Position paper on the proposals from the European Commission regarding the Common Consolidated Corporate Tax Base (CCCTB)

26-11-2016

Crucial disadvantages of the proposals for a European tax on profits

 

A common corporate tax base across EU member states for businesses with revenue in excess of EUR 750 million, ultimately resulting in a fully harmonised system in which multinationals pay their tax on profits in a single member state. It sounds great on paper, but there are quite a few fundamental problems with the tabled proposal.
 

  1. Future changes almost impossible
    The proposal by the European Commission means that member states would permanently transfer their authority to decide on their own corporate taxes to the EU. The Netherlands would then only be able to decide on the tax rate. This would have far-reaching consequences. Countries outside the EU, such as the US, the UK post-Brexit, Switzerland, Singapore or China could further modernise their own tax systems, while we in the EU would be stuck in a frozen system. Future changes would require the unanimous agreement of all member states. In the Netherlands, the corporate tax base is determined in accordance with fair commercial practice. This system makes it possible to adapt the way profits are determined in line with changes of opinion in society. The Common Corporate Tax Base (CCTB) is a rigid system that is unable to do this. The potential benefits of lower administrative burdens across the EU do not outweigh the downsides. In particular, this is because any reduction in administrative burdens would not be felt in the initial years after implementation. In fact, the opposite is true: the lion's share of any reduction in administrative burdens would only come after the introduction of the one-stop shop principle and consolidation. And neither of these would materialise until after the introduction of the consolidated common corporate tax base (CCCTB), which has effectively been kicked into the long grass.
     
  2. Adding an EU dimension to OECD proposals
    The argument that the plan for a Europe-wide tax on profits is needed to tackle tax avoidance by brass-plate companies does not hold water. Last year, the OECD already established an international framework to tackle this. And less than four months ago, the Council of Ministers adopted the Anti-Tax Avoidance Directive (ATAD). This Directive is the European iteration of the consensus achieved within the OECD on the base erosion and profit shifting (BEPS) project. It is unfathomable that the European Commission is already including amended anti-abuse provisions in the CCTB. A more sensible course of action would have been to integrate the ATAD requirements unamended into the CCTB.

    Furthermore, it undermines the international consensus reached within the OECD and limits the opportunity to roll out this approach in a coordinated and meaningful way. Adding an EU dimension to these proposals is a bad idea. Going it alone has major disadvantages for our own competitive position as well as that of Europe. Particularly interesting is that less than six months ago, proposals by the European Commission to include the switch-over clause in ATAD were consigned to the rubbish bin by member states because this measure would constitute an excessive limitation of the participation exemption. The same objections still apply, so it is difficult to understand why the European Commission has included the same switch-over clause in the proposal again.
     

  3. Bad for corporate HQs
    The proposal encompasses a participation exemption, albeit a less generous one than that currently available in the Netherlands. This makes the EU – and the Netherlands in particular – less appealing as a location for corporate headquarters. The existing regime for the set-off of liquidation losses is one of the core components of the participation exemption. It is incomprehensible why this essential regime for Dutch businesses is absent from the proposal. The proposal also seems to limit opportunities to organise active financing activities at a global level. The possibility of a fiscal unity also seems to disappear.
     
  4. Penalty on investments or dividend distributions
    The European Commission is introducing an allowance for growth and investment (AGI). The AGI results in additional tax relief if equity increases, but also in an increased tax assessment if equity reduces. This last point means that the AGI actually serves as a penalty on making investments or distributing dividends. This again does nothing to increase the appeal of the investment and business climate within the EU. And that is something that would hit an open economy like ours rather hard.
     
  5. Procyclical system
    The CCTB is procyclical in nature. This is because the aforementioned AGI results in businesses facing a higher tax bill during economic hardship. . As equity decreases during a recession, companies will have to pay more tax or, at the very least, will have fewer losses to offset against other years. This is further reinforced as the CCTB only allows for losses to be offset against future profits, as there is no possibility for carry-back. In Dutch law, losses can also be set off against the preceding year. Also, the rules on the limitation of interest deduction further contribute to the pro-cyclical nature of the CCTB. This means that the CCTB creates an enormous liquidity disadvantage for businesses in an economic downturn.
     
  6. Bad for innovative businesses
    The proposals for a super-reduction for R&D expenses is far less favourable for innovative multinationals than the rules currently in place in a number of Member States as well as the rules in place in countries outside the EU. Also, innovative assets do not count towards the allocation key that assigns the share of the total tax base to each of the Member States. In combination with the remarks on the AGI this increases the appeal of making investments in R&D outside the EU.
     
  7. No consolidation
    The proposals for cross border loss relief between Member States is not a real alternative for EU-wide consolidation. It would also give rise to major uncertainty about how local rules on loss relief and fiscal unity would have to be applied. . An absence of consolidation would also mean that transfer pricing and permanent establishments would prove problematic between group companies within the EU. If CCTB were to become a reality, it is not a foregone conclusion that the second step towards full consolidation would also be taken
     
  8. Taxation agreements are not fit for CCTB
    The European Commission has not taken into account that the Dutch system of tax treaties conventions is tailored to fit Dutch legislation. The same applies to the tax treaties of other member states. CCTB would mean that these treaties would lose much of their effectiveness and double taxation on a large scale would loom large. The detrimental impact of this on the business climate in the Netherlands and the rest of the EU can scarcely be imagined. The interaction with taxation conventions would also have a different effect in all EU countries. As a result, establishing a harmonised corporate tax base will become problematic for cross-border activities and investments in particular, which is an even bigger problem for an open economy with a smaller internal market.
     
  9. Impact on the tax rate?
    The allocation key will cause for the tax base to be distributed differently across Member States than is currently the case. The nature of the elements of the allocation key will ensure that more tax revenue will flow to the larger Member States. Earlier calculations in the 2011 proposal that some of the smaller Member States stood to lose up to one third of their corporate tax revenue. Since national authority under the CCTB only extends to the tax rate, the smaller Member States would be forced to either raise the tax bill of other taxpayers or raise corporate income tax rates. The latter would seriously harm the investment climate in these particular Member States (also for domestic SMEs) and the former would be at odds with the fairness goals of the CCTB.
     
  10. Impact assessment too optimistic
    Strikingly, the impact assessment of this proposal devotes scarcely any attention to the consequences for the competitive position of the EU compared to the rest of the world. As a result, the effects that the European Commission posits for employment and investment are far too optimistic.
     
  11. Timing
    The European Union is on the threshold of negotiating with the UK on Brexit. The question is whether this is the best time to launch a proposal like this. The OECD proposals and ATAD offer the necessary instruments to tackle tax avoidance at the international level. During its European presidency, the Netherlands strongly supported this ambition by reaching a consensus on a robust approach to tax avoidance by European businesses. The Netherlands and the Commission should build on this success by making efforts towards a coordinated introduction of ATAD. There is no place for new, further-reaching initiatives, such as CCTB. Moreover, the proposal is detrimental to the current developments that are being investigated by the G20 and the OECD: how can a tax system support sustainable growth and innovation while providing legal certainty? CCTB is not a constructive answer to this question.