On 15 March 2018, the European Parliament (EP) approved two Directive proposals for the Common Corporate Tax Base (CCTB) and the Common Consolidated Corporate Tax Base (CCCTB), supporting the need for the two Directives to be implemented simultaneously. This creates a legal framework under which companies would be taxed in the European Union (EU) under a harmonised corporate tax law system, which also takes into account their digital activities.
In the form adopted by the EP, the two directives will be binding for groups of companies with a consolidated turnover of at least EUR 750 million. This threshold is to be lowered to zero within maximum seven years. We present below the main provisions of the two proposals as amended by the EP:
Common Corporate Tax Base (CCT) Directive
- Sets out the mandatory rules for determining the corporate tax base;
- Introduces the concept of a digital permanent establishment (DPE), representing a significant digital presence of a taxpayer providing online services to individuals or businesses in Member State (MS) other than its residency state. Conditions to be classified as a DPE:
- the total amount of revenue of the taxpayer or associated enterprises from remote transactions generated from digital platforms from a MS exceeds EUR 5 million per year, and
- at least 1,000 registered individual users from a MS per month visited the digital platform, or
- at least 1,000 digital contracts have been concluded per month with customers or users in a MS, or
- the volume of digital content collected by the taxpayer in a taxable year exceeds 10% of the group’s overall stored digital content.
- Amends the tax incentives for research and development (R&D), limiting the tax credit to 10% of the R&D staff costs and imposing a maximum threshold of such eligible costs of EUR 20 million;
- Introduces the non-deductibility of expenses paid to beneficiaries located in a jurisdiction considered to be a “tax haven” (according to the EU list of non-cooperative jurisdictions for tax purposes);
- Limits the deductibility of excess borrowing costs to 10% of the taxpayer's earnings before interest, tax, depreciation and amortisation ('EBITDA') or EUR 1 million (whichever is higher);
- The carry-forward period for losses has been decreased from seven years (as in the proposal presented in 2016) to five years;
- Changes the classification of controlled foreign company (CFC);
- Provides that, by 31 December 2018, the Commission is to present a legislative proposal for a harmonised, common European taxpayer identification number, in order to make automatic exchange of tax information more efficient and reliable within the Union;
- Introduces measures against tax treaty abuse by recommending amendment of bilateral tax conventions to contain the following:
- A clause ensuring that both parties to the treaty undertake to establish measures whereby tax is to be paid where economic activities take place and where value is created;
- An addendum to clarify that the objective of bilateral treaties, beyond avoiding double taxation, is also to fight tax evasion and aggressive tax planning;
- A clause for a principal purpose test based on a general anti-avoidance rule.
Common Consolidated Corporate Tax Base (CCCTB)
- Contains the principles of fiscal consolidation and the formula for allocating the tax base of a multinational company between Member States;
- The tax base of a consolidated group of companies is established as if it were a single entity. Thus, the profits or losses between two or more entities within the group are consolidated. If the consolidated base is negative, losses may be carried forward over a period of a maximum of five years;
- Regarding the formula for the allocation of the consolidated tax base, the following four factors are taken into account: labour, assets, sales and data collected and exploited by digital content users, with each of these factors having an equal weight.
- Provides that the EC will adopt acts establishing rules on the electronic submission of consolidated tax returns and other statements;
- Provides that the EC will establish a compensation mechanism financed by the fiscal surplus from those Member States which experience gains in fiscal revenues (set for an initial period of seven years)
The two Directive proposals mention the deadline of 31 December 2019 for transposing their provisions, with measures to take effect as of 1 January 2020.
[Source: Press release issued by the European Parliament]
When these two directives enter into force, we will see a harmonised corporate tax system in the EU. Groups of companies will calculate their taxes by consolidating the revenues of their constituent companies across all EU Member States, with those taxes shared between Member States according to where the profit was generated, based on the four allocation factors - labour, assets, sales and data collected and exploited by digital content users.
For EU-level adoption of these initiatives, the proposals will be submitted to the European Council and the Commission for consideration. Moreover, all such measures to harmonise tax rules require the unanimous vote of all Member States in the European Council.
The EC actually initiated these two proposals in 2011, but it was then difficult for the Member States to reach a consensus. As some states remain sceptical regarding the adoption of these provisions, it is difficult to assess whether a consensus is any more likely this time.