The concepts of Common Corporate Tax Base (CCTB) and Common Consolidated Corporate Tax Base (CCCTB) once again emerge as a perceived solution to tax the Member States via a “digital presence” and commonality in computing tax liabilities of the EU Member States.
These proposals have emerged in prior years, now with a digital presence emphasis, although such measures have required a unanimous vote which is difficult to achieve. However, this trend is always worth watching as the public perception may help to sway those countries that strive to protect their sovereignty over taxation.
The European Commission issued a significantly important proposal for a Double Taxation Dispute Resolution; it hopes to remain a leader in this ever-changing international tax arena with a mandate for binding arbitration, as applicable, as one of the leading initiatives. This proposal would require a unanimous adoption by all EU Member States (although UK’s vote may be considered to be of less significance as time moves on, it still counts).
Other proposals of the three-prong package include a renewed focus on the Common Consolidated Corporate Tax Base (CCCTB) and hybrid mismatches with third countries. The last initiative is interesting, as the EU now seeks to expand its reach with those countries outside the EU.
Although each proposal is significant as a stand-alone initiative, the Dispute Resolution would provide the most benefit at a critical time for a win-win relationship going forward.
EY’s Global Tax Alert provides further details on this initiative for reference.
The EU Council has provided a Directive that would introduce legislation ensuring the EU maintains its leadership role in anti-BEPS recommendations, as well as providing good tax governance for the rest of the world. EY’s summary of the Directive is provided for reference:
- Automatic exchange of tax rulings would be effective 1/1/2017.
- Changes would be introduced for the EU Code of Conduct.
- EU anti-BEPS proposal to include the following BEPS Actions:
- 2: Hybrid mismatches
- 3: CFC rules
- 4: Interest limitations
- 6: General anti-abuse rule (noting its inclusion for the Royalty & Interest Directive, similar to the Parent-Subsidiary Directive)
- 7: PE status
- 13: Country-by-Country (CbC) reporting
- Common Corp. Tax Base (absent later consolidation phase) proposal to be introduced in 2016
The EU continues its pace to maintain its global lead in addressing anti-BEPS concerns, which will impact non-EU countries around the world. Thereby, it provides another set of rules that would be mandated to achieve EU conformity.
The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States. Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.
Article 116 TFEU:
Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.
If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives. Any other appropriate measures provided for in the Treaties may be adopted.
The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:
- EU Common Corporate Tax Base (CCTB)
- Country-by-Country (CbC) reporting, public disclosure
- Tax rulings, (redacted) public disclosure
- Permanent Establishment (PE) definition
- Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
- Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
- EU Dispute Resolution approach
Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.
The European Parliament adopted a resolution to tackle tax avoidance and tax evasion via transparency measures to ameliorate limited resources of tax administrations. A summary and full content of the proposal are referenced herein:
- Publish country-by-country reporting (CBCR) template as part of annual reporting; The European Commission is to provide a legislative proposal to amend the Accounting Directive accordingly.
- Establish a consistent definition of “tax havens” by the end of 2015.
- Provide a blacklist of countries that do not combat tax evasion or that accept it.
- New treaties with developing countries should tax profits where value is created.
- EU Member States should agree on a Common Consolidated Corporate Tax Base (CCCTB).
- The EU should be taking a leading role to combat tax havens, tax fraud and evasion, leading by example.
- Beneficial information should be public; the Financial Action Task Force’s (FAFT) anti-money laundering recommendation is a minimum.
- Public scrutiny of tax governance and the monitoring of tax fraud cases; protect whistleblowers and journalistic sources.
- Transition period for developing countries to adopt the Automatic Exchange of Information mechanism.
These initiatives are accelerating the focus and intent for public tax disclosures in the very near future.
Most importantly, inclusion of the CBCR template as required documentation of annual reporting will automatically accelerate the due date for completion of such information. Thus, the year-end 2017 timeline proposed by the OECD will give way to this proposal and similar unilateral actions.
My prior post of 30 May 2015 revealed that the European Commission would be developing a new Action Plan, the contents of which are hereby revealed.
The objectives of the new Action Plan are:
- Re-establish the link between taxation and where economic activity takes place
- Ensuring that Member States can correctly value corporate activity in their jurisdiction
- Creating a competitive and growth-friendly EU tax environment
- Protecting the Single Market and securing a strong EU approach to external corporate tax issues, including BEPS measures, to deal with non-cooperative tax jurisdictions and to increase tax transparency
The new Action Plan is provided for reference:
5 Key Action Areas:
- Mandatory Common Consolidated Corporate Tax Base (CCCTB), with the consolidation component included as a second step.
- Taxation of profits where they are generated (“However, it is clear that the current transfer pricing system no longer works effectively in the modern economy.”)
- Enhance the EU’s tax environment via cross-border loss offset and improving double taxation dispute resolution mechanisms.
- Increased tax transparency via an EU-wide list of third country non-cooperative tax jurisdictions and assessing whether additional disclosure obligations of certain tax information should be introduced.
- Providing EU Coordination Tools to improve Member States’ tax audit coordination and reforming the Code of Conduct for Business Taxation and the Platform on Tax Good Governance.
The European Commission’s Action Plan clearly reveals a large step away from the traditional arm’s-length transfer pricing principle and toward an economic activity based source of taxation. This clear divergence, with the OECD and established legislation in most countries, sets the stage for a new evolution in transfer pricing and a hybrid of different approaches by various jurisdictions in the next several years.
Accordingly, the Action Plan is required reading to appreciate short and long-term objectives of the European Commission to unify the Member States.
The European Commission, in its meeting on 27 May 2015, determined that a new Action Plan is needed to address tax abuse and ensure sustainable fisc growth by the Member States. This follows its proposals on the Tax Transparency Package, including automatic exchange of tax rulings, possible public tax disclosure, and a review of the Code of Conduct.
The new Action Plan will look at integrating BEPS actions within the EU, review the digitalized economy, relaunching the Common Consolidated Corporate Tax Base (CCCTB) initiative and further rules for increased transparency.
The KPMG Euro Tax Flash provides a summary of the new proposals.
It is noteworthy that the EU is proceeding on designed actions in anticipation of, and subsequent to, BEPS actions for the EU Member States. These actions may form a new set of rules similar to, as well as disparate from, the new OECD Guidelines and the rest of the world. Other countries will be following these initiatives for similar adoption at a unilateral level, thereby providing a complex multi-layering of anti-abuse rules, transparency initiatives, and tax bases.
The answers to the struggle for fostering a better business environment in the EU market may be much different from an EU and rest of world perspective.