Examining the 2011 CCCTB proposals

What is it?

 

CCCTB is the common consolidated corporate tax base which would adopt common rules for definition of the major aspects of companies’ profits for corporate tax purposes, eg, tax depreciation, provisions, interest relief, participation exemption and exemption of foreign branch income, and anti-avoidance such as CFC, thin cap, a switchover rule and a GAAR.

 

The common base profits and losses would then be aggregated for all companies in a CCCTB group, which would require at least 75% share capital and economic ownership together with more than 50% of voting power. This would give automatic cross-border loss relief, way beyond the Marks & Spencer Plc limited ‘final losses’ relief.

 

The application of CCCTB is currently proposed to be at the option of the principal company of the group in question, normally the ultimate EU parent company or top EU holding company for a non-EU MNC.

 

Any resulting CCCTB group taxable profit would then be reallocated to the Member State companies using formulary apportionment with reference to employees (1/6), payroll (1/6), property (1/3) and sales by destination (1/3). Sales by EU companies opted into CCCTB in non-EU countries or in EU countries with no taxable presence (subsidiary or PE) would be attributed under a ‘spread throwback’ rule using the factors attributable to EU countries with a taxable presence. 

 

A single consolidated tax return would be filed by the principal company with the tax authority of that Member State. There would, however, be provision for co-ordination with the tax authorities of the other Member States in which the CCCTB group had a taxable presence.

 

Status

 

In December 2010, the Commission’s CCCTB proposal passed the mandatory EU impact assessment procedure for all new EU legislative proposals.

 

Next steps

 

A draft Directive, largely based on the limited circulation 2008 text, together with the impact studies, will be published and is expected by 31 March 2011. The 2008 text was not formally released because of the first Irish vote against the Lisbon agreement. Tax Commissioner Semeta will seek the support of the College of Commissioners for the Directive, which he is expected to get, particularly given President Barroso’s backing for CCCTB.

 

The Directive will then be formally proposed by the Commission to the Member States in the ECOFIN Council. This is also expected this year. Barring considerable political movement on the part of several Member States, one or more States is/are highly likely to veto the proposed Directive in its present optional form, particularly given the arbitrage possibilities between the CCCTB and domestic corporate tax bases. However, abstentions cannot block a proposal requiring unanimity.

 

Enhanced co-operation

 

Provided a minimum of nine Member States still want to introduce CCCTB in some form, it is then likely that the enhanced co-operation procedure under the EU/TFEU Treaties will be invoked, as is currently the case regarding the introduction of a European patent. The Commission’s view is that this requires a qualified majority vote. Currently, pending Lisbon changes from 1 November 2014, this requires a majority c 70% of population weighted votes, the larger member states having more votes. This is likely to happen in 2012.

 

So what does this mean for UK and inbound groups?

 

If, as appears likely, CCCTB is adopted but on an enhanced co-operation basis by say 12 or more Member States, even if the UK does not participate, some of a UK MNC’s subsidiaries elsewhere in the EU will be entitled to opt into CCCTB if it remains optional, or will be required to adopt CCCTB if as Germany/Austria have been advocating, it becomes mandatory.

 

As noted above, CCCTB is a harmonised Corporation tax base which in its current form as proposed by the Commission is aggregated for members of a group established via subsidiaries or PEs in the participating EU Member States, any resulting profit then being allocated back to the relevant companies with regard to payroll (1/6), headcount (1/6), property excluding intellectual property (1/3) and sales by destination (1/3). Any overall period loss is carried forward at group level to the next future profitable period and then the net profit is allocated to group members under the formulary apportionment approach.

 

Classic tax planning involving financing, IP planning, entrepreneur structures or hybrids within a CCCTB group is accordingly unlikely to continue to work effectively, given the harmonised base and aggregation and reallocation with regard to the factors listed above.

 

What about the politics?

 

As Harold McMillan once observed, a week is a long time in politics. The financial press has recently been reporting an initiative led by Chancellor Angela Merkel and President Sarkozy to introduce a common corporate tax base at least within the Euro zone. It seems this would be a CCTB, ie, a common corporate tax base but without the cross-border consolidation element, which as noted above would give cross-border loss relief beyond the Marks & Spencer Plc concept of ‘final losses’. Such a CCTB system would of itself nonetheless be significant, in considerably reducing opportunities for arbitrage between the national tax bases involved.

 

What should MNCs do now?

 

Accordingly, the CCCTB Directive or even CCTB is a real driver for MNCs to review their European structure and tax planning, particularly in the light of UK CT reform. For example, the upcoming Finance Bill 2011 UK foreign branch exemption should greatly facilitate operation through a single UK company, with the ability for the non-UK EU branches to opt into/comply with CCCTB or CCTB without adverse UK tax consequences.

 

Financing of CCCTB zone operations may still be tax effectively achieved by lending from outside the CCCTB zone, subject to CCCTB thin cap type rules. Similar considerations apply for licensing into the CCCTB zone and entrepreneur planning, provided the licensor/principal is outside the CCCTB zone.

 

CCTB planning would revolve more around identifying current arbitrage structures between Member State companies/PEs in different States that would cease to work with CCTB.

 

MNCs should be able to model their likely CCCTB or CCTB tax profile, to evaluate the possible impact on their EU tax charge.
For US inbounds, there would be major implications for their US foreign tax credit profile in and planning in the EU.

 

Code of Conduct Group

 

MNCs should not overlook the ongoing work of the Code of Conduct group, which is overseeing a new (November 2010) ECOFIN Council initiative ‘on the application of the principles and criteria of the Code’ to Liechtenstein and Switzerland, which is due to report back to ECOFIN shortly.

 

CCCTB compliance impact

 

If introduced, CCCTB or CCTB is also likely to have significant compliance implications for MNCs and the configuration of their European tax departments.

 

Implementation timing

 

Implementation of CCCTB or CCTB in the participating Member States would be likely to be by 2013 or perhaps 2014.

 

 

Peter Cussons, International Tax Partner, PwC