2 Taxation
| (32617)
7263/11
+ ADDs 1-2
COM(11) 121
| Draft Directive on a common consolidated corporate tax base (CCCTB)
|
| Legal base | Article 115 TFEU; consultation; unanimity
|
| Document originated | 16 March 2011
|
| Deposited in Parliament | 24 March 2011
|
| Department | HM Treasury
|
| Basis of consideration | EM of 5 April 2011 and SEM of 21 April 2011
|
| Previous Committee Report | None
|
| To be discussed in Council | Not known
|
| Committee's assessment | Legally and politically important
|
| Committee's decision | Not cleared, but for immediate debate on the Floor of the House on a draft Reasoned Opinion and the Treasury Committee asked for an Opinion
|
Background
2.1 In the past the Commission has made plain its hope of introducing
harmonisation of direct taxation for companies, in particular
by establishing a "Common Consolidated Corporate Tax Base"
(a CCCTB). In Communications in October 2001, April 2006 and May
2007 it reported on efforts to develop a proposal for a CCCTB.[9]
And in February 2007, in its Annual Policy Strategy for 2008,[10]
the Commission announced its intention to introduce a proposal
for a CCCTB in 2008 — however this did not happen.
2.2 In response to all this the previous Government
consistently made clear that direct taxation is primarily a matter
for Member States and that in its view fair tax competition, not
tax harmonisation, was the basis on which the EU could compete
with the rest of the world.
The document
2.3 With this draft Directive the Commission now
seeks to introduce a CCCTB. The draft Directive would:
- provide for a single set of
harmonised rules for calculating the tax base for taxable profits
of companies resident in Member States;
- allow companies to opt into this CCCTB or to
continue to operate within national tax systems;
- allow groups of companies to calculate their
total EU-wide consolidated profit for tax purposes;
- provide for that profit to be allocated to companies
making up the group on the basis of an apportionment formula composed
of sales, payroll, number of employees and assets in each Member
State; and
- provide that Member States would then tax the
profit apportioned to companies in their Member State.
2.4 Allocating profit on this basis would be a significant
change from the status quo — the current arrangements
are for separate accounting in each Member State to determine
location of income and thus tax due. The proposal would redistribute
the tax base between Member States, but they would continue to
set their own corporate tax rates.
2.5 The proposal is accompanied by a summary of the
Commission's impact assessment and by the impact assessment itself,
which includes the results of five studies undertaken for the
Commission. The impact assessment considers four options —
the proposed optional CCCTB, a compulsory CCCTB, an optional Common
Corporate Tax Base (that is with separate accounting remaining
in place, rather than consolidating tax results) and a compulsory
Common Corporate Tax Base.
The Government's view
2.6 In his Explanatory Memorandum the Exchequer Secretary
to the Treasury (Mr David Gauke) says that:
- as set out in the Coalition
agreement, the Government will ensure "that there is no further
transfer of sovereignty or powers to the EU over the course of
the Parliament";
- the Government will not agree to a proposal that
might threaten or limit its ability to shape the UK's own tax
policy;
- the Government recognizes, however, the proposal's
potential impact on companies operating across the EU, notably
if taken forward by a smaller group of Member States under enhanced
co-operation; and
- it will engage in discussions to help shape a
CCCTB that does not undermine the competitiveness of the EU or
the UK.
2.7 Turning to the financial implications of the
draft Directive the Minister says that:
- in its impact assessment the
Commission suggests a reduction in compliance costs for companies
for recurring tax related tasks in the range of 7% when moving
from the current situation to a CCCTB and a reduction in these
compliance costs is cited as a major benefit of the CCCTB;
- the Government believes, however, that there
are significant shortcomings to this estimate and that the reduction
in compliance costs for companies may not be as significant as
the Commission anticipates;
- the Commission concedes it is difficult to predict
the proposal's exact impact on the tax revenues of individual
Member States — the proposal would effectively redistribute
the EU corporate tax base amongst Member States, based on the
allocation factors;
- the assessment of the optional CCCTB, the Commission's
preferred option, suggests that, if the UK participated along
with all 26 other Member States, the UK's share of the EU wide
corporate tax base would increase from 20.3% to 20.5%;
- the Government believes there are significant
shortcomings to this estimate and the impact assessment as a whole;
- the impact assessment shows a negative impact
on investment (-0.74% to -0.87%), employment (0% to -0.01%) and
GDP (-0.15% to -0.17%) at EU level, with only a marginal gain
in welfare (+0.02%);
- it also shows a shows a negative impact on investment
(-0.77% to -0.93%), employment (-0.03% to -0.04%) and GDP (-0.02%
to -0.05%) for the UK, with only a marginal gain in welfare (0
to +0.02%);
- an optional CCCTB would mean that Member States'
tax administrations would have to manage two distinct tax schemes
(CCCTB and their national corporate income tax), which would increase
costs;
- there would also be new costs associated with
the need for coordination with other administrations and one-off
costs, such as the need for personnel training and upgrading of
IT systems; and
- the proposal does not have any budgetary implications
for the EU.
2.8 Finally in his Explanatory Memorandum the Minister
says that the Government intends to consult business representative
bodies and interested parties about the proposal.
2.9 In his Supplementary Explanatory Memorandum the
Minister discusses the draft Directive in the context of subsidiarity
and proportionality, saying that the Government recognises the
importance of ensuring that the principle of subsidiarity is applied
to all EU Directives and has consistently emphasised its commitment
to upholding tax sovereignty and subsidiarity. He comments that:
- the Government recognises that
the Commission has framed its assessment of subsidiarity carefully
— some Member States may be convinced by the Commission's
arguments that non-coordinated Member State action would not address
the specific single market issues that it believes are created
by the interaction of 27 different tax regimes as effectively
as the EU-level solution it proposes;
- this assessment seems to be based, however, on
an assumption that a CCCTB is necessary to address the broader
objectives identified as the aim of the Commission's proposal
and that 27 different national corporate tax systems inherently
impede the proper functioning of the internal market — this
is an assumption the Government finds difficult to accept;
- the Government is not convinced that a CCCTB
is necessary to improve the simplicity and efficiency of corporate
tax systems in the EU;
- it considers that the fiscal impediments to cross-border
activity that the proposal claims to tackle (compliance costs,
double taxation, and over-taxation) can be addressed through other
routes (for example, informal coordination or bilateral solutions);
- it remains to be convinced, therefore, that the
Commission has provided a sufficiently strong justification that
action at EU level is required and that the proposal is compliant
with the requirements of subsidiarity and proportionality; and
- when discussions begin the Government will be
pressing the Commission for any further analysis it is able to
provide on the subsidiarity and proportionality issues.
Finally the Minister notes that the House, and/or
the Lords may issue a Reasoned Opinion to the EU institutions
on the issue of subsidiarity if this proposal gives cause for
concern.
Conclusion
2.10 This proposal has significant and possibly
unwelcome implications. We are concerned about five matters —
the basic justification for the proposal, its legal base and its
actual legality, the detailed content of the proposal, subsidiarity
and proportionality.
2.11 The Minister tells us that the Government
is not convinced that there is a real single market case for a
CCCTB and that it is challenging the Commission to substantiate
this claimed justification. We share this doubt about the utility
of the proposal EU-level solution to the alleged problems of 27
separate tax systems and we should like to hear from the Government
about the Commission's
response.
2.12 The draft Directive is concerned with direct
taxation. The legal base cited for it is Article 115 TFEU. This
article allows EU legislation to approximate national legislation
which directly affects the operation of the single market, but
this provision is expressly "without
prejudice to Article 114".
Article 114(2) TFEU provides that Article 114(1) TFEU "shall
not apply to fiscal provisions".
Article 113 TFEU, the only provision referring to the harmonisation
of taxation, is limited in its scope to "turnover
taxes, excise duties and other forms of indirect taxation".
There is therefore no express provision in the Treaty for the
harmonisation of direct taxation. We should be grateful to know
whether the Minister agrees with the Commission that Article 115
TFEU provides a sufficient legal base for this proposal, or whether
he agrees with us that there is no legal base at all.
2.13 The Commission has also commented in the
impact assessment that the impact of the proposal on the revenues
of Member States will depend on their responses to the new regime,
including possible tax rate adjustments. We ask the Minister to
say whether he thinks this could amount to an indirect interference
in Member States'
sovereign control of such rates.
2.14 The question of legality as set out in the
two paragraphs above will also have a bearing on any proposal
for enhanced cooperation, since this is only permitted "in
one of the areas covered by the Treaties"
(Article 329 TFEU).
2.15 The draft Directive has 27 recitals, 136
articles and three annexes —
in neither his Explanatory Memorandum nor his Supplementary Explanatory
Memorandum does the Minister suggest whether any of the provisions
gives particular cause for concern. For instance, as a simple
example, are the delegated powers in Article 127 of the draft
Directive significant? The implication of the Minister's
comment that the Government "will
engage in discussions to help shape a CCCTB that does not undermine
the competitiveness of the EU or the UK"
is that there are provisions that do give cause for concern. We
should be grateful to learn from the Government what these are.
2.16 We have three concerns in relation to proportionality,
on which we should be grateful for the Minister's
comments:
- adoption of the draft Directive
would lead to the doubling, from 27 to 54, of systems for corporate
taxation in the EU, so leading to on-going costs wholly disproportionate
to any benefit;
- introduction of 27 new systems would be costly
and might require renegotiation of many existing tax treaties;
and
- the proposed apportionment formula, which
does not include, for instance, financial assets, may excessively
disadvantage Member States with large commercial sectors.
2.17 On the question of subsidiarity we recommend
that, pursuant to Article 6 of Protocol (No 2) on the Application
of the Principles of Subsidiarity and Proportionality, the House
should send to the Presidents of the Council, the European Parliament
and the Commission a Reasoned Opinion stating that the draft Directive
does not comply with the principle of subsidiarity. The reasons
for coming to this view are set out in the Opinion. The deadline
for receipt of the Opinion is 18 May 2011; we leave how this will
be respected to the Government. Our position is that in view of
the infrequency of these recommendations for a Reasoned Opinion
and the time constraint for their submission, the Motion should
be debated on the Floor of the House. The alternative of a debate
in European Committee B, followed by a forthwith Motion on the
Floor of the House causes, we believe, more difficulty with the
deadline for submission. Whichever course the Government takes,
a draft Reasoned Opinion for agreement by the House is annexed
to this chapter.
2.18 However, we do not wish yet to release the
draft Directive from scrutiny. Rather we intend to consider it
again when we have received:
- a response from the Government
to our various requests;
- an account from the Government of the preliminary
discussions about the proposal; and
- an account of the views about the proposal
of business representative bodies and interested parties emerging
from the Government's
consultations.
And we may wish, at a later stage, to recommend
a further debate in European Committee B, to cover issues other
than subsidiarity.
2.19 Finally, we would like, given the importance
of the matter, the Treasury Committee meanwhile to let us have
an Opinion, in accordance with paragraph 11 of Standing Order
No. 143, on the utility and advisability of the draft Directive.
Annex: Draft Reasoned Opinion
Reasoned Opinion of
the House of Commons
Submitted to the Presidents of the European Parliament,
the Council and the Commission, pursuant to Article 6 of Protocol
(No 2) on the Application of the Principles of Subsidiarity and
Proportionality
Draft Directive on a common
consolidated corporate tax base (7263/11)
Treaty framework for appraising compliance with
subsidiarity
1. The principle of subsidiarity is born of the wish
to ensure that decisions are taken as closely as possible to the
citizens of the EU. It is defined in Article 5(2) TEU:
"Under the principle of subsidiarity, in areas
which do not fall within its exclusive competence, the Union shall
act only if and in so far as the objectives of the proposed action
cannot be sufficiently achieved by the Member States, either at
central level or at regional and local level, but can rather,
by reason of the scale or effects of the proposed action, be better
achieved at Union level."
2. The EU institutions must ensure "constant
respect"[11] for
the principle of subsidiarity as laid down in Protocol (No 2)
on the Application of the Principles of Subsidiarity and Proportionality.
3. Accordingly, the Commission must consult widely
before proposing legislative acts; and such consultations are
to take into account regional and local dimensions where necessary.[12]
4. By virtue of Article 5 of Protocol (No 2), any
draft legislative act should contain a "detailed statement"
making it possible to appraise its compliance with the principles
of subsidiarity and proportionality. This statement should contain:
— some
assessment of the proposal's financial impact;
— in the case of a Directive, some assessment
of the proposal's implications for national and, where necessary,
regional legislation; and
— qualitative and, wherever possible, quantitative
substantiation of the reasons for concluding that an EU objective
can be better achieved at EU level.
The detailed statement should also demonstrate an
awareness of the need for any burden, whether financial or administrative,
falling upon the EU, national governments, regional or local authorities,
economic operators and citizens, to be minimised and to be commensurate
with the objective to be achieved.
5. By virtue of Articles 5(2) and 12(b) TEU national
parliaments ensure compliance with the principle of subsidiarity
in accordance with the procedure set out in Protocol (No 2), namely
the reasoned opinion procedure.
Previous Protocol on the application of the principle
of subsidiarity and proportionality
6. The previous Protocol on the application of the
principle of subsidiarity and proportionality, attached to the
Treaty of Amsterdam, provided helpful guidance on how the principle
of subsidiarity was to be applied. This guidance remains a relevant
indicator of compliance with subsidiarity:
"For Community action to be justified, both
aspects of the subsidiarity principle shall be met: the objectives
of the proposed action cannot be sufficiently achieved by Member
States' action in the framework of their national constitutional
system and can therefore be better achieved by action on the part
of the Community.
"The following guidelines should be used in
examining whether the abovementioned condition is fulfilled:
- the issue under consideration has transnational
aspects which cannot be satisfactorily regulated by action by
Member States;
- actions by Member States alone or lack of Community
action would conflict with the requirements of the Treaty (such
as the need to correct distortion of competition or avoid disguised
restrictions on trade or strengthen economic and social cohesion)
or would otherwise significantly damage Member States' interests;
- action at Community level would produce clear
benefits by reason of its scale or effects compared with action
at the level of the Member States."[13]
Proposal
7. The proposed Directive seeks to introduce a Common
Consolidated Corporate Tax Base (CCCTB). A CCCTB would introduce
a single set of harmonised rules for calculating the tax base
for taxable profits of companies resident in EU Member States,
and allow groups of companies to calculate their total EU-wide
consolidated profit for tax purposes.
8. This profit would then be allocated to companies
making up the group on the basis of an apportionment formula composed
of sales, payroll, number of employees and assets in each Member
State. Member States would then tax the profit apportioned to
companies in their Member State.
9. Allocating profit on this basis would be a significant
change from the status quo — the current arrangements
are for separate accounting in each Member State to determine
location of income and thus tax due. The proposal would redistribute
the tax base between Member States, but they would continue to
set their own corporate tax rates.
10. If adopted, the Directive would have to be transposed
into national law. Member States would be required to manage two
distinct tax systems, their existing national system, which is
covered by existing legislation, and a CCCTB. According to the
UK Government, this would not require an adjustment to existing
legislation in the UK, but would increase costs: new costs associated
with the need for coordination with other administrations; and
one-off costs such as the need for employee training and upgrading
of IT systems.
Impact assessment
11. The Commission's proposal is accompanied by an
explanatory memorandum, a summary of the impact assessment, and
by the impact assessment itself. The impact assessment follows
the Guidelines of Secretariat General for Impact Assessments and
accordingly provides: "(i) a review of the consultation process;
(ii) a description of the existing problems; (iii) a statement
of the objectives of the policy; and (iv) a comparison of alternative
policy options which could attain the stated objectives".
[14] It also includes
the results of five studies undertaken for the Commission. The
four alternative policy options are —
the proposed optional CCCTB, a compulsory CCCTB, an optional Common
Corporate Tax Base (that is with separate accounting remaining
in place, rather than consolidating tax results) and a compulsory
Common Corporate Tax Base.
12. The impact assessment of the Commission's preferred
option suggests that if the UK participated along with all 26
other Member States, the UK's share of the EU wide corporate tax
base would increase from 20.3% to 20.5%.
13. At EU level the impact assessment shows a negative
impact on investment (-0.74% to -0.87%), employment (0% to -0.01%),
and GDP (-0.15% to -0.17%), with only a marginal gain in welfare
(+0.02%).
14. For the UK it shows a shows a negative impact
on investment (-0.77% to -0.93%), employment (-0.03% to -0.04%),
and GDP (-0.02% to -0.05%) for the UK, with only a marginal gain
in welfare (0 to +0.02%).
15. The Commission concedes it is difficult to predict
the proposal's exact impact on the tax revenues of individual
Member States. The proposal would effectively redistribute the
EU corporate tax base amongst Member States, based on allocation
factors. The explanatory memorandum states that:
"[i]n fact, the impact on the revenues of Member
States will ultimately depend on national policy choices with
regard to possible adaptations of the mix of different tax instruments
or applied tax rates. In this respect it is difficult to predict
the exact impacts on each of the Member States. In this context,
as an exception to the general principle, where the outcome of
the apportionment of the tax base between Member States does not
fairly represent the extent of business activity, a safeguard
clause provides for an alternative method."[15]
The view of the UK Government
16. The UK Government believes there are significant
shortcomings in the Commission's estimates of the impact of the
proposal on the UK and in the impact assessment as a whole. It
does not accept the assumption that a CCCTB is necessary to address
the broader objectives of the proposal or that 27 different national
corporate tax systems inherently impede the proper functioning
of the internal market. It is not convinced that a CCCTB is necessary
to improve the simplicity and efficiency of corporate tax systems
in the EU. It considers that the fiscal impediments to cross-border
activity that the proposal claims to tackle — compliance
costs, double taxation, and over-taxation — can be addressed
through other routes, such as informal coordination or bilateral
solutions. It remains to be convinced, therefore, that the Commission
has provided a sufficiently strong justification that action at
EU level is required and that the proposal is compliant with the
requirements of subsidiarity and proportionality; when negotiations
begin the Government will be pressing the Commission for any further
analysis it is able to provide on compliance with subsidiarity
and proportionality.
Aspects of the Directive which do not comply
with the principle of subsidiarity
17. The House of Commons considers that the draft
Directive on a common consolidated corporate tax base does not
comply with either the procedural obligations imposed on the Commission
by Protocol (No 2) or the principle of subsidiarity in the following
respects.
i) Failure to comply with procedural obligations
18. Section 2.4 of the impact assessment (on subsidiarity
and proportionality) does not contain a "detailed statement"
to make it possible to appraise compliance with the principle
of subsidiarity (and proportionality), as required by Article
5 of Protocol No 2. The summary of the impact assessment states
that the impact assessment followed the Guidelines of Secretariat
General for Impact Assessments, which do not appear to include
a provision for a detailed statement in accordance with Article
5 of Protocol (No 2) (see paragraph 11 above). Section 2.4 falls
a long way short of the level of detail required to substantiate
action at EU level, and also includes irrelevant considerations
of legal base and compliance with the EU Charter on Fundamental
Rights:
"2.4. Subsidiarity and proportionality
"The right for the Community [sic] to
act in the field of direct taxation is set out in article 115
of TFEU, which provides that '[t]he Council shall, acting unanimously
on a proposal from the Commission and after consulting the European
Parliament and the Economic and Social Committee, issue directives
for the approximation of such laws, regulations or administrative
provisions of the Member States as directly affect the establishment
and functioning of the common market'. Moreover, the envisaged
policy options are compatible with the EU Charter of Fundamental
Rights.
"As pointed out in the previous sections, the
current framework with 27 different national corporate tax systems
impedes the proper functioning of the Internal market. Member
States cannot provide a comprehensive solution to this problem.
Non-coordinated action, planned and implemented by each Member
State individually, would replicate the current situation, as
taxpayers would still need to deal with as many tax administrations
as the number of jurisdictions in which they are liable to tax.
Community action is necessary in view of establishing a juridical
framework with common rules. The Commission has taken initiative
having in mind that, under the principle of subsidiarity, Member
States are free to determine the size and the composition of their
tax revenues.
"The measures to be taken under the present
initiative are both suitable and necessary for achieving the desired
end (i.e. proportionate). The comprehensive proposals examined
in this document do not imply a harmonisation of corporate tax
rates in the EU and, therefore, they do not restrict Member States'
capability to influence their desired amount of corporate tax
revenues. They do not interfere with national choices in terms
of the size of public sector's intervention and composition of
tax revenues. They propose a more efficient way to collectively
manage the problems arising from the segmentation of national
corporate tax systems in view of a more efficient Internal market.
In line with the general understanding of the subsidiarity principle,
they offer solutions allowing managing collectively the market
failures resulting from the separate working of 27 national tax
systems".[16]
19. The presumption in Article 5 TEU is that decisions
should be taken as closely as possible to the EU citizen. A departure
from this presumption should not be taken for granted but be justified
with sufficient detail and clarity that an EU citizen can understand
the qualitative and quantitative reasons leading to a conclusion
that EU action rather than national action is justified. In its
impact assessment the Commission has failed to discharge the obligations
placed on it to present a detailed statement on subsidiarity
by Article 5 of Protocol (No 2).
ii) Failure to comply with principle of subsidiarity
20. The first recital of the proposal sets out the
legislative objective:
"(1) Companies which seek to do business across
frontiers within the Union encounter serious obstacles and market
distortions owing to the existence of 27 diverse corporate tax
systems. These obstacles and distortions impede the proper functioning
of the internal market. They create disincentives for investment
in the Union and run counter to the priorities set in the Communication
adopted by the Commission on 3 March 2010 entitled Europe 2020
— A strategy for smart, sustainable and inclusive growth.
They also conflict with the requirements of a highly competitive
social market economy."[17]
21. Compliance of this objective with subsidiarity
is appraised in the light of the guidance set out in paragraph
6 above.
22. There is an assumption, rather than clear evidence
in the form of qualitative and quantitative indicators, in the
impact assessment that the issue under consideration has transnational
aspects which cannot be satisfactorily regulated by action
by Member States, for example through informal coordination
as suggested by the UK Government.
23. Similarly, there is an assumption, rather than
clear evidence in the form of qualitative and quantitative indicators,
in the impact assessment that action by Member States alone or
lack of EU action would conflict with the requirements of the
EU Treaties, in this instance the internal market. Whilst it is
clear that different corporate tax regimes place additional burdens
on companies operating in more than one EU Member State, and that
a unified corporate tax base would attenuate these burdens, this
is not the same as the contention made by the Commission that
such burdens amount to an impediment to the functioning
of the internal market:
"the tax barriers faced by EU firms when they
expand across national borders can be defined as cost-increasing
barriers resulting in market-entry restrictions. The removal of
such barriers is akin to a liberalisation policy to be analysed
within the framework of the freedom of establishment in the Internal
market."[18]
There is insufficient evidence in the impact assessment
to justify this proposal on the grounds of it being "akin
to a liberalisation policy to be to be analysed within the framework
of the freedom of establishment in the internal market."
24. There is insufficient evidence in form of qualitative
and quantitative indicators in the impact assessment that action
at EU level would produce clear benefits by reason of its
scale or effects compared with action at the level of the Member
States. Although the reduction in tax compliance costs is estimated
to be in the range of 7%, the impact assessment shows a negative
impact on investment, employment and GDP at the EU level, with
only a marginal gain in welfare. The benefits for Member States
are equally questionable: a safeguard clause is deemed necessary
to allow for an alternative method of apportionment where the
redistribution of the tax base between Member States is considered
unfair on a Member State.
25. For these reasons the House of Commons concludes
that this proposal does not respect the principle of subsidiarity.
9 (22808) -: see HC 152-xiv (2001-02), chapter 4 (23
January 2002) and HC 152-xxxvii (2001-02), chapter 21 (17 July
2002; (27425) 8231/06: see HC 34-xxix (2005-06), chapter 2 (17
May 2006) and HC 34-xxxiii (2005-06), chapter 17 (28 June 2006)
and (28619) 9415/07: see HC 41-xxv (2006-07), chapter 15 (13 June
2007). Back
10
(28417) 6788/07: see HC 519-I (18 July 2007). Back
11
Article 1 of Protocol (No 2). Back
12
Article 2 of Protocol (No 2). Back
13
Article 5. Back
14
Explanatory memorandum, p 7. Back
15
p 6. Back
16
pp 15-16. Back
17
p 11 of the proposal. Back
18
Section 2.3 of the impact assessment "Summary of the problems
and the baseline scenario", p 14. Back
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