The European Union is working on its latest attempts to squeeze more money out of multinational businesses for its bankrupt governments.

The Common Consolidated Corporate Tax Base (CCCTB) is not new, it has been proposed in various forms for most of this century. But “in Europe, a bad idea rarely goes away,” as PwC Ireland’s Feargal O’Rourke said of it, and it seems CCCTB is moving forward in an even worse form than before, and recently moved a step closer to actually being implemented.

The EU’s idea is to ignore the usual way of calculating tax for multinationals, tearing up the long-established system. CCCTB abandons any attempt at actually calculating how much profit is made in each country; instead a single profit will be calculated for the whole of the EU. That total profit will then be allocated between the member countries according to a formula, rather as a pirate ship divides its spoils, and each country will then able to tax the share allocated to it.

This makes two huge changes in the corporate tax system.

First, under CCCTB, countries within the European Union will not be able to decide how taxable profit is to be calculated. What income is taxable and what is exempt; which expenses are allowed and which are not; what allowances are given for capital investment; the treatment of interest payments and dividends; all of these will become EU decisions.

Currently these are national matters, often fiercely debated in national parliaments, and different countries adopt different approaches depending on what they think is best for their economy. But under CCCTB Brussels will take over all these powers, and the method of calculating taxable profit will be set centrally by the European Union.

The other major change is in the allocation of profits to different countries.

Currently profits are allocated on some version of the arm’s length basis; companies and tax authorities try to calculate how much profit was made in each country, as if the group’s operations in each country were an independent company dealing with the other parts of the group at a proper market price.

This is currently a complex calculation but a fair one; it takes account of the different contributions made by each part of the multinational group, and values them on a fair basis. But under CCCTB that will all be ignored, and instead the group’s entire EU profits will be allocated between the various EU countries according to a formula.

The proposed version of that formula is that:

  • One third of the profits will be allocated according to where the customers are based;
  • One third of the profits will be allocated according to where the assets used in the business are based;
  • One sixth of the profits will be allocated according to the number of employees based in each country; and
  • One sixth of the profits will be allocated according to the total employee payroll in each country.

As can be seen, there is no attempt to discover which countries the group’s profits are actually made in. No account is to be taken of which operations are actually profitable or significant to the group.

Worse, when allocating part of the profit according to where the group’s assets are located, a very restricted and old-fashioned definition of assets is to be used that focuses only on physical, tangible assets.

It is as if no-one in the European Union has noticed the huge changes in business in the last thirty years; the ever-growing importance of intellectual property, of patents and commercial know-how, is ignored. So is the essential role of finance to the modern company.

Instead the only assets that count under the apportionment formula are physical ones; the European Commission seems to be stuck in a 1950s fantasy world of metal-bashing factories.

But although the CCCTB has a simplified method of calculating profit, it still has room for the usual anti-avoidance rules; deductible interest payments will be capped at 30 percent of EBITDA; there will be a controlled foreign company (CFC) rule to include the profits of subsidiaries in low-tax countries; and of course on top of the rules for calculating profit there will be a general anti-avoidance rule (GAAR), to allow tax authorities to ignore any principle they do not like.

This is an unambiguous attempt to squeeze more taxes out of businesses and remove the ability of EU member countries to control their own taxes and attract multinational businesses by offering better tax systems. Under CCCTB the only freedom left to member countries will be to choose the actual tax rate to be applied. Everything else, the calculation of taxable profits, what expenses or allowances are given, and so on, will be set centrally by Brussels, the same for every country in the EU.

As one MEP (Alain Lamassoure, of France) boasted, CCCTB will “put a halt to unfettered competition between corporate tax systems within the single market.” The ability of countries to have business-friendly tax systems appropriate to a modern economy is to be ended, to allow other countries within the EU to continue with their outdated high-tax models.

To show how difficult it is to change thinking in the EU, Lamassoure thinks that this ending of tax competition is a good idea, and he is from the supposedly center-right and pro-business European People’s Party; the comments from the more left-wing parties are even worse.
Its supporters repeatedly claim that CCCTB is a “modern” tax system, “targeting profits where they are made,” but neither claim is true.

As a group of MEPs opposed to CCCTB (led by Brian Hayes of Ireland) have pointed out, the system of calculating consolidated EU-wide profits and then allocating them according to a formula “favors the larger member states where factories have been built, but not the place where, due to high investments in research, development and innovation, the profit is actually being made.”

Ignoring patents, R&D and innovation, as CCCTB does, is hardly appropriate for a “modern” tax system, nor does it seek to tax profits “where they are made” if it ignores intellectual property, which is widely accepted as one of the most important sources of modern business profits.

No, CCCTB is neither modern nor fair; it is a tax grab designed to shore up the revenues of old-fashioned high-tax member countries and block those, such as Ireland, with more modern systems.

Sadly, CCCTB is still moving forward. The current status is that it was passed by the relevant committee of the EU Parliament on March 7, 2018. Indeed, the committee not only approved the Commission’s plans in general terms but also called for them to be toughened and implemented more quickly.

The EU Commission had initially proposed a two-stage implementation, with a Common Corporate Tax Base (CCTB) first. Under this the common rules for calculating taxable profits would be implemented across all of the EU, with Brussels laying down exactly how profits would be taxed in each member country. But under the Commission’s proposal the full CCCTB (with the extra ‘C’ for ‘consolidated’), i.e. the single EU-wide calculation of profits and their allocation to countries by formula, would be postponed until a later second stage.

But the EU Parliament’s economics committee wanted a faster result, and recommended that the CCCTB system be implemented in full, in a single stage, and to be operational before the end of 2020.

That date is unfortunate, because the U.K. and EU have recently agreed that the transitional period for the U.K.’s withdrawal from the EU will last until the end of 2020, with the U.K. having to follow all new EU law until then. Hopefully CCCTB is delayed until after the U.K. is free.

Fortunately, there is still some way to go before CCCTB becomes a reality. As well as the full EU Parliament (which is likely to approve its committee’s decision), the proposal still needs to be approved by the Council of Ministers, i.e., the governments of all of the EU member countries, and that is by no means a foregone conclusion.

Seven national parliaments within the European Union objected to CCCTB last time it was proposed. That included the U.K., which might not have a vote this time round, if it falls within the Brexit transitional period. However, other countries objecting included Ireland, the Netherlands, Luxembourg and Malta (all of which have very successful low-tax regimes to attract international business), and the more surprising Denmark and Sweden.

However, the vote in the Council of Ministers is by national governments, not parliaments, and a great deal of horse-trading and arm-twisting can take place, so a national objection at the parliamentary level might not result in that country actually voting against CCCTB in the Council of Ministers.

Worse, the EU Parliament’s committee called for the CCCTB proposal to be toughened up in several ways:

  • They want the turnover threshold for companies to be forced to adopt CCCTB to be lowered from the Commission’s proposed €750 million to €40 million, so as to catch more corporate groups, and ultimately for the threshold to be abolished;
  • They want all EU member countries to have a minimum corporate tax rate of 20 percent (the original Commission proposal had allowed each country to continue to choose what tax rate to apply to the share of the group’s profits allocated to them).

The EU Parliament also called for additional ways of allocating profits of digital business, allowing high-tax countries to grab an even higher share of profits earned elsewhere. These include more emphasis on the location of customers, looking at which countries’ domain names are used by websites, or which countries websites are “directed towards.”

This is not, as is claimed, a modern system trying to tax profits where they are made. This is a protectionist, nationalist system that believes the state has the power to tax the profit on all sales to anyone within its borders.

So CCCTB is one attempt by the EU to increase the tax take of its big high-tax high-spend member countries, at the expense of those with more modern systems. But there are two other proposals that are also trying to squeeze more tax out of businesses.

The first is a turnover tax on digital businesses, expected to be proposed at 3 percent. Like CCCTB, this is initially said to apply only to multinationals with turnover of more than €750 million, but if the CCCTB threshold is reduced it seems likely that this threshold will be cut also.

This is a new proposal and details are not yet available at the time of writing, but the aim is clear; like CCCTB, this is moving away from taxing businesses where their profits are earned, the whole basis of the modern international tax system, and towards taxing them where their customers are based. No doubt we will hear more of this over the next few months.

The third move, which is ongoing, is of course the EU’s “blacklist” of more competitive tax regimes. So far that has not yet been linked to CCCTB, but once CCCTB gives Brussels control of how taxable profits are calculated, it seems likely that they will seek to include the blacklist as part of that, perhaps putting restrictions on multinational groups including legitimate payments to blacklist jurisdictions when calculating taxable profits.

This has already been hinted at, with the EU saying that it intends to seek new ways of using its blacklist.

So, three EU tax attacks on business – CCCTB, the turnover tax on digital business, and widening the use of the “blacklist.”

All of them have a similar approach; rather than the established idea of taxing businesses where the profits are made, they seek to tax profits in the countries where the customers are based. All ignore the role of innovation, intellectual property and finance in modern businesses, and instead try to levy tax based on the old-fashioned concepts of physical plant and customer location.

Fundamentally, these proposals are driven by the EU’s fear of change. Instead of embracing the modern world and seeing the huge advantages for their citizens from the services offered by high-tech multinationals, the EU’s instinct is to circle the wagons, put up a wall and try to protect the status quo – and their tax revenues.

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Richard Teather
Richard acts as a tax policy consultant, including advising the Jersey parliament on their recent tax reforms, is a Fellow of the Adam Smith Institute. and is an editor or member of the editorial board of various journals. His book, "The Benefits of Tax Competition", is published by the London-based Institute for Economic Affairs. His work has been the subject of a debate in the UK Parliament and quoted in government studies in the UK, EU and Australia, and hit the national press when the UK government tried to suppress its own civil servants favourable comments on it.Richard TeatherSenior Lecturer Tax LawBournemouth UniversityChristchurch House C206Poole, BH12 5BBUKT: 01202 961870E: [email protected]W:   


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