On October 25, 2016, the European Commission (EC) published plans to overhaul the way in which companies are taxed within the EU, with the aim of delivering a growth-friendly and fair corporate tax system.
There are three separate initiatives and related directive proposals included in the package:
I. The Common Consolidated Corporate Tax Base (CCCTB)
The re-launched CCCTB will be implemented in two steps; first as Common Corporate Tax Base (CCTB) and later, with the inclusion of cross-border consolidation, as the full CCCTB.
The CCCTB will be mandatory for all groups with global consolidated revenues of more than EUR 750 million. Companies that fall below the threshold will still be able to opt in to the CCCTB.
In the re-launched CCCTB, Member States will have the possibility to agree on and implement the common base first, with consolidation coming as a second step. The common base provides the single set of rules to decide how a company’s profit will be taxed, once various exemptions and deductions have been accounted for whereas the consolidation element will allow a group to add up all the profits and losses of its constituent companies in different Member States, to reach a net profit or loss for the entire EU.
Once the tax base of the company has been established, the company’s taxable profits will be shared out between the Member States in which the company is active using an apportionment formula. The proportion of the company’s base that a Member State can tax will be decided based on three (3) equally weighted factors:
- The assets the company has in that Member State (e.g. buildings, machinery).
- The labour the company has in that Member State (i.e. the number of employees and employment costs).
- The sales that the company made in that Member State. The sales factor will be calculated on the basis of destination (i.e. where the goods are sold/dispatched to or where the service is carried out).
Member States will continue to decide their own corporate tax rates, as is their sovereign right. In other words, CCCTB will establish the tax base of a company and divide it between the
II. Improved mechanisms to resolve double taxation disputes
The Commission has proposed a number of important changes to current mechanisms that should ensure that companies can rely on timely and decisive resolutions to double tax disputes. The proposal expands the scope of cases that will be covered by the dispute resolution mechanism. Companies will be allowed to access it when they have problems with double taxation for all corporate tax issues. It also sets clear deadlines for Member States to resolve double taxation disputes, to prevent companies from suffering long periods of uncertainty.
The company subject to double taxation can initiate a procedure whereby the Member States in question must try to solve the dispute amicably within two years.
If at the end of this period, no solution has been found, the Member States should set up an Advisory Commission to arbitrate on the case. If the Member States fail to do this, the taxpayer can ask the national court to do so. This Commission will be comprised of three (3) independent members and representatives of the competent authorities in question. It will have six (6) months to deliver a final, binding decision. This decision will be immediately enforceable and must eliminate the double taxation. Any company faced with double taxation of its profits, including SMEs, will be able to benefit from this improved dispute resolution mechanism.
III. Measures to tackle tax loopholes with non-EU countries
This proposal builds on to the Anti-Tax Avoidance Directive, which was agreed in July 2016, with measures to stop companies from exploiting differing rules or ‘mismatches’ between the tax systems of Member States and those of non-EU countries, also known as “hybrid mismatches”.
Today’s proposal tackles hybrid mismatches between Member States and non-EU countries. If a hybrid mismatch with a third country leads to double non-taxation, the company may have to pay tax on certain payments in the EU which it normally would not have to or may no longer be able to deduct certain payments.
The Package also contains a Chapeau Communication, outlining the political and economic rationale behind the proposals, as well as impact assessments on the CCCTB and the dispute resolution mechanism.
The legislative proposals will now be submitted to the European Parliament for consultation and to the Council for adoption.
The CCTB/CCCTB directives will enter into force as of January 1, 2020, provided that all EU Member States adopt them unanimously.
The ATAD II directive, containing anti-abuse rules with regard to hybrid mismatch arrangements involving third countries will enter into force as of January 1, 2019, alongside with the ATAD I already adopted by ECOFIN.
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