interest via anti-abuse rules have somewhat decreased the leverage of companies.87 

Finally,  simulations  with  CORTAX  indicate  that  all  options  would  indeed  reduce  the 
leverage of firms, ranging from a decrease by 1.8% in the case of the ACE and AGI to 
4.4% with the no interest deductibility (see Table 11). 

Impacts on investment and growth 

The  macroeconomic  impacts  of  the  three  potential  reforms  and  the  central  scenario  (in 
which the CCCTB is implemented without a debt-bias reform) are summarized in Table 
11.  As  before,  the  results  have  been  obtained  using  CORTAX,  which  simulates  all 
reforms in an ex-ante revenue-neutral way by adjusting the CIT rate. The macroeconomic 
effects  of  the  ACE  and  the  AGI  are  positive  and  superior  to  those  of  the  no-action 
scenario,  the  ACC  and  the  non-deductibility  of  interest.  The  table  shows  the  case  of  a 
CCCTB applied to multinational entities only, but similar results are obtained under all 
possible  variations  (CCTB  or  CCCTB,  all  firms  or  multinational  entities  only).88  In  all 
these  variations,  the  non-deductibility  of  interest  leads  to  a  negative  effect  on  GDP, 
driven by depressed investment. 

84   As  discussed  in  ZEW  (2016b,  chapter  6.1),  16  Member  States  apply  interest  deductibility  limits  to 
intra-group debt only (of which 9 simply apply the arm's length principle without any specific rule), 
whereas the other 12 Member States apply specific limitations to both intra-group and third-party debt.  
85   The ACE in Belgium has some resemblance with the traditional ACE as it is based on stock of equity 
and the anti-avoidance framework, although the way certain tax planning opportunities are addressed 
is considered as incomplete by some (e.g. Zangari, 2014). In contrast, the Italian system is closer to the 
AGI as it is based on incremental equity and has a relatively complete anti-avoidance framework. 

86   See Princen (2012), aus dem Moore (2013), Panier et al. (2015) and Hebous and Ruf (2015). 
87   See for example Büttner et al. (2012) and Blouin et al. (2014). 
88   The  results  are  confirmed  even  if  one  allows  companies  in  the  model  to  relocate  their  activities  in 

response to taxation (JRC, 2016). 

50 

 
 
                                                 
The  CORTAX  model  does  not  incorporate  the  incremental  feature  of  the  AGI,  i.e.  the 
fact  that  it  is  only  granted  on  equity  increases.  Sensitivity  analyses  presented  in  annex 
XIII suggest that the extent of the economic impacts depends on the exact calibration of 
the AGI (and the ACE), notably the choice of the rate. 

The impact on investment has been assessed empirically for the Belgian ACE.89 Aus dem 
Moore  (2014b)  finds  "highly  significant  and  robust  estimates  that  correspond  to  an 
increase  in  investment  activity  by  small  and  medium-sized  firms  of  about  3  percent  in 
response  to  the  ACE  reform".  Hebous  and  Ruf  (2015)  find  no  effect  on  production 
investment  from  multinational  affiliates,  which  are  the  focus  of  their  study.  Zangari 
(2014)  concludes  that  while  the  Belgian  ACE  has  possibly  benefitted  investment  by 
SMEs,  multinationals seem  to  have  used  the  ACE  mostly  as  a  tax  planning  device.  He 
stresses the weaknesses of the anti-avoidance framework of the Belgian ACE as opposed 
to Italy's system, where the same effect has not been reported. In addition, the fact that 
the  Belgian  ACE  at  its  introduction  was  granted  on  the  already  existing  stock  of  a 
company's  equity  implied  a  windfall  gain  for  companies,  without  any  impact  on 
investment decisions or their financing source.  

Table 11:   Economy-wide impacts of budget-neutral debt bias reforms under the CCCTB  

Multinational entities only – GDP-weighted EU-28 average 

%-change unless stated 
otherwise 
(compared to no CCCTB – 
baseline scenario) 

(1) 

CCCTB 
central 
scenario 

(2) 

(3) 

(4) 

(5) 

CCCTB  
with no interest 
deductibility 

CCCTB  
with ACE 

CCCTB  
with AGI 

CCCTB  
with ACC 

Cost of capital (change in 
percentage points) 

Investment 

Share of debt-financed 
investment 

Wages 

Employment 

Welfare (%GDP) 

GDP 

-0.04 

0.57 

1.53% 

0.40 

0.19 

0.07 

0.16 

0.14 

-0.90 

-4.37 

-0.02 

-0.15 

0.13 

-0.37 

-0.32 

3.36 

-1.79 

1.26 

0.65 

0.18 

1.17 

-0.32 

3.36 

-1.79 

1.26 

0.65 

0.18 

1.17 

-0.14 

1.41 

-4.31 

0.71 

0.30 

0.16 

0.48 

Source:  Joint Research Centre of the European Commission (2016).  
Note:   All simulations are changes compared to the baseline scenario of no CCCTB 
The CORTAX simulations do now allow capturing the incremental feature of the AGI. However, sensitivity analysis on 
the level of the allowance base suggest that the economic impacts of the AGI depend on its exact calibration. 

Impacts on tax revenue 

Revenue  impacts  are  difficult  to  assess  for  non-deductibility  of  interest  and  the  ACC 
since  none  of  the  systems  have  so  far  been  implemented.  For  the  non-deductibility  of 
interest a back-of-the-envelope calculation, which does not take into account behavioural 
responses, suggests an increase in CIT collected of between 0.4% and 1% of GDP (see 
annex XII). 

89   As neither a full non-deductibility of interest nor an ACC have been applied in practice, no empirical 
study  exists.  In  addition,  the  Italian  and  the  Cypriot  ACE  are  too  recent  to  offer  long  enough  time-
series data to investigate their impact on investment. 

51 

 
 
 
                                                 
Regarding the revenue impact of the ACE, De Mooij (2012) finds a potential decrease in 
the tax base by 14.1% and in tax collection by 0.49% of GDP. Zangari (2014) finds that 
for the period 2009-2011, the revenue losses of the ACE represented about a third of CIT 
collected. He estimates that the revenue cost would be lower by 15% taking into account 
reductions  in  deductible  interest  as  companies  substitute  debt  for  equity.  The  National 
Bank of Belgium (2008) puts this correction at about a third of the gross revenue loss in 
2006. More details on these analyses are available in annex XII.  

The  CORTAX  simulations  allow  evaluating  the  additional  revenue  impact  of  debt  bias 
reforms  compared  to  the  CCCTB  central  scenario,  i.e.  the  CCCTB  without  addressing 
the debt bias. The figures are subject to a number of caveats. Notably it should be kept in 
mind  that  CORTAX ensures  budget-neutrality by adjusting the CIT rate and lump sum 
transfers. In terms of total tax revenues the additional impact from 'non-deductibility of 
interest  payments'  is  positive  in  the  order  of  EUR  13  billion  (0.1%  of  GDP),  due  to  a 
larger increase in CIT revenues partly compensated by a decrease in other tax revenues. 
The ACE/AGI reform is expected to decrease total tax revenue by EUR 19 billion (0.1% 
of GDP), due to a larger decrease in CIT revenues partly compensated by an increase in 
other tax revenues. With its design, the AGI is supposed to lead to lower revenue losses 
than the ACE and could be made fully revenue-neutral by introducing offsetting tax rate 
increases,  without  affecting  the  positive  impact  on  financing  neutrality.  The  ACC  is 
almost  neutral  with  a  negative  impact  of  EUR  1  billion,  due  to  a  decrease  in  CIT 
revenues largely offset by an increase in other taxes.  

Impact on administrative burden 

None  of  the  options  seem  to  imply  important  changes  in  administrative  burden.  They 
concern  only  one  aspect  of  the  computation  of  the  tax  base  and  are  not  per  se  more 
burdensome  than  e.g.  the  application  of  depreciation  rules.  The  non-deductibility  of 
interest is straightforward as is the application of a defined interest rate to equity.  

The  application  of  anti-avoidance  rules  may  generate  additional  compliance  and 
administrative  costs  for  companies  and  tax  administrations  respectively.  This  is 
specifically the case for the AGI but, depending on their depth, also for the ACE and the 
ACC.  These  costs  of  course  need  to  be  balanced  with  the  objectives  of  fairness. 
Compared to the no-action scenario and the non-deductibility of interest, the application 
of AGI, ACE and ACC could then lead to increased administrative burden. 

5.3.2.  Fairness impacts 

The  design  of  individual  debt-bias  reforms  is  crucial  for  the  impacts  on  fairness.  Not 
addressing the debt bias would leave opportunities for groups operating cross-border to 
shift profit via the debt instrument, at least under a common base.  

Fully  disallowing  interest  deductibility  would  suppress  such  opportunities  and  would 
therefore address the fairness aspects. The ACC would reduce tax planning opportunities 
via transfer price manipulations on interest rates as the deductible interest would not be 
based on the actual rate but on a defined one.  

52 

 
 
The  ACE  has  been  criticised  because  of  the  tax  planning  opportunities90  it  can 
theoretically open in the form of cascading of the deductions on the same initial capital. 
Under  the  current  system,  interest  paid  is  taxed  at  the  level  of  the  receiver,  which  is 
justified  by  the  fact  that  the  payment  is  tax  deductible  at  the  level  of  the  payer.  At  the 
level of company groups, the reverse is true for dividends. Dividends paid are not taxed 
at  the  level  of  the  receiver  (via  participation  exemption  in  the  EU),  which  finds  its 
justification by the fact that they are not deductible at the level of the payer. The ACE 
changes this system by allowing a notional deduction for equity at the level of the payer 
(but does not change the exemption for dividends at the level of the receiver). This opens 
the following possibility to cascade the benefits of deductions: a parent borrows debt (D) 
from  a  bank  and/or  receives  equity  injections  (Ep)  from  shareholders  and  re-injects  the 
full  amount  of  capital  into  a  subsidiary  as  equity  (Es  =  D+Ep).  Under  an  ACE  system 
without  proper  anti-avoidance  rules,  the  parent  company  receives  tax  deductions  in  the 
form  of  ACE  and  deductible  interest  on its equity  Ep  and  its  debt  D,  respectively. The 
subsidiary  receives  a  tax  deduction  in  the  form  of  an  ACE  on  the  same  (transferred) 
capital. 

Figure 8: Cascading of benefits under ACE 

Shareholders 

Banks 

Ep 

D 

Divp 

Parent 

Int 

Es 

Divs 

Subsidiary 

Profitp = Xp – ACE/AGIp-int 

Profits = Xs – ACE/AGIs 

Source: European Commission  

To  avoid  such  cascading,  there  is  a  need  to  make  sure  that  the  same  euro  of  capital 
invested  in  the  group  receives  tax  deductibility  only  once.91  This  is  achieved  with  an 
allowance  for  growth  and  investment  (AGI).  The  embedded  anti-avoidance  measures 
ensure  that  the  funds  injected  in  a  group  benefit  only  once  from  a  deductibility  (via 
deductible  actual  interest  or  the  allowance  on  equity).  The  system  would  remove  the 
loopholes used for aggressive tax planning. 

These  specific  rules  to  make  the  system  robust  to  tax  planning  can  include  inter  alia  a 
stricter definition of the ACE/AGI  base to exclude items that do not represent business 
needs or genuine investment, as well as participations and own shares, the limitation of 
the  benefits  of  the  ACE/AGI  both  in  time  (via  an  incremental  system  with  a  moving 
reference  date)  and  amount  (with  a  fixed  limit),  general  anti-abuse  rules  (GAAR)  and 
specific  anti-abuse  rules  in  terms  of  interest  limitation  rule;  last  but  not  least  the  AGI 

90   For  the  Belgian  ACE,  Hebous  and  Ruf  (2015)  find  indications  for  the  use  of  such  tax  planning 

strategies. 

91   Zangari  (2014)  discusses  the  Belgian  and  Italian  ACE  systems  and  the  role  of  anti-avoidance 

provisions targeting intra-group transactions. 

53 

 
 
 
                                                 
offers a correction mechanism at the level of either the parent or the subsidiary to avoid 
the cascading of the benefits. 

5.3.3.  Stakeholder views 

In the stakeholders' consultation (see annex II), an overwhelming majority of respondents 
have voiced that the debt bias shall be addressed in the proposal. Among companies who 
responded more than 60% are in favour of addressing the debt bias, large companies and 
SMEs alike. 

Most  of  the  NGOs  opt  for  the  non-deductibility  of  interest  method  whereas  from  the 
companies'  perspective  there  is  resounding  support  for  the  ACE/AGI92.  Like  the 
companies,  a  strong  majority  of  business/professional  associations  and  consultancy/law 
firms expressed their preference for the ACE/AGI. A few respondents were in favour of 
the  ACC/CoCA.  Some  respondents  indicated  that  anti-avoidance  measures  are  an 
important component of a possible ACE/AGI. 

Several  respondents  mention  the  interest  limitation  rules  foreseen  in  BEPS  action  4  to 
indicate  that  interest  limitation  shall  probably  not  go  beyond  those.  Finally,  many 
respondents emphasise the need for a solution to promote investment. 

5.3.4.  Debt bias preferred option. 

In light of the above, deductibility for equity costs in the form of an allowance for growth 
and  investment  (AGI,  option  3d)  is  the  option  that  scores  best  in  terms  of  economic 
outcomes while at the same time addressing the fairness aspects of the tax system. 

Indeed, looking back at the objectives, both the non-deductibility of interest and the AGI 
would  reduce  tax  planning  opportunities,  something  the  ACE  would  not  do.  When  it 
comes to levelling the playing field for domestic and multinational companies, we have 
seen that the debt bias is particularly detrimental for SMEs, which constitute a large share 
of domestic companies. By entirely removing the debt bias, all options have the potential 
to help SMEs. However, the ACE and the ACC offer planning opportunities that would 
favour multinational entities over domestic companies.  

The  ACE,  AGI  and  ACC  may  bring  some  complexity  notably  when  it  comes  to  their 
details. This is certainly true when compared to the non-deductibility of interest which is 
a simple, albeit radical, solution. However, a specific issue arises with the application of 
the  full  non-deductibility  of  interest  in  the  financial  sector.  Applying  the  full  non-
deductibility  of  interest  paid  to  the  financial  sector  would  represent  a  disproportionate 
financial  cost  for  the  sector,  unless  by  symmetry  the  interest  received  would  be 
exempted.  This  however  would  in  turn  mean  that  the  larger  part  of  traditional  banking 
would  be  exempted  from  corporate  taxation.  Another  practical  question  concerns  the 
compatibility of non-deductibility of interest within the international landscape. In most 
countries interest is taxed based on residence whereas disallowing interest deductibility 
would imply moving to taxation at source. 

92   The AGI was not formally part of the public consultation as it is a special case of the ACE. 

54 

 
 
                                                 
In the panel of options, only the AGI – by ensuring that deductibility is granted only once 
–  offers  a  remedy  without  leading  to  double  taxation.  The  non-deductibility  of  interest 
creates double taxation unless interest received is exempted at the level of the recipient.  

In theory, all options should offer a satisfactory remedy to the distortions in the financing 
decisions. However, the same is not true when it comes to investment decisions and the 
attractiveness  of  the  EU  as  the  non-deductibility  of  interest  would  have  adverse  effects 
and the ACE would distort choices because of potential tax planning opportunities. 

Taking no action, i.e. introducing the CCCTB without a debt bias solution, would imply 
that  problems  due  to  distorted  financing  incentives  remain  unaddressed,  whereas  profit 
shifting  via  debt  would  be  mitigated  to  a  certain  degree  through  limitation  rules  in  the 
CCCTB on interest deductibility.  

In conclusion, the AGI addresses the debt bias and is expected to have a positive impact 
on  the  investment,  even  if  implemented  in  a  revenue-neutral  way.  The  robust  anti-
avoidance framework inherent to the AGI makes it the preferred debt bias option.  

Table  12  summarises  the  impacts  of  the  different  debt  bias  options  and  assesses  them 
against  the  central  scenario  for  a  CCCTB.  This  means  that  options  are  compared  to  a 
situation  with  a  CCCTB  which  does  not  address  the  debt  bias.  The  table  therefore 
answers the questions whether a debt bias solution will improve the CCCTB vis-à-vis the 
central  scenario.  The  analysis  shows  that  granting  no  interest  deductibility  at  all  is 
attractive  to  reduce  tax  planning  opportunities.  At  the  same  time  this  option  clearly 
hampers investment due to its impact on capital costs. An allowance for equity features 
high  on  improving  the  economic  environment,  but  scores  lower  when  tax  planning 
considerations  are  taken  into  account.  The  allowance  for  growth  and  investment  (AGI) 
comes  with  stricter  anti-avoidance  rules  and  is  only  granted  on  incremental  changes  in 
the capital stock. It provides economic benefits while reducing the risks of tax planning. 
The allowance for the cost of capital (ACC) is similar to an ACE, but less favourable in 
economic terms. 

55 

 
 
Table 12: Assessment of impacts of debt-bias options 

Options 

(1) 

No Interest 
deductibility 

(2) 

ACE 

(3) 

AGI 

(4) 

ACC 

Enhancing the fairness of the tax 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 tax payer 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 

+ 

+ 

n.a. 

n.a. 

+ 

- 

- 

-- 

0 

- 

0 

n.a. 

n.a. 

0 

0 

0 

++ 

0 

+ 

+ 

n.a. 

n.a. 

0 

+ 

+ 

++ 

0 

0 

0 

n.a. 

n.a. 

0 

0 

+ 

+ 

0 

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). 

5.3.5.  Independence  of  the  debt  bias  preferred  option  with  other  option 

dimensions 

The conclusion on the preferred debt bias option does not depend on the preferred option 
for  the  scope  or  the  R&D  incentive.  The  results  from  the  CORTAX  and  ZEW  studies 
confirm  that  the  ranking  of  debt  bias  options  is  stable,  irrespective  of  the  scope  (and 
indeed independent also from consolidation). The specific design of the R&D incentive 
should not have implications for the choice on scope or debt bias either. The debt bias is 
a  wider  issue,  changing  the  cost  of  capital  for  all  investments,  not  only  R&D 
investments. 

5.4.  Treatment of R&D expenses 

This  section  reviews  the  two  retained  options  for  ensuring  that  the  CCCTB  provides 
sufficient  incentives  to  invest  in  R&D.  The  available  options  are  'No  further  action'  on 
R&D  (option  4a),  which  is  equivalent  to  immediate  expensing  of  R&D  in  the  2011 
CCCTB  proposal,  and  granting  a  super  allowance  for  R&D  expenses  (option  4b).  The 
options  of  granting  tax  credits  or  granting  tax  incentives  for  income  from  intellectual 
property (option 4c) have been discarded in Section 4.4. 

56 

 
 
 
 
 
 
 
 
 
 
 
5.4.1.  Economic impacts 

Option  4a  provides full and immediate deductibility for R&D expenses.93 The majority 
of  national  tax  incentives  provide  currently  larger  than  full  immediate  expensing 
(additional allowances amount to up to 200% in Latvia and Lithuania) or a tax credit for 
qualifying R&D costs.94 Annex XI provides an overview table of the systems currently 
applied in Member States and selected third countries.  

A  systematic  comparison  of  the  generosity  levels  requires  a  measure  which  condenses 
different features of the tax system (rate, design of the incentive, etc.) into one indicator. 
Such an indicator of tax support to R&D is the '1-B-index' (see box 3). This index takes 
the  value  zero  if  the  tax  system  does  not  provide  any  tax  incentive  on  business  R&D 
expenses beyond immediate expensing of all R&D expenses. It takes a positive value if 
the incentive is larger. It takes a negative value if the incentive is smaller. 

Box. 3 The B-index and the 1-B-index  

The  B-index  measures  the minimum  level  of  profit  before  tax  that  a  representative  company needs  to 
earn to break even on one euro spent on R&D. The B-index summarises a large array of qualitative and 
quantitative  information  about  R&D  tax  incentives  and  depreciation  regimes  for  R&D  assets  as 
collected by the OECD. An alternative and more intuitive way is to look at the one minus B-index. 

1-B-index = Tax subsidy (if positive) or tax burden (if negative). 

The 1-B-index shows the influence of R&D tax incentives on the price of business R&D (user cost). For 
example,  a  value  of  0.1  suggests  that  the  price  for  a  business  to  invest  in  R&D  is  10%  lower  than  it 
would have been in the absence of taxation, whereas a value of  -.05 suggests that the user cost is 5% 
higher than it would have been in the absence of taxation. A value of 0 corresponds to the case of no 
taxation. 

Source: OECD and Warda (2001). 

Table  13  shows  the  computations  of  the  1-B  index  for  all  EU  countries.  The  values  are 
positive in 21 Member States, i.e. these Member States provide more tax support beyond full 
immediate  expensing.  They  are  negative  in  four  Member  States  and  the  value  is  zero  for 
three Member States. The weighted average of the tax subsidy rate for the EU stands at 0.12. 
This means that for every euro invested in business R&D in the EU, Member States give on 
average a subsidy of 12 cents.  

Option 4a offers immediate expensing for all R&D costs except for the estimated 5% related 
to  buildings  and  land.  This  would  translate  into  a  tax  burden  on  R&D  of  -0.01  and  not 
maintain the current generosity level of the tax treatment of R&D expenses.  

93   As  explained  in  Section  3.6.1.,  the  exception  is  expenses  for  R&D  buildings  which  cannot  be 

immediately expensed, but these account for only 5% of total R&D expenditure. 

94   These considerations may be affected in case a country requires capitalisation of some current R&D 
costs. The effect of expensing or capitalisation of current R&D costs was considered in preparation for 
the 2011 proposal and the results of the simulation reveal no considerable impact (ZEW, 2008).  

57 

 
 
 
                                                 
Table 13: Tax subsidy rates as measured by the '1-B-index' in EU Member States. 

Country 

B-index 

1-B-index 

Country 

B-index 

1-B-index 

Germany 

Finland 

Denmark 

Luxembourg 

Cyprus 

Bulgaria 

Estonia 

Poland 

Italy 

Sweden 

Romania 

Greece 

United Kingdom 

Belgium 

EU-28 – 
simple average 

1.02 

1.01 

1.01 

1.01 

1.00 

1.00 

1.00 

0.98 

0.96 

0.95 

0.92 

0.91 

0.90 

0.89 

0.85 

-0.02 

-0.01 

-0.01 

-0.01 

0.00 

0.00 

0.00 

0.02 

0.04 

0.05 

0.08 

0.09 

0.10 

0.11 

0.15 

Slovak Republic 

Austria 

Netherlands 

Slovenia 

Czech Republic 

Croatia 

France 

Hungary 

Ireland 

Latvia 

Lithuania 

Portugal 

Spain 

Malta 

EU-28 – 
GDP-weighted average 

0.89 

0.88 

0.84 

0.81 

0.77 

0.74 

0.74 

0.72 

0.71 

0.69 

0.68 

0.64 

0.63 

0.51 

0.88 

0.11 

0.12 

0.16 

0.19 

0.23 

0.26 

0.26 

0.28 

0.29 

0.31 

0.32 

0.36 

0.37 

0.49 

0.12 

Source:  OECD calculations, where available. Joint Research Centre and DG Taxation and Customs Union  
Note:   Calculations for missing EU countries and for Poland following the regime change in 2016. 

Impact on R&D investment 

The  vast  majority  of  empirical  research  concludes  that  expense-based  R&D  tax 
incentives lead to additional R&D investment.95 The estimates of the size of this effect 
are  widely  diverging,  partly  due  to  differences  in  methodologies  and  countries  covered 
by the studies. Recent studies conclude that the tax elasticity (the proportional change in 
R&D spending due to a 1% decrease in the tax burden) is positive and close to, but less 
than one.96 

To  reflect  these  results  in  a  plausible  but  conservative  manner,  an  elasticity  of  0.8  is 
assumed in the calculations presented in table 14.97 An elasticity of 0.8 means that a 10% 
reduction  in  the  price  of  business  R&D  results  in  an  8%  increase  in  business  R&D.  In 
line with the result above that Option 4a would lead to a deterioration in incentives, the 
analysis  finds  an  18%  reduction  in  R&D  spending  compared  to  the  baseline  (existing 
national schemes). An additional allowance (option 4b) of 33% is required to achieve the 
same level of tax subsidy as in current national tax schemes. 

95   See the study by CPB (2014) for a recent survey of the literature. 
96   See for example CPB (2014), Becker (2015) and Koehler et al. (2012). The effects, may, however be 
underestimated, as some research suggests that R&D tax incentives may assessed to be less effective 
than they really are if studies do not take into account the endogenous determination of tax policies, 
i.e. the fact that tax reforms are often introduced to offset economic downturns (Chang, 2014).  

97   Alternative  calculations  were  also  performed  using  a  plausible  range  of  literature-backed  elasticities 
(from 0.5 to 1.2). Minimum and maximum bounds suggested by these alternative elasticities are also 
presented. 

58 

 
 
                                                 
Table 14: Reform scenarios and their possible impact on R&D investment  

Pre-reform: 

B-index: 

EU-28 GDP-weighted average 

0.88 

Expected % change in R&D expenditures: 

Post-reform: 

Elasticity 1.2 

Elasticity 1.0  Elasticity 0.8 

Elasticity 
0.5 

Option 4a, full expensing 

Option 4b, full expensing, 33% bonus 
allowance 
Option 4b, full expensing, 100% bonus 
allowance 
Option 4b, full expensing, 200% bonus 
allowance 

1.01 

0.88 

0.69 

0.38 

-0.27 

-0.22 

-0.18 

-0.11 

0.00 

0.25 

0.78 

0.00 

0.21 

0.65 

0.00 

0.17 

0.52 

0.00 

0.10 

0.32 

Source:  Joint Research Centre and DG Taxation and Customs Union. European Commission. 
Note:  R&D  buildings  are  depreciated  under  all  options.  Inclusion  of  own-calculated  B-indices  leads  to  a  lower 
average  tax  subsidy  in  the  EU  than  the  one  calculated  based  on  the  available  OECD  indices  as  the  GDP-
weighted average B-index drops from 0.88 to 0.86. Under the B-index of 0.86, the full expensing has worse 
consequences  on  R&D,  as  the  drop  in  R&D  is  -23%  (from  -18%  with  the  full  set  of  28  B-indexes).  An 
allowance of 37% is needed to achieve pre-reform levels (up from 33%).  

An additional allowance of 100% (on top of full expensing) would significantly improve 
existing  incentives  to  engage  in  R&D,  with  an  expected  increase  of  about  17%  in 
business R&D investment compared to the status quo. Meeting the Europe 2020 target of 
3%  of  GDP  devoted  to  R&D  would  require  an  even  bolder  allowance.  If  2%  of  GDP 
were to come from the private sector, business R&D investment would need to increase 
by  54%  from  current  levels.98  An  additional  allowance  of  200%  could  result  in  an 
increase in business R&D by 52%, approximately meeting the Europe 2020 target.  

However, the effectiveness of an additional allowance of a given level will vary with the 
applicable  CIT  rate.  The  higher  the  tax  rate  the  larger  the  benefit  for  the  company 
investing  in  R&D  and  thus  the  stronger  the  incentive  to  invest.  Under  the  CCCTB  the 
relevant  rate  would  depend  on  a  weighted  average  of  tax  rates  after  formula 
apportionment. To the extent that Member States change CIT rates after introduction of 
the CCCTB this could change the generosity level of the allowance. 

Impact on tax revenue 

In terms of foregone tax revenues, granting an additional allowance of 33% should have 
an overall neutral impact on CIT revenues as it corresponds to the R&D tax incentives 
already offered in EU Member States.99 Estimates of the likely changes in CIT revenues 
under the two options for different rates of the allowance, as presented in annex XII, vary 
from 5% for an additional allowance of 100% to 15% for an allowance of 200%. These 
estimates are broadly in line with OECD (2015c).  

Neither of these estimates takes into account revenue gains from the reversal of all patent 
boxes currently applied in the EU. Griffith et al. (2014) simulate the revenue impacts of 
introducing patent boxes in four countries. They find that tax revenues from new patents 
are less than half of their pre-reform levels in the four countries concerned. The impact 
from the removal of patent box regimes would be the same for both options.  

98   R&D  business  expenses  stood  at  1.3%  of GDP  in  2014 and  thus  the  shortfall  in  the EU  amounts  to 

0.7% of GDP (Eurostat data).  

99   The effect will depend on the tax rates Member States choose after the introduction of a CCCTB.  

59 

 
 
 
 
 
 
 
                                                 
Impact on different types of companies and possible targeting of R&D incentives  

A conclusion from the economic literature is that tax incentives should not be linked to 
the  size  of  a  company  but  rather  to  the  desirable  outcome  such  as  more  research  and 
innovation investment.100  

The effects of R&D tax incentives vary across firm types, notably size. In general, there 
is no undisputed conclusion whether SMEs respond more strongly to R&D tax incentives 
than large companies. Recent evidence however suggests that knowledge spillovers from 
large  firms  exceed  those  from  small  firms  (Bloom  et  al,  2013).  Targeting  R&D  tax 
incentives to firm size needs to consider both, the degree of responsiveness and the level 
of  spillovers.  There  is  nevertheless  evidence  that  size  may  not  be  the  best  selection 
criterion as the impact of tax incentives on R&D spending for start-up firms can exceed 
the  average  impact.  Therefore,  targeting  young  companies  can  be  considered  a  better 
practice than targeting SMEs.101 

If the CCCTB is more generous than national tax incentives schemes, it could be seen as 
favouring  incumbent  firms.  This  is  because  more  generous  R&D  tax  incentives  can  be 
associated with a more concentrated growth distribution in R&D intensive sectors, which 
may  favour  incumbent  firms  (Bravo-Biosca  et  al.,  2013).  Young  companies  can 
challenge incumbent businesses and generate proportionally more jobs (Criscuolo et al., 
2014). The EU has currently fewer young leading innovative companies than the US in 
fast moving sectors (Cincera and Veugelers, 2013). Tax incentives can hence be designed 
to  support  young  companies  directly  with  relatively  more  generous  provisions  (as 
currently  applied  in  France,  Belgium,  the  Netherlands  and  Portugal),  by  including 
options  to  carry  forward  the  R&D  expenditure  (as  in  most  national  schemes)  and/or  to 
get  a  cash  refund  (as  in  seven  EU  countries).  Such  features  offer  young  firms  more 
flexibility and reduce the uncertainty associated with investment decisions.  

Impact on EU competitiveness 

Based  on  the  conclusion  that  option  4a  weakens  current  incentives  for  businesses  to 
invest  in  R&D  and  given  that  the  EU  underinvests  in  private  R&D  compared  to  other 
innovation  leaders  such  as  US,  Japan  and  South  Korea  (which  all  apply  R&D  tax 
incentives), option 4a could further deteriorate the competitive position of EU businesses 
and  could  also  lead  to  delocalisation  of  R&D  efforts  of  EU  businesses  from  the  EU  to 
other countries. 

The likely impact of the tax treatment of R&D expenses on GDP growth is difficult to 
estimate. The IMF (2016) expects a long-term increase in GDP of about 5% following an 
increase  in  business  R&D  by  38%  based  on  the  literature  estimates  of  the  elasticity  of 

100   This seems to be the focus as well in national tax systems. A 2015 study on SME taxation concludes 
that SME tax incentives are not as frequently implemented as R&D tax incentives. Mostly, reduced tax 
rates  are  employed  to  support  SMEs  on  which  available  evidence  suggests  that  such  SME  reduced 
rates  may  prevent  companies  from  growing  (IMF,  2016).  Most  SME  tax  incentives  seem  to  benefit 
only micro and small enterprises, while medium-sized corporations basically benefit only from R&D 
tax incentives (see also table 37 in annex XI). Reductions in the effective tax burden due to R&D tax 
incentives  for  large  corporations  comes  mostly  from  reductions  applicable  to  the  tax  base,  i.e. 
enhanced allowances (VVA and ZEW, 2015). 

101   See the discussion and evidence provided in CPB (2014), OECD (2016) and IMF (2016). 

60 

 
 
                                                 
output with respect to changes in business R&D. Extrapolating from this, an allowance 
of 100% and 200%  may increase GDP by roughly 2% and 7%, respectively. However, 
linear extrapolations should be treated with caution.102 

Impact on administrative burden 

As explained above, introducing the CCCTB is expected to reduce administrative burden 
in  relation  to  R&D  tax  incentives,  which  currently  vary  considerably  across  the  EU 
(annex  XI).  This  reduction  in  administrative  burden  is  expected  to  be  the  same  for 
options 4a and 4b. 

5.4.2.  Fairness impacts 

Stimulating R&D activities should also contribute to the objective of enhancing fairness. 
13  EU  countries  currently  offer  tax  reductions  on  the  income  earned  from  exploiting 
intellectual  property.  Such  patent  boxes  have  been  introduced  in  recent  years  with  the 
declared  objective  of  boosting  R&D,  high-tech  jobs  and  competitiveness.  However, 
patent  boxes  have  been  criticized  from  the  outset.  Research  shows  that  they  do  not 
stimulate  R&D  and  may  rather  be  used  as  a  profit-shifting  instrument,  leading  to  high 
revenue losses. Section 4.4 discusses this more and Table 1 in Section 2.1 illustrates the 
large  tax  saving  potential  by  exploiting  patent  boxes.  Patent  boxes  reward  successful 
innovations  which  already  profit  from  an  intellectual  property  protection.  They  could 
thus  make  research  efforts  that  are  not  patentable,  with  potentially  higher  social 
spillovers, less attractive. Furthermore, the use of intellectual rights is sector specific.103 
Overall,  both  options  4a  and  4b  would  increase  fairness  by  reducing  IP-related  profit 
shifting  and  improving  the  level  playing  field  between  those  research  efforts  which 
benefit from IP-protection and those which do not.  

5.4.3.  Stakeholder views 

A majority of respondents (55%) are in favour of making the CCCTB more favourable 
for R&D than in the 2011 CCCTB proposal, while 18% are against. Those in favour are 
companies – in fact all large companies and 80% of SMEs who responded - while most 
of the NGOs and private individuals are against a more favourable regime.  

Around half of the respondents who are against making the framework more favourable 
refer to concerns about harmful tax competition induced by tax schemes based on income 
from  intellectual  property.  Many  respondents  highlight  that  any  scheme  under  the 
CCCTB should be based on actual R&D costs. Other responses in this group suggest a 
preference for other means to stimulate R&D.  

102   The variance observed in quantitative literature on the returns to R&D (e.g. Hall et al., 1999) argues 
against  crude  linear  extrapolations.  In  fact  literature  on  the  statistical  distribution  of  highly  valuable 
inventions (e.g. Scherer and Harhoff, 2000; Silverberg and Verspagen, 2007) suggests that they have 
no  mean  and  no  variance  and  therefore  attempts  to  forecast  the  aggregate  outcome  of  R&D  with 
precision need to be treated with caution. 

103   Hall et al. (2013) find that in the UK even among firms that conduct R&D, only 4% patent. Findings 
are  similar  for  the  US  as  5.5%  of  US  manufacturing  firms  own  a  patent  (Balasubramanian  and 
Sivadasan,  2011).  Sectors  such  as  computers,  electronics,  machinery,  chemical  and  pharmaceuticals 
seem to have the highest patenting activities (Squicciarini and Dernis 2013). The empirical evidence 
suggests that for many sectors patents seem an ineffective way to appropriate returns and secrecy and 
lead times are used extensively (Arundel, 2001; Hanel, 2008; Hall et al., 2014). 

61 

 
 
  
                                                 
The  suggestions  of  respondents  who  are  in  favour  of  making  the  framework  more 
favourable mostly concentrate on super deductions.  

Across  the  various  groups  of  respondents,  some  believe  that  Member  States  should  be 
allowed  to  retain  their  flexibility  in  granting  R&D  tax  credits  or  super  deductions  in 
parallel to the CCCTB. 

5.4.4.   Preferred R&D option 

Given its impact on R&D investment and positive spillovers for the whole society, option 
4b, i.e. granting an additional allowance, is preferable to maintaining the 2011 CCCTB 
proposal on R&D (option 4a). An additional allowance between 33% and 100% would 
be preferable to maintain or further encourage R&D investment in the EU at a reasonable 
cost.  To  stimulate  growth  of  innovative  firms  and  ensure  fairness,  a  more  generous 
provision  could  be  proposed  to  young  innovative  companies  that  would  opt  into  the 
CCCTB.  An  alignment  of  definitions  and  eligible  costs  with  EU  state  aid  rules  would 
ensure coherence with other EU policies.  

Table  15  summarizes  the  impacts  of  the  two  options.  Column  (1)  shows  the  central 
scenario for the CCCTB which by definition is neutral (option 4a). Column (2) shows the 
impacts in comparison to this central scenario of an additional allowance (4b). 

Table 15: Assessment of impacts of R&D options 

Options 

(Option 4a) 

(Option 4b) 

2011 R&D 
treatment in 
CCCTB 

Additional 
R&D 
allowance 

Enhancing the fairness of the tax 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 (impact on R&D) 

Reduction in administrative burden for companies and administrations 

0 

0 

n/a 

n/a 

0 

0 

n/a 

0 

0 

0 

0 

n/a 

n/a 

0 

0 

n/a 

++ 

0 

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). 

5.4.5.  Independence  of  the  R&D  preferred  option  with  other  option 

dimensions 

The  preferred  choice  for  the  treatment  of  R&D  expenses  does  not  have  important 
dependencies with the preferred option for the scope or the debt bias. This is due to the 
possibility to opt in and the objective to include R&D tax incentives that are at least as 

62 

 
 
 
 
 
 
 
 
generous  as  what  Member  States  currently  apply.  However,  it  is  possible  that  in  some 
cases a company will have more incentives to invest in R&D under the national system, 
but  falls  under  the  mandatory  scope.  This  would  be  an  argument  for  keeping  the 
threshold  for  the  mandatory  application  rather  high  to  reduce  the  possibility  for  such 
cases.  The  considerations  between  the  principal  choices  for  the  R&D  incentive 
(additional  allowance,  tax  credit  etc.)  do  not  depend  on  the  preferred  debt  bias  option 
either.  As  shown  above,  in  order  to  design  the  preferred  R&D  option  in  a  way  to 
maintain at least current generosity levels, at least immediate expensing of all R&D costs 
needs  to  be  ensured.  As  this  means  that  R&D  costs  are  not  capitalised,  there  is  no 
interaction between the generosity of the R&D incentive and the choice for the preferred 
debt bias option, which is the AGI. 

5.5.  The staged approach  

This  section  presents  (i)  the  impacts  expected,  relative  to  the  CCCTB,  from  an  initial 
stage  without  consolidation  and  formula  apportionment  (option  5a);  and  (ii)  it  assesses 
whether  it would  be  opportune  to  foresee  some  form  of  cross-border  loss  offset  during 
this initial stage (option 5b).  

It is clear from this impact assessment and the one underpinning the 2011 proposal that 
the preferred option is the CCCTB. However, discussions in the Council have shown that 
the CCCTB is unlikely to be adopted in one piece, consolidation being the most difficult 
and  controversial  element.  It  no  longer  appears  promising  to  move  forward  with  the 
CCCTB  in  one  single  go  and  the  Commission  therefore  decided  to  pursue  a  pragmatic 
approach,  postponing  the  work  on  consolidation  until  after  the  common  base  has  been 
agreed  and  implemented.  Therefore  this  section  presents  the  economic  and  fairness 
impacts of the initial stage, in which the common base is implemented. This means that 
provisions  on  profit  and  loss  consolidation  within  groups  and  formula  apportionment 
across  Member  States  would  be  postponed.  All  other  features  of  the  base  definition, 
notably an allowance for growth and investment (AGI) and R&D incentives would be the 
same in the common base and the CCCTB.  

The comparison of options in this subsection concerns merely the possible inclusion of 
some  form  of  cross-border  loss  offset,  if  the  political  environment  required  the  staged 
approach for the introduction of the CCCTB. The main difference between cross-border 
loss offset and consolidation is that the latter would fully offset losses and profits within 
a  CCCTB  group  whereas  cross-border  loss  offset  would  only  allow  a  vertical  offset 
between  parents  and  subsidiaries.  In  addition,  the  cross-border  loss  offset  envisaged 
would foresee a reincorporation of the loss offset after some time. 

5.5.1.  Economic impacts 

Table 16 presents the results from the CORTAX simulations for the common base with 
and  without  cross-border  loss  offset  as  well  as,  for  comparison,  the  results  for  the 
CCCTB. All the simulations presented assume that all multinational enterprises apply the 
common  base  and  that  the  common  base  includes  the  ACE/AGI  to  address  the  debt 
bias.104 It is clear that the CCCTB is expected to achieve better economic results than the 
common base. GDP, investment, wages and employment all perform better. In the model, 

104   R&D incentives should also apply but these do currently not feature in the CORTAX model. 

63 

 
 
                                                 
three  main  effects  drive  these  differences  in  the  impacts.  First,  under  the  CCCTB 
compliance costs are assumed to fall to zero for subsidiaries of multinational enterprises, 
whereas they stay the same as before under the common base.105 Second, consolidation 
allows  for  the  immediate  offset  of  losses  against  profits  made  somewhere  else  in  a 
multinational  group.  This  lowers  the  tax  burden  and  the  cost  of  labour  and  the  cost  of 
capital. Third, the move to formula apportionment removes an important distortion to the 
location of real factors and replaces it by another, yet less significant, distortion induced 
by  formula  apportionment  (see  discussion  Section  5.1).  Overall,  since in  the  CORTAX 
model the key economic benefits of the reform are driven by the ACE/AGI reform, the 
relative differences between the common base and the CCCTB are relatively minor. 

Turning to the cross-border loss offset, CORTAX results indicate a fairly modest positive 
economic impact of allowing cross-border loss relief, where parents can claim losses of 
their subsidiaries. The most important benefit from offering some cross-border loss relief 
is  the  enhancement  of  cash-flow  capacity  of  businesses  (for  instance,  by  compensating 
start-up losses in a Member State with profits in another Member State) and the resulting 
support for cross-border investment within the EU.  

Currently  only  a  few  Member  States  offer  limited  forms  of  cross-border  loss 
compensation.  Some  cross-border  loss  offset  would  alleviate  in  most  Member  States 
differences  in  the  treatment  of  groups  operating  cross-border  and  domestic  groups. 
Moreover,  limited  or  non-existing  cross-border  loss  offset  implies  differences  in  tax 
treatment  of  foreign  permanent  establishments  and  foreign  subsidiaries.  As  the  2011 
impact assessment notes, other potential benefits include the reduced risk of investment, 
as  losses  are  better  insured,  and  increased  efficiency  in  the  international  allocation  of 
productive capital. 

Table 16:   Economic  impacts  of  an  initial  stage  without  consolidation,  with  and  without 

cross-border loss relief –   
multinational entities only + ACE/AGI, EU-28, GDP-weighted average 

Common base 

Common base with 
cross-border loss relief 

CCCTB 

Cost of capital  
(change in percentage points) 

Investment 

Wages 

Employment 

GDP 

Welfare (% of GDP) 

-0.29 

3.06 

0.88 

0.40 

1.06 

0.19 

Source:  Joint Research Centre of the European Commission (2016) 
Note:  Changes are in % unless noted otherwise 

Impact on administrative burden 

-0.35 

3.62 

1.11 

0.52 

1.31 

0.22 

-0.32 

3.36 

1.26 

0.65 

1.17 

0.18 

The administrative burden would be reduced by much more under the CCCTB compared 
to the common base. Consolidation brings major benefits in terms of reduced compliance 

105   A sensitivity analysis, in which the compliance costs instead are reduced by 50% is also performed in 

the CORTAX study. 

64 

 
 
 
                                                 
costs, eliminating the necessity to comply with the arm's length principle. For groups, the 
absence of consolidation implies that cross-border transactions between group members 
and associated enterprises would continue to be subject to transfer pricing rules and filing 
formalities.  It  would  therefore  be  necessary  to  work  out  arm's  length  adjustments.  In 
addition,  groups  of  companies  would  have  to  continue  dealing  with  as  many  tax 
administrations as the number of Member States where they have a taxable presence (i.e. 
subsidiary  or  permanent  establishment).  On  the  other  hand,  formula  apportionment 
requires documenting additional information on the factors used in each company entity 
in order to apply the formula.106  

Thus  the  CCCTB  is  expected  to  be  particularly  effective  in  reducing  recurrent  tax 
compliance cost. In terms of one-off costs for setting up a subsidiary in a new location, 
the  common  base  would  already  constitute  a  major  improvement  as  a  company 
expanding  cross-border  would  not  have  to  deal  with  a  new  tax  system.  Tax 
administrations  would  be  able  to  benefit  from  a  reduced  number  of  cases  and  fewer 
dealings with transfer pricing issues only once the CCCTB is implemented. 

5.5.2.  Fairness impacts 

Consolidation and apportionment is clearly an important element to reap all the benefits 
from reducing tax avoidance. Whereas the common base would address profit shifting by 
exploiting  patent  boxes  and  mismatches  in  the  tax  systems,  the  CCCTB  would  in 
addition  render  profit  shifting  via  transfer  pricing  and  debt  shifting  unattractive 
(assuming that both the common base and the CCCTB would be mandatory for the most 
relevant companies).  

A mechanism for a cross-border loss relief outside formula apportionment may give rise 
to  new  opportunities  of  tax  planning  and  profit  shifting  in  favour  of  multinational 
companies. Anti-tax avoidance provisions that may be implemented in order to prevent 
an  abusive  use  of  cross-border  loss  relief  could  have  only  limited  dissuasive  effect.  It 
should also be underlined that tax administrations would have a crucial role in order to 
prevent abuses. Hence, anti-avoidance provisions could remain ineffective to the extent 
that tax administrations are not capable to apply them.  

The  loss  relief  should  therefore  have  a  narrow  scope  to  minimise  possibilities  for  tax 
avoidance.  Notably,  to  safeguard  national  tax  revenues,  the  deducted  losses  should  be 
reincorporated ('recaptured') automatically if this has not occurred after a certain number 
of  years  or  if  the  requisites  to  qualify  as  an  immediate  subsidiary  or  permanent 
establishment are no longer met. In addition, it should be ensured that companies cannot 
artificially  reduce  their  tax  bill  by buying  loss-making  companies.  This  is  an  issue that 
has already been recognised in national systems that provide a loss relief for groups and 
can be addressed via specific anti-avoidance rules. 

5.5.3.  Stakeholder views 

More than 50% of companies who responded are in favour of a temporary cross-border 
loss relief. The positive view is shared by large companies and SMEs alike. The majority 
of  the  companies  argue  that  the  current  lack  of  mechanisms  available  to  offset  cross-

106   The required information concerns sales by destination, tangible fixed assets, employees and the wage 

bill. 

65 

 
 
                                                 
border  losses  is  one  of  the  major  obstacles  to  the  completion  of  the  single  market  and 
reduces the competitiveness of the EU. A few respondents suggest that the cross-border 
loss  offset  should  be  extended  to  non-EU  companies  and  permanent  establishments, 
given that competitiveness of EU companies needs to be regarded on a global scale.  

A  strong  majority  of  respondents  from  business/professional  associations  and 
consultancy/law  firms  believe  that  consolidation  is  essential.  However,  they  would 
accept  a  transitory  and  temporary  cross-border  loss  relief  as  a  second-best  approach. 
Some  envisage  resistance  from  Member  States  in  offering  wide-ranging  cross-border 
relief as taxes should be paid where value is created. Others advocate the introduction of 
an  EU  wide  regime,  not  linked  to  the  CCCTB,  to  be  implemented  into  domestic 
legislation.  

Conversely,  most  NGOs  and  civil  society  organizations  do  not  support  a  temporary 
mechanism for cross-border loss relief. They fear it would only shrink the taxable base of 
multinational companies and open up the system to new types of aggressive tax planning 
while postponing consolidation would remove the main benefit of the proposal. 

5.5.4.  Conclusion on staged approach 

Should  an  initial  stage  without  consolidation  be  required  politically,  a  limited  form  of 
cross-border loss offset (option 5b) could have small positive impacts on key economic 
variables such as GDP, the labour market and investment.  

5.6. 

Impact on SMEs 

the  recommended  high 

turnover  threshold.  Given 

SMEs  would  be  effectively  excluded  from  the  mandatory  application  of  the  CCCTB 
low  degree  of 
through 
internationalisation  of  SMEs,  the  risk  of  imposing  an  additional  administrative  burden 
(through  a  change  in  the  tax  rules  to  which  they  would  be  subjected)  would  not 
necessarily  be  offset  by  the  benefits  of  having  a  common  base  throughout  the  EU. 
However,  the  CCCTB  is  expected  to  support  growth  and  investment  and  to  reduce 
compliance costs when expanding across border. SMEs might therefore want to opt into 
the system, which would allow them to benefit from the CCCTB, including the AGI and 
the allowance for R&D expenses.  

the 

Indeed 63% of SMEs that responded to the public consultation are in favour of providing 
the  possibility  to  opt  into  the  CCCTB.  Views  by  SMEs  on  other  issues  have  been 
summarised above in the respective sections on the public consultation. 

The impact of debt bias measures is likely to be higher for SMEs that would opt for the 
CCCTB. The debt bias is particularly detrimental for young and innovative firms, whose 
access  to  external  funding  is  more  difficult.  Among  the  options,  the  AGI  could 
potentially be particularly favourable to growing companies, which are likely to be small 
on  average.  Caiumi  (2015)  investigates  the  impact  of  the  Italian  ACE  on  the  debt  bias 
and finds that the corrective effect is particularly strong for SMEs. 

5.7. 

Social and environmental impacts 

There  are  no  relevant  environmental  impacts  expected  from  any  of  the  options.  Social 
impacts  will  also  be  limited,  but  two  aspects  are  worth  mentioning.  To  the  extent  that 

66 

 
 
positive  indirect  impacts  on  the  labour  market  materialise  (employment  and  wages), 
positive social impacts are also expected. This aspect lends further support for a CCCTB 
with an AGI, which has the most positive impacts on the labour market.  

In  addition,  the  significant  reduction  of  corporate  tax  avoidance  under  the  CCCTB  is 
expected  to  influence  positively  general  taxpayer  morale.  The  positive  impact  on 
taxpayer  morale  is  maximized  with  a  CCCTB  and  a  mandatory  scope  that  ensures  that 
the major share of corporate tax avoidance is no longer feasible.  

In the longer term, the provision of R&D tax incentives in the CCCTB which would lead 
to  more  investment  in  R&D  could  improve  the  living  standard  by  generating  positive 
social spillovers. Cost-benefit analyses of the social effects of R&D tax incentives carried 
out in the Netherlands, Canada and Japan find positive effect on welfare.107 

5.8.  Conclusion on the preferred option  

5.8.1.  Design components of the preferred option 

The analysis of impacts in the previous sections focusses on three design elements of the 
CCCTB proposal. These elements were  added to the 2011 proposal to  address  the new 
general  and  specific  objectives  outlined  in  Section  3.  The  general  objectives  are  to  (1) 
enhance  the  fairness  of  the  tax  system  and  to  (2)  stimulate  growth  and  investment. 
Section  5.1  shows  that  the  CCCTB  offers  clear  advantages  in  comparison  with  the 
baseline scenario. 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. Small positive economic and investment 
effects  arise,  notably  by  removing  obstacles  in  the  single  market.  Overall,  welfare  is 
expected to increase slightly. The impact on public finances will largely depend on how 
Member States will adjust tax rates, but also on some calibration issues such as the rate 
for  the  AGI.  Under  the  assumption  of  partly  offsetting  changes  in  CIT  rates,  the 
simulations  show  a  small  decrease  in  total  tax  revenues  by  0.2%  of  GDP,  due  to  a 
reduction  in  CIT  revenues  partly  offset  by  an  increase  in  other  taxes  as  a  result  of  the 
increased  economic  activity.  However,  these  figures  do  not  capture  expected  positive 
impacts from closing important tax planning channels. 

Effectively  reducing  tax  avoidance  by  multinational  entities  and  increasing  fairness 
through  a  more  level  playing  field  in  the  EU  can  only  be  reached  if  the  relevant 
companies have to operate under a CCCTB. Section 5.2 concludes that a scope which is 
mandatory for a defined set of multinational entities and optional for other companies is 
the  preferred  option.  The  limit  of  compulsory  application  is  set  to  groups  with  a  high 
consolidated  turnover.  A  threshold  of  EUR 750  million  would  serve  the  purpose  of 
capturing the vast majority (ca. 64%) of turnover generated by groups while limiting the 
risk  of  including  purely  domestic  groups.  Furthermore,  such  a  threshold  would  be 
coherent with the approach taken in current EU initiatives to enhance tax transparency.  

107   Parsons and Phillips (2007) conclude that the tax incentive in Canada had a positive welfare effect of 
eleven cents for every dollar spent in terms of lost tax revenue. Lokshin and Mohnen (2009) conclude 
that  the  Dutch  program  resulted  in  a  16%  net  welfare  gain.  Such  analyses  are  sensitive  to  the 
assumptions made, for example on spillover rate and administrative and compliance costs.  

67 

 
 
                                                 
Solutions for the CCCTB to address the debt bias in corporate taxation are analysed in 
Section  5.3.  The  options  to  address  the  debt  bias  are  assessed  not  only  based  on  their 
economic merits of removing the distortion, but also with a view to minimising the risks 
of  tax  planning.  The  allowance  for  growth  and  investment  (AGI)  is  identified  as  the 
option that best matches both criteria. Compared to the CCCTB without AGI, the results 
also  show much  larger  positive  impacts  in  terms  of  overall  investment  which  increases  
by up to 3.4% depending on the level of allowance.  

Section  5.4  analyses  the  question  of  the  appropriate  level  for  an  allowance  for  R&D 
investments.  When  setting  the  level  of  the allowance,  policy  makers  have  to  weigh  the 
increase in R&D expenses from granting the allowance with the loss of tax revenue. The 
simulations show that an additional allowance between 33% and 100% (i.e. beyond full 
immediate  expensing)  would  be  preferable  to  maintain  or  further  encourage  R&D 
investment  in  the  EU  at  a  reasonable  cost.  Allowances  will  reduce  the  tax  bases  and 
therefore  revenues.  However,  costly  and  inefficient  existing  patent  box  regimes  in 
Member States would be removed with the CCCTB. This could partly offset some of the 
revenue losses.  

In  conclusion,  a  mandatory  CCCTB  for  very  large  companies,  an  AGI  with  well-
designed  anti-avoidance  measures  and  an  R&D  tax  incentive  designed  as  a  super 
allowance  for  R&D  expenses  define  the  preferred  option  for  the  re-launch  of  the 
CCCTB. 

5.8.2.  Regulatory fitness and simplification of the preferred option 

Tax compliance costs are an important burden for businesses and their reduction will be a 
major  advantage  of  the  implementation  of the CCCTB. Estimated compliance costs for 
large  companies  amount  to  about  2%  of  taxes  paid,  while  for  SMEs  the  estimate  was 
about  30%  of  taxes  paid.  Compliance  costs  are  estimated  to  increase  with  cross-border 
activity and with increasing number of subsidiaries. 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 when the CCCTB is introduced remains a 
major advantage: The compliance costs for companies will decline for those cases where 
cross-border investments are involved – partly because of the abolition of transfer pricing 
documentation,  more  generally  because  there  is  only  one  set  of  rules  to  comply  with. 
Given  the  fact  that  the  CCCTB  is  more  streamlined  than  national  systems,  one  could 
expect that also domestic compliance costs are reduced. In any case, the choice to enter 
the CCCTB will reflect compliance cost considerations, both for domestic firms and for 
multinational  entities  not  subject  to  mandatory  application.  Generally,  data  on  these 
questions are scarce or in some cases missing. The available survey data point however 
to cost savings as explained in Section 5.1.1 and therefore serves the objective to increase 
regulatory  fitness.  Time  costs  for  setting  up  a  new  subsidiary  in  a  Member  State  are 
estimated to decrease 62-67% for the CCCTB. Focussing on recurring costs, i.e. ignoring 
one-off  switching  costs,  the  Impact  Assessment  estimates  a  decrease  in  time  spent  on 
compliance  activities  by  8%  after  implementation  of  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. 

68 

 
 
With regard to  the costs of tax administrations, the parallel  application of national  CIT 
systems and the CCCTB will increase administrative burden in tax administrations since 
two, albeit similar taxes need to be managed. However, since multinational entities under 
the scope of the CCCTB will file only one tax declaration in the EU the total amount of 
tax declarations should decline and ease the burden for tax administrations. Also, the fact 
that  no  more  transfer  pricing  documentation  is  necessary  in  the  EU  will  reduce  the 
burden on administrations – in line with increasing regulatory fitness.  

5.9.  Choice of the corresponding policy instrument  

It is beyond doubt that binding legal rules are necessary for providing solutions, through 
a common legislative framework, to the problems identified earlier as distortions to the 
single  market.  Soft  law  would  risk  not  being  implemented  by  Member  States  at  all  or 
could lead to a piece-meal approach. Such an outcome would be highly undesirable. In 
addition  to  creating  legal  uncertainty  for  taxpayers,  non-binding  rules  could  jeopardise 
the objectives for a coordinated and coherent corporate tax system in the single market. 
In addition, as the architecture of the common tax base should be expected to impact on 
national budgets, especially through the formula apportionment, it is critical that the rules 
which  define  its  composition  be  applied  consistently  and  efficiently.  This  is  far  more 
likely to be achieved through binding law.  

Based on Article 115 of the Treaty on the Functioning of the European Union (TFEU), 
which is the legal base used for legislating in direct taxation, "the Council shall, acting 
unanimously  …  issue  directives  for  the  approximation  of  laws,  regulations  and 
administrative  provisions  of  the  Member  States  as  directly  affect  the  establishment  or 
functioning  of  the  internal  market."  The  Treaty  is  therefore  prescriptive  that  in  direct 
taxation, legislation shall exclusively be  in  the form of directives. According to  Article 
288  TFEU,  a  directive  shall  be  binding,  as  to  the  result  to  be  achieved,  upon  each 
Member  State  to  which  it  is  addressed,  but  shall  leave  to  the  national  authorities  the 
choice  of  form  and  methods  for  achieving  this  result.  In  this  vein,  the  directive  should 
remain  general  in  nature  since  technicalities  and  the  minute  detail  should  be  left  to 
Member States to decide.  

6.  MONITORING AND EVALUATION  

6.1.  Monitoring arrangements 

The  Commission  will  monitor  the  implementation  of  the  legal  proposal  and  its 
application in close cooperation with the Member States. Monitoring in a continuous and 
systematic way will allow identifying whether the policy proposal is applied as expected 
and addressing implementation problems in a timely manner. Collection of factual data 
of  the  suggested  monitoring  indicators  will  also  provide  the  basis  for  the  future 
evaluation  of  the  CCCTB.  Given  the  specificities  of  the  proposal,  the  monitoring  will 
cover both phases of the staged approach set out in the preferred option.  

In  terms  of  operational  objectives,  the  number  of  intra-EU  profit  shifting  arrangements 
should be significantly reduced compared to the status quo since the CCCTB makes the 

69 

 
 
current  practices  obsolete.108  The  corresponding  indicators  presented  in  Table  17  are  a 
selection  of  those  suggested  by  the  OECD/G20  BEPS  project  (Action  11),  slightly 
modified to fit the context of the CCCTB initiative. For other companies the CCCTB is 
optional, but it is generally designed to be attractive for all businesses. The operational 
goal is to have a large number of firms opting into the system, ideally from all sectors of 
the economy. The operational objective to ensure that profit taxation that does not distort 
financing decisions is (i) to reduce the difference in the cost of capital for debt and equity 
and (ii) to reduce the debt-equity ratio in companies. High take-up rates of the R&D tax 
incentives are the relevant operational objective to measure progress towards the goal to 
enhance investment in business R&D.  

To measure the operational objectives, in-depth analyses is necessary. The data needed is 
micro-panel data for companies, as well as national accounts data and information from 
tax administrations, for instance on the take-up of the R&D allowance under the CCCTB. 
To  measure  the  effects  econometrically  a  period  of  five  years  after  the  introduction  is 
necessary to produce statistically relevant results. 

In  compliance  with  the  principle  of  subsidiarity,  the  relevant  information  should  be 
gathered  primarily  by  the  Member  States'  tax  administrations  when  data  on  tax 
compliance and the use of the system is concerned. Micro-data on companies is available 
from external data providers. 

Table 17:  Potential monitoring indicators 

Operational Objective 

Indicators 

1.  Significantly reduce the 

number of intra-EU profit 
shifting arrangements 

2.  Large number of companies 
opting in from all sectors 

3.  Reduce difference in cost of 
capital for debt and equity 

4.  High take-up rates of  
R&D incentives 

  Concentration of foreign direct investment relative to GDP 
 

Effective tax rates of MNEs subject to mandatory application of the 
common base/CCCTB relative to companies not applying the common 
base/CCCTB with similar characteristics 

  Concentration of royalty receipts relative to R&D spending 
 

Interest-to-income ratios of MNE affiliates in locations with above 
average statutory tax rates 

  Number of companies who have opted for the common base/CCCTB  
  Number of companies who have opted-in or opted-out in a given year  
  Number of companies who fall under the mandatory application of the 

common base/CCCTB  

  Contextual information: resident Member State, sector and size of the 

company; statutory and effective tax rates under the common 
base/CCCTB 

  Cost of capital for investments financed by debt and by equity for 
companies applying the common base/CCCTB (by Member State) 
Levels of debt and equity for companies applying the common 
base/CCCTB and for companies not applying the common base/CCCTB 

 

  Number of companies receiving an R&D allowance under the common 

base CCCTB 

  R&D allowance granted under the common base/CCCTB by company 
  Contextual information: sector and size of the company 

Source: European Commission 
Note:  The data sources for indicator 1 are described in the final report on BEPS Action 11. 

108   For the status quo see the study by Ramboll et al. (2015) on aggressive tax planning structures as well 

as ZEW (2016c). 

70 

 
 
                                                 
6.2.  Evaluation 

The evaluation of the CCCTB should assess the extent to which the outlined objectives 
have been met. It will also analyse the extent to which  the expected simplifications for 
the  targeted  stakeholders  have  materialized  and  assess  the  related  administrative  and 
regulatory  burden.  Considering  the  phased  approach  of  the  CCCTB  and  allowing  for 
impacts  to  materialize  and  to  be  observed  after  the  implementation  of  the  policy,  an 
evaluation  should  be  carried  out  three  to  five  years  after  the  implementation  of  the 
second phase of the proposal. The Commission will report on the evaluation results in the 
form of an evaluation report. 

71 

 
 
 
 
7.  GLOSSARY 

tax  planning 

(see  also:  Tax  planning): 

the  Commission 
Aggressive 
Recommendation  on  aggressive  tax  planning  (C(2012)  8806  final),  aggressive  tax 
planning  is  defined  as  “taking  advantage  of  the  technicalities  of  a  tax  system  or  of 
mismatches  between  two  or  more  tax  systems  for  the  purpose  of  reducing  tax liability. 
Aggressive tax planning can take a multitude of forms. Its consequences include double 
deductions (e.g. the same loss is deducted both in the state of source and residence) and 
double non-taxation (e.g. income which is not taxed in the source state is exempt in the 
state of residence)”. 

In 

Allowance  for  corporate  capital  (ACC)  is  a  corporate  tax  system  where  corporations 
may  deduct  a  defined  return  on  total  capital  (both  equity  and  debt)  from  the  corporate 
income  tax  base.  It  achieves  full  financing  neutrality  between  debt  and  equity  at  the 
corporate level. 

Allowance  for  corporate  equity  (ACE)  is  a  corporate  tax  system  where  interest 
payments and a defined return on equity can both be deducted from the corporate income 
tax  base.  It moves  the  system  closer  to  financing  neutrality  between  debt  and equity  at 
the corporate level. 

Allowance for growth and investment (AGI) is a corporate tax system where interest 
payments  and  a  return  on  equity  can  both  be  deducted  from  the  corporate  income  tax 
base.  It  moves  the  system  closer  to  financing  neutrality  between  debt  and  equity  at  the 
corporate level. It goes some steps further than ACE because it removes tax avoidance by 
cascading the benefits (the funds injected in a group benefit from deductibility only once) 
and uses an incremental system based on a moving reference year. 

Anti-Tax Avoidance Directive (ATAD) is an EU Tax Directive which lays down rules 
against tax avoidance practices which directly affect the functioning of the single market. 

Anti-Tax Avoidance Package (ATAP) is a package of actions which includes legally-
binding anti-avoidance measures necessary to reduce aggressive tax planning. It is part of 
the  action  plan  on  corporate  taxation  for  fairer,  simpler  and  more  effective  corporate 
taxation in the EU. 

Base erosion and profit  shifting (BEPS  project):  Tax planning strategies that exploit 
gaps  and  mismatches  in  tax  rules  to  artificially  shift  profits  to  low  or  no-tax  locations 
where there is little or no economic activity, resulting in little or no overall corporate tax 
being paid. The OECD and the EU have developed specific actions to give countries the 
tools they need to ensure that profits are taxed where economic activities generating the 
profits  are  performed  and  where  value  is  created,  while  at  the  same  time  giving 
enterprises greater certainty by reducing disputes over the application of international tax 
rules, and standardising requirements. 

Common  consolidated  corporate  tax  base  (CCCTB)  is  a  policy  proposal  of  the 
European Commission consisting of the harmonisation of the tax base of corporations at 
EU level. It also includes consolidation and apportionment of the tax base of corporation 
groups.  

72 

 
 
Common corporate tax base (CCTB) consists of the harmonisation of the tax base of 
corporations at the EU level, but does not include the element of tax consolidation which 
is part of the CCCTB.  

Comprehensive  business  income  tax  (CBIT)  refers  to  a  corporate  tax  system  where 
neither interest payments nor the return on equity can be deducted from corporate profits, 
and are thus both fully subject to corporate income tax. It equalises the tax treatment of 
debt and equity finance at the corporate level. 

Controlled foreign corporation (CFC) is a foreign corporation whose income (or some 
part of it) is deemed to be generated (and hence to be taxed) in the residence country of 
the multinational group if certain conditions are met (usually this condition is that the tax 
rate  in  the  foreign  country  is  lower  than  a  set  percentage  of  the  tax  rate  in  the  country 
implementing the CFC rule). The particular definition of the foreign corporations subject 
to these rules varies across jurisdictions, but it is generally based on a control percentage. 

Corporate income tax (CIT) is a direct tax levied on the profits of corporations. The tax 
rate payable varies across jurisdictions. 

Cost of capital (CoC) is a measure of the cost of either debt and/or equity. It is used to 
assess the cost of new investments.   

Cost of capital allowance (CoCA): The term refers to a corporate tax system where the 
cost  for  both  debt  and  equity  finance  is  captured  by  a  defined  allowance  which  is 
deductible from the corporate tax base; similarly, at the investor's level, the income tax 
base increases by a defined return on the investments, which corresponds to the defined 
allowance  and  can  be  taxable.  The  amount  of  the  allowance/return  is  computed  as  the 
product  of  the  relevant  assets/investments  multiplied  by  a  CoCA  rate.  This  system 
equalises the tax treatment of debt and equity finance at the corporate and investor level. 

Country-by-country  reporting  (CBCR)  refers 
large 
multinational  entities  (those  with  consolidated  revenues  of  at  least  EUR 750  million) 
have to submit a report on tax-related information to the jurisdictions in which they do 
business on an annual basis. 

the  requirement 

that 

to 

Debt-equity  tax  bias/debt  bias  can  be  the  result  of  operating  a  corporate  tax  system 
which  favours  financing  by  debt,  rather  than  by  equity.  This  is  achieved  by  treating 
interest payments as a tax deductible expense whilst no equivalent deduction is granted 
for the return on equity (mainly, dividends). 

Double taxation is an international taxation scenario in which the same taxable object is 
subject to taxation in two or more jurisdictions.  

Earnings  before  interest,  tax  depreciation  and  amortisation  (EBITDA)  is  an 
accounting  measure  of  the  net  earnings  of  a  company.  It  excludes  interest,  taxes, 
depreciation and amortisation expenses.  

Effective  average  tax  rate  is  a  tax  rate  calculated  from  the  nominal  tax  rate  and  the 
definition of the tax base. Particularly, this effective tax rate is based on total investment 
income.  

73 

 
 
Effective marginal tax rate is a tax rate calculated from the combination of the nominal 
(i.e.  statutory)  tax  rate  and  the  definition  of  the  tax  base  (i.e.  the  taxable  profit). 
Particularly, this effective tax rate is based on additional investment income.  

Formula  apportionment  is  an  equation  used  to  allocate  the  tax  base  of  multinational 
corporations between the entities of the group. 

Hybrid mismatches: This refers to the situation where, as a result of disparities amongst 
national laws, the same entity or financial instrument is characterized differently, as far 
as  its  tax  treatment  is  concerned,  in  two  or  more  States  (e.g.  an  entity  is  treated  as  a 
partnership  in  one  jurisdiction  and  as  a  corporation  in  another;  a  financial  instrument 
qualifies  as  deductible  interest  in  one  jurisdiction  and  as  tax  exempt  dividend  in  the 
other). Taxpayers often set up arrangements to exploit such mismatches for the purpose 
of lowering their overall tax burden. 

Intellectual property is a set of intangible assets owned by a company, which are legally 
protected by patents, trademarks, copyrights or other type of intellectual property rights.  

Joint  Transfer  Pricing  Forum  is  an  EU  forum  of  experts  that  assists  and  advises  the 
European Commission on transfer pricing tax issues. It was created by a Commission's 
Decision  of  25th  January  2011.109  The  JTPF  has  one  representative  from  each  Member 
State's tax administrations and 18 non-government organisation members. It is chaired by 
an  independent  chairperson.  The  JTPF  works  within  the  framework  of  the  OECD 
Transfer  Pricing  Guidelines  and  operates  on  the  basis  of  consensus  to  propose  to  the 
Commission pragmatic, non-legislative solutions to practical problems posed by transfer 
pricing practices in the EU. 

Multinational  entities/companies/enterprises  are  corporations  that  operate  across 
different jurisdictions. 

Non-financial corporations are corporations not belonging to the financial sector. 

Profit shifting is an intra-group tax planning strategy of multinational entities consisting 
of shifting profits from the entities of the group operating in high tax paying countries to 
other entities operating in low tax paying countries.   

Research & Development (R&D):   
Research: all original and planned investigation undertaken with the prospect of gaining 
new scientific or technical knowledge and understanding.    
Development: the application of research findings or other knowledge to a plan or design 
for  the  production  of  new  or  substantially  improved  materials,  products,  devices, 
processes, systems or services before the start of commercial production or use. 

Small and medium-sized enterprises (SMEs) are defined by the European Commission 
as having less than 250 persons employed. They should also have an annual turnover of 
up  to  EUR 50  million,  or  a  balance  sheet  total  of  no  more  than  EUR 43  million 
(Commission Recommendation of 6 May 2003). 

109

   http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/c_2011_16_en.pdf  

74 

 
 
                                                 
Special-purpose  entities  are  legal  entities  established  to  perform  specific  functions 
limited in scope or time, which has little or no production, is often a subsidiary and has 
as a core business function financing its group activities or holding assets and liabilities 
of its group. 

Treaty on the Functioning of the European Union (TFEU) is one of the Treaties on 
which the EU is  founded. It organises the functioning  of the Union and determines the 
areas of, delimitation of, and arrangements for exercising its competences. 

Tax avoidance: According to the OECD glossary of tax terms, tax avoidance is defined 
as the arrangement of a taxpayer’s affairs in a way that is intended to reduce his or her 
tax  liability  and  that  -  although  the  arrangement  may  be  strictly  legal  -  is  usually  in 
contradiction with the intent of the law it purports to follow. 

Tax  evasion:  According  to  the  OECD  glossary  of  tax  terms,  tax  evasion  is  defined  as 
illegal arrangements where the liability to tax is hidden or ignored. This implies that the 
taxpayer  pays  less  tax  than  he  or  she  is  legally  obligated  to  pay  by  hiding  income  or 
information from the tax authorities. 

Tax planning (see also: Aggressive tax planning): According to the OECD glossary of 
tax terms, tax planning is an arrangement of a person’s business and/or private affairs in 
order to minimize tax liability. 

75 

 
 
 
 
 
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9.  ANNEXES 

86 

 
 
 
 
Annex I: Procedural Information 

1. LEAD DG, AGENDA PLANNING AND WORK PROGRAMME 

The re-launch of a proposal for a Common Consolidated Corporate Tax Base (CCCTB) 
was  prepared  under  the  lead  of  Directorate  General  for  Taxation  and  Customs  Union. 
Within  the  Agenda  Planning  of  the  European  Commission,  the  project  is  referred  to 
under  item  2016/TAXUD/006.  In  the  Commission  Work  Programme  for  2016,  the 
Commission  committed  under  the  header  "Deeper  and  Fairer  Internal  Market  with  a 
Strengthened  Industrial  Base"  to  propose  a  staged  approach  starting  with  agreeing  a 
mandatory tax base.  

2. ORGANISATION AND TIMING 

Work on the re-launch of the CCCTB started in July 2015.  

An  Inter-services  Steering  Group  assisted  DG  Taxation  and  Customs  Union  in  the 
preparation  of  this  Impact  Assessment  report.  The  Steering  Group  was  set  up  on 
24/08/2015  and  included  colleagues  from  DG  Communication  Networks,  Content  and 
Technology;  DG  Competition;  DG  Economic  and  Financial  Affairs;  DG  Environment; 
DG  Financial  Stability,  Financial  Services  and  Capital  Markets  Union;  DG  Internal 
Market, Industry, Entrepreneurship and SMEs; DG Justice and Consumers; DG Research 
and Innovation; DG Taxation and Customs Union; DG Trade; the Joint Research Centre; 
the Legal Service; and the Secretariat-General. 

The Steering Group met on four occasions between September 2015 and June 2016. The 
last  meeting  of  the  Steering  Group  took  place  on  13  June  2016.  At  each  occasion,  the 
members  of  the  Steering  Group  were  given  the  opportunity  to  provide  comments  in 
writing on the draft versions of the documents presented.  

3. CONSULTATION OF THE REGULATORY SCRUTINY BOARD 

The  impact  assessment  report  was  reviewed  by  the  Regulatory  Scrutiny  Board  on  20th 
July  2016.  Based  on  the  Board's  recommendations,  the  impact  assessment  has  been 
revised in accordance with the following points. 

(1) The introduction (Section 1) has been amended to clarify and better explain the policy 
context.  The  other  sections  have  been  revisited  to  ensure  consistency  with  the  new 
introduction. A box on the 2011 proposal has been introduced in Section 1.  

(2)  The  intervention  logic  was  refined  and  is  explained  in  Section  3  which  now  also 
includes  a  table  which  provides  an overview  of  the  links  between  problems,  objectives 
and policy options as well as the general context. The choice of the preferred option for 
the scope has been elaborated more vis-à-vis the summary table 8.  

(3)  Throughout  the  text  the  references  to  baseline  scenario  have  been  clarified  and 
streamlined  to  better  explain  the  assessment  of  options.  A  new  section  on  EU  value 
added has been introduced in Section 2.5. 

87 

 
 
(4) Options have been numbered and further clarified with regard to the 2011 proposal. 
More information on the fiscal impact of the options has been added in the subsections of 
Section 5 and in annexes XII and XIII. . Section 5.5 has been expanded to explain better 
the implications of a staged approach.  

(5) The REFIT elements have been added in Section 5.8 in the discussion of the preferred 
policy option. 

4. EXTERNAL EXPERTISE 

DG Taxation and Customs Union used external expertise to substantiate the discussion of 
the design of the CCCTB with  extensive  quantitative analysis. These  projects were not 
triggered specifically by the decision to propose a re-launch of the CCCTB itself, but part 
of continuous analysis of policy issues in the area of corporate income taxation by DG 
TAXUD.  

On the basis of administrative agreement between DG Taxation and Customs Union and 
the  Joint  Research  Centre  (JRC)110,  the  JRC  Institute  for  Prospective  Technological 
Studies  (IPTS)  has  provided  modelling  support  in  the  area  of  corporate  tax  policy.  By 
means  of  econometric  analysis  and  computable  general  equilibrium  model,  IPTS  has 
analysed corporate income tax policy development and reforms. 

Within  the  Framework  Service  Agreement  with  the  Centre  for  European  Economic 
Research  (ZEW)  on  the  "Provision  of  effective  tax  rates  in  the  context  of  an  enlarged 
European  Union  and  related  supporting  services"111,  DG  TAXUD  signed  specific 
contracts  for  the  analysis  of  effective  tax  rates.  One  of  these  studies  explored  potential 
effects  of  aggressive  tax  planning  on  the  effective  marginal  and  effective  average 
corporate tax rate of  multinational corporations112. In  another study, the ZEW analysed 
the "The Effects of Tax Reforms to Address the Debt Bias on the Cost of Capital and on 
Effective Tax Rates". 

For  the  studies  prepared  by  the  JRC  and  the  ZEW,  Annex  4  provides  more  detailed 
information  on  the  model  structure  used,  underlying  assumptions  and  sensitivity  of 
results. 

In addition to these specific studies commissioned by DG TAXUD, there exist a number 
of other recent external studies of particular relevance for the design of a CCCTB. A list 
of the scientific papers referred to in the Impact Assessment is provided in Section 8 of 
the Impact Assessment report. 

110   "Competitiveness  and  welfare  effects  of  corporate 

tax 
Administrative Agreement JRC N°33829 - TAXUD/2014/DE/324 

111   Framework Service Contract TAXUD/2013/CC/120 
112   "The Impact of Tax Planning on Forward-Looking Effective Tax Rates". 

reforms 

(TAXMOD-Corporate)", 

88 

 
 
 
 
 
 
                                                 
Annex II: Stakeholder Consultation – Synopsis Report 

1. INTRODUCTION 

On 17th June 2015 the Commission published an action plan for a Fairer and Efficient 
Corporate  Tax  System  which  proposed  5  key  areas  for  action  in  the  coming  months 
(COM  (2015)  302).  The  re-launch  of  the  Common  Consolidated  Corporate  Tax  Base 
(CCCTB) proposal lies at the heart of the action plan. It is presented as an overarching 
objective which has the potential to be an extremely effective tool for meeting the twin 
objectives of fairer and more efficient taxation. 

The Inception Impact Assessment has been published on the EUROPA webpage early in 
the process to inform the public of the setup and scope of the re-launch of the CCCTB. 
The  Commission  has  not  received  any  direct  feedback  on  this  Inception  Impact 
Assessment. 

The  Commission  has  furthermore  run  an  open  public  consultation  to  consult  all 
stakeholders  and  offer  interested  parties  the  possibility  to  provide  their  input  to  the  re-
launch of the CCCTB. 175 participants participated in this consultation. 

The percentages given in this factual summary correspond to the responses submitted by 
stakeholders to the open public consultation. Beyond a statistical analysis of the data, the 
summary  also  provides  a  qualitative  assessment  of  the  valued  opinions  and  input 
received. 

2. BREAKDOWN OF PARTICIPANTS 

The majority of respondents were trade or business associations and companies (42% and 
32%  of  responses,  respectively).  A  comparably  high  share  of  responses  came  from 
Bulgarian  companies  (about  20%).  The  second  largest  group  of  responses  came  from 
trade/business  associations  in  Belgium  (some  being  representations  to  the  EU). 
Respondents indicating  "Other  country"  were  located  in  Norway, Russia,  South Africa, 
USA – or did not want to single out a specific country when their association or company 
group is located in many different countries. 

89 

 
 
Table 18: Distribution of respondents 

Source: European Commission (2016), own calculations based on 175 responses 

With respect to the 55 responses provided by individual companies, the data shows that a 
majority  (30  out  of  55)  of  the  responses  were  provided  by  micro,  small  and  medium-
sized companies. This indicates the relative high interest also of smaller companies in the 
re-launch of the CCCTB. 

Table 19: Distribution of responses submitted by companies 

Source: European Commission (2016), own calculations based on 55 responses by companies 

90 

CountriesPrivate individualsNon registered associationsRegistered AssociationsCompaniesNGOsAcademicsPublic AuthoritiesOthersGrand TotalAustria0%0%1%3%0%0%1%0%4%Belgium1%0%10%1%3%0%0%2%16%Bulgaria0%1%0%19%1%0%0%0%21%Czech Republic0%0%1%0%0%0%0%0%1%Denmark1%0%1%0%1%0%0%0%2%Estonia0%1%0%0%0%0%1%0%1%Finland0%0%0%1%1%0%0%0%2%France1%1%2%2%0%0%0%1%6%Germany3%0%5%2%1%1%1%1%14%Hungary0%0%0%1%0%0%0%0%1%Ireland0%1%2%1%0%0%0%1%4%Italy1%1%4%1%0%1%0%0%7%Lithuania0%0%0%0%0%1%0%0%1%Luxembourg0%0%1%0%0%0%0%0%1%Malta0%0%1%0%0%0%0%0%1%Other country1%0%3%1%1%0%0%0%6%Portugal0%0%0%1%0%0%0%0%1%Romania1%0%0%0%0%0%0%0%1%Spain0%0%0%1%0%0%0%0%1%Sweden0%0%2%0%1%0%0%0%2%The Netherlands1%0%1%0%1%1%0%0%3%United Kingdom0%1%5%0%1%0%0%0%7%Grand Total7%5%37%32%10%3%2%5%100%Economic Sectors1 - 910 - 4950 - 249 250 or moreGrand TotalConstruction2%0%0%2%4%Electricty, Gas, Water Supply, ...0%0%0%7%7%Financial and Insurance Activities (incl. fund management activities)0%0%2%0%2%Manufacturing2%4%4%15%24%Professional, scientific and technical activities (incl. accounting, bookkeeping, auditing activities)11%2%0%2%15%Wholesale and Retail Trade18%0%0%0%18% Other7%0%2%5%15% Multiple sectors2%7%2%5%16%Grand Total42%13%9%36%100% 
 
 
 
Figure 9: Participation in the public consultation - by type of respondent 

Source: European Commission (2016), own calculations based on 175 responses 

Figure 10: Responses by extent of national/international activities of respondents 

Source:  European  Commission  (2016),  own  calculations  based  on  162  responses,  i.e.  responses  not  by  private 

individuals 

3. ANALYSIS OF RESPONSES 

3.1 Policy directions  

The Commission believes that the CCCTB system can be an effective tool against aggressive tax planning 
and at the same time retain its attractiveness to the business. What are your views? 

91 

 
 
 
 
Figure 11:   Views on CCCTB as effective tool against aggressive tax planning 

Source: European Commission 

Table 20:   Views on CCCTB as effective tool against aggressive tax planning –  

by type of respondent 

Source: European Commission 

A  majority  of  participating  private  individuals  and  civil  society  organisations  share  the 
view that CCCTB can be an effective tool against aggressive tax planning while retaining 
its attractiveness to business. A number of respondents mentioned that a common set of 
rules for calculating the corporate tax base, accompanied by consolidation, would prevent 
profit  shifting,  provide  greater  transparency  and  align  economic  activity  with  taxation. 
This  will  also  make  the  EU  a  more  attractive  place  for  foreign  firms  to  invest  in  and 
make doing business easier.  

Many  companies  also  broadly  agree  with  this  objective.  Respondents  who  don't  agree 
argue that the CCCTB should be focussed on removing cross-border obstacles in order to 
reduce tax compliance costs. 

Furthermore  a  large  majority  of  respondents  from  NGOs,  public  authorities  and  other 
respondents  shared  the  view  that  the  CCCTB  could  be  an  effective  anti-avoidance  tool 
within the CCCTB zone. For arrangements involving third countries, or tax avoidance by 
multinationals  headquartered  outside  the  CCCTB,  the  prevailing  opinion  is  that  the 
OECD BEPS project outcomes will provide more targeted and global responses and that 
diverging  from  OECD/BEPS  could  leave  EU  business  at  a  competitive  disadvantage. 
Therefore  the  CCCTB  ''should  not  go  faster  and  further  than  the  rest  of  the  world  in 
implementing BEPS recommendations''. 

92 

Type of RespondentAgreeNeutralDon't agreeOther(1) Private individuals and       non registered associations59%9%18%14%(2) Registered Associations14%27%19%41%(3) Company43%30%18%9%of which: SMEs54%34%11%0% Large enterprises20%25%30%25%(4) NGOs, Public authorities, Others68%14%4%14%(5) Academics40%0%60%0%Grand Total38%23%17%22% 
 
 
 
 
Some respondents had some concerns about the overall administrative burden that many 
new rules could place on business and the risk that shifting the focus towards aggressive 
tax  planning  may  undermine  the  original  purpose  of  the  CCCTB,  i.e.  to  support  EU 
business and make the internal market more business friendly. Concerns have also been 
expressed about the risk that the interaction between the formulary approach followed by 
the  CCCTB  and  the  arm's  length  principle  strengthened  by  the  OECD  BEPS  project 
could potentially lead to double taxation.  

The Commission envisages re-launching the CCCTB in a staged approach which will consist of 2 steps: 
Firstly,  agreement  on  the  tax  base,  secondly,  moving  on  to  consolidation.  What  are  your  views  on  the 
staged approach? 

Figure 12:   Views on Staged Approach 

Source: European Commission  

Table 21:   Views on Staged Approach – by type of respondent 

Source: European Commission 

Among the respondents to the public consultation, in general more respondents were in 
favour  of  the  staged  approach  than  against.  For  those  in  favour  of  a  staged  approach, 
consolidation  is  essential  and  its  introduction  should  follow  as  quickly  as  possible 
without delay. Therefore the first stage should incorporate a procedural path towards the 
second  stage  and  a  clear  timeframe/  commitment  to  move  to  consolidation  should  be 
introduced at the outset. 

Only  the  group  of  NGOs,  public  authorities  and  other  respondents  was  –  with  a  big 
majority – in favour of introducing the CCCTB in one move. These respondents argued 
that delaying consolidation would create uncertainty and a risk of more tax competition. 

93 

Type of RespondentIn favour of the staged approachNeutralAgainst the staged approachOther(1) Private individuals and       non registered associations50%5%36%9%(2) Registered Associations20%27%17%36%(3) Company46%21%21%11%of which: SMEs60%26%14%0% Large enterprises20%15%35%30%(4) NGOs, Public authorities, Others25%7%64%4%(5) Academics40%20%20%20%Grand Total34%19%29%19% 
 
 
 
 
Among  the  remaining  respondents,  some  are  concerned  that  there  is  little  point  in 
achieving  a  CCTB  when  there  may  be  difficulty  making  further  progress;  a  few  are  in 
principle against the concept of CCCTB; and a couple support implementing the CCTB 
as a stand-alone and not depending on consolidation. 

It is a priority of the Commission to promote discussion in Council of certain BEPS-related international 
aspects  of  the  common  base  before  the  re-launched  CCCTB  is  proposed.  The  aim  will  be  to  arrive  at 
consensus  on  how  to  implement  certain  OECD  anti-BEPS  best  practice  recommendations  in  a  uniform 
fashion across  the  EU.  The  intention  would be  to  create a common playing  field  in  defending  the  single 
market against base erosion and profit shifting. 
What are your views on agreeing on such a common approach? 

Figure 13:   Views on Common approach 

Source: European Commission 

Table 22:   Views on Common approach – by type of respondent 

Source: European Commission 

In the responses to the consultation, NGOs stated their views that OECD has fallen short 
of expectations and that it is now up to the EU to go beyond the BEPS recommendations 
in  order  to  close  the  remaining  tax  loopholes  and  develop a  solution  to  the  widespread 
phenomenon  of  tax  avoidance.  Only  one  reply  from  civil  society  organisations  showed 
opposition  to  a  common  approach  to  implementing  OECD  anti-BEPS  best  practice 
recommendations. Companies believe that it is crucial for multinational entities to have 
stability and legal certainty. Accordingly, if the proposals of the OECD BEPS action plan 
were to be implemented by EU Member States unilaterally without any harmonisation or 
coordination, the basic principles of the OECD BEPS action plan would be violated and 
the  chances  to  achieve  its  aims  would  be  severely  harmed.  Only  a  small  percentage  of 
this category's respondents are opposed to the Commission's approach. 

94 

Type of RespondentIn favour of common approachNeutralAgainst common approachDon't knowOther(1) Private individuals and       non registered associations77%14%5%0%5%(2) Registered Associations42%20%9%0%28%(3) Company66%13%11%2%9%of which: SMEs74%14%9%3%0% Large enterprises50%10%15%0%25%(4) NGOs, Public authorities, Others39%7%4%0%50%(5) Academics80%20%0%0%0%Grand Total55%15%8%1%22% 
 
 
 
 
There  is  a  strong  support  from  registered  business/professional  associations  and 
consultancy/law  firms  for  the  common  implementation  of  the  OECD  BEPS  principles 
through the EU. However the majority believes that EU anti-BEPS measures should not 
go beyond the OECD recommendations in order to avoid competitive disadvantages for 
EU companies. 

As  to  the  timing  and  modalities,  some  proposed  an  anti-BEPS  directive  to  be 
supplemented  with  a  strong dispute resolution  system, while  others questioned whether 
the  CCCTB  would  be  an  appropriate  mechanism  to  implement  anti-BEPS  measures 
before the common tax base has been agreed. A few objected that applying a one size fits 
all  approach  to  tax  legislation  within  the  EU  does  not  take  into  account  the  needs  of 
different Member States. 

3.2 Scope of the CCCTB proposal  

The Commission considers making the new proposal for a CCCTB obligatory for all EU companies which 
are part of a group. A group can be formed: 
- Between parent and subsidiary companies where there is a holding of more than 50% of the voting rights; 
and  direct  or  indirect  holding  amounting  to  more  than  75%  of  capital  or  more  than  75%  of  the  profit 
rights); or 
- Between a Head Office and its permanent establishment where a company has one or more permanent 
establishment in other Member States. 
What are your views on making the proposal for a CCCTB obligatory for all EU companies which are part 
of a group? 
Would  you  suggest  a  different  approach  to  defining  who  should  be  required  to  use  the  CCCTB?  If  yes, 
please explain your suggestion briefly. 

Figure 14:   Views on making CCCTB mandatory 

Source: European Commission 

95 

 
 
 
 
Table 23:   Views on making CCCTB mandatory – by type of respondent 

Source: European Commission 

Respondents from NGOs, public authorities and other respondents advocate a mandatory 
CCCTB given that an optional one would allow companies to choose the more profitable 
system, hence creating new arbitrage opportunities. A substantial number of respondents 
consider that the co-existence of two systems, the domestic one and the CCCTB, could 
cause  the  Internal  Market  to  deteriorate  and  therefore  propose  a  broader  scope  for  the 
CCCTB to include all companies with a taxable presence in the EU.  

Companies' opinions appear to be more divided. 40% of them support the Commission 
proposal.  On  the  other  hand  30%  of  them  are  opposed  to  a  mandatory  CCCTB.  Even 
among  the  supporters,  the  definition  of  "group"  gives  rise  to  different  views.  Some 
respondents propose to include only cross-border entities while others prefer a threshold 
based on the turnover of the company. 

The  majority  of  business/professional  associations  and  consultancy/law  firms  do  not 
support  this  approach.  The  divergent  opinions  expressed  on  this  question  include  the 
following: "Making the system optional could create an incentive for EU governments to 
create  a  system  that  is  superior  to  existing  individual  systems  and  to  give  businesses  a 
practical  alternative."  "For  governments  an  optional  system  entails  the  benefit  of  a 
gradual  adoption  by  businesses,  thereby  ensuring  a  limited  short  term  impact  on 
corporate tax".  

Business  and  professional  associations  expressed  concern  about  the  definition  of  group 
for which the system should be mandatory. Considering the difficulty of introducing the 
concept of group for jurisdictions that have very different legal accounting models, some 
proposed  that  the  criteria  for  defining  a  group  should  be  based  on  the  accounting 
directive.  

The Commission envisages providing the following option: 
Companies  which  would  not  be  subject  to  the  mandatory  CCCTB  -  because  they  do  not  fulfil  the 
requirements of being part of a group - could still have the possibility to apply the rules of the system. 
What are your views on offering non-qualifying companies the option to apply the rules? 

96 

Type of RespondentIn favour of mandatory CCCTBNeutralAgainst mandatory CCCTBDon't knowOther(1) Private individuals and       non registered associations45%0%41%0%14%(2) Registered Associations11%11%52%0%27%(3) Company41%23%29%5%2%of which: SMEs51%29%14%6%0% Large enterprises20%15%55%5%5%(4) NGOs, Public authorities, Others64%7%14%4%11%(5) Academics20%20%0%20%40%Grand Total34%13%35%3%15% 
 
 
Figure 15:   Views on possibility of opt-in  

Source: European Commission 

Table 24:   Views on possibility of opt-in – by type of respondent 

Source: European Commission 

Overall,  a  clear  majority  of  the  respondents  to  the  consultation  supports  the  possibility 
that non-qualifying companies could opt for applying the common tax base. 

Most  enterprises  and  business/professional  associations  support  optionality  for  all 
companies. There is some agreement that a system mandatory for qualifying companies 
should  allow  non-qualifying  companies  to  opt  in.  Others  believe  that  allowing  some 
companies to opt in would undermine the level playing field the CCCTB wants to create 
and will distort the system, opening it up to possible abuses and tax planning.   

3.3 Anti-avoidance elements 

In  view  of  recent  developments,  the  CCCTB  system  should  include  more  robust  rules  to  defend  itself 
against aggressive tax planning. 
Which of the elements of the CCCTB system would you reinforce so that the system can better respond to 
tax avoidance? 
(Multiple answers possible) 

97 

Type of RespondentIn favour of opt-inNeutralAgainst opt-inDon't knowOther(1) Private individuals and       non registered associations55%14%5%9%18%(2) Registered Associations63%19%3%2%14%(3) Company75%18%5%0%2%of which: SMEs63%29%6%0%3% Large enterprises95%0%5%0%0%(4) NGOs, Public authorities, Others36%14%32%7%11%(5) Academics60%20%20%0%0%Grand Total61%17%9%3%10% 
 
 
 
Figure 16:   Views on options to fight aggressive tax planning 

Source: European Commission 

Table 25:   Views on options to fight aggressive tax planning – by type of respondent 

Source: European Commission 

All measures have received a certain support but, overall, there is a general demand for 
more  robust  CFC  rules.  In  particular,  many  NGOs  call  for  "full-inclusion"  CFC  rules 
which means: " treating all foreign affiliates of EU resident parent companies as CFCs so 
that the group consolidated profits are subject to tax in the resident country, with a full 
credit  for  all  equivalent  foreign  taxes  paid,  which  under  the  CCCTB  should  be 
apportioned  among  the  group’s  E   affiliates  by  an  appropriate  formula.  This  would 
protect the tax base of both source and residence countries. They should certainly not be 

98 

Type of RespondentLimiting Interest DeductibilityDisallowance of tax exemption for portfolio participantsExit taxation rulesMore robust rules on CFC(1) Private individuals and       non registered associations27%27%41%36%(2) Registered Associations2%8%6%20%(3) Company4%4%20%30%of which: SMEs0%6%26%34% Large enterprises10%0%10%20%(4) NGOs, Public authorities, Others75%68%75%75%(5) Academics40%20%60%40%Grand Total18%19%27%35%Type of RespondentAnti-abuse rules based on effective rather than statutory ratesAddressing distortions casued by debt/equity biasOther suggestionsNone of the above(1) Private individuals and       non registered associations36%41%23%18%(2) Registered Associations6%11%72%27%(3) Company41%18%16%21%of which: SMEs57%26%3%9% Large enterprises10%5%40%45%(4) NGOs, Public authorities, Others64%68%61%0%(5) Academics20%40%60%20%Grand Total31%27%46%19% 
 
 
 
limited  to  income  from  transactions  with  the  parent  company,  and  there  should  be  no 
exemptions  based  on  criteria  such  as  effective  exchange  of  information,  as  profits  may 
also be shifted into cooperative jurisdictions. Full-inclusion CFC rules would be easier to 
apply  than  attempting  to  distinguish  between  active  and  passive  income,  or  using  a 
threshold such as 40% of the taxpayer’s effective tax rate." 

Most of civil society respondents who chose 'other suggestion', argue that consolidation 
and harmonisation would make the listed elements unnecessary.  

From the companies' perspective, improving arbitration seems to be essential. 

The  most  recurrent  'other  suggestion'  from  business/professional  associations  and 
consultancy/law firms include: 

  a double tax avoidance mechanism (arbitration) between EU and non-EU country 

with a mandatory system for the EU through a directive; 

  consistency between the anti-avoidance measures incorporated in the CCCTB and 

those advocated by the OECD; 

  coordination  with  non-EU  countries  to  avoid  relocation  of  business  activities 

outside the EU. 

One  respondent's  comments  summarise  the  prevailing  opinion  of  this  category: 
"Effective anti-avoidance rules are necessary under a CCCTB but they should not trigger 
any  unintended  consequences  such  as  having  a  negative  effect  on  investments  into  the 
EU or the international competitiveness of EU based groups". 

3.4 Hybrid Mismatches 

Hybrid  mismatches  are  the  result  of  disparities  in  the  tax  treatment  of  an  entity  or  financial  instrument 
under the laws of two or more States. Currently, arrangements can be set up to exploit such mismatches for 
the  purpose  of  lowering  their  overall  tax  burden.  The  risk  of  such  arrangements  would  be  removed  in 
transactions between enterprises applying the common tax base rules within a consolidated group. It would 
however  persist  in  relations  with  enterprises  outside  the  common  rules  as  well  as  during  step  1  of  the 
staged  approach  to  a  CCCTB,  in  the  absence  of  tax  consolidation  amongst  the  companies  applying  the 
common rules. 
One option to address hybrid mismatches would be to require enterprises to follow in a Member State the 
classification  of  entities  and/or  of  financial  instruments  adopted  in  the  other  Member  State  or  the  third 
country which is party to the transaction. 
In  your  view,  can  hybrid  mismatches  be  effectively  addressed  through  any  other  measures  than  the  one 
suggested above? 

99 

 
 
Figure 17:   Views  on  whether  hybrid  mismatches  can  effectively  be  addressed  through 

other measures 

Source: European Commission 

Table 26:   Views  on  whether  hybrid  mismatches  can  effectively  be  addressed  through 

other measures – by type of respondent 

Source: European Commission 

The majority of NGOs and public authorities propose full-inclusion CFC rules as a key 
element  to  catch  hybrids,  accompanied  by  a  credit  for  taxes  paid  abroad.  One  third 
doesn't know. A few suggest a public country by country report as an effective measure 
to  cover  more  hybrid  mismatches,  others  stress  that  consolidation  would  solve  the 
discrepancies. 

A  vast  majority  of  companies  answered  that  they  don't  know,  mainly  driven  by  the 
responses  of  small  and  medium  size  enterprises.  Only  a  few  respondents,  including 
multinationals,  mentioned  that  hybrids  could  be  avoided  through  OECD  anti-BEPS 
actions. 

Among  registered  business  associations,  some  believe  that  the  EU  should  not  diverge 
from the OECD recommendations on this topic. Some make a distinction between intra-
EU  situations,  where  a  consolidated  CCCTB  from  the  beginning  could  solve  the  issue, 
and  extra-EU  situations  where  OECD/BEPS  covers  the  issue.  A  couple  of  respondents 
say that hybrid instruments are not necessarily a result of tax planning.  

100 

Type of RespondentYesNoDon't knowOther(1) Private individuals and       non registered associations32%14%32%23%(2) Registered Associations20%6%25%48%(3) Company13%7%61%20%of which: SMEs11%6%83%0% Large enterprises15%5%25%55%(4) NGOs, Public authorities, Others64%0%14%21%(5) Academics20%20%20%40%Grand Total26%7%35%31% 
 
 
 
3.5 Research and Development (R&D) 

In the currently pending CCCTB proposal, the Commission has proposed a favourable treatment of costs 
for  Research  and  Development  (R&D)  by  making  these  costs  fully  deductible  in  the  tax  year  they  are 
incurred, with the exception of costs relating to immovable property. 
What are your views on the existing framework for R&D? 

Figure 18:   Views on existing R&D framework 

Source: European Commission 

Table 27:   Views on existing R&D framework – by type of respondent 

Source: European Commission 

A large majority of respondents expressed strong support for the existing framework.  

Many  among  the  responding  NGOs,  public  authorities  and  other  respondents  replied 
"other", mainly calling for clear definitions. It was also remarked that deduction of R&D 
costs  should  be  strictly  limited  to  genuine  research  and  development  costs  in  order  to 
subsidise only real innovation.   

The  overwhelming  majority  of  companies  believe  it  is  important  to  allow  deduction  of 
R&D and support the existing framework. 

from 

respondents 

60%  of 
registered  business/professional  associations  and 
consultancy/law firms also support the existing framework. 17% are neutral, and a small 
number  don't  know.  The  other  respondents  from  this  category  mostly  ask  for  a  clear 
definition  of  R&D,  possibly  consistent  with  the  accounting  definitions,  or  believe  that 
"Member  States  should  have  flexibility  to  design  tax  policy  for  R&D  within  the BEPS 
work in order for the EU to remain attractive compared to extra-EU".  

101 

Type of RespondentIn favour of the existingR&D frameworkNeutralAgainst the existing R&D frameworkDon't knowOther(1) Private individuals and       non registered associations55%14%9%9%14%(2) Registered Associations59%17%5%8%11%(3) Company80%5%7%0%7%of which: SMEs83%6%9%0%3% Large enterprises75%5%5%0%15%(4) NGOs, Public authorities, Others36%7%25%0%32%(5) Academics40%20%0%0%40%Grand Total61%11%9%4%14% 
 
  
 
One  option  for  rendering  the  CCCTB  more  favourable  to  promoting  R&D  could  be  to  introduce  more 
generous provisions for deducting R&D costs, such as super deductions which are currently applied by a 
number of Member States (e.g. Croatia, the Netherlands and the UK)? 
What are your views on making the existing framework for R&D more favourable?  
Would  you  suggest an  alternative  scheme?  If  so,  please  explain  in  your  response  and/or  provide further 
comments 

Figure 19:   Views on possible improvements to the existing R&D framework 

Source: European Commission 

Table 28:   Views on possible improvements to the existing R&D framework  

– by type of respondent 

Source: European Commission 

Most of the NGOs, public authorities are against R&D incentives for the reason that they 
can  be  used  for  aggressive  tax  planning.  They  argue  that  there  are  other  means  to 
stimulate  R&D  without  risking  new  abuses.  Some  of  them  point  out  the  lack  of  clear 
definitions. Some respondents would like to go further and reverse intellectual property 
regimes such as patent boxes. 

With  a  completely  different  approach,  almost  all  companies  would  welcome  a  more 
favourable framework for R&D as it would foster the economy. 

Half  of  the  respondents  from  business/professional  associations  and  consultancy/law 
firms are in favour of making the existing framework for R&D more favourable. Their 
suggestions include:  

  Super deductions (mostly);  
 

Introduction  of  a  common  incentive  rule  such  as  an  incremental  deduction  for 
R&D or an EU Intellectual Property box;  

102 

Type of RespondentIn favour of improvements to the existing R&D frameworkNeutralAgainst improvements to the existing R&D frameworkDon't knowOther(1) Private individuals and       non registered associations27%18%36%5%14%(2) Registered Associations50%20%3%8%19%(3) Company88%7%2%2%2%of which: SMEs80%11%3%3%3% Large enterprises100%0%0%0%0%(4) NGOs, Public authorities, Others25%0%71%4%0%(5) Academics60%0%20%0%20%Grand Total55%12%18%5%10% 
 
  
 
 
  Tax  credits  (cash  premiums)  because  super  deductions  tend  to  most  benefit 

companies that are profitable;   

  Above-the-line  R&D  expenditure  credits  in  EU  countries  so  that  even  loss-

making companies can benefit from them. 

Some respondents from this category believe that any EU initiative needs to build on the 
recent  work  of  OECD  and/or  that  Member  States  should  be  allowed  to  retain  their 
flexibility in designing their own national R&D policies.  

3.6 Debt equity bias 

Corporate tax systems usually favour debt-financing over equity-financing by treating interest payments as 
a tax deductible expense with no equivalent deduction for the return paid to equity. 
Should debt bias be addressed in the proposal? 

Figure 20:   Views on whether debt bias should be addressed 

Source: European Commission 

Table 29:   Views on whether debt bias should be addressed – by type of respondent 

Source: European Commission 

44% of respondents agree that the debt bias shall be addressed against 13.1% who think 
it should not. The 'yes' surpasses the 'no' in all categories of respondents, even though a 
large  share  of  business/professional  associations  and  consultancy/law  firms  chose  the 
category  'other'.  The  majority  of  those  who  agree  with  addressing  the  debt  bias  stress 
distortions of economic decisions, notably related to investment.   

Those among business/professional associations and consultancy/law firms who believe 
that  debt/equity  bias  should  not  be  addressed  as  part  of  the  CCCTB  argue  that  the 
CCCTB  is  primarily  focused  on  the  taxation  of  corporate  groups  and/or  OECD/BEPS 

103 

Type of RespondentYes, debt bias should be addressedNeutralNo, debt bias should not be addressedDon't knowOther(1) Private individuals and       non registered associations55%18%14%9%5%(2) Registered Associations28%19%14%6%33%(3) Company63%13%14%9%2%of which: SMEs63%11%11%14%0% Large enterprises60%15%20%0%5%(4) NGOs, Public authorities, Others36%32%11%7%14%(5) Academics40%40%0%20%0%Grand Total44%19%13%8%15% 
 
  
 
Action 4 recommendations need to be put in place and tested before considering  a new 
set of rules. 

Some argue that equity and debt are two different instruments with different rights and 
different costs and, as such, the tax treatment should not necessarily be the same and that 
a  different  treatment  is  justified  for  the  banking  sector.  A  couple  think  that  a  detailed 
assessment  of  the  budgetary  impact  for  each  Member  State  is  a  pre-requisite;  others 
suggest that since equity financing is not readily available in the EU any changes should 
not further impact the financing options available in the EU. A few respondents from this 
category replied in a completely positive manner. 

The corporate tax debt equity bias could be addressed via three possible policy options. 
Option  1  is  the  Comprehensive  Business  Income  Tax  (CBIT)  that  disallows  any  financing  costs  as 
deductible expense. 
Option  2  is  the  Allowance  for  Corporate  Equity  (ACE)  that  allows  the  deductibility  of  actual  interest 
payments and of a notional interest on equity. 
Option  3  is  the  Cost  of  capital  Allowance  (CoCA)  that  allows  the  deductibility  of  a  notional  interest  on 
capital (equity and debt). 
In your view, which option would be best suited to address the corporate debt bias? 

Figure 21:   Views on options to address corporate tax debt equity bias 

Source: European Commission 

Table 30:   Views on options to address corporate tax debt equity bias –  

by type of respondent 

Source: European Commission 

More than 40% of the respondents favour an ACE system against 12% in favour of the 
CBIT  and  3%  in  favour  of  the  CoCA.  18%  do  not  know,  12%  want  no  solution  and 
11.4% want something other than the ones proposed.  

Most  of  the  NGOs  opt  for  the  CBIT  method  whereas  from  the  companies'  perspective 
there  is  resounding  support  for  ACE.  Several  of  those  who  support  ACE  argue  that 

104 

Type of RespondentComprehensive Business Income Tax (CBIT)Allowance for Corporate Equity (ACE)Cost of Capital Allowance (CoCA)None of the aboveDon't knowOther(1) Private individuals and non registered associations21%32%5%16%21%5%(2) Registered Associations0%50%2%12%14%22%(3) Company4%52%5%11%29%0%of which: SMEs6%31%9%11%43%0%Large enterprises0%90%0%10%0%0%(4) NGOs, Public authorities, Others52%15%0%11%0%22%(5) Academics0%50%0%25%25%0%Grand Total12%43%3%12%18%12% 
 
 
 
 
interest limitation shall be limited to OECD BEPS Action 4 and ask whether the proposal 
is  in  line  with  OECD  BEPS  Action  4.  Like  the  companies,  a  strong  majority  of 
business/professional associations and consultancy/law firms expressed its preference for 
ACE. Some warn against the risk of raising tax rates and levelling down of deductibility 
of interest to pay for ACE.  

3.7 Temporary mechanism for cross-border loss relief 

The Commission envisages proposing a temporary mechanism for cross-border loss relief with recapture 
until the consolidation step (CCCTB) is agreed. The aim will be to balance out the absence of the benefits 
of consolidation during the first step (CCTB) of the proposal. 
What are your views on such a temporary mechanism for cross-border loss relief? 

Figure 22:   Views on temporary cross-border loss relief 

Source: European Commission 

Table 31:   Views on temporary cross-border loss relief – by type of respondent 

Source: European Commission 

The  majority  of  the  companies  who  responded  argue  that  the  lack  of  mechanisms 
available  to  offset  cross  border  losses  is  currently  one  of  the  major  obstacles  to  the 
completion  of  the  single  market  and  reduces  the  competitiveness  of  EU.  In  addition,  a 
few respondents suggest that the cross-border loss offset should be extended to non-EU 
companies  and  permanent  establishments,  given  that  competitiveness  of  EU  companies 
needs to be regarded on a global scale.  

In addition a strong majority of respondents from business/professional associations and 
consultancy/law firms also believe that consolidation is essential. However, they would 
accept  a  transitory  and  temporary  cross-border  loss  relief  as  a  second  best  approach. 
Some  envisage  resistance  from  Member  States  in  offering  wide-ranging  cross-border 
relief as taxes should be paid where value is created. Others advocate the introduction of 

105 

Type of RespondentIn favour of a temporary cross-border loss reliefNeutralAgainst a temporary cross-border loss reliefDon't knowOther(1) Private individuals and       non registered associations41%14%32%5%9%(2) Registered Associations52%9%3%8%28%(3) Company55%25%9%5%5%of which: SMEs54%29%9%9%0% Large enterprises55%20%10%0%15%(4) NGOs, Public authorities, Others4%14%71%0%11%(5) Academics80%0%20%0%0%Grand Total45%15%20%5%15% 
 
  
 
an  EU  wide  regime,  not  linked  to  the  CCCTB,  to  be  implemented  into  domestic 
legislation.  

Conversely most NGOs and civil society organizations don't support the introduction of a 
temporary  mechanism  for  cross-border  loss  relief.  They  believe  that  postponing 
consolidation indefinitely while introducing a cross-border loss relief risks removing the 
main benefit of the proposal, while shrinking the taxable base of multinational companies 
and opening up the system to new types of aggressive tax planning. 

3.8 Additional information provided by respondents 

Is there anything else you would like to bring to the attention of the Commission? 
The  Commission  services  have  analysed  and  factored  into  the  summary  all  additional 
comments and papers that were submitted. 

106 

 
 
 
 
Annex III: Who is affected by the initiative and how 

The  objective  of  this  annex  is  to  set  out  the  practical  implications  of  the  initiative  for 
different types of companies and for national tax administrations.  

The  initiative  directly  affects  companies  falling  under  the  mandatory  scope,  companies 
that are given the possibility to opt for the CCCTB and tax administrations. In a first step, 
all  companies  active  in  the  EU  would  have  to  determine  whether  they  fall  under  the 
mandatory application, depending on the threshold on consolidated turnover.  

Large  companies  above  the  high  turnover  threshold  that  are  subject  to  mandatory 
application of the CCCTB would be faced with new rules to compute the tax base in the 
Member States in which they are active, including the rules on consolidation and formula 
apportionment. This would inter alia entail a one-off cost for switching to new rules on 
(i)  depreciation,  (ii)  the  valuation  of  assets  and  liabilities,  and  (iii)  the  deductibility  of 
expenses and exempt revenues, and for determining (iv) which parts of a group fall under 
the CCCTB definition of a group (and consolidating the EU-wide tax base for this group) 
and  (v)  the  information  required  on  the  formula  apportionment  factors  (assets, 
employment and wage bill, sales by destination) for each group member.  

It  is  estimated  that  a  vast  majority  of  companies  under  the  mandatory  scope  would  be 
active cross-border (at least 80% for a threshold of EUR 750 million; at least 75% for a 
threshold  of  EUR  500  million,  see  table  below).  For  companies  active  in  several  EU 
Member  States,  it  is  expected  that  the  recurrent  compliance  costs  will  decrease 
considerably. The same is true for domestic companies that would wish to expand their 
operations to another EU Member State.  

The fairly high turnover threshold envisaged under the preferred option would imply that 
only  a  small  share  of  groups  would  be  subject  to  mandatory  application.  By  means  of 
example, for a threshold of EUR 750 million the application would be compulsory for an 
estimated 1.6% of company groups the CCCTB. It is estimated that at most 19% of the 
groups subject to compulsory application are purely domestic groups.  

SMEs and other companies which are not obliged to apply the CCCTB are free to stay 
within their national systems and would as such not be affected by the initiative. Those 
among  these  companies  that  consider  the  possibility  to  opt  in  would  have  to  conduct  a 
cost-benefit assessment to decide whether they would benefit from applying the CCCTB. 
Such cost-benefit analysis would also factor-in the costs for switching to the new system.   

Tax administrations will also incur costs for implementing the new system, notably on 
IT  and  staff  training.  There  will  also  be  a  need  to  coordinate  in  the  EU  the  uniform 
implementation  and  practical  application  of 
tax 
administrations are expected to 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.  

rules.  Eventually, 

the  new 

Since  the  CCCTB  would  not  be  made  mandatory  for  all  firms,  the  burden  for  national 
administrations  may  overall  go  up  slightly  due  to  the  required  maintenance  of  two 
parallel systems.  

107 

 
 
Table 32:   Estimated shares of groups, turnover and domestic groups  

for different size thresholds 

Consolidated 
turnover  

Share of groups, compared 
to total number of groups 

Corresponding share 
of unconsolidated 
turnover 

Share of groups active only 
domestically compared to 
total number of groups in this 
bracket113 

<= EUR 50 million 

> EUR 50 million 

> EUR 500 million 

> EUR 750 million 

96.1% 

3.9% 

1.9% 

1.6% 

19.9% 

81.1% 

68.6% 

64.2% 

Source:  ORBIS and ORBIS Historical Ownership (December 2014) 

95.2% 

51.0% 

24.5% 

19.2% 

113   This ratio has been computed for groups that have their Global Ultimate Owner (GUO) in the EU. In 
other words, groups active in the EU but with GUO outside the EU are not reflected in this ratio. This 
ratio therefore gives an upper estimate of the share of purely domestic groups. 

108 

 
 
 
 
 
                                                 
Annex IV: Analytical Models used in preparing the Impact Assessment 

1. CORTAX: A MODEL TO SIMULATE CORPORATE TAX POLICIES  

1.1. Brief Description of the Model 

The  CORTAX  model  is  a  computable  general  equilibrium  model  designed  to  evaluate 
the effects of corporate tax reforms in 28 EU countries capturing the optimal behaviour 
of  all  agents  in  the  economy.  In  the  model,  each  country  is  assumed  to  have  the  same 
structure  in  terms  of  consumption,  savings,  production  and  public  finances  (though  the 
data  are  country-specific).  Countries  are  linked  to  each  other  via  international  trade  in 
goods markets, international goods markets and investment by multinationals. The model 
also includes Japan, USA and a tax haven. 

Firms  are  divided  into  three  categories:  multinationals  headquarters,  their  subsidiaries 
located  abroad  and  domestic  firms  that  only  produce  in  their  country  of  residence. 
Multinationals  and  domestic  firms  differ  to  the  extent  that  the  former  optimise  profits 
globally and are engaged in profit shifting activities across borders. Domestic firms pay 
their corporate taxes in their country of residence according to the revenues generated in 
this  country  only.  Both  domestic  and  multinational  firms  shift  profits  to  tax  haven  to 
reduce their tax burden. In  the benchmark, all  firms are equal and, whilst on aggregate 
taxable profits are positive, there are random shocks affecting their revenues that can be 
attributed to, for example, business cycle evolutions. These shocks may result in losses 
that can be carried forward in the model.  

In relation to government, there is a balanced budget where consumption and public debt 
are a fixed proportion of GDP. Tax revenues and/or transfer payments adjust to keep a 
constant public budget. The taxes included in CORTAX are taxes consumption and direct 
taxes  on  income  from  corporate  and  labour,  dividends,  capital  gains  and  interest. 
Government  consumption  and  government  debt  as  a  share  of  GDP  are  maintained 
constant after a reform. 

The  effects  of  reforms  can  be  expressed  as  changes  in  GDP,  household  consumption, 
business investment and fiscal revenue. The model is elaborated using data from different 
data sources including Eurostat, the OECD, the United Nations, the IMF and the Orbis 
firm database (see Section 4.2 below for more details). In the present exercise, the model 
has been constructed with a database for the year 2012. The structural description of the 
model and the calibration process borrow heavily from Bettendorf et al. (2009b).  

1.2. Model Validation and Peer Review 

The CORTAX model has acquired a strong reputation among corporate tax experts. As 
noted, the model was originally produced by CPB Netherlands, and has since been used 
by experts affiliated to the Oxford University Centre for Business Taxation, the Erasmus 
University  Rotterdam,  the  Tinbergen  Institute  and  CESifo.  The  model  was  previously 
used in an Impact Assessment (European Commission, 2011a), which drew extensively 
from a report produced for DG TAXUD (Bettendorf et al., 2009b). Among other policies, 
the  report  analysed  both  a  common  corporate  tax  base  and  a  common  consolidated 
corporate tax base for the EU.  

The CORTAX model has been the basis for a number of publications in peer-reviewed 
journals.  Of  particular  note  is  Bettendorf  et  al.  (2010a)  in  Economic  Policy  which 

109 

 
 
simulates  a  common  consolidated  corporate  tax  base  (CCCTB)  across  the  EU,  with 
further innovations of the ideas subsequently published in  Fiscal Studies (Bettendorf et 
al., 2010b). The issue of using CORTAX to analyse the debt bias in corporate taxation 
was  addressed  in  de  Mooij  and  Devereux  (2011b)  published  in  International  Tax  and 
Public Finance. An earlier publication in The World Economy used CORTAX to analyse 
the impact of corporate taxation on the labour market (Bettendorf et al., 2009a). That the 
model has stood up to the rigorous standards required to be accepted by journals of this 
quality reflects the level of the theoretical and empirical work underlying the model, and 
that it is appropriate for analysing key policy questions in the area of corporate taxation. 

1.3. Discussions with External Experts 

As  noted  in  the  previous  section,  the  CORTAX  model  has  been  accepted  within  the 
corporate  taxation  community  for  some  years.  The  model  has  been  used  by  leading 
research institutes and universities, and work based around the model has been accepted 
for publication in high-level, peer-reviewed academic journals in the area of fiscal policy. 

Since this earlier body of work, the model data has been updated by the Tax Modelling 
Group  in  JRC-Seville.  This  extensive  recalibration  process  has  been  carried  out  in 
conjunction with external experts, as appropriate. The team has collaborated closely with 
Leon Bettendorf (CPB Netherlands), one of the original authors of the model, and lead 
author  for  many  of  the  reports  and  journal  articles.  Regarding  the  calibration,  the  team 
has worked with Simon Loretz (Institute for Advanced Studies, Vienna), who produced 
much of the data for the previous calibration of the model during his time at the Oxford 
University Centre for Business Taxation, and was a co-author for the report that formed 
the basis of the 2011 Impact Assessment (European Commission, 2011a).  

1.4. Underlying Assumptions and Data Input 

1.4.1 Baseline and key assumptions 

In CORTAX, we account for two types of households: old and young. Their lifetime is 
40-year  periods  each  and  their  behaviour  remains  the  same  during  the  whole  period. 
Households maximise their intra-temporal utility function subject to a budget constraint, 
where  net  savings  from  young  workers  (wages,  current  transfers  and  negative 
consumption) are equal to negative value of net savings from old households. The effects 
on  welfare  are  calculated  using  the  compensating  variation.  This  is  calculated  as  the 
difference in transfers received by young households required to compensate the change 
in utility. 

Firms  maximise  their  value  subject  to  the  production  function  and  the  accumulation 
constraints on physical capital and fiscal depreciation. Total production is calculated as 
the  sum  of  production  in  all  firms  (domestic  and  multinationals)  net  of  intermediate 
inputs  in  foreign  subsidiaries.  Usually,  the  production  function  is  a  Cobb  Douglas 
combination of the fixed factor and the value added, which is a CES aggregate of labour 
and capital. The model allows the parent company to charge a transfer price for intra-firm 
deliveries that deviates from the equivalent price that would be charged if it had been an 
inter-firm  transaction  (the  ‘arms-length’  price),  which  reflects  profit  shifting  in 
multinationals.  In  the  case  of  domestic  firms,  these  practices  are  captured  with  the 
existence of a tax haven. Profit shifting to tax havens depends on the difference between 
the statutory rate in their respective countries and the tax rate in the tax haven.  

110 

 
 
The simulations are coded to ensure that the government budget remains balanced. This 
is achieved in two ways. First, it is assumed that governments will adjust the corporate 
tax  rates  to  maintain  constant  corporate  tax  revenue,  prior  to  any  behavioural  response 
(i.e.  ex-ante  to  the  simulation).  Any  revenue  changes  due  to  the  behavioural  responses 
(i.e. ex-post to the simulation) are accounted for by the government adjusting transfers to 
retirees. 

1.4.2 Key sources of macroeconomic and socio-economic data 

The current calibration largely uses the same data sources as the original calibration of 
CORTAX  as  outlined  in  Bettendorf  and  van  der  Horst  (2006),  though  in  a  few  cases 
alternatives were used if these were considered more reliable, or the original source was 
no longer available. The year 2012 was chosen as reference year for the calibration, as it 
represented  a  good  compromise  between  timeliness  and  completeness.  The  countries 
covered are the 28 EU member states, the United States and Japan.  

Population  and  employment  statistics  come  from  the  United  Nations  and  national 
accounts  data  on  income  and  expenditure  are  collected  from  OECD  and  Eurostat. 
Purchasing  power  parity  (PPPs)  exchange  rates  are  from  the  IMF  and  Eurostat  and 
general  government  consolidated  gross  debt  as  a  percentage  of  GDP  is  from  DG 
ECF N’s Ameco Database. Additionally, CORTAX needs bilateral FD  positions as part 
of  the  calibration.  For  these,  the  modelling  starts  with  the  Eurostat  bilateral  positions. 
Data  on  Foreign  Direct  Investment  (FDI)  flows  by  country  of  origin  and  country  of 
receipt are from Eurostat (financial account, direct investment, reporting economy). As a 
number of countries have incomplete information on the country of origin of the inward 
FDI  stock,  the  modellers  impute  these  values  following  the  practice  in  Bettendorf  and 
van  der  Horst  (2006),  and  a  correction  is  made  when  the  FDI  data  represent  special 
purpose entity activity.  

Finally,  CIT  receipts  as  a  percentage  of  GDP  are  from  European  and  the  OECD  while 
information  on  balance  sheets  and  ownership  structure  are  extracted  from  the  Orbis 
database, provided by Bureau Van Dijk. Although Orbis is a firm-level database, for the 
purposes  of  the  calibration  it  is  only  used  to  produce  national-level  estimates  of  debt 
shares  and  of  corporate  investment  shares  (by  type  of  asset)  so  as  to  calculate  relevant 
corporate tax parameters such as the cost of capital (financed via equity or debt). 

1.4.3 Construction of the baseline and core policy simulations 

The  data  described  above  is  entered  into  the  model,  which  provides  a  consistent  and 
connected  framework  for  firms,  household  and  governments.  The  data  and  the  current 
policies of each country are  used to replicate the corporate taxation regime, and indeed 
the  production  structure  and  household  behaviour.  The  corporate  taxation  regime  is 
necessarily  stylised  (for  example,  not  every  deduction  can  be  included),  though  the 
simulations confirm that at a macro-level the CIT regimes are replicated well. 

The  core  simulations  have  been  chosen  to  reflect  potential  policy  options  for 
harmonisation  of  corporate  tax  bases  in  the  EU.  Following  the  proposal  (European 
Commission, 2015a), two main reforms are considered: the common corporate tax base 
(CCTB),  and  the  common  consolidated  corporate  tax  base  (CCCTB).  Both  reforms  are 
assumed  to  be  mandatory  for  multinationals  only  (though  the  work  also  simulates  the 
case where domestic firms participate). The CCCTB proposal offers a holistic solution to 

111 

 
 
profit  shifting.  It  combines  a  common  tax  base  together  with  consolidation  of  each 
multinational  group's  profit,  removing  the  incentive  to  engage  in  profit  shifting.  Under 
this  reform,  the  consolidated  tax  base  must  then  be  apportioned  to  each  country 
according to an agreed formula. Both the CCTB and CCCTB require a definition of the 
common tax base, which according to  our  interpretation  of the legislation is  defined as 
follows: a 12.5 percent straight line depreciation rate for machinery (8 years), a 4 percent 
rate for industrial buildings (25 years), a 6.67 percent rate for intangibles (15 years) and 
an  average  value  for  inventories  (alternative tax  bases  are also  simulated  as  part  of  the 
sensitivity analysis).  

Debt and equity financing can be seen as imperfect substitute forms of capital use, and 
their  different  tax  treatment  introduces  an  obvious  distortion  in  the  way  firms  and 
investors choose to invest funds – the so-called debt bias. The main proposals to correct 
for this tax-induced debt bias are, first, the comprehensive business income tax (CBIT), 
which fully disallows the deductibility of interest, and so taxes all returns to investment 
including  the  "normal"  return.  Second,  an  allowance  for  corporate  capital  (ACC) 
provides an imputed return to investment, regardless of its form (debt or equity). Third, 
an  allowance  for  corporate  equity  (ACE/AGI,  undistinguished  in  the  model)  keeps  the 
deductibility  of  interest  (like  in  the  traditional  corporate  tax  design),  but  adds  a 
deductible imputed  return  for  equity  investments.  All  these  are introduced  by  changing 
how the corporate tax base is calculated. The change in tax liability has implications for 
the cost of capital, and hence for investment decisions. 

1.4.4 Sensitivity of model results and likely robustness to changes in the underlying 
assumptions and/or data input 

Extensive  sensitivity  analysis  has  been  conducted  around  the  core  policy  simulations. 
These simulations provide additional insights into the consequences of altering the model 
assumptions or policy choices, and offer a strong test of the robustness of the results. The 
eight types of sensitivity analysis are as follows: (i) implementing the common corporate 
(CCTB  and  CCCTB)  for  all  firms,  rather  than  just  multinationals,  (ii)  alternative 
definitions of the common tax base, (iii) stricter control on profit shifting, (iv) alternative 
choices  for  capital-labour  substitutability,  (v)  less  compliance  cost  saving  from 
consolidation,  (vi)  compensate  revenue  with  labour  taxes,  instead  of  changing  transfer 
payments, (vii) discrete location choice for firms, (viii) inclusion of a cross-border loss 
offset  provision  with  the  common  corporate  tax  base  (CCTB),  (ix)  alternative 
deductibility  shares  and  rates  for  the  ACE/AGI,  and  (x)  alternative  assumptions  on  the 
ex-ante CIT rate closure. 

The sensitivity analysis provides a more rounded picture of the model. Where different 
model  assumptions  are  simulated  (such  as  alternative  capital-labour  substitutability  or 
less compliance cost savings), some changes in the magnitude of the effects are observed, 
though  the  broad  conclusions  remain.  For  all  core  and  sensitivity  simulations  full 
country-level  results  are  provided,  as  are  additional  tables  as  necessary  to  explain  the 
results. 

2. EFFECTS OF FUNDAMENTAL TAX REFORMS ON EFFECTIVE TAXATION 

2.1. Brief Description of the Model 

112 

 
 
Corporate  tax  systems  in  Europe  usually  encourage  the  use  of  debt  rather  than  equity 
financing  as  interest  payments  are  deductible  for  tax  purposes  while  equity  returns  are 
not. This unequal treatment might cause economic problems, such as excessive leverage 
in the corporate sector and an associated increased vulnerability to economic crises. The 
report focuses on the current extent of the corporate debt bias in the tax systems of the 
EU-28  Member  States  and  informs  about  whether  different  reform  options  could  in 
principle manage to address the debt bias and promote investment, possibly in a revenue 
neutral way.  

The  report  analyses  current  interest  deduction  limitation  rules,  intended  to  prevent  an 
excessive use of debt financing, and assess the impact of interest deductions limitations 
rules on effective tax burdens in the EU-28 Member States. The main focus of the study 
is  the  analysis  of  the  consequences  of  four  fundamental  tax  reforms  which  try  to 
overcome the debt bias differently, i.e. the Comprehensive Business Income Tax (CBIT), 
Allowance for Corporate Equity (ACE), Allowance for Corporate Capital (ACC), Cost of 
capital Allowance (CoCA). 

The  study  relies  on  the  general  framework  of  the  Devereux/Griffith  model  which 
provides different indicators of the effective tax burden levied on corporate investments. 
The Devereux/Griffith model allows considering marginal and profitable investments and 
different financing sources taking into account the taxes borne at the corporate level and 
the level  of the  shareholders.  For  marginal investments,  the  model  provides the cost  of 
capital  and  the  effective  marginal  tax  rate  (EMTR)  as  a  measure  of  effective  taxation. 
The  cost  of  capital  represents  the  minimum  pre-tax  rate  of  return  required  for  a  real 
investment to achieve the same after-tax return as a safe investment in the capital market 
and  should,  from  a  theoretical  point  of  view,  impact  on  the  scale  of  investments.  For 
profitable investments, the effective average tax rate (EATR) is a more proper measure 
of  the  effective  tax  burden  levied  on  the  investment  return  and  is  used  to  identify  the 
effect of taxation on discrete location choices.  

The fundamental reform options will  impact the tax bases at  corporate and  shareholder 
level differently and, therefore, will affect Member States tax revenues. Member States 
might be reluctant to suffer revenue losses or increase their statutory tax rates as this is 
associated  with  lower  investment  rates  and  growth.  The  report  provides  options  for  a 
revenue  neutral  introduction  of  the  fundamental  tax  reforms  as  well  as  possible 
consequences for the level of investment in the EU-28 Member States. 

2.2.  Model validation and peer review 

The  Devereux  and  Griffith  methodology  has  acquired  a  strong  reputation  among 
corporate tax experts. This approach is rooted in the model originally proposed by King 
and Fullerton (1984) and as such has the advantage of allowing the computation of both 
effective marginal tax rate and effective average tax rate under a unique framework.  

The EMTR method has been extensively used to compute the effective tax rates levied 
on  capital  income  from  different  domestic  investment  over  time  and  across  countries. 
However,  as  Devereux  and  Griffith  (1998)  demonstrate,  this  indicator  may  not  be  a 
suitable one when the purpose of the analysis is the international location of capital. In 
these circumstances, firms usually face a choice between two or more mutually exclusive 
investment  projects  that  are  expected  to  earn  some  economic  rent.  The  location  choice 
will be made on the basis of the highest post-tax economic rent, that is to say, where the 

113 

 
 
proportion of total income taken in taxes is the lowest. The most suitable measure for  a 
highly profitable multinational to adopt when deciding where to invest is the EATR, that 
is,  the  present  value  of  the  expected  total  tax  burden  in  relation  to  total  profits.  The 
EATR is usually higher than the EMTR. The reason is that many tax deductions apply to 
the  cost  of  investment  projects  (which  for  the  marginal  investment  project  are  equal  to 
the rate of return) but are irrelevant for economic rent. Once the strategic location choice 
has been made, the cost of capital and the EMTR play an important role in determining 
the optimal scale of the investment.  

A  range  of  studies  have  examined  the  theoretical  foundation  of  the  Devereux/  Griffith 
model and its scope of application (Lammers 2002; Schreiber et al. 2002; Devereux and 
Griffith,  2003).  These  forward-looking  indicators  permit  to  compare  international  tax 
regimes and to isolate the structure of incentives and disincentives given by the different 
tax  systems  to  undertake  a  specific  investment.  Hence,  these  indicators  are  a  useful 
policy  tools  in  the  analysis  of  the  effects  of  corporate  tax  differentials  on  resource 
allocation.  

The  Devereux/Griffith  approach  was  previously  used  in  an  Impact  Assessment  by  the 
European Commission (EEC 2001), following the advice of a panel of academic experts, 
to comply with the mandate of the ECOFIN Council in December 1998 concerning the 
scope  of  the  analysis  of  effective  tax  rates.114  Since  then  the  methodology  has  been 
applied for the calculation of effective tax rates in the EU and other countries on a yearly 
basis.  

2.3.  Underlying assumptions and data input 

2.3.1. 

Baseline and key assumptions 

To gain insights on the effects of different reform options on effective tax rates, the cost 
of capital and the EATR of the reform scenario are compared to the pre-reform scenario 
(status quo). The results for the effective tax rates for the year 2015 are used as the status 
quo scenario. 

The  basic  approach  proposed  by  Devereux  and  Griffith  is  to  consider  hypothetical 
incremental investment located in a specific country  undertaken by a company resident 
possibly  in  the  same  country,  but  also  possibly  in  another  country.  The  hypothetical 
investment  takes  place  in  one  period  and  generates  a  return  in  the  next  period.  The 
impact  of  taxation  is  analysed  by  considering  a  number  of  features  of  the  tax  system, 
including the statutory tax rate, capital allowances, depreciation rules and the treatment 
of different financing sources, the treatment of foreign source income, wealth taxes paid 
by the company, as well as possibly the treatment at the corporate and personal level of 
dividends paid by the company, and wealth and capital gains taxes.115 The tax database 
comprises all relevant tax parameters for the EU-28 Member States. 

Both  the  cost  of  capital  and  the  EATR  are  computed  for  five  different  types  of  assets 
(intangibles, buildings, machinery, financial assets, inventory), three different sources of 

114   For  a  deeper  analysis  of  the  pros  and  cons  of  the  forward-looking  indicators  for  policy-makers,  see 

Giannini and Maggiulli (2002). 

115   It is assumed that the tax system remains unchanged over the life of the investment. 

114 

 
 
                                                 
financing (retained earnings, new equity, debt) and by three types of shareholders (zero-
rate,  top-rate  non-qualified  and  top-rate  qualified)  and  can  thereby  be  used  to  compare 
the relative distortions introduced by the tax system in relation to certain investments or 
financing sources both at the corporate level and shareholder level.  

In presenting averages over different forms of assets, these assets are weighted equally, 
while  unequal weights are used  for financing: retained earnings  55%,  new equity  10%, 
and debt 35% (OECD, 1991). As for true economic depreciation rates it is assumed in all 
countries:  intangibles  (15.35%),  industrial  buildings  (3.1%);  machinery  (17.5%), 
financial assets (0%), and inventories (0%).  

The  alternative  form  of  investment  is  assumed  to  be  lending  and  the  alternative 
investments earns a real interest rate of 5%. The inflation rate is assumed to be 2% in all 
countries. The computations of EATRs are based on a pre-tax rate of profitability of 20% 
which corresponds to the standard economic assumption.  

2.3.2. 

Construction of the core policy impact assessment 

The report provides calculation of effective tax rates using the Devereux/Griffith model 
for Member States with interest deduction limitation rules by assuming binding limits to 
the deductibility of interest costs.  

Thin capitalization or earnings stripping  rules limit the deductibility of interest costs in 
case  of  debt  financing  and  can  be  found  in  more  and  more  Member  States.  The 
Devereux/Griffith model does not allow a detailed implementation of interest deduction 
limitation  rules. In  previous  reports on  effective  taxation  in the  European  Union,  it has 
always been assumed that interest costs were deductible irrespective of the existence of 
limitation  rules.  For  the  purpose  of  this  study,  it  is  assumed  that  the  limitations  with 
regard  to  interest  costs  are  applicable.  In  Member  States  with  interest  deduction 
limitation  rules,  this  will  result  in  a  complete  non-deductibility  of  interest  costs  at  the 
corporate  level.  The  chosen  approach  (applicable  vs.  non-applicable)  will  neglect 
substantial  differences  in the existing interest  limitation  deduction  rules of the Member 
States  at  the  corporate  level,  like  a  possible  carry-forward  of  non-deductible  interest. 
Therefore, the report will interpret the results cautiously.  

Moreover,  for  the  analysis  of  fundamental  tax  reforms,  the  tax  codes  of  Belgium  and 
Italy  are  modified.  Both  Member  States  have  already  implemented  one  type  of 
fundamental  tax  reform:  the  Allowance  for  Corporate  Equity.  For  the  analysis  of  the 
other  hypothetical  fundamental  tax  reforms,  it  is  consistent  to  assume  that  no  other 
fundamental tax reform is currently in place. Otherwise, the effects of two fundamental 
tax  reforms  (e.g.  CBIT  and  ACE)  would  overlap  and  might  even  contradict  and 
compensate each other. 

2.3.3. 
underlying assumptions and/or data input 

Sensitivity  of  model  results  and  likely  robustness  to  changes  in  the 

The effect of the revenue neutral fundamental tax reforms on the EATR might differ if 
the pre-tax rate of profitability is changed. Therefore, a sensitivity analysis with pre-tax 
rates of profitability below and above the base case assumption of 20% is conducted. The 
sensitivity  of  the  effective  tax  measures  to  the  assumed  inflation  and  interest  rates  are 
discussed in ZEW (2016b). 

115 

 
 
3. THE IMPACT OF TAX PLANNING ON FORWARD-LOOKING EFFECTIVE TAX RATES 

3.1.  Brief description of the model 

Multinationals  companies  have  the  opportunity  to  apply  profit  shifting  strategies  to 
reduce  their  tax  payments  in  high-tax  countries  and  minimize  the  overall  effective  tax 
burden on their global profits. The tax planning strategies of multinational corporations 
have been a key issue on the international policy agenda for some years now.  The aim of 
the report is to explore the implications of typical tax planning strategies on effective tax 
rates for cross-border investments between the 28 EU member states and the US.  

The  report  derives  forward-looking  average  and  marginal  effective  tax  rates  that 
incorporate the possibility of sophisticated tax planning strategies by multinationals and 
the existence of preferential tax regimes such as IP boxes. Profit shifting channels from 
high-tax to low-tax countries cover intra-group debt shifting, royalty payments, as well as 
transfer  pricing  of  goods  and  services.  A  number  of  cases  are  considered,  including 
“triangular”  structures  involving  the  use  of  tax  haven  finance  affiliates  and  the  use  of 
hybrid entities and hybrid instruments. The report also provides insights on the potential 
impact of anti-avoidance measures against so-called aggressive tax planning. 

As in the annually updated report on effective tax rates conducted by ZEW, the study at 
hand applies the Devereux/Griffith model to calculate cost of capital (CoC) and effective 
average  tax  rates  (EATR).  This  allows  one  to  compare  the  results  for  different  tax 
planning  structures  to  the  results  for  direct  cross-border  investments  known  from  the 
annual updates.  

3.2.  Model validation and peer review 

The  Devereux  and  Griffith  methodology  has  acquired  a  strong  reputation  among 
corporate tax experts. This approach is rooted in the model originally proposed by King 
and Fullerton (1984) and as such has the advantage of allowing the computation of both 
effective marginal tax rate and effective average tax rate under a unique framework.  

The  Devereux/  Griffith  approach  was  previously  used  in  an  Impact  Assessment  by  the 
European Commission (EEC 2001), following the advice of a panel of academic experts, 
to comply with the mandate of the ECOFIN Council in December 1998 concerning the 
scope  of  the  analysis  of  effective  tax  rates.116  Since  then  the  methodology  has  been 
applied for the calculation of effective tax rates in the EU and other countries on a yearly 
basis. 

A  range  of  studies  have  examined  the  theoretical  foundation  of  the  Devereux/  Griffith 
model and its scope of application (Lammers 2002; Schreiber et al. 2002; Devereux et al. 
2003).  OECD  (2007)  provides  specific  considerations  on  cross-border  METR/AETR 
analysis  with  triangular  financing  structure.  The  issue  of  incorporating  IP  Box  regimes 
into a model of effective tax rates was addressed in Evers et al. (2015). 

116   For  a  deeper  analysis  of  the  pros  and  cons  of  the  forward-looking  indicators  for  policy  makers,  see 

Giannini and Maggiulli (2002). 

116 

 
 
 
 
                                                 
3.3.  Underlying assumptions and data input 

3.3.1. 

Baseline and key assumptions 

The  basic  framework  underlying  the  Devereux/Griffith  model  for  cross-border  settings 
with  a  parent  company  and  its  subsidiary  located  in  different  countries  have  been 
established  in  several  earlier  studies  undertaken  by  ZEW  on  behalf  of  the  European 
Commission.  The  focus  here  is  on  multinational  corporations  hence  the  case  of 
incorporated  SMEs  and  partnerships  is  ignored.  Given  to  the  high  mobility  on  the 
international capital market, personal taxes are of little importance for decision making in 
multinational  enterprises.  Therefore,  the  analysis  is  limited  to  the  corporate  level  (i.e. 
excluding shareholders' taxation).   

The  basic  approach  proposed  by  Devereux  and  Griffith  is  to  consider  hypothetical 
incremental investment located in a specific country undertaken by a company resident 
possibly  in  the  same  country,  but  also  possibly  in  another  country.  The  hypothetical 
investment  takes  place  in  one  period  and  generates  a  return  in  the  next  period.  The 
impact  of  taxation  is  analysed  by  considering  a  number  of  features  of  the  tax  system, 
including the statutory tax rate, capital allowances, depreciation rules and the treatment 
of different financing sources, the treatment of foreign source income, wealth taxes paid 
by the company, as well as possibly the treatment at the corporate and personal level of 
dividends paid by the company, and wealth and capital gains taxes.117  

Both  the  cost  of  capital  and  the  EATR  are  computed  for  five  different  types  of  assets 
(intangibles, buildings, machinery, financial assets, inventory) and three different sources 
of financing (retained earnings, new equity, debt). In presenting averages over different 
forms  of  assets,  these  assets  are  weighted  equally,  while  unequal  weights  are  used  for 
financing: retained earnings 55%, new equity 10%, and debt 35% (OECD, 1991). As for 
true  economic  depreciation  rates  it  is  assumed  in  all  countries:  intangibles  (15.35%), 
industrial  buildings  (3.1%);  machinery  (17.5%),  financial  assets  (0%),  and  inventories 
(0%).  

The  alternative  form  of  investment  is  assumed  to  be  lending  and  the  alternative 
investments earns a real interest rate of 5%. The inflation rate is assumed to be 2% in all 
countries. The computations of EATRs are based on a pre-tax rate of profitability of 20% 
which corresponds to the standard economic assumption.  

3.3.2. 

Construction of the core policy impact assessment 

The report extends the basic formulas underlying the Devereux/Griffith model for cross-
border settings - with a parent company and its subsidiary located in different countries - 
for  implementing  representative  profit  shifting  strategies  via  interest  and  royalty 
payments. A number of cases are considered:  

(1) Tax  planning  via  an  intermediate  financing  company  resident  in  a  tax-exempt 
country which grants a loan to the subsidiary and receives the marginal return of 
the investment as interest.  

117   It is assumed that the tax system remains unchanged over the life of the investment. 

117 

 
 
                                                 
(2) The second tax planning strategy replicates  tax planning  strategy 1 but assumes 
that the intermediate company is resident in a fictitious EU average country. 
(3) Tax planning strategy 3 replicates tax planning strategy 1 but assume that the loan 
granted  to  the  subsidiary  has  a  hybrid  element  resulting  in  its  classification  as 
equity capital in the country of residence of the intermediate company. 

(4) Tax  planning  strategy  4  replicates  tax  planning  strategy  2  considering  a  hybrid 

loan.  

(5) Under  tax  planning  strategy  5  profits  are  not  shifted  via  debt  financing  but  via 
royalty payments. It is assumed that  the subsidiary invests  in a  bundle of assets 
(buildings,  machinery,  inventory,  and  a  financial  asset)  whereas  the  intangible 
asset used in the production process is owned by a separate intellectual property 
(IP) holding company resident in a tax-exempt country. The intangible is licensed 
to  the  subsidiary  which  generates  profits  from  the  use  of  the  intangible  and 
forwards  these  profits  to  the  IP  holding  company  in  the  form  of  a  royalty 
payment. 

(6) Tax planning strategy 6 replicates tax planning strategy 5 but assumes that the IP 

holding company is resident in the fictitious EU average country. 

(7) Tax planning strategy 7 replicates tax planning strategy 5 but assumes that the IP 
holding company is resident in one of the EU member states offering an IP-box 
regime.  

As for the tax-exempt country, two different assumptions are made: (i) "Offshore treaty" 
is assumed to be a non-EU tax exempt country that does not levy any kind of profit and 
non-profit  taxes  but  has  concluded  tax  treaties  with  all  EU  member  states  and  the  US 
reducing all withholding taxes to zero; (ii) "Offshore no treaty" is assumed to be a non-
EU tax exempt country that that does not levy any kind of profit and non-profit taxes and 
has not concluded tax treaties with all EU member states and the US, therefore domestic 
withholding tax rates apply (up to 75% in France). The fictitious EU average country is 
defined as an average EU member states. Relevant tax parameters for this country are the 
arithmetic means of the respective tax parameters across all 28 EU member states.  

The  calculations  are  based  on  tax  law  data  for  the  year  2015  (ZEW  2015).  The  tax 
database comprises all relevant tax parameters for the EU-28 Member States. Additional 
tax  parameters  used  in  the  study  at  hand  include  (i)  withholding  taxes  on  dividends, 
interest  and  royalties  between  EU  and  US  companies;  (ii)  IP-box  regimes  in  the  EU 
member states.  

3.3.3. 
underlying assumptions and/or data input 

Sensitivity  of  model  results  and  likely  robustness  to  changes  in  the 

The effect of the revenue neutral fundamental tax reforms on the EATR might differ if 
the pre-tax rate of profitability is changed. Therefore, a sensitivity analysis with pre-tax 
rates  of  profitability  below  and  above  the  base  case  assumption  of  20%  is  conducted 
(ZEW 2016c). The sensitivity of the effective tax measures to the assumed inflation and 
interest rates are discussed in ZEW (2016b).  

118 

 
 
 
Annex V: Formula apportionment  

This annex presents the formula apportionment outlined in the 2011 impact assessment 
and  proposal  for  a  CCCTB.  The  approach  of  2011  is  furthermore  complemented  by 
findings in the literature since then. 

1. INTRODUCTION  

The 2011 proposal for a CCCTB118 is a system of common rules for computing the tax 
base  of  companies  which  are  tax  resident  in  the  EU  and  of  branches  of  third-country 
companies  located  in  the  EU.  Specifically,  the  common  fiscal  framework  provides  for 
rules to compute each company's (or branch's) individual tax results, the consolidation of 
those  results,  when  there  are  other  group  members,  and  the  apportionment  of  the 
consolidated tax base to each eligible Member State. 

In the CCCTB, the consolidated tax base is apportioned to the different jurisdictions in 
which the group entities operate according to the formula set out in Articles 86-102 of the 
2011  proposal  for  the  CCCTB.  The  formula  establishes  a  method  to  determine  the 
respective  economic  presence  and  activity  of  subsidiaries  in  a  particular  geographic 
location  ('allocation'),  i.e.  the  taxable  profit  of  a  multinational  entity  within  a  specific 
jurisdiction.  Generally,  for  the  purpose  of  establishing  a  taxable  presence,  formulary 
systems apportion income with reference to inputs and outputs, which respectively reflect 
supply and demand components of income production. The formula attributes profits to 
those Member States where the economic activity takes place as measured by the factors 
in the formula. 

Formula  apportionment  is  a  necessary  consequence  of  consolidation.  In  this  annex,  the 
elements of the formula apportionment mechanism in the 2011 proposal of the CCCTB 
will be outlined. Section 2 of this annex describes the proposed CCCTB's apportionment 
formula  and  its  allocation  factors  as  defined  in  the  Directive.  Section  3  presents  an 
overview  of  the  steps  which  led  to  the  emergence  of  formulary  apportionment  as  the 
Commission's  preferred  allocation  mechanism.  Section  4  reviews  the  treatment  of 
formula apportionment in the 2011 Impact Assessment which accompanied the CCCTB 
proposal, specifically with respect to the analysis and conclusions of three main studies: 
(i)  PricewaterhouseCoopers  (PwC)  Study:  (ii)  Amadeus  and  Orbis  database;  and  (iii) 
CORTAX  study.  Section  5,  presents  a  brief  review  of  literature  on  formula 
apportionment,  leading  up  to  and  following  the  2011  CCCTB  proposal.  Section  5 
concludes.   

2. APPORTIONMENT FORMULA IN THE 2011 CCCTB 

Following on from the work of the CCCTB Working Group, the formula proposed by the 
Directive  is  based  on  company-specific  data  and  comprises  three  equally  weighted 
factors (labour, assets and sales): 

i. 

Labour  is  computed  based  on  both  payroll  and  the  number  of  employees  (each 
item counts for half); 

ii.  Assets consist of all fixed tangible assets, meaning that intangibles and financial 

assets are excluded from the formula apportionment; 

118   SEC(2011) 315-316. 

 
 
                                                 
iii. 

Sales  are  taken  into  account  to  increase  the  taxing  entitlement  of  the  Member 
State of destination. 

The choice of the three factors stems from the need to reflect both the state of production 
(supply side, measured by assets and/or labour payroll) and the state of demand (sales to 
destination) to describe economic activity properly. Specifically, the apportionment share 
of  the  consolidated  tax  base  of  a  'group  member  A'  is  determined  by  the  following 
formula: 

Share A =  

1
3

           +  

1
3

1
2

+

             +

1
2

                      +

1
3

∗    ′                                                   

Sales are weighted by one-third, payroll by one-sixth, the number of employees by one-
sixth,  and  assets  by  one-third.  The  sum  of  the  weights  equals  one  so  that  100%  of  the 
CCCTB  is  apportioned  across  the  Member  States.  Member  States  can  then  apply  the 
national corporation tax rates to their respective shares of taxable bases.  

Apportionment factors 

The  provisions  of  the  proposed  Directive  that  regulate  the  sharing  mechanisms  are 
contained in Article 86, which illustrates the general formula, up to Article 103, in which 
the provisions deal with the three apportionment factors in detail.119  

In accordance with Articles 90 and 91, the labour factor is subdivided into two equally 
weighed  components:  payroll  and  number  of  employees  as  measured  at  the  year  end. 
Specifics regarding the definition of employee, the inclusion of seconded employees and 
temporary  workers,  as  well  as  a  broad  definition  of  payroll  and  how  it  is  allocated  are 
also provided. The inclusion of the two components in the labour factor reflects the need 
to take into account cross-country disparities (due to the variance in labour productivity) 
across the EU. 

Pursuant to Articles 92, 93, and 94, assets include all fixed tangible assets (owned, fixed, 
or rented), which are allocated to the economic owner or to the legal owner (in the event 
that  the  first  is  not  identifiable),  and  are  valuated  according  to  defined  valuation 
principles. Inventory, intangible and financial assets are excluded from the formula due 
to their mobile nature and the risks of circumventing the system. The computation of the 
asset  factor  includes  all  the  costs  incurred  for  research,  development,  marketing  and 
advertising in the six year period preceding the entry into the CCCTB system. The use of 
the labour and asset factors gives appropriate weight to the interests of the Member State 
of origin.  

Finally, sales are taken into account in order to ensure fair participation of the Member 
State of destination. The sales factor, defined in Article 95, consists of the proceeds from 
the  total  sale  of  goods  and  supplies  of  services  of  a  group  member.  The  definition 
excludes 'exempt revenues' and 'dividends' from the sales factor, as they respectively do 
not contribute to the tax base and have no readily identifiable geographic location. Intra-
group sales of goods and supplies are excludable in accordance to the same principle, i.e., 
that a factor which does not contribute to the tax base should not be used to apportion the 
base.  The  sales  factor  is  attributed  to  group  members  on  a  'destination'  basis,  as  it  is 

119   See CCCTB Arts 86-103. 

120 

 
 
       
 
        
                 
        
            
                                                 
designed to reflect the state of demand (sales to destination), and specific rules address 
situations in which the general rules might create 'nowhere' income. 

In addition to the general rules, the CCCTB contains three provisions: the general anti-
abuse  rule,  the  safeguard  clause  (applicable  to  apportionment)  and  an  explicit  grant  of 
rulemaking  authority  to  the  Commission  to  calculate  apportionment  factors.  The 
provisions provide an alternative method where the outcome of the apportionment does 
not  fairly  represent  the  extent  of  business  activity.  The  provisions  determine  the 
composition  of  factors  and  the  attribution  of  the  tax  base  for  specific  industries. 
Specifically,  the  CCCTB  proposal  includes  special  apportionment  rules  for  four 
industries: financial institutions; insurance  undertakings; oil and gas;  and transportation 
(shipping,  inland  waterway  transport,  and  air  transport).  Insofar  as  certain  aspects  of 
formula apportionment could create planning opportunities, these provisions provide the 
basis for limiting their scope.  

3. HOW THE SHARING MECHANISM WAS CHOSEN  

The Commission's proposed sharing mechanism, or apportionment formula, has been the 
outcome of a comprehensive analysis. The Commission refined its ideas largely though 
the  CCCTB  Working  Groups:  formula  apportionment  was  among  the  main  building 
blocks of the CCCTB which was reviewed and analysed by the CCCTB WG and its sub-
group  6  on  the  sharing  mechanism.120  The  main  findings  are  contained  in  various 
working papers,121 analysing the main issues linked to valuation, location, availability of 
data,  advantages  and  disadvantages  of  the  three  factors  of  formula  apportionment.  In 
addition  to  the  consultations  of  the  working  group,  the  Commission  conferred  with 
academic  experts  on  allocation  mechanisms122  and  invited  experts  to  evaluate  the 
formula, commissioned a study,123 published its own study,124 and conducted an Impact 
Assessment125 on its chosen three-factor formula which accompanied the proposal for a 
Council Directive on a CCCTB. 

As an outcome to this extensive analysis, stakeholder and experts in the field have agreed 
that the three-factor formula best fulfils the principles that have guided the design of the 
sharing mechanism, i.e. the formula should: (i) be as simple as possible for taxpayers and 

120   A subgroup was set up in December 2004 to analyse more closely the issue of sharing the tax base. 
The subgroup was chaired by the Commission and met twice in Brussels in February and June 2007. 
The  results  of  those  meetings  are  summarized  in  two  Commission  Working  Documents  that  were 
presented at the meetings of the main Working Group held after the meetings of the subgroup and can 
be found at the following web-page: 
http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/article_3831_en.htm 
and   
http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/article_4381_en.htm  
121   See Working Paper 47 (The mechanism for sharing CCCTB), Working Paper 52, (An overview of the 
main issues that emerge during the discussion on the mechanism for sharing CCCTB), paragraph III of 
Working  Paper  55,  (Summary  record  of  the  meeting  of  the  CCCTN  Working  group)  and  Working 
Paper 60 (CCCTB: possible elements of the sharing mechanism). 

122   Thus,  for  example  a  meeting  with  academic  experts  was  held  in   arch  2004  on  “the  allocation 
mechanism”  and  written  contributions  on  the  factors  for  apportioning  income  were  requested  and 
received at other stages of the consultation process. 

123   Weiner (2005). 
124   Agúndez-García (2006). 
125   European  Commission  (2011a),  "Impact  assessment,  accompanying  document  to  the  proposal  for  a 
council  directive  on  a  common  consolidated  corporate  tax  base  (CCCTB)  COM(2011)  121  final", 
Commission Staff Working Document, SEC(2011) 316 final. 

121 

 
 
                                                 
 
tax administrations to apply and easy for tax administrations to audit; (ii) be difficult for 
taxpayers to manipulate, that is, it should not rely on factors that can be easily relocated 
to  exploit  tax  rate  differentials  across  the  EU;  (iii)  distribute  the  tax  base  among  the 
various entities concerned in a way that can be considered fair and equitable; and (iv) not 
lead  to  undesirable  effects  in  terms  of  tax  competition.  It  was  generally  accepted  that 
there should be a uniform formula across the EU, with the same factors and weights for 
all Member States. 

The  Commission's  CCCTB  apportionment  mechanism  constitutes  a  comparable  system 
to  what has been  used in Canada, US and  Switzerland to distribute income across  sub-
national boundaries in the last century. The above mentioned countries employ formulas 
which  attribute  the  tax  base  to  taxing  jurisdictions  based  on  geographically  determined 
factors. As such, the evaluation of the US and Canadian experience provided insight on 
the  use  of  formulary  methods  and  guidance  for  the  Commission,  limited  in  part  by  the 
different  political  structures  at  hand,  as  it  designed  an  apportionment  system  for  the 
EU.126 The Commission's choice of a uniform formula127 and equally weighted factors,128 
the exclusion of intangible assets,129 and the provision of sector-specific formulae130 all 
stem in  part  from the lessons learned in  the application of formulary  methods in  North 
America.  

A  subtle  difference  between  the  US  apportionment  formula  and  the  2011  CCCTB 
apportionment formula is that the first is designed to apportion the tax base directly to a 
particular  state,  whereas  the  later  attributes  income  to  its  'group  members'131(which 
results in an indirect attribution of income to the various Member States). Allocating the 
tax base to a group member assures that there is an EU Member State in which the base 
will be taxable.132  

4. TREATMENT OF FORMULA APPORTIONMENT IN THE 2011 IMPACT ASSESSMENT  

Along  with  the  Directive,  in  2011  the  Commission  released  an  Impact  Assessment.133 
The  impact  of  the  apportionment  formula  on  the  following  aspects  is  presented:  (i) 
impact  on  distribution  of  the  corporate  tax  bases  among  the  EU  Member  States  (ii) 
impact  on  the  costs  for  tax  administrations  and  on  the  compliance  costs  for  taxpayers; 
(iii) the main economy-wide impacts. 

126   Weiner (2006). 
127   In contrast to the US where each state is free to choose its own formula, Member states in the EU are 
not allowed to apply domestic variations to the formula by attributing different weights to the factors. 
Non  uniform  formulae  have  led  to  distorting  tax  competition  on  the  factors  and  double  taxation  (or 
double non taxation) in the US experience.  

128   The  US  and  Canada  have  employed  formulas  based  on  equally  weighted  origin-based  supply  and 

destination-based demand factors.  

129   In the US intangibles are excluded from the asset factor. 
130   For certain economic sectors, the predefined formula does not adequately reflect the importance of the 
various factors generating income. It is not uncommon for states to have special apportionment rules 
for certain industries; however, the industries differ from those proposed in the CCCTB. 

131   See CCCTB Arts 4(7), 55.  
132   This addresses the theoretical possibility that the formula allocates tax base to a Member State where 

the group has no taxable presence.  

133   European  Commission  (2011),  "Impact  assessment,  accompanying  document  to  the  proposal  for  a 
council  directive  on  a  common  consolidated  corporate  tax  base  (CCCTB)  COM(2011)  121  final", 
Commission Staff Working Document, SEC(2011) 316 final.  

122 

 
 
                                                 
The 2011 Impact Assessment includes the results from (i) PwC Study: (ii) Amadeus and 
Orbis database; and (iii) CORTAX study, which examine formula apportionment within 
the  context  of  a  wider  analysis  aiming  to  quantify  the  impacts  of  alternative  policy 
options.  

  PwC case study: a survey was launched in 2008 among multinational companies 
located in the EU. One task of the study was to quantify the impact of alternative 
tax  scenarios  on  the  size  of  multinationals'  taxable  profit.  Multinational 
companies were surveyed with a questionnaire on the quantitative and qualitative 
views on compliance under the current national systems for corporate income tax 
and  in  the  two  hypothetical  scenarios  of  CCTB  and  CCCTB.134  Of  the  21 
multinational companies surveyed, 13 participated in the PwC taxable profits case 
the  CCCTB 
study.  The  findings  show 
apportionment  factors  has  little  effect  on  the  relative  apportionment  of  the  tax 
base  between  countries.  This  result  is  attributed  to  a  similar  distribution  of 
apportionment factors across countries.135  

the  weighing  of 

that  changing 

  ORBIS  and  Amadeus  databases:  the  databases  provide  balance  sheets  and 
profits  and  loss  accounts  for  representative  samples  of  about  6700  EU 
multinational groups in the financial and about 2000 groups in the non-financial 
sectors,  respectively,  over  the  2002-2005  period.  The  data  have  been  used  to 
calculate the effect of loss consolidation and, with particular reference to ORBIS, 
to  calibrate  the  CORTAX  model.136  Using  data  from  ORBIS  and  Amadeus 
databases,  shifts  in  the  national  tax  bases  after  apportionment  are  evaluated  by 
comparing  the  formulary  apportionment-based  distribution  of  tax  bases  across 
countries  to  the  current  profits-based  distribution.  Table  3  of  the  2011  Impact 
Assessment reports the results from the formula where the labour factor (split into 
payroll  and  number  of  employees),  assets  and  sales  by  destination  are  equally 
weighted. The consolidated EU tax base distributed using the formula would be 
larger  in  12  Member  States,  smaller  in  9  Member  States,  and  unchanged  in  2 
Member  States.137  The  effects  of  alternative  formulae  are  also  evaluated.138 
According  to  the  study,  the  simulation  of  alternative  sharing  mechanisms,  i.e. 
changing apportionment factors, has very small effects on aggregate EU welfare. 
  CORTAX model: an applied computable general equilibrium (CGE) model that 
describes  the  27  countries  of  the  EU  at  the  time,  plus  the  US  and  Japan.  It  is 
designed  to  simulate  the  economic  implications  of  unilateral  and  multilateral 
corporate tax policies as well as the harmonisation of these policies. The model is 
calibrated  using  data  from  the  ORBIS  database.  Importantly,  the  simulations  in 
CORTAX  are  run  under  the  working  assumption  that  any  changes  in  the 
corporate tax base would be compensated by changes in the national tax rates to 
guarantee ex-ante budget neutrality.139 Results include a quantification of welfare 
effect of the reforms after firms' behavioural responses to the new tax system. In 
CORTAX,  the  shift  from  separate  accounting  to  consolidation  with  formula 
apportionment  has  a  number  of  effects:  i)  an  impact  on  the  distribution  of 

134   See annex 7 of the 2011 Impact Assessment for more details on this exercise. 
135   See Table A.14 in annex 7 of the 2011 Impact Assessment. 
136   See annex 3 of the 2011 Impact Assessment for a detailed description of the different ways in which 

the data have been used. 

137   The result is undetermined for 4 Member States.  
138   See Table A.11 in annex 3 of the 2011 Impact Assessment. 
139   See annex 10 of the 2011 Impact Assessment for more detail. 

123 

 
 
                                                 
corporate  tax  bases  across  countries;  ii)  a  removal  of  profit  shifting  within  the 
EU; iii) a shift from current distortions in international capital allocation towards 
a new type of distortion associated with the formula factors; iv) a reduction in tax 
compliance costs; v) the possibility to offset a loss in one Member State against 
profits  in  other  Member  States.  In  turn,  the  welfare  effects  under  the  CCCTB 
have  been  simulated  using  alternative  sharing  mechanisms.140  The  switch  to 
payroll instead of employment mainly benefits high wage countries (in the former 
EU15)  at  the  expense  of  low-wage  countries  (like  Romania  and  Bulgaria).  The 
larger weight on capital benefits capital-intensive countries like Belgium, Ireland 
and the Netherlands. On balance, CORTAX suggests that the isolated aggregate 
effect on welfare in the EU of any apportionment mechanism is very small. The 
discussion above assumes away other dynamic effects that would affect the size 
and  distribution  of  the  cake  of  corporate  taxable  profits  in  the  EU  in  the  long-
term.  CORTAX  simulations  show  that  with  respect  to  economy-wide  impacts, 
consolidation  and  apportionment  have  a  positive  economic  effect.  Overall  the 
CCCTB implies a welfare gain  of about 0.02%  to 0.06% of GDP in  aggregated 
terms for the EU as a whole.  

5. FORMULA APPORTIONMENT IN THE ECONOMIC LITERATURE  

Formula  apportionment  has  been  the  subject  of  analysis  in  a  large  body  of  literature, 
especially following the European Commission's interest in apportionment mechanisms. 
The choice and relative weighing of the factors to be used in the apportionment formula 
have  been  evaluated  from  an  historical  perspective,  as  well  as  from  a  conceptual  and 
political basis. This section summarizes the most relevant contributions with a focus on 
findings  in  the  literature  after  the  2011  proposal.  The  results  of  recent  literature 
contribute  to  an  understanding  of  the  macroeconomic  effects  induced  by  the  potential 
introduction of the CCCTB system. 

In one of the first analyses of sharing mechanisms, Musgrave (1973) identifies the role of 
consolidation  and  formula  apportionment  in  solving  transfer  pricing  problems  within 
multinational  corporations.  He  points  out  that  a  formula  for  apportionment  should  be 
easy  to  administer  and  reflect  the  elements  measuring  the  processes  involved  in  the 
earning  of  net  income.  McLure  (1980)  shows  theoretically  that  a  corporate  income  tax 
which  is  applied through  an  apportionment  formula  is  essentially  equivalent  to  a direct 
tax levied on the factors of the formula. It follows that tax rate differences may distort the 
allocation of formula apportionment factors.141  

As to the factors in the formula, literature discusses micro- and macroeconomic factors as 
possible  choices.  Schäfer  and  Spengel  (2003)  show  that  microeconomic  (industry 
specific  factors) are  preferable to  macroeconomic factors (which are market specific  or 
linked to policy objectives) according to the principle of equity. Microeconomic factors 
better  reflect  each  group  member’s  share  in  the  income  generating  activities  of  taxable 
entities. Factors have also been individually analysed. For example, one essential matter 
of  concern  regarding  the  payroll  factor  for  apportioning  consolidated  income,  is  the 
variance  in  wage  levels  across  the  EU,  and  hence  the  difference  in  labour  costs  across 
Member States. 142 The number of employees is proposed as an alternative to the payroll 

140   See Figure A.3 in annex 10 of the 2011 Impact Assessment.  
141   See Gordon and Wilson (1986). 
142   See also McLure (2002). 

124 

 
 
                                                 
factor, with the premise that it may in turn lead to potential distortions due to differences 
in the levels of labour productivity across the Member States.143  

Real and artificial factor shifting 

The  literature  documents  a  range  of  potential  tax  avoidance  strategies  under  formula 
apportionment.  A  study  by  Büttner  et  al.  (2011)  finds  that  profit-shifting  activities  of 
multinational entities remain important within formulary apportionment if companies are 
allowed  to  decide  whether  their  affiliates  are  included  in  the  consolidated  group. 
Multinational entities can strategically exploit the definition of a consolidated group, by 
choosing  to  not  consolidate  if  intra-group  tax-rate  differences  are  large,  thereby 
preserving profit shifting opportunities. Their theoretical model of multinational entities 
shows  that  there  are  trade-offs  to  consolidation  decision:  "exclusion  of  affiliates  costs 
(loss-offset  opportunities  foregone),  but  there  is  also  a  benefit  of  non-consolidation 
(maintaining  profit-shifting  opportunities)”.  Greater  dispersion  of  statutory  tax  rates 
increases  the  benefit  of  leaving  affiliates  in  low-tax  jurisdictions  unconsolidated.  This 
result  is  important  for  the  EU  and  explains  the  choice  of  an  'all-or-nothing'  option  for 
including companies in the consolidated group and the mandatory requirement to remain 
within the CCCTB for five years. Furthermore, a study based on an experimental design 
finds  indications  that  multinational  entities  opting  for  taxation  on  a  consolidated  basis 
may look for opportunities to shift profits to alternative investment locations outside the 
European Union.144    

Generally though, formula apportionment systems are less subject to the manipulation of 
the  tax  base  by  companies  through  transfer  pricing  as  discussed  by  Hellerstein  (2005). 
Allocation  rules,  in  comparison  to  separate  accounting  rules,  reduce  the  ability  of 
companies  to  use  profit-shifting  techniques,  especially  with  regards  to  intra-group 
financing.145  Hence,  formula  apportionment  is  regarded  as  less  vulnerable  to  tax 
avoidance  practice146  when  compared  to  separate  accounting  tax  regimes,  where  the 
allocation of income among jurisdiction is strongly affected by profit shifting strategies 
of  multinational  entities.147 Studies  also find that under formula apportionment systems 
there is less incentive for corporate tax rate competition.148 

On  the  other  hand,  there  is  evidence  of  tax-motivated  factor  shifting  that  entails  real 
shifts  in  economic  activity.  For  instance,  empirically  analysed  impacts  of  a  payroll 
formula apportionment regime on German business activity show a significant negative 
correlation  of  the  tax  differential  to  payroll  expense.149  Firms  react  to  incentives  in  a 
formula apportionment tax regime by changing the allocation of real production factors, 
i.e.,  shifting  payroll  to  low-tax  jurisdictions.150  Distortions  with  respect  to  location 
investment  decisions  have  important  policy  implications.  The  impact  varies  among 
sectors: multinational entities in the manufacturing industry may have more potential to 
incentives  under  formula 
adjust 
the 
apportionment, 

the  company  structure 
in  comparison 

to  altered 
to  companies 

industries,  such  as 

investment 

in  other 

143   For a discussion see Agundez-Garcia (2006). 
144   See Keser et al. (2014). 
145   See also Mintz and Smart (2004).  
146   Clausing et al. (2011) discuss this point in more detail. 
147   See Dharmapala (2014). 
148   See Kind et al. (2005). 
149   See among others Thomsen et al. (2014). 
150   See also Eichfelder et al. (2015). 

125 

 
 
                                                 
pharmaceutical  industries.  Finally,  taking  optimal  pre-tax  investment  decisions  as  a 
given,  a  study  of  after-tax  investment  decisions  of  centrally  managed  multinational 
entities  under  a  formula  apportionment  system,  finds  that  incentives  to  invest  in  a  tax-
optimal manner tend to be lower under formula apportionment.151 The incentive to locate 
apportionment  factors  in  low-tax  jurisdiction  leads  to  economic  distortions  which  are 
undesirable  from  an  economic  standpoint,  highlighting  the  importance  of  the  choice  of 
factors; however it does not raise abundant issues related to artificial tax shifting152. 

6. CONCLUSION 

In sum, the formula apportionment rules proposed in 2011, which draw in part from the 
experiences  with  the  formulary  method  in  the  US  and  Canada,  were  chosen  for  the 
following  reasons:  (i)  the  micro-factors  composing  the  formula  reflect  the  supply  and 
demand sides of profit generating activities, (ii) the labour factor is split in two parts  – 
payroll and employees –taking into account disparities in labour productivity across the 
EU,  (iii)  little  sensitivity  of  the  formula  to  different  weights,  i.e.,  changing  the  weights 
has little effect on the relative apportionment of the tax base, (iv) intangible and financial 
assets are excluded to prevent manipulation, (v) a uniform formula with identical factors 
and  weights  in  all  Member  States  taking  part  in  the  CCCTB  avoids  distorting  tax 
competition  and  double  taxation  (or  double  non  taxation),  and  finally  (vi)  the  'all-or-
nothing' approach limits tax-motivated manipulations of group structures.  

Recent literature, including the contributions following the 2011 Directive, show that the 
determinants for the choice of factors as concluded in the 2011 CCCTB impact 
assessment remain relevant. There are certain risks for tax planning through 'factor 
shifting' under formula apportionment, but that these are very limited and would require a 
re-allocation of real factors, which is in general not mainly driven by tax considerations, 
but where other economic considerations play a more important role. In conclusion, the 
chosen sharing mechanism and the proposed formula reflect an approach which ensures 
that profits are taxed where economic activity as measured by the apportionment factors 
takes place. 

151   See Ortmann and Erich (2015).  
152   See Hellerstein (2012). 

126 

 
 
 
                                                 
Annex VI: The Anti-Tax Avoidance Package  

1. RECENT DEVELOPMENTS 

At the global level, the challenges related to the taxation of multinational companies have 
increased  the  political  pressure  to  strengthen  the  international  rules  of  co-operation  in 
corporate tax  matters. 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 BEPS 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.  This  allows  for  a  coordinated  implementation  of  the 
new  international  standards  agreed  in  the  package.  The  Treaties  require  that  the 
fundamental  rights  –  including  the  freedom  of  establishment  –  be  respected.  Reforms 
must  therefore  be  tailored  for  the  EU  content  and  fix  inconsistencies  on  an  EU-wide 
basis.  

The BEPS action plan was swiftly followed, in January 2016, by the Anti-Tax Avoidance 
Package. This package is made up of four proposals to ensure that tax is paid where the 
value is generated and that tax information is effectively accessed. 

The  Anti-Tax  Avoidance  Directive153  puts  forward  tax  rules  aimed  at  preventing  that 
income  goes  untaxed  (or  taxed  at  very  low  level).  It  ensures  coordination  of  the  28 
national  corporate  rules  in  order  to  effectively  limit  aggressive  tax  planning.  The 
Commission proposal covered the following rules: interest limitation rule, exit taxation,  
general  anti-abuse  rule,  controlled  foreign  company  rules,  rules  on  hybrid  mismatches 
and switch-over clause. The latter was not retained in the text agreed by the Council. The 
content of the agreed text is discussed in more detail below. 

The  Amendment  to  the  existing  Directive  on  administrative  cooperation  to  implement 
Country-by-Country  Reporting  foresees  the  automatic  exchange  of  information  on 
country-by-country reports of multinational companies with consolidated revenues of at 
least EUR 750 million will have to provide tax-related information on an annual basis for 
each  tax  jurisdiction  in  which  they  do  business.  Member  States  will  have  to  share  the 
information  with  the other Member States concerned.154 The new rules,  adopted by the 
ECOFIN  Council  in  May  2016,  aim  at  enhancing  transparency,  thereby  providing 
Member States with the information that they need to detect and prevent tax avoidance 
schemes.  

The Recommendation on Tax Treaty issues advises Member States how to reinforce their 
tax treaties against abuse by aggressive tax planners in a way that is compliant with EU 
law. It covers the introduction of general anti-abuse rules in tax treaties and the revision 
of the definition of permanent establishment. 

153   COM/2016/026 final 
154   This  information  will  be  provided  to  the  tax  authorities  of  the  Member  States  where  the  parent 
company is established.  If  the  parent  company is  not an EU  tax  resident,  the  reporting  will  be  done 
through its EU subsidiaries. 

127 

 
 
                                                 
The  Communication  on  External  Strategy  for  Effective  Taxation  sets  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. In 
particular, it focusses on: 

  Transparency measures: In March 2015, the Commission launched a package of 
measures  to  boost  tax  transparency.  It  included  a  proposal  for  an  automatic 
exchange  of  information  on  tax  rulings,  which  was  adopted  by  the  Council  in 
December  2015.  All  advance  cross-border  tax  rulings  and  advance  pricing 
arrangements  will  be  subject  to  an  automatic  exchange  of  information  as  from 
January  2017.  Further  to  the  introduction  of  non-public  Country-by-Country 
reporting, the Commission adopted in April 2016 a proposal to introduce public 
reporting requirements for multinational entities.  

  Dispute resolution mechanism: The June action plan called for further improving 
the dispute resolution mechanism. The Commission is currently exploring various 
options for a coordinated EU approach to improve the current situation, following 
a public consultation.  

  Joint  Transfer  Pricing  Forum:  The  EU  Joint  Transfer  Pricing  Forum  assists  and 
advises the Commission on transfer pricing tax issues. It proposes non-legislative 
solutions to practical problems posed by transfer pricing practices in the EU. The 
work of the forum centres around two areas: the Arbitration Convention, which is 
a  specific  dispute  resolution  mechanism  for  transfer  pricing  cases;  and  the 
practical  application  of  transfer  pricing  rules  in  the  EU.  The  June  action  plan 
called  on improving  the  transfer  pricing  framework  in  the EU  in  order  to  better 
align the transfer pricing outcomes with value creation. 

2. THE ADOPTED ANTI-TAX AVOIDANCE DIRECTIVE  

The  Anti-Tax  Avoidance  Directive  puts  forward  tax  rules  aimed  at  preventing  that 
income goes untaxed (or taxed at very low level). It ensures optimal coordination of the 
28  national  corporate  rules  in  order  to  effectively  limit  aggressive  tax  planning.  The 
proposal covers the following rules: 

1.  Interest Limitation Rule 

Multinational  enterprises  have  increasingly  engaged  in  "shifting  profits,  often  through 
inflated  interest  payments,  out  of  high  tax  jurisdictions  into  countries  with  lower  tax 
regimes. The interest limitation rule is necessary to discourage such practices by limiting 
the deductibility of taxpayers’ net financial costs" (source: proposal for a Directive CO  
2016/026  final).  The  proposed  Directive  foresees  that  net  interest  expenses  cannot  be 
deducted  above  a  fixed  ratio  (30%)  expressed  in  terms  of  a  taxpayer’s  earnings  before 
interest tax depreciation and amortisation (EBITDA). This is complemented by a group 
ratio rule, whereby the indebtedness of the overall group is considered for the purpose of 
entitling  taxpayers  to  deduct  higher  amounts  of  net  financial  costs.  Finally,  a  safe-
harbour provision foresees that companies that have net interest expenses below EUR 3 
million are not caught by the rules as these companies are less likely to engage in debt 
shifting. 

128 

 
 
2.  Exit taxation 

Exit taxes aim at ensuring that states are in a position to tax the economic value of any 
capital gain created in their territory even though this gain has not yet been realised at the 
time  of  the  exit.  The  proposed  rule  on  exit  taxation  would  allow  taxpayers  either  to 
immediately pay the amount of exit tax assessed or defer payment of the amount of tax. 

3.  General anti-abuse rule (GAAR) 

The  GAAR  complements  specific  anti-abuse  rules.  It  ensures  that  tax  avoidance 
strategies  that  were  not  envisaged  by  the  legislator  can  be  addressed,  by  granting  the 
authorities  the  power  to  deny  taxpayers  the  benefit  of  aggressive  tax  planning 
arrangements.  The  GAAR  will  apply  domestically,  intra-EU  and  internationally  to 
taxpayer’s arrangements that are non-genuine. 

4.  Controlled foreign company rules (CFC) 

CFC rules allow the reattribution of this income of a (low-taxed) controlled subsidiary to 
its parent company for tax purposes in certain situations. CFC rules therefore can ensure 
that  profits  parked  in  low  or  no  tax  countries  are  effectively  taxed.  The  proposed  rules 
cover both intra-EU and extra-EU situations.  

5.  Rules on hybrid mismatches 

Hybrid  mismatches  arise  from  differences  in  the  legal  characterisation  of  payments 
(financial instruments) or entities in different jurisdictions. The directive includes rules to 
address  hybrid  mismatches  in  intra-EU  situations,  which  should  close  the  doors  to 
exploiting such mismatches both for entities and transactions. 

129 

 
 
 
 
Annex VII: Compliance Costs 

The reduction of tax compliance costs remains an important argument in the debate about 
harmonising the corporate tax base in the EU. The 2011 Impact Assessment analysed the 
consequences  of  a  CCCTB  on  compliance  costs  based  on  survey  results,  notably  for 
cross-border activities. This annex describes briefly the main finding on tax compliance 
costs.  The  first  section  explains  the  relevance  of  compliance  costs  and  summarizes  the 
main results from the literature. The second section reports the results of the 2011 Impact 
Assessment  and  discusses  them  in  the  light  of  the  recent  literature.  The  last  section 
reviews the very limited information on the impacts on the costs of tax administrations. 

1. THE ROLE OF COMPLIANCE COSTS IN TAXATION 

Taxation has a significant impact on business decisions. Taxes on businesses are indeed a 
key  policy  instrument  of  economic  policy.  One  reason  is  that  taxes  can  be  changed 
relatively  quickly  in  comparison  to  other  important  determinants  of  investment  levels 
such  as  the  public  infrastructure  or  the  skill  level  of  the  work  force.  Accordingly,  tax 
policy  is  an  attractive  tool  for  policy  makers  to  react  quickly  to  different  economic 
developments without too large time lags.  

Taxation  impacts  businesses  (and  households)  via  three  channels:  (1)  The  tax  payment 
which  corresponds  to  the  amount  to  be  paid  after  the  tax  has  been  declared.  (2)  The 
welfare  loss  (deadweight  loss)  which  arises  from  the  economic  distortions  in  (relative) 
prices due to taxation (tax wedge) and (3) the compliance costs incurred by businesses as 
well  tax  administrations  for  being  tax  compliant  (or  not),  auditing  and  book  keeping. 
While  the  first  two  channels  feature  prominently  in  the  public  economics  literature, 
compliance  costs  are  less  discussed.  One  reason  for  this  is  the  difficulty  in  measuring 
compliance costs properly.  

Most research focuses on measuring compliance costs using survey techniques. The first 
step in order to isolate compliance costs for measurement is to define them properly. Tax 
compliance costs are commonly  defined as the cost borne by businesses for complying 
with tax regulation, excluding the tax payment itself (Ramboll Management Consulting,  
2013). The literature defines them as costs “incurred by taxpayers, or third parties such as 
businesses,  in  meeting  the  requirements  laid  upon  them  in  complying  with  a  given 
structure and level of tax” ( andford, Godwin, and Hardwick 1   , p. 10).  

From  an  economic  perspective,  compliance  costs  can  be  regarded  as  an  efficiency  loss 
and a waste of economic resources; they reduce private profits, but do not lead to higher 
tax  revenue.  Reducing  compliance  costs  is  therefore  clearly  beneficial  and  has  been 
identified as a key objective in many national tax systems. In fact, most of the economic 
literature  focuses  largely  on  measuring  and  reducing  domestic  tax  compliance  costs. 
Evidence  on  cross-border  tax  compliance  costs  remains  very  scarce,  although  early 
contributions  such  as  the  1992  Ruding  report  provided  a  first  survey  of  cross-border 
compliance  costs  for  EU  companies.  965  companies  of  different  size  and  sectors  were 
part of the survey and estimated compliance costs were found to be at around 3% of their 

130 

 
 
total income.155 The 2011 Impact Assessment has built on this work and provided some 
more evidence on the size of the problem in the context of international investments.  

Regarding  the  academic  literature  on  the  topic,  Eichfelder  and  Vaillancourt  (2014) 
provided  an  extensive  survey  of  the  current  empirical  estimates  of  tax  compliance  for 
different  tax  payers  for  the  period  between  1984  and  2014.  For  business  taxes,  the 
surveyed  studies  show  that  (domestic)  compliance  costs  are  regressive.  For  large 
companies  they  can  be  below  0.01%  of  turnover,  while  for  SME  the  burden  can  be 
several  percentage  points  and  according  to  some  studies  even  exceed  the  actual  tax 
payment.  

The literature as surveyed by Eichfelder and Vaillancourt (2014), as well as by Evans et 
al. (2014) shows regressive compliance costs and a decline in relative terms with the size 
of  the  business,  whether  measured  by  reference  to  turnover,  income,  number  of 
employees or any other proxy. The evidence suggests that the share of tax planning costs 
in  total  compliance  costs  increases  with  company  size.  The  research  also  shows  that 
those  compliance  costs  do  not  appear  to  be  diminishing  over  time  (Lignier  and  Evans 
2012; Lignier, Evans and Tran-Nam 2014). 

In  conclusion,  compliance  costs  remain  a  major  investment  impediment  for  companies 
both  at  the  national  level  when  complying  with  national  rules,  and  at  the  international 
level when deciding on cross-border investments. In the latter case, compliance becomes 
even  more  costly  since  the  rules  of  two  countries  have  two  be  applied  in  addition  to 
international tax rules which have to be considered (double tax treaties).  

The  CCCTB  could  make  two  contributions.  Firstly,  it  can  reduce  compliance  costs 
domestically since the system is easier and shorter than most national corporate income 
tax  laws.  Secondly  and  discussed  in  more  detail  below,  it  offers  substantial 
improvements for companies which operate cross-border.  

2. COMPANIES’ TAX COMPLIANCE COSTS 

Changeover costs 

tax 

related  compliance  costs  presents  a  number  of  well-known 
Estimating 
methodological  difficulties.  These  are  exacerbated  when  it  comes  to  estimating  costs 
stemming from the adoption of a new system. That these costs can be substantial in some 
cases is discussed by Eichfelder and Vaillancourt (2014) in the case of introduction of an 
indirect tax in Australia. However, there is no evidence from the literature for setting up a 
new  CIT  system.  It  should  be  emphasized  that  if  the  adoption  of  the  new  system  were 
made  optional  for  firms,  the  decision  process  would  most  likely  be  based  on  a  cost-
benefit  analysis  that  will  itself  take  time  and  resources.  For  companies  for  which  the 
CCCTB was mandatory, these specific costs were zero since a cost-benefit analysis was 
obsolete. For companies which are in the mandatory scope of the CCCTB or which opt-
into the system, learning costs should be expected from the compliance to the new rules. 
Table  33  reports  the  areas  in  which  the  surveyed  multinationals  expect  costs  from  a 
changeover  to  arise  according  to  a  PwC  study  conducted  for  the  2011  Impact 

155   The summary of compliance cost issues in the annex 2 of the 2001 Communication on Tax obstacles 
in the internal market provides a summary of the results of the Ruding survey as well as a discussion 
of the literature available at the time. 

131 

 
 
                                                 
Assessment.  It  should  be  noted  that  such  costs  will  by  definition  be  one-off  costs,  and 
hence be outweighed by the savings in recurring outlays that companies face in dealing 
with tax administrations. 

Table 33: One-off costs expected to arise on a changeover from the current system 

Type of cost 

Training staff 

Calculations to decide on whether to opt into CCCTB/CCTB 

Calculations to set up asset pool for tax depreciation under CCCTB/CCTB 

Development of new processes and systems 

Consulting/advisory fees 

Software license fees 

Other HR costs/relocation of staff 

Outsourcing compliance cost obligations 

Source: PricewaterhouseCoopers Survey on multinational firms. 

Recurring compliance costs 

% of respondents 

100.0% 

92.9% 

85.7% 

85.7% 

85.7% 

64.3% 

28.6% 

28.6% 

Different  methodologies  have  been  used  to  quantify  recurring  compliance  costs  of  the 
CCCTB.  In  particular,  different  surveys  have  been  carried  out  among  firms  as  well  as 
among  tax  experts.  The  results  of  the  PwC  survey  of  17  multinationals  shows  that  the 
respondents predict, on average, an increase of 4% in time spent overall for corporate 
tax  compliance  activities  in  the  event  of  a  common  base  (see  table  34).  Although 
somewhat puzzling, small increases are expected in the time spent on record keeping, on 
the  preparation  of  tax  computation  and  on  dealing  with  tax  authorities.  One  reason  for 
this  surprising  result  could  be  that  respondents  implicitly  assumed  that  the  new 
legislation  might  lead  to  more  exchanges  and  clarifications  with  tax  administrations. 
Also, in the case of a common base there remains the need to provide a tax declaration in 
each  Member  State  where  the  firm  is  active.  In  any  case,  the  qualitative  results  show 
strong  belief  that  the  introduction  of  a  common  base  will  have  little  or  no  impact.  An 
overwhelming  majority  of  companies  see  the  common  base  as  equally  burdensome 
across all the categories covered.  

Regarding  the  shift  to  a  CCCTB  system,  participants  to  the  survey  predicted,  on 
average,  a  reduction  of  8%  in  the  time  spent  overall  on  corporate  income  tax 
compliance activities. The main areas where time savings are expected refer to transfer 
pricing  documentation  and  to  the  preparation  of  tax  computations.  On  the  qualitative 
side, the CCCTB option is deemed by the majority of the respondents less burdensome 
than  the  current  situation,  with  respect  to  the  following  areas:  keeping  up  to  date  with 
rules  and  regulations;  single  filing  of  the  tax  return  and  dealing  with  a  single  tax 
authority; applying for clearances and rulings. The tasks of keeping records and dealing 
with  formulary  apportionment  are  expected  to  be  more  burdensome.  Altogether,  the 
qualitative  picture  confirms,  on  average,  the  quantitative  estimation  of  an  overall 
decrease of time devoted to tax compliance activities in the event of a CCCTB.  

132 

 
 
Table 34:   Average changes in compliance time when moving from the current situation to 

CCTB and CCCTB 

CCTB 

CCCTB 

Record keeping 

Transfer Pricing Documentation 

Preparation of tax computations 

Tax returns & payments 

Dealing with the tax authorities 

Mutual agreement procedures 

Securing clearances and rulings 

Learning and education 

Total 

2% 

-1% 

1% 

0% 

1% 

-1% 

0% 

0% 

4% 

1% 

-4% 

-5% 

-1% 

2% 

-1% 

-1% 

0% 

-8% 

Source: PricewaterhouseCoopers Survey on multinational firms. 
Notes:   Changes are expressed as a percentage change of the total time spent compared to the base case. 

This data does not include the estimation of one-off variation due to the switching to another system. It relates 
to the permanent time spent associated with the new definition of the taxable base. 
The amount of compliance costs will depend on the wage level of employees in the different tax activities.  

Switching  the  focus  from  existing  companies  to  multinational  enterprises  that  set  up  a 
new  subsidiary  in  a  different  Member  States,  significantly  higher  compliance  time  and 
cost savings under the common base and most notably under the CCCTB regime can be 
expected.  Through  expert  assessment,  Deloitte  estimated  that  under  a  situation  with 
different  tax  codes  in  Member  States,  the  additional  recurrent  compliance  costs  for  a 
large representative parent investing in a medium sized subsidiary amounts to 0.23% of 
turnover, while  for a medium parent this ratio  more than doubles to  0.55%  of turnover 
(see table 3). These  figures  amount  to  roughly EUR 141,000 and 128,000 respectively, 
calculated from the estimated compliance time. 

133 

 
 
 
 
 
 
Table 35: Compliance time and cost for setting up a new subsidiary  

Large Parent 

Current regime 

CCTB  

CCCTB 

Time 

Cost 

Time 

% Diff. 

Cost 

% Diff. 

Time 

% Diff. 

Cost 

% Diff. 

Record keeping for corporate tax purposes 

5 261 

3 740.60 

3 063 

-41.79% 

2 992.46 

-20.00% 

3 592 

-31.73% 

5 708.94 

52.62% 

Transfer pricing documentation 

22 255 

36 165.74 

22 162 

-0.42% 

36 143.08 

-0.06% 

0 

-100.00% 

0.00 

-100.00% 

Preparation of corporate tax computations 

Prepayments for corporate tax 

Corporate tax returns and payments 

4 049 

907 

1 080 

2 750.04 

1 976 

-51.19% 

2 190.86 

-20.33% 

4 256 

5.11% 

4 761.47 

73.14% 

965.56 

1 131.27 

771 

987 

-14.99% 

793.10 

-17.86% 

2 450 

170.18% 

2 662.13 

175.71% 

-8.58% 

1 005.12 

-11.15% 

3 085 

185.73% 

3 505.17 

209.84% 

Dealing with the tax authorities for corporate tax 

19 009 

37 365.70 

16 616 

-12.59% 

35,038.00 

-6.23% 

10 509 

-44.71% 

30 200.90 

-19.17% 

Mutual agreement procedures on transfer pricing  

8 823 

17 618.47 

8 841 

0.20% 

17 677.73 

0.34% 

0 

-100.00% 

0.00 

-100.00% 

Clearances and rulings for corporate tax 

14 430 

34 912.77 

14 541 

0.77% 

34,928.95 

0.05% 

1 288 

-91.08% 

3 996.90 

-88.55% 

Learning and education for corporate tax 

10 000 

5 220.08 

8 264 

-17.37% 

5 388.20 

3.22% 

1 469 

-85.31% 

2 104.33 

-59.69% 

Any other cross-border corporate tax compliance formality 

1 548 

733.76 

1 548 

0.00% 

733.02 

-0.10% 

0 

-100.00% 

0.00 

-100.00% 

Total estimated time spent/cost 

87 362 

140 603.97 

78 768 

-9.84% 

136 890.52 

-2.64% 

26 649 

-69.50% 

52 939.85 

-62.35% 

Total estimated cost (% turnover) 

0.23% 

0.22% 

0.09% 

 
 
  
  
  
  
  
  
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 35 (cont'd): Compliance time and cost for setting up a new subsidiary  

Medium-sized Parent 

Current regime 

CCTB  

CCCTB  

Time 

Cost 

Time 

% Diff. 

Cost 

% Diff. 

Time 

% Diff. 

Cost 

% Diff. 

Record keeping for corporate tax purposes 

5 147 

3 653.23 

3 034 

-41.05% 

2 957.01 

-19.06% 

3 178 

-38.26% 

4 490.57 

22.92% 

Transfer pricing documentation 

19 962 

30 192.40 

19 337 

-3.13% 

30 625.38 

1.43% 

0 

-100.00% 

0.00 

-100.00% 

Preparation of corporate tax computations 

Prepayments for corporate tax 

Corporate tax returns and payments 

4 023 

896 

1 075 

2 253.53 

1 954 

-51.42% 

1 778.82 

-21.07% 

636.81 

871.48 

760 

987 

-15.20% 

-8.15% 

524.54 

-17.63% 

790.31 

-9.31% 

3 301 

1 880 

2 433 

-17.94% 

2 862.65 

27.03% 

109.73% 

1 497.66 

135.18% 

126.34% 

2 427.03 

178.50% 

Dealing with the tax authorities for corporate tax 

18 686 

32 968.18 

16 347 

-12.51% 

30 604.60 

-7.17% 

10 675 

-42.87% 

24 889.54 

-24.50% 

Mutual agreement procedures on transfer pricing  

8 609 

17 076.44 

8 434 

-2.03% 

17 115.31 

Clearances and rulings for corporate tax 

13 893 

34 175.02 

14 083 

1.37% 

34 188.34 

0.23% 

0.04% 

7.27% 

0 

-100.00% 

0.00 

-100.00% 

1 266 

1 450 

-90.89% 

3 958.48 

-88.42% 

-85.49% 

2 064.35 

-60.31% 

Learning and education for corporate tax 

Any other cross-border corporate tax compliance formality 

9 997 

1 459 

5 201.14 

8 422 

-15.75% 

5 579.09 

677.86 

1 395 

-4.42% 

674.05 

-0.56% 

0 

-100.00% 

0.00 

-100.00% 

Total estimated time spent/cost 

83 747 

127 706.09 

74 754 

-10.74% 

124 837.45 

-2.25% 

24 184 

-71.12% 

42 190.28 

-66.96% 

Total estimated cost (% turnover) 

0.55% 

0.54% 

0.18% 

Source: Deloitte Tax Experts survey. 
Note:   Time in minutes. Costs in Euros. Average of all investment flows 

135 

 
 
 
 
  
  
  
  
  
  
  
 
According  to  the  study,  the  introduction  of  the  CCTB  would  on  average  save 
approximately 10% in compliance time and about 2.5% in compliance costs.156 This 
difference can be explained by the fact that higher savings in time are related to internal 
compliance activities (e.g. record keeping, preparation of tax computations, prepayments 
and tax returns and payments) estimated as less expensive compared to external advisors. 
Such savings are expected to occur because the CC(C)TB tax provisions are simpler and 
more stable compared to the current frequently changing tax environment. However, the 
main  corporate  compliance  cost  drivers  are  directly  or  indirectly  related  to  transfer 
pricing  (transfer  pricing  documentation,  clearances  and  rulings  and  mutual  agreement 
procedures),  which  account  for  about  60%  of  all  compliance  costs,  remain  unchanged 
(see figure 1). Due to the elimination or reduction of transfer pricing related compliance 
tasks, and of those related to contacts with tax authorities, an average decrease in total 
compliance  time  of  70%  can  be  expected  if  the  additional  cross-border  investment  is 
made under the CCCTB regime.157 This results in a reduction of compliance costs of 
62%  for  a  group  with  a  large  parent  and  of  67%  for  a  group  with  a  medium-sized 
parent.158  The  corresponding  monetary  figures  are  about  53,000  and  42,000  Euros 
respectively.  The  high  savings  linked  to  the  abolition  of  transfer  pricing  and  the  sharp 
reduction  of  costs  in  dealing  with  tax  authorities  are  partly  counterbalanced  by  other 
activities: corporate tax computations, (pre)payments and tax returns will be most likely 
centralized  at  the  level  of  the  principal  tax  payer,  normally  the  parent  company.159 
However, all these tasks account only for about 10% of all compliance costs. All in all, as 
the figures in table 35 suggest, the size of the parent seems to have only a minor impact 
on total additional compliance time and costs savings under the CCTB and the CCCTB 
regime.160  

156  The  individual  investment  flow  results  by  country-pairs  range  between  4%  to  16%  savings  in 

additional compliance time and between -3% and 9% in compliance costs. 

157  The individual results by country-pairs range between 11% to 91% savings in additional compliance 

time. 

158  Deloitte's tax experts expect that the group led by a medium parent can realise more savings on time 

spent by external advisors that generally have higher costs per hour than the internal workforce. 

159  The compliance time and cost savings would be even higher if it would be assumed that compliance 
activities would be centralized at the level of the subsidiary ("CCCTB Sub lead"-scenario) operating in 
a low wage country, rather than at the level of the EU parent ("CCCTB Parent lead"-scenario).  

160  The results are fairly robust with respect to the sensitivity analysis performed. First, it is assumed that 
the  parent  company  and  the  subsidiary  belong  to  different  sectors.  This  would  depict  a  situation  in 
which  the  central  taxpayer  lacks  sector-specific  and  tax-related  knowledge  for  its  subsidiary.  The 
assumption  has  no  impact  on  compliance  time  under  the  current  regime  and  the  common  base, 
whereas  under  the  CCCTB  regime  an  increase  of  8%  of  compliance  time  can  be  expected. 
Accordingly, the savings of compliance time and cost compared to the current situation would slightly 
diminish  to  65%  and  50  %  respectively.  Second,  if  the  investing  company  would  be  only  a  single 
company without intra-group transactions significant lower compliance time can be expected for the 
current regime and the common base whereas for the CCCTB, without the transfer pricing related task, 
compliance time remains the same compared to the baseline investment. Again, in this case the savings 
due to the CCCTB compared to the current regime would be smaller than in the baseline scenario.  

 
 
                                                 
Figure 23: Compliance time spent on setting up a new subsidiary  

Source: Deloitte Tax Experts Survey 

3. TAX ADMINISTRATIONS 

Measuring the cost of tax administrations for levying a specific tax is a very difficult task 
and  has  become  even  more  difficult  in  recent  years.  The  reason  is  that  most  tax 
administrations  (and  the  corresponding  IT  systems)  are  organised  by  functions  and  not 
any  more  by  type  of  tax.  While  there  have  been  some  attempts  to  calculate  the  front 
office  costs  for  single  tax,  these  efforts  led  to  limited  information  since  back  office 
functions  and  costs  (namely  audit  and  debt  collection)  are  estimated  globally,  and then 
apportioned  according  to  the  share  of  each  tax  in  the  total  revenue,  or  to  the  audit  or 
enforcement  yield.  In  the  context  of  the  discussion  here,  this  means  that  there  is  no 
readily  available  data  on  the  direct  impact  on  tax  administrations.  In  the  following,  we 
elaborate on some qualitative arguments related to an introduction of a CCCTB and its 
impact on tax administrations. 

A  move  to  any  of  the  alternative  policy  options  from  the  current  situation  will  entail 
some new costs for Member States' tax administrations. These costs include: the need for 
coordination  with  other  administrations  (for  example,  in  the  application  of  double 
taxation relief methods) and one-off costs like the need of personal training, upgrading of 
IT  systems,  etc.  Some  of  the  alternative  systems  may  save  some  of  the  current  costs 
which tax administrations incur, such as the costs of resolving intra-EU transfer-pricing 
disputes  or  the  general  costs  of  monitoring  transfer-price  setting  by  companies  (these 
costs would be saved only by a CCCTB, but would remain in place under the common 
base,  since  it  would  still  operate  under  separate  accounting).  In  case  of  optional  policy 
alternatives, the costs associated with maintaining two different systems simultaneously 
should  be  estimated.  These  costs  would  be  saved  in  the  compulsory  versions  of  the 
CCCTB, where this alternative tax scheme  would replace all current national  corporate 
tax systems. 

137 

Compliance time spent on setting up a new subsidiary - Large parent, average of all countries investigated -Thousands of minutes 0102030405060708090100Current CCTBCCCTB TP MUTUAL AGRREEMENTPROCEDURESTP DOCUMENTATIONCLEARANCES AND RULINGS LEARNING AND EDUCATION DEALING WITH TAX AUTHORITIESRECORD KEEPING PREPARATION OF COMPUTATIONSPREPAYMENTSTAX RETURNS AND PAYMENTSANY OTHER 
 
 
 
The  parallel  application  of  national  CIT  systems  and  the  CCCTB  will  increase 
administrative  burden  in  tax  administrations  since  two,  albeit  similar  taxes  need  to  be 
managed. However, since multinational companies under the scope of the CCCTB will 
only  file  one  tax  declaration  in  the  EU,  the  total  amount  of  tax  declarations  should 
decline and ease the burden for tax administrations. Also, the fact that no more transfer 
pricing documentation is necessary in the EU will reduce the burden on administrations. 
The  compliance  costs  for  companies  will  decline  for  those  cases  where  cross-border 
investments  are  involved  –  partly  because  of  the  abolition  of  transfer  pricing 
documentation,  more  generally  because  there  is  only  one  set  of  rules  to  comply  with. 
Given  the  fact  that  the  CCCTB  is  more  streamlined  than  national  systems,  one  could 
expect that also domestic compliance costs are reduced. In any case, the choice to enter 
the CCCTB will reflect compliance cost considerations, both for domestic firms and for 
MNEs not subject to mandatory application. Generally, data on these questions are scarce 
or in some cases missing. 

138 

 
 
 
 
Annex VIII: The 2011 Proposal for a CCCTB 

1. TAX OBSTACLES IN THE SINGLE MARKET AND THE 2011 PROPOSAL FOR A CCCTB  

While  the  integration  of  markets  has  made  substantial  progress  in  recent  decades,  the 
same  cannot  be  said  for  the  taxation  of  income  from  pan-EU  activities,  which  remains 
largely a national task. This can lead to frictions in the single market due to tax obstacles 
and has been recognized as a concern early in the European integration process.  

The primary focus was on preventing problems which could hamper the development of 
the single market, such as double taxation and tax discrimination. 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. 
Proposals  for  reforming  corporate  taxation  have  been  discussed  in  the  European  Union 
since  at  least  1962  when  the  Neumark  Committee  called  to  gradually  harmonize  tax 
systems  in  Europe.  It  was  followed  by  the  1970  van  den  Tempel  report  and  the  1992 
Ruding  report.  In  1998  the  Code  of  Conduct  for  business  taxation  was  established  to 
limit harmful tax competition and identify specific tax regimes considered harmful. In the 
same year, rules on the application of the State Aid rules to measures relating to direct 
business  taxation  were  published  by  the  Commission.  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  ten  years  of  technical  preparation, 
culminating in the Commission's 2011 proposal for a CCCTB.161  

On 16 March 2011, the Commission tabled 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. 

In 2011, 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. 
A company which opted for the CCCTB would be committed to apply the system for an 
initial term of five years. This would automatically be extended for successive periods of 
three years unless a company applying the system as a single taxpayer or a group, as the 
case  may  be,  filed  a  notice  of  termination  in  the  three  months  before  a  period  of 
applicability expired. 

161   In addition, several academic reports called for more harmonisation in the field of corporate taxation. 
See e.g. Klemm and Radaelli (2001) or Spengel and Zöllkau (2012) for two prominent contributions to 
the debate. 

139 

 
 
                                                 
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, instead of the 27 at the time. Having a common set of 
rules  would  also  reduce  the  possibility  of  double  taxation  or  double  non  taxation  and 
mismatches in general. 

2. WORK ON THE CCCTB PROPOSAL DURING 2011-2016 

Intensive  technical  discussions  and  an  article-by-article  detailed  analysis  amongst 
national  experts  in  Council  followed  tabling  the  proposal  for  a  CCCTB.  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.  The  Presidency  was  invited  to  draft  a  compromise 
text on that basis. 

After technical work on the elements of the tax base (i.e. skeleton - main computations, 
timing and quantification, depreciation, treatment of losses) was accomplished under the 
subsequent  Presidencies  (i.e.  Lithuania  &  Greece),  the  Italian  Presidency  shifted  its 
attention  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 (first inserted in a compromise text by the Presidency of Denmark). 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.  As  outcome  of  this  debate,  the 
Presidency  concluded  that  future  work  on  the  CCCTB  proposal  should  primarily  be 
centred  on  the  international  aspects  of  the  system  (in  particular,  Controlled  Foreign 
Company legislation and anti-abuse measures, hybrid mismatches, the interest limitation 
rule and a definition of permanent establishment).  

In  the  wake  of  the  publication  of  the  OECD  BEPS  action  plan  conclusions  in  October 
2015,  the  Luxembourg  Presidency  resumed  the  in-depth  technical  examination  of  the 
international  and  anti-abuse  aspects  of  the  CCCTB,  with  the  aim  to  facilitate  a 
coordinated implementation of the OECD recommendations in the EU. In the meantime, 
the  Commission's  action  plan  on  Corporate  Taxation  of  June  2015  had  already 
announced a comprehensive re-launch of the CCCTB proposal in 2016. In line with its 
EU BEPS roadmap, the Presidency launched a discussion on the opportunity of splitting 

140 

 
 
the  CCCTB  proposal,  in  order  to  attempt  a  speedy  adoption  of  the  BEPS  related  and 
international aspects. In July 2015, most delegations supported such a split and suggested 
that the "anti-BEPS directive" address both third countries and intra-EU situations. At the 
following technical meetings in Council, the Presidency brought further clarifications as 
to  how  such  EU  legislation  could  materialise  more  concretely.  In  this  context,  the 
Presidency  reflected  BEPS  related  issues  which  had  already  been  subject  to  technical 
examination into a consolidated text of the prospective “anti-BEP ” directive. 

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. 

3. THE IMPACT ASSESSMENT FOR THE 2011 PROPOSAL  

The analysis underlying key features of the 2011 proposal was based on many years of 
work  and  input  from  within  the  Commission,  external  contractors  and  Member  States 
(CCCTB  Working  Group)  as  well  as  other  stakeholders  (including  academia,  tax 
administrations,  business  and  professional  associations,  think  tanks).  The  CCCTB 
Working  Group  was  created  in  2004  and  held  its  last  meeting  in  October  2010.  The 
group  produced  68  papers  and  summary  records  of  their  meetings,  all  published  on  a 
dedicated DG TAXUD website.162  

Compliance costs 

The main findings from the analysis were that firms' tax compliance costs 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. Compliance 
costs increase with cross-border activity and with increasing number of subsidiaries, have 
not  reduced  over  time  and  in  particular  the  transfer  pricing  compliance  burden  has 
increased over time.  

For tax administrations, the 2011 Impact Assessment anticipated that they would benefit 
mainly from saving costs in relation to transfer pricing (monitoring, dispute resolution). 
At  the  same  time  there  would  be  an  additional  cost  for  maintaining  two  systems  in 
parallel  (Annex  9  of  the  2011  Impact  Assessment).  For  companies,  optionality  would 
require  a  decision  whether  to  opt  into  the  system,  but  arriving  at  the  optimal  decision 
entails  a  cost-benefit  analysis,  which  takes  resources. Focussing  on  recurring  costs,  i.e. 
ignoring  one-off  switching  costs,  an  increase  in  time  spent  on  compliance  activities  by 
4%  was expected for the  CCTB and a decrease by 8%  for the  CCCTB. Time costs for 
setting up a new subsidiary in a Member State were estimated to decrease by 10-11% for 
the CCTB and 62-67% for the CCCTB.  

162   http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm 

141 

 
 
                                                 
Other tax obstacles in the single market 

These  obstacles  mainly  referred  to  'over-taxation'  and  double  taxation.  Over-taxation 
occurs  whenever  cross-border  activities  lead  to  tax  liabilities  that  would  not  have 
occurred in a domestic context. Based on the public consultation conducted for the 2011 
Impact  Assessment,  double  taxation  occurs  mainly  in  the  context  of  cross-border 
business  restructurings  or  due  to  different  tax  treatments  of  transfer  prices  in  different 
Member  States.  Another  source  for  double  taxation  is  heterogeneity  in  double  taxation 
treaties and their interpretation. The increased number of requests received under the EU 
Arbitration  Convention  between  2004  and  2008,  along  with  the  unresolved  pending 
cases,  has  also  been  seen  as  evidencing  continued  problems  in  the  area  of  transfer 
pricing.  

Since only a few Member States offer limited forms of cross-border loss compensation, 
groups  operating  cross-border  have  substantially  fewer  possibilities  to  offset  losses 
compared to domestic groups in most Member States (some do not provide any kind of 
loss  relief).  Moreover,  the  limited  or  non-existing  cross-border  loss  offset  implies 
differences in tax treatment of foreign permanent establishments and foreign subsidiaries. 
The  2011  Impact  Assessment  notes  "several  further  potentially  important  economic 
effects  of  (cross-border)  loss  compensation:  (i)  improved  neutrality  between  domestic 
and cross-border investment; (ii) reduced risk of investment, as losses are better insured 
(Domar-Musgrave effect), which may stimulate risk-taking and raise returns to capital in 
the  economy;  (iii)  increased  efficiency  in  the  international  allocation  of  productive 
capital;  (iv)  enhanced  investment  ability  from  financially  constrained  firms  following 
higher after-tax profits". Based on this, it was concluded that consolidation would be apt 
to  reducing  over-taxation  of  cross-border  economic  activities  and  thereby  improve 
efficiency in the internal market. The quantitative analysis found that in a given year 50% 
of non-financial and 17% of financial multinational groups could benefit from immediate 
cross-border  loss  offset,  leading  to  additional  losses  as  a  share  of  net  current  taxable 
profits  of  3%  for  the  average  non-financial  group  and  2.5%  for  the  average  financial 
group.  A  PWC  case  study  with  13  multinational  companies  found  substantially  higher 
figures. The Computable General Equilibrium model used to simulate the reform pointed 
to  an  a  priori  reduction  of  15%  in  the  corporate  tax  base  and  in  the  new  equilibrium, 
where the reform is designed in a budget neutral way, of about 4.5%.  

Formula apportionment 

The 2011 Impact Assessment concluded to allocate the consolidated tax base to a 'group 
member A' according to the following formula: 

Share A =  

1
3

           +  

1
3

1
2

+

             +

1
2

                      +

1
3

             .

∗    ′                                                   

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  PWC  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. 

142 

 
 
       
 
        
                 
        
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.  

Depreciation regime 

Based on work by the CCCTB Working Group, it was decided that fixed assets would be 
depreciable  for  tax  purposes  with  the  exception  of  financial  assets  and  those  tangible 
assets not subject to wear and tear and obsolescence. Fixed assets are all tangibles, those 
intangibles  acquired  for  a  value  where  they  are  capable  of  being  valued  independently 
and  are  used  in  the  business  in  the  production,  maintenance  or  securing  of  income  for 
more  than  12  months.  The  concept  also  includes  financial  assets  (although  these  are 
excluded from depreciation) but not assets of  a small value (i.e. where the cost of their 
acquisition, construction or improvement is less than EUR 1 000). Depreciable long-life 
(at least 15 years) tangible and intangible fixed assets would be depreciated individually. 
Remaining  assets  would  go  into  a  pool,  which  should  simplify  matters  for  both  tax 
authorities and taxpayers since it avoids the need to establish and maintain a list of every 
single  type  of  fixed  asset  and  its  useful  life.  Regarding  the  generosity  level  of  the 
depreciation  allowances,  the  CORTAX  simulations  showed  that  the  results  improved 
with increasing generosity of depreciation allowances. Accordingly, from the two options 
on the depreciation regime for the pooled assets that were examined, the more generous 
one was chosen. 

Economic impacts 

As for the present impact assessment, the economy-wide impacts were analysed based on 
CORTAX simulations (Box 1 explains the features for the updated version of the model 
used  in  this  impact  assessment).  The  CCTB  and  CCCTB  were  assessed,  with  two 
variations  on  the  scope  (optional  for  all  firms  or  compulsory  for  all  firms)  and  three 
variations  on  the  depreciation  regime.  Since  the  CORTAX  model  cannot  reasonably 
capture the opt-in choice, it was assumed that all multinational entities would opt for the 
CCCTB.  The  conclusion  drawn  based  on  the  simulations  was  that  the  CCCTB  was 
preferable to the CCTB due to slightly better impacts on welfare. The conclusion on the 
scope  hinged  on  the  depreciation  regime.  Under  a  base  broadening  reform  (i.e.  stricter 
depreciation  regime  than  in  the  baseline),  it  was  better  to  make  the  CCCTB  optional, 
whereas a compulsory application was better with a more generous depreciation regime.  

Preferred option in the 2011 Impact Assessment 

The  CCCTB  was  chosen  over  the  CCTB,  based  on  the  CORTAX  results  and  the 
CCCTB's  clearly  superior  results  in  terms  of  compliance  cost  savings  and  reduction  in 
other  tax  obstacles.  Moreover,  since  only  base  broadening  reforms  were  seriously 
considered based on input from the CCCTB WG, the preferred option was the one that 
would make the CCCTB optional for all firms. It should be kept in mind though that in 
terms of economic impacts this corresponded to the scenario in which all multinational 
entities applied the CCCTB.  

143 

 
 
 
Annex IX: Impact of the CCCTB on intra-group profit shifting 

Table 36: Impact of the CCCTB on intra-group profit shifting 

Member State 

Baseline 

CCCTB 

Change 

Outward 

Inward 

Outward 

Inward 

Outward 

Inward 

AT 

BE 

DK 

FI 

FR 

DE 

EL 

HR 

IE 

IT 

LU 

NL 

PT 

ES 

SE 

UK 

CY 

CZ 

EE 

HU 

LV 

LT 

MT 

PL 

SK 

SL 

BG 

RO 

-0.3% 

-9.0% 

-0.3% 

0.0% 

-7.7% 

-1.1% 

-0.2% 

-0.2% 

0.0% 

-1.5% 

-1.8% 

-0.7% 

-1.0% 

-2.5% 

-1.1% 

-0.1% 

0.0% 

0.0% 

-1.1% 

0.0% 

-0.1% 

0.0% 

-5.0% 

0.0% 

-0.1% 

0.0% 

0.0% 

0.0% 

2.6% 

2.9% 

4.4% 

2.9% 

0.1% 

0.7% 

1.4% 

11.6% 

16.5% 

0.9% 

8.6% 

11.1% 

1.8% 

0.1% 

3.2% 

6.1% 

10.0% 

3.5% 

4.7% 

4.1% 

4.9% 

3.6% 

0.0% 

2.2% 

4.5% 

4.9% 

4.6% 

2.7% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.0% 

0.2% 

1.5% 

0.9% 

0.4% 

0.7% 

0.2% 

0.3% 

0.2% 

0.8% 

0.3% 

2.2% 

1.9% 

0.2% 

0.0% 

1.6% 

0.3% 

2.1% 

0.2% 

0.4% 

0.8% 

0.3% 

0.1% 

0.0% 

0.1% 

0.1% 

0.0% 

0.2% 

0.1% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

n/a 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

n/a 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

-100.0% 

n/a 

-100.0% 

-91.8% 

-50.1% 

-78.3% 

-86.9% 

720.4% 

-74.1% 

-80.5% 

-98.0% 

-95.1% 

-70.2% 

-74.0% 

-82.9% 

-90.9% 

-78.8% 

-49.1% 

-95.3% 

-78.7% 

-94.4% 

-90.7% 

-81.2% 

-94.6% 

-97.9% 

-98.3% 

-97.3% 

-96.8% 

-99.2% 

-96.2% 

-96.2% 

Average* EU-28 

-1.5% 

5.5% 

0.0% 

1.0% 

-100% 

-82.2% 

Source:  Joint Research Centre of the European Commission (2016) 
Notes:   The values indicate changes in percent to the theoretical tax base without intra-group profit shifting. Take for 
example Italy and assume it had a corporate income tax base amounting to 100 in the theoretical case where 
profit  shifting  via  transfer  pricing  would  not  be  feasible  for  multinational  entities.  The  baseline  results 
indicate  that  allowing  for  profit  shifting  via  transfer  pricing  would  lead  to  the  new  tax  base  of  100-
1.5+0.9=99.4.  In  other  words,  in  the  baseline  scenario,  Italy  loses  1.5%  of  its  corporate  tax  base  due  to 
multinational  entities  shifting  profits  to  other  countries  and  gains  0.9%  of  its  tax  base  due  to  multinational 
entities shifting profits to Italy. Under the CCCTB, profits would no longer be shifted to other countries as it 
would not reduce tax liabilities (i.e. outward equals zero). There remains a small inward shift of 0.3% which 
is profits shifted to Italy from the US and Japan. *Average refers to the weighted EU average of the individual 
country values. 

144 

 
 
 
 
 
 
Annex X: Measuring the cost of capital and effective average tax rates 

This  impact assessment uses analysis  of the  existing differences in effective corporate 
tax  rates  within  the  EU.  The  aim  is  to  detect  possible  tax  induced  distortions  to  the 
allocation  of  resources  in  both  domestic  and  international  investments  in  a  theoretical 
framework which allows country comparisons. The analysis of the impact of taxation on 
investment  behaviour  requires  forward-looking  indicators  which  include  a  large 
majority of the relevant tax provisions relevant for corporate investment. 

The  annual  report  on  effective  tax  levels  in  the  EU  carried  out  by  the  ZEW  applies  a 
forward-looking  approach  originally  developed  by  Devereux  and  Griffith  (1998a, 
1998b)  and  provides  a  comprehensive  analysis  of  the  effects  of  tax  legislation  on 
investments for all 28 EU Member States and selected third countries. 

The  basic  approach  is  to  consider  a  hypothetical  incremental  investment  located  in  a 
specific  country  that  is  undertaken  by  a  company  resident  in  the  same  country  or  in 
another country. Two tax measures are computed: the cost of capital and the effective 
average tax rate. The cost of capital measures the required minimum pre-tax return of a 
real investment (the 'marginal investment') to achieve the same after-tax return as a safe 
investment  in  the  capital  market.  The  standard  assumption  by  the  ZEW  for  the  real 
return on the safe investment is 5%. The lower the cost of capital the more investments 
are  undertaken.  If  the  cost  of  capital  is  exactly  equal  to  the  return  from  a  safe 
investment,  the  tax  system  does  not  distort  the  scale  of  investments.  This  approach  is 
based on the presumption that firms undertake all investment projects that earns at least 
the required rate of return.  

A  complementary  approach  is  to  consider  discrete  choices  for  profitable  investments 
and in particular discrete location choices. The effective average tax rate measures the 
relative difference between a fixed rate of pre-tax return of a profitable investment (the 
standard  assumption  by  the  model  is  20%)  and  its  after-tax  return.163  The  effective 
average tax rate is thus a measure of the attractiveness of a tax system. 

In  both  cases,  the  hypothetical  investment  takes  place  in  one  period  and  generates  a 
return in the next period. The impact of taxation is analysed by considering a number of 
features  of  the  tax  system,  including  the  statutory  tax  rate,  capital  allowances,  the 
treatment  of  interest  deduction,  the  allowance  for  corporate  equity,  the  treatment  of 
foreign  source  income,  wealth  taxes  paid  by  the  company,  as  well  as  possibly  the 
treatment  at  the  corporate  and  personal  level  of  dividends  paid  by  the  company,  and 
wealth and capital gains taxes at the personal level.164 

Both the cost of capital and the effective average tax rate are computed for five different 
types of assets (intangibles, buildings, machinery, financial assets, inventory) and three 
different  sources  of  financing  (retained  earnings,  new  equity,  debt).  Further,  both 
measures  are  computed  for  the  corporate  level  and  the  shareholder  level,  considering 
top-rate  qualified 
three  different 
shareholder) and can thereby be used to compare the relative distortions introduced by 
the  tax  system  in  relation  to  certain  investments  or  financing  sources  both  at  the 
corporate level and shareholder level. 

top-rate  non-qualified  and 

types  (zero-rate, 

163   The effective average tax rate equals the effective marginal tax rate if the profitability is equal to the 

cost of capital. 

164   It is assumed that the tax system remains unchanged over the life of the investment.  

145 

 
 
                                                 
In presenting averages over different forms of assets, these assets are weighted equally, 
while unequal weights are used for financing: retained earnings 55%, new equity 10% 
and  debt  35%  (based  on  OECD,  1991).  As  for  true  economic  depreciation  rates  it  is 
assumed:  intangibles  (15.35%),  industrial  buildings  (3.1%);  machinery  (17.5%), 
financial assets (0%), and inventories (0%). 

In the context of this Impact Assessment, two studies using the methodology described 
above  were  produced  by  the  ZEW.  The  first  report  analyses  the  impact  of  debt-bias 
reforms  on  the  cost  of  capital  and  effective  average  tax  rates  as  well  as  the 
consequences  of  a  revenue  neutral  implementation.  Four  debt-bias  reforms  are 
considered:  a  no  interest  deductibility  (Comprehensive  Business  Income  Tax,  CBIT), 
Allowance for Corporate Equity (ACE), Allowance for Corporate Capital (ACC), Cost 
of Capital Allowance (CoCA). 

A  second  report  analyses  the  impact  of  certain  tax  planning  strategies  on  tax  burden 
measures. The tax planning strategies considered involve profit shifting via cross-border 
structures  generally  available  to  multinational  corporations.  Profit  shifting  channels 
from high-tax to low-tax countries cover intra-group debt shifting, royalty payments and 
the use of hybrid instruments. 

146 

 
 
 
 
Annex XI: Existence and design of R&D tax incentives in the EU 

Table 37: R&D Incentives by EU Member States 

Type of R&D tax incentive 

Type of Tax 

Expense-based 

Input-based 

Country 

Tax credits 

Enhanced 
allowance 

Accelerated 
depre-
ciation 

Existing 
expense-
based 
incentive 

Patent Box 

Corporate 
income 
tax 

Personal 
income tax 

Wage tax / 
SSCs 

BE 

BG 

CZ 

DK 

DE 

EE 

IE 

EL 

ES 

FR 

HR 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

EU 

Norway 

Canada 

US 

Israel 

Japan 

X 

X 

X* 

X 

X 

X 

X 

X 

X 

X 

X 

X* 

X 

X 

X 

15 

X 

X 

X 

X* 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

15 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

10 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

24 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

13 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

24 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

6 

X 

X 

X 

X 

X 

X 

7 

X 

Source:   CPB(2014) 
Notes:  The temporary scheme in Finland has expired. Ireland has introduced a knowledge box.  

*: Reduced corporate tax rate.  
SSCs stands for social security contributions.  

147 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 38: Reduction in the effective tax burden from R&D tax incentives across firm size  

Firm Size  Effective tax burden reduction from R&D tax incentives 

Effective tax burden 
reduction from combination 
of SME incentives and R&D 
incentives 

Large 

From less than -1% (Luxembourg) to -20% (Lithuania). 

Not applicable 

[Reduction in 15 countries among 20 countries considered] 

Tax base incentives  
From -0.2% (France) to -20% 
(Lithuania) 

Tax liability incentives 
From -3% (The Netherlands) to -
6% (Ireland) 

[Reduction in 14 countries 
among 20 countries 
considered] 

[Reduction in 7 countries among 
20 countries considered 

Medium 

From less than -1% (Luxembourg)  
to -25% (Ireland). 

[Reduction in 16 countries among 20 countries considered] 

Small 

From less than -1% (Luxembourg)  
to -22% (Ireland). 

[Reduction in 16 countries among 20 countries considered] 

From less than -1% 
(Luxembourg)  
to -25% (Ireland). 

From less than -1% 
(Luxembourg)  
to -33% (Ireland). 

Source:  VVA and ZEW (2015) 

148 

 
 
 
 
 
 
Annex XII: The impact on tax revenues 

Baseline vs CCCTB using CORTAX 

The  CORTAX  simulations  allow  for  some  stylised  insights  on  the  impact  on  tax 
revenues.  Interpretation  of  these  values  should  however  be  done  with  caution  as  a 
number of factors impact on revenues. First, the calibration of the model tries to replicate 
the baseline corporate tax bases for each Member State and, while this is done in the best 
possible  way  to  capture  the  EU-28  values,  there  remain  some  differences  between  the 
actual  and  the  simulated  tax  base  for  some  Member  States.  Moreover  and  importantly, 
the  model  makes  the  hypothesis  that  governments  change  ex-ante  (that  is  before  the 
behavioural impact is taken into account) the corporate income tax rate for the CCCTB in 
order to compensate for differences in the rules to compute the corporate tax base. This is 
a  technical  –  and  necessary  for  model  closure  –  assumption.    In  reality  national 
governments would be free to adjust tax rates in other ways. Overall, Table 39 shows the 
impact on tax revenues for individual Member States and for the EU-28 as a whole.165  

The  results  are  difficult  to  interpret,  for  a  number  of  reasons  that  are  discussed  below. 
More importantly, there is a downward bias as they capture only in a limited manner the 
positive  impact  on  revenues  due  to  the  expected  reduction  in  corporate  tax  avoidance. 
Notably, the model does not cover the positive impact from the effective elimination in 
the CCCTB of the use of patent boxes, the exploitation of hybrid mismatches and profit 
shifting  via  intra-group  debt  shifts.  Under  the  assumptions  of  the  model,  corporate  tax 
revenues are expected to decline by 0.27% of GDP. The largest decrease would amount 
to  1%  of  GDP  for  Luxembourg,  whereas  at  the  other  extreme  corporate  income  tax 
revenues  would  increase  by  0.19%  of  GDP  in  Croatia.  The  impact  on  overall  tax 
revenues  in  the  EU-28  is  considerably  smaller  as  losses  in  corporate  tax  collection  are 
partly  compensated  for  by  a  higher  collection  of  labour  taxes  driven  by  the  positive 
impacts  on  employment  and  wages.  They  decrease  by  0.08%  of  GDP,  ranging  from  a 
decrease of -0.95% of GDP in Luxembourg to an increase of 0.29% of GDP in Croatia.  

Individual  results  are  subject  to  large  caveats.  Changes  in  corporate  tax  revenues  are 
influenced in many different ways in the model and most impacts are not uniform across 
countries: (1) The CCCTB changes the depreciation rules. For some countries this means 
a  decrease  in  the  tax  base,  for  others  it  implies  an  increase.  (2)  Corporate  income  tax 
rates  are  adjusted  ex-ante  to  compensate  for  the  changes  in  the  base  computation.  (3) 
Profit shifting via transfer pricing within the EU is no longer beneficial. This impact goes 
in different directions for different Member States. The model tends to underestimate this 
effect. (4) Consolidation of profits and losses within a company group tends to reduce the 
overall  tax  base.  (5)  Formula  apportionment  distributes  the  tax  base  differently  across 
Member  States  compared  to  the  existing  separate  accounting  system.  In  addition,  both 
corporate  income  tax  revenues  and  other  tax  revenues  are  impacted  by  the  predicted 
macroeconomic changes, notably with respect to GDP and labour market outcomes. 

Due  to  the  assumed  adjustment  in  corporate  income  tax  (CIT)  rates  and  the  many 
different  interactions  of  different  impacts,  the  change  in  tax  revenues  is  difficult  to 
predict for each individual Member State.  

165   The impact from introducing the Allowance for growth and investment and the R&D tax incentives are 
treated  separately  because  the  CORTAX  model  does  not  replicate  the  fact  that  an  Allowance  for 
Growth and Investment is less generous than a full-fledged ACE and it does not cover the R&D tax 
incentives. 

149 

 
 
                                                 
Table 39: 

Impact on tax revenues by tax type (in % of GDP) of the CCCTB –  
only multinational entities 

Corporate 
tax 

Labour 
tax 

Consump-
tion tax 

Tax on 
bonds 

Tax on 
dividends 

Tax on 
capital 
gains 

Total tax 
revenues 

Austria 

Belgium 

Denmark 

Finland 

France 

Germany 

Greece 

Croatia 

Ireland 

Italy 

Luxembourg 

Netherlands 

Portugal 

Spain 

Sweden 

UK 

Cyprus 

Czech Rep 

Estonia 

Hungary 

Latvia 

Lithuania 

Malta 

Poland 

Slovakia 

Slovenia 

Bulgaria 

Romania 

EU 

-0.14 

-0.08 

-0.12 

-0.07 

-0.13 

-0.24 

0.03 

0.19 

-0.14 

-0.04 

-1.01 

-0.19 

-0.03 

-0.61 

-0.12 

-0.88 

-0.02 

-0.05 

0.04 

-0.08 

0.03 

0.08 

-0.55 

-0.14 

0.02 

-0.01 

0.00 

-0.01 

-0.27 

0.05 

0.09 

0.03 

0.08 

0.06 

0.09 

-0.02 

0.06 

0.10 

0.03 

0.03 

0.29 

0.07 

0.31 

0.15 

0.30 

0.03 

0.06 

0.02 

0.08 

0.02 

0.00 

0.06 

0.00 

0.02 

0.01 

0.01 

0.00 

0.05 

0.02 

0.01 

0.03 

0.12 

0.03 

0.03 

0.06 

0.04 

0.00 

0.00 

0.01 

0.00 

0.00 

-0.03 

-0.01 

0.20 

0.10 

0.06 

0.08 

0.10 

0.05 

0.13 

0.04 

0.01 

0.01 

0.02 

0.03 

0.01 

0.02 

0.00 

-0.01 

0.01 

0.00 

0.00 

0.01 

0.00 

-0.01 

0.02 

0.00 

0.00 

0.00 

0.00 

0.04 

0.00 

0.11 

0.00 

0.00 

0.00 

0.01 

0.00 

0.00 

0.06 

0.01 

0.00 

0.00 

0.01 

0.00 

0.02 

Source:   Joint Research Centre of the European Commission (2016) 

Debt bias 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.01 

0.00 

0.00 

0.00 

0.00 

0.01 

0.00 

0.02 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.01 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.01 

0.00 

0.00 

0.01 

0.00 

0.00 

0.00 

0.00 

0.02 

0.00 

0.04 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.04 

0.01 

0.00 

0.00 

0.00 

0.00 

0.01 

-0.09 

0.06 

-0.08 

0.03 

-0.06 

-0.12 

0.01 

0.29 

0.02 

0.00 

-0.95 

0.22 

0.07 

-0.20 

0.09 

-0.37 

0.01 

0.01 

0.07 

0.01 

0.05 

0.04 

-0.2 

-0.01 

0.09 

0.09 

0.14 

0.05 

-0.08 

Next,  we  turn  to  the  possible  revenue  impacts  of  the  debt  bias.  Revenue  impacts  are 
difficult to assess for non-deductibility of interest and the ACC since none of the systems 
have so far been implemented. For the non-deductibility of interest, however, a back-of-
the-envelope calculation can provide a rough estimate based on aggregate company data. 

150 

 
 
 
 
 
 
Table 40 shows that interest on financial debt represents a sizeable share of profit before 
tax. Column (6) shows that values vary between about 15 and 40% of profit before tax.166 
Assuming that the non-deductible amount would be taxed at the same average rate as the 
other profits, the results suggest an increase in corporate income tax collected of between 
0.4 and 1% of GDP. Obviously, this result needs to be taken with extreme caution as it is 
based  on  strong  stylised  assumptions  and  does  not  take  into  account  the  reaction  of 
businesses in terms of substitution, relocation and/or bankruptcy. 

Table 40:   Potential revenue impact of non-deductibility in selected countries (2014) 

(1) 

Country  Interest on 
financial 
debt 

(2) 

Tax on 
profit 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

Net P&L 

Profit 
before tax 

Profit 
before tax 
and 
interest  

Interest on 
financial 
debt  

CIT 
collected 

Potential 
increase 
in CIT 

(% total 
assets) 

(% total 
assets) 

(% total 
assets) 

(% total 
assets) 

(% total 
assets) 

(% GDP) 

(% GDP) 

(% of 
profit 
before tax) 

=(2)+(3) 

=(4)+(1) 

=(1)/(4) 

=(7)*(1+6) 

BE 

CZ 

DE 

ES 

FR 

NL 

PL 

PT 

2.17 

0.80 

1.84 

2.41 

1.44 

2.39 

0.88 

2.89 

1.10 

0.90 

1.19 

0.36 

0.86 

1.10 

0.64 

1.21 

4.03 

4.20 

3.01 

6.28 

3.89 

5.13 

5.10 

4.20 

6.64 

4.75 

7.30 

5.90 

6.04 

9.05 

6.19 

14.51 

15.61 

18.00 

3.81 

1.36 

4.45 

2.57 

5.33 

5.46 

42.30 

15.69 

43.81 

36.30 

30.32 

15.31 

19.78 

112.45 

3.19 

3.38 

2.44 

2.44 

2.71 

2.58 

1.75 

2.84 

1.35 

0.53 

1.07 

0.88 

0.82 

0.39 

0.35 

3.20 

Source:  European Commission and BACH (Bank for the Accounts of Companies Harmonised)  

Regarding the revenue impact of the ACE, de Mooij (2012, pp. 506-507) estimates the 
potential  effect  for  14  OECD  countries  assuming  an  average  notional  rate  of  4%,  and 
finds  a  potential  decrease  in  the  tax  base  by  14.1%  and  in  tax  collection  by  0.49%  of 
GDP. Zangari (2014, pp. 17-20) discusses the budgetary impact  of the Belgian ACE in 
some  details.  He  recalls  the  negative  impact  of  the  stock-based  approach  and  of  the 
imperfect anti-avoidance framework on tax collection on the tax collection in Belgium. 
He finds that for the period 2009-2011, the revenue losses of the ACE represent about a 
third  of  CIT  collected.  However,  as  the  author  points  to,  this  figure  represents  a  gross 
loss, which does not take into account the fact that companies have substituted debt for 
equity,  hence  leading  to  lower  deductible  interest.  He  estimates  that  the  revenue  cost 
needs to be corrected down by about between 5 and 15% due to lower deductible interest. 
The National  Bank of Belgium (2008) puts  this correction at  about a third of the gross 
revenue loss in 2006. The example of Belgium may represent an extreme case because of 
its specific design. 

A  closer  look  at  the  evolution  of  CIT  collection  in  the  Member  States  that  have 
implemented  an  ACE  (Austria,  Belgium,  Latvia,  Italy)  does  not  reveal  fundamental 
changes in the trends compared to the trend of the EU-28 average. 

166   Leaving aside the value for Portugal which seems to be an outlier.  

151 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Figure 24:   Evolution of CIT collection in Member States with ACE experiences: 

Austria and Belgium  

Source:  European Commission based on Taxation Trends data  

Figure 25:  Evolution of CIT collection in Member States with ACE experiences: 

Italy and Latvia 

Source:  European Commission based on Taxation Trends data  

We further assess the estimated effect of ACE by regressing the CIT to GDP ratio of 28 
EU Member States for the period 1995-2014 on a set of variables, including the presence 
of  an  ACE  (Table  41).  It  appears  that  having  an  ACE  does  not  seem  to  have  any 
statistically significant effect on CIT collection.  

152 

 
 
 
 
 
 
 
 
Table 41: Selected determinants of CIT collection 

Statutory CIT rate 

ACE 

Specific rate for SMEs 

GDP Growth (%) 

Country dummies 

Year dummies 

R² 

Number of obs. 

CIT in % GDP 

CIT in % GDP 

0.060*** (0.009) 

-0.109       (0.087) 

-0.257**   (0.093) 

0.002*** (0.000) 

Yes 

Yes 

0.775 

510 

0.030*** (0.005) 

-0.082       (0.089) 

-0.086       (0.103) 

0.002*** (0.001) 

Yes 

No 

0.713 

510 

Source:  European Commission, own computations based on data from Taxation Trends 
Note:   Huber-White Robust Standard Errors are between brackets.   

***, **  and * denote statistical significance at the 1, 5 and 10% level, respectively. 

With  its  design,  notably  its  incremental  feature  and  its  anti-avoidance  framework,  the 
AGI is supposed to lead to lower revenue losses than the ACE. The introduction of the 
allowance  can  always  be  made  revenue-neutral  by  introducing  an  offsetting  CIT  rate 
increase. 

R&D incentives 

In terms of foregone tax revenues, granting an additional allowance of 33% should have 
an overall neutral impact on CIT revenues as it corresponds to the R&D tax incentives 
already  offered  in  EU  Member  States.167  Table  42  presents  the  estimates  of  the  likely 
changes in CIT revenues under the two options for different rates of the allowance. The 
likely forgone corporate income tax revenues vary from 5% for an additional allowance 
of 100% to 15% for an allowance of 200%. 

The estimates are broadly in line with OECD (2015c) which reports indirect support for 
business R&D as shares of GDP for 19 EU Member States. The weighted average of the 
reported EU shares was 0.08% of GDP or approximately EUR 11 billion. Assuming that 
the foregone tax revenues would increase in direct proportion to changes in the B-index, 
an  additional  allowance  of  100%  would  imply  roughly  a  5%  decline  in  total  corporate 
income  tax  revenues  (exactly  the  effect  in  Table  42)  whereas  an  allowance  of  200% 
would imply roughly a 13% decline in revenues (slightly lower than in Table 42).  

It is important to note that  these estimates do not take into account revenue gains from 
the reversal of all patent boxes currently applied in the EU. Griffith et al (2014) simulate 
the  revenue  impacts  of  introducing  patent  boxes  in  four  countries.  They  find  that  tax 
revenues  from  new  patents  are  less  than  half  of  their  pre-reform  levels  in  the  four 
countries concerned.  The impact from the removal of patent  box regimes  would be  the 
same for both options. 

167   The effect will depend on the tax rates Member States choose after the introduction of a CCCTB.  

153 

 
 
 
                                                 
Table 42: Reform scenarios and their possible impacts on total CIT revenues 

Main estimate 

Minimum 

Maximum 

CIT revenue change 

CIT revenue change 

CIT revenue change 

as share of 
total 

in % of 
GDP 

as share of 
total 

in % of 
GDP 

as share of 
total 

in % of 
GDP 

+5% 

+0.13% 

+2% 

+0.05% 

+9% 

+0.21% 

-5% 

-0.12% 

-2% 

-0.05% 

-8% 

-0.20% 

-15% 

-0.38% 

-6% 

-0.14% 

-25% 

-0.63% 

Option 4a : 
Full expensing 

Option 4b:  
100% bonus 
allowance 

Option 4b:  
200% bonus 
allowance 

Source:  Joint Research Centre and DG Taxation and Customs Union, European Commission.  
Note:   Estimates are obtained by working backwards from the elasticity of business R&D. Main estimates assume an 
elasticity of business R&D with respect to the user cost of 0.8, a rate of return to R&D of 0.2 and a rate of 
return  to  other  types  of  investment  of  0.08.  The  calculations  are  done  in  two  steps.  The  actual  tax  base  is 
estimated starting from R&D investment, which is combined with information on the share of R&D over total 
business investment (Eurostat), literature-derived estimates on the rates of return on R&D (Hall et al., 1999) 
and the rate of return on other types of investment (Fama and French, 1999; Poterba, 1998), as well as the 
level  of  total  CIT  revenue  in  the  EU-28  (Eurostat).  The  net  effect  on  CIT  revenues  is  approximated  by 
subtracting estimated revenue losses from the gains implied by the reform.  
The minimum and maximum bounds correspond to alternative choices in the above assumptions on elasticities 
(as  before  1.2,  1,  0.8  and  0.5),  different  rates  of  return  on  R&D  investment  (0.1,  0.2,  0.3  and  0.4),  and 
different  shares  of  R&D  in  total  business  investment  (17%  suggested  by  Eurostat  versus  12%  suggested  by 
combining Orbis with the JRC Industrial R&D Investment Scoreboard). 

154 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annex XIII: Sensitivity analysis on the AGI and the ACE 

Allowance for growth and investment (AGI) 

Modelling the AGI 

As  explained  in  Section  5.3.1  in  the  impact  assessment,  the  CORTAX  model  used  to 
evaluate  the  impact  of  the  different  debt-bias  reform  options  does  not  allow  a  proper 
reflection of the incremental feature of the AGI, i.e. the fact that it is granted on equity 
increases only. Instead, the model assumes that the allowance is given to the full stock of 
equity. Hence, the simulations for the ACE and the AGI are identical. 

To address this limitation, the effect of an AGI is simulated by restricting the share of the 
equity stock that qualifies for the allowance. This restriction is based on the assumption 
that over the long-term the economy grows at around 2% per year. One can assume that 
on average companies grow at an identical rate. Hence, the AGI simulations assume an 
increase in equity of 2% per year. If the allowance is granted for a period of ten years, the 
share of the equity stock that qualifies for the AGI corresponds to 20%, the increase in 
equity over this period. Table 43a presents the results of the simulations for an allowance 
granted on 20% of the equity stock. 

It  should  be  stressed  that  these  simulations  probably  underestimate  the  positive 
macroeconomic  effects  of  the  AGI.  Indeed,  the  effects  on the  cost  of  capital  determine 
the  macroeconomic  outcomes  for  investment  which  in  turn  affects  GDP  and  other 
variables such as employment. Given the design of the model, the effect of AGI is here 
computed  as  the  effect  of  an  ACE  applied  to  20%  of  the  stock  of  equity.  This 
underestimates the economic effects because in reality, the AGI would be granted fully 
on  new  financing  decisions.  This  means  that  an  investment  financed  by  new  equity 
would  benefit  from  the  allowance  and  reduce  in  full  the  cost  of  capital  for  this 
investment.  In  contrast,  granting  the  allowance  on  20%  of  the  equity  stock  does  not 
reward new equity investments as much as it does not reduce the cost of capital of such 
an  investment  to  the  same  extent.  Thus  the  AGI  is  likely  to  have  stronger  positive 
economic impacts than an allowance granted on 20% of the equity stock.    

Sensitivity analysis of the AGI rate 

The simulations in columns (a) to (f) vary with the rate of the allowance. In scenario (a) 
the rate is the nominal risk-free long-term interest rate (equivalent to the one applied for 
interest  on  debt)  as  defined  in  the  CORTAX  model.  The  results  of  this  simulation  are 
compared with the effects of the CCCTB central scenario that has no debt bias treatment. 
For example, implementing the AGI under this scenario would increase GDP by 0.37% 
compared to an increase of 0.16% without the AGI. The loss in CIT revenues would be 
0.11% of GDP compared to a loss of 0.08% of GDP without the AGI. Table 43b shows 
the  same  simulations  as  absolute  changes  in  the  respective  variables  compared  to  the 
CCCTB central scenario.  

The simulations vary with the AGI rate applied to the 20% of equity stock. One can think 
of this rate as the rate that a company would need to pay to compensate a shareholder for 
the risk of investing in the company. As a minimum, the company would have to pay the 
return  that  an  alternative  risk-free  investment  would  yield.  However,  shareholders  will 
ask for a risk premium on top of this rate to compensate for the risk associated with an 

155 

 
 
 
equity  investment.  In  simulation  (a)  in  Table  43a  the  AGI  rate  is  equal  to  the  risk-free 
interest  rate;  i.e.  no  risk  premium  is  being  granted.  In  simulations  (b)  to  (f)  the  risk 
premium is gradually increased from 1% to 3%.168  

The simulation results show a trade-off between the positive macroeconomic impacts of 
a larger allowance and its costs in terms of tax revenue collection. As the risk premium 
increases,  the  cost  of  capital  decrease  and  investment  increases,  which  has  positive 
effects on GDP and the labour market. As explained above, it is expected that the AGI 
would have stronger positive impacts in reality.  

The larger the allowance the bigger is also the reduction in corporate tax revenues, which 
is  however  partly  offset  by  increases  in  other  taxes.  Overall  the  differential  total  tax 
revenue impact of the AGI is fairly small, going up to -0.06% of GDP (EUR 8 billion), 
compared to average government revenues above 40% of GDP in the EU (Table 43b).  

Table 43a: Impact of an allowance for equity limited to 20% of the equity stock. 

Type 

CCCTB 
central 
scenario 

(a) 

AGI 

(b) 

AGI 

(c) 

AGI 

(d) 

AGI 

(e) 

AGI 

(f) 

AGI 

Risk premium 

0% 

1.0% 

1.5% 

2% 

2.5% 

3.0% 

Cost of capital 
(change in pps) 

Investment 

Debt share 

Wages 

Employment 

Welfare (%GDP) 

GDP 

CIT (% of GDP) 

Total tax (% of GDP) 

Total tax (EUR bn) 

-0.04 

-0.11 

-0.13 

-0.14 

-0.15 

-0.16 

-0.18 

0.57 

1.53 

0.40 

0.19 

0.07 

0.16 

-0.27 

-0.08 

-11.2 

1.15 

0.83 

0.58 

0.28 

0.10 

0.37 

-0.39 

-0.11 

-14.7 

1.35 

0.58 

0.65 

0.32 

0.11 

0.45 

-0.43 

-0.12 

-16.1 

1.46 

0.45 

0.68 

0.34 

0.11 

0.49 

-0.45 

-0.13 

-16.9 

1.58 

0.32 

0.72 

0.36 

0.12 

0.53 

-0.48 

-0.13 

-17.7 

1.70 

0.17 

0.76 

0.37 

0.13 

0.57 

-0.5 

-0.14 

-18.5 

1.82 

0.03 

0.79 

0.39 

0.13 

0.62 

-0.53 

-0.14 

-19.3 

Source:   Joint Research Centre of the European Commission (2016) 

168   The risk premium required to make the AGI in the CORTAX model equivalent to the ACE presented 

in the main simulations in this impact assessment is 8.5%. 

156 

 
 
 
 
 
 
                                                 
Table  43b:  Incremental  impact  of  an  allowance  for  equity  limited  to  20%  of  the  equity 

compared to the CCCTB central scenario 

Type 

CCCTB 
central 
scenario 

(a) 

AGI 

(b) 

AGI 

(c) 

AGI 

(d) 

AGI 

(e) 

AGI 

(f) 

AGI 

Risk premium 

0% 

1.0% 

1.5% 

2% 

2.5% 

3.0% 

Cost of capital 
(change in pps) 

Investment 

Debt share 

Wages 

Employment 

Welfare (% of GDP) 

GDP 

CIT (% of GDP) 

Total tax (% of GDP) 

Total tax (EUR bn) 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

-0.07 

-0.09 

-0.10 

-0.11 

-0.12 

-0.14 

0.58 

-0.70 

0.18 

0.09 

0.03 

0.21 

-0.12 

-0.03 

-3.5 

0.78 

-0.95 

0.25 

0.13 

0.04 

0.29 

-0.16 

-0.04 

-4.9 

0.89 

-1.08 

0.28 

0.15 

0.04 

0.33 

-0.18 

-0.05 

-5.7 

1.01 

-1.21 

0.32 

0.17 

0.05 

0.37 

-0.21 

-0.05 

-6.5 

1.13 

-1.36 

0.36 

0.18 

0.06 

0.41 

-0.23 

-0.06 

-7.3 

1.25 

-1.50 

0.39 

0.2 

0.06 

0.46 

-0.26 

-0.06 

-8.1 

Source:   Joint Research Centre of the European Commission (2016) 

Allowance for corporate equity (ACE) 

The  CORTAX  simulations  for  the  ACE  presented  in  the  main  part  of  the  impact 
assessment assume that only 70% of the equity stock qualifies for the allowance, based 
on empirical data. This assumption reflects the observation that in existing ACE systems 
it  is  rarely  the  case  that  the  full  return  on  equity  is  deductible.  Table  44  presents  an 
alternative simulation, where the full equity stock qualifies for the allowance (i.e. 100%). 
As expected, the result is more positive economic impacts, but also a larger cost in terms 
of tax revenues. The last four columns present the incremental impacts compared to the 
CCCTB central scenario. 

157 

 
 
 
 
 
 
Table 44: Sensitivity analysis on the level of the ACE 

Type 

CCCTB 
central 
scenario 

(a) 

ACE 

(b) 

ACE 

Differential analysis  CCCTB 
central 
scenario 

(a) 

(b) 

ACE 

ACE 

Share of 
equity stock 

70% 

100% 

Risk premium 

0% 

0% 

Cost of capital 
(change in pps) 

Investment 

Debt share 

Wages 

Employment 

Welfare (% of 
GDP) 

GDP 

CIT (% of GDP) 

Total tax (% of 
GDP) 

Total tax (EUR 
bn) 

-0.04 

-0.32 

-0.50 

0.57 

1.53 

0.40 

0.19 

0.07 

0.16 

-0.27 

3.36 

-1.79 

1.26 

0.65 

0.18 

1.17 

-0.85 

5.47 

-4.29 

1.88 

1.00 

0.25 

1.91 

-1.30 

-0.08 

-0.23 

-0.36 

-11.2 

-30.6 

-48.4 

Share of 
equity stock 

Risk 
premium 

Cost of 
capital 
(change in 
pps) 

Investment 

Debt share 

Wages 

Employment 

Welfare (% 
of GDP) 

GDP 

CIT (% of 
GDP) 

Total tax (% 
of GDP) 

Total tax 
(EUR bn) 

70% 

100% 

0% 

0% 

0.0 

-0.28 

-0.46 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

0.0 

2.79 

-3.32 

0.86 

0.46 

0.11 

1.01 

-0.58 

4.90 

-5.82 

1.48 

0.81 

0.18 

1.75 

-1.03 

-0.14 

-0.28 

-19.4 

-37.2 

Source:   Joint Research Centre of the European Commission (2016) 

158