Common Consolidated Tax Base Proposal
The EU Commission has pursued the adoption of an EU wide common consolidated corporate tax base. It is proposed that as a fair transparent and efficient tax system. The original proposal was launched in 2011 and was relaunched in 2016 having been resisted in particular by the UK and Ireland
The Common Consolidated Corporate Tax Base (CCCTB) is a single set of rules to calculate companies’ taxable profits in the EU. With the CCCTB, cross-border companies would only have to comply with one, single EU system for computing their taxable income, rather than many different national rulebooks.
Companies could file one tax return for all of their EU activities, and offset losses in one Member State against profits in another. The consolidated taxable profits would be shared between the Member States in which the group is active, using an apportionment formula. The apportionment formula is complex proposed to be based on weighted factors of capital, labour, and sales.
Each Member State would then tax its share of the profits at its own national tax rate. The CCCTB will be mandatory for large multinationals. There would be a single set of rules for how EU corporations calculate corporation tax. The measure does affect the Corporation tax rate.
Original CCCTB Proposal
The original CCCTB proposal was optional for all companies and groups of companies. The re-launched CCCTB system was to be mandatory for large groups, to cover those with the greatest capacity to tax plan. The system would remain optional for those not captured by the mandatory scope.
The measure has been strongly resisted by Ireland and the UK. The present model of charging corporation tax is determined by residence. This in turn based largely on the state of incorporation and control. Accordingly, there is the possibility that profits may be taxed in a low tax jurisdiction in which the company is resident where it does not have any branch establishment or another footprint in the country where the profits were earned. This is a phenomenon that has emerged with tech giants whose profits in any cases are earned digitally without a presence in a particular state.
The incoming EU Commission president said the following in her vision and political guidelines for the new 2020 commission
“The EU and international corporate tax systems are in urgent need of reform. They are not fit for the realities of the modern global economy and do not capture the new business models in the digital world.I will stand for tax fairness – whether for bricks-and-mortar or digital businesses.
I will ensure that the taxation of big tech companies is a priority. I will work hard to ensure the proposals currently on the table are turned into law. Discussions to find an international solution are ongoing, notably at the OECD. However, if by the end of 2020 there is still no global solution for a fair digital tax, the EU should act alone.
European companies ask for simple tax systems and simple rules, especially when working across borders. In the first half of my mandate, I will put forward proposals to improve the business taxation environment in the single market.
A CCCTB would provide businesses with a single rulebook to compute their corporate tax base in the EU. This is a longstanding project of the European Parliament and I will fight to make it a reality.Differences in tax rules can be an obstacle to the deeper integration of the single market. It can hamper growth, particularly in the euro area where the economic ties are stronger. We need to be able to act.
I will make use of the clauses in the Treaties that allow proposals on taxation to be adopted by co-decision and decided by qualified majority voting in the Council. This will make us more efficient and better able to act fast when needed.In the same spirit, I will step up the fight against tax fraud and make our action against harmful tax regimes in third countries stronger.”
Digital Sales Tax
On 21 March 2018, the European Commission proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. In the digital economy, value is often created from a combination of algorithms, user data, sales functions, and knowledge. For example, a user contributes to value creation by sharing his/her preferences (e.g. liking a page) on a social media forum. This data will later be used and monetised for targeted advertising.
The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example. This means that the user contribution to the profits is not considered when the company is taxed.
The Commission has made two legislative proposals:
- The first initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. This forms the Commission’s preferred long-term solution.
- The second proposal responds to calls from several Member States for an interim tax which covers the main digital activities that currently escape tax altogether in the EU.
A common reform of the EU’s corporate tax rules for digital activities
This proposal would enable the Member States to tax profits that are generated in their territory, even if a company does not have a physical presence there. The new rules would ensure that online businesses contribute to public finances at the same level as traditional ‘brick-and-mortar’ companies.
A digital platform will be deemed to have a taxable ‘digital presence’ or a virtual permanent establishment in a Member State if it fulfils one of the following criteria:
- it exceeds a threshold of €7 million in annual revenues in a Member State
- it has more than 100,000 users in a Member State in a taxable year
- over 3000 business contracts for digital services are created between the company and business users in a taxable year.
The new rules would also change how profits are allocated to the Member States in a way that better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption. Ultimately, the new system seeks to secure a real link between where digital profits are made and where they are taxed.
The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) – the Commission’s already proposed initiative for allocating profits of large multinational groups in a way that better reflects where the value is created.
An interim tax on certain revenue from digital activities
This interim tax ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for the Member States. It would also help to avoid unilateral measures to tax digital activities in certain Member States which could lead to a patchwork of national responses which would be damaging for our Single Market.
Unlike the common EU reform of the underlying tax rules, this indirect tax would apply to revenues created from certain digital activities which escape the current tax framework entirely. This system would apply only as an interim measure until the comprehensive reform has been implemented and would has inbuilt mechanisms to alleviate the possibility of double taxation.
The tax would apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues:
- created from selling online advertising space
- created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
- created from the sale of data generated from user-provided information.
Tax revenues would be collected by the Member States where the users are located and would only apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million.This would help to ensure that smaller start-ups and scale-up businesses remain unburdened. An estimated €5 billion in revenues a year could be generated for the Member States if the tax is applied at a rate of 3%.
The proposal for a digital sales tax was blocked by Ireland Sweden Denmark and Germany in November 2018.12 countries including Ireland rejected a proposal for a Commission directive which would have required companies to report the revenues and profits on a country by country basis.