Documents considered by the Committee on 7 September 2011, including the following recommendation for debate: Standing Order and membership - European Scrutiny Committee Contents

5 Taxation



+ ADDs 1-2

COM(11) 121

Draft Directive on a common consolidated corporate tax base (CCCTB)

Legal baseArticle 115 TFEU; consultation; unanimity
DepartmentHM Treasury
Basis of considerationMinister's letter of 14 July 2011
Previous Committee ReportHC 428-xxv (2010-12), chapter 2 (4 May 2011) and HC Debs, 11 May 2011, cols. 1282-1304
To be discussed in CouncilNot known
Committee's assessmentLegally and politically important
Committee's decisionNot cleared; further information requested


5.1 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.[38] And in February 2007, in its Annual Policy Strategy for 2008,[39] the Commission announced its intention to introduce a proposal for a CCCTB in 2008 — however this did not happen.

5.2 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.

5.3 With this draft Directive the Commission has now sought 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.

5.4 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.

5.5 When we considered this proposal, in May 2011, we said that it had significant and possibly unwelcome implications. We were 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. First, we commented that we shared the Government's doubt about the utility of the proposed EU-level solution to the alleged problems of 27 separate tax systems and asked to hear about the Commission's response to the Government's challenge to it to substantiate this claimed justification.

5.6 Next, noting that there was no express provision in the Treaty for the harmonisation of direct taxation, we asked to know whether the Government agreed with the Commission that Article 115 TFEU provided a sufficient legal base for this proposal, or whether it agreed with us that there was no legal base at all. We also asked, in reference to the Commission comment, in its impact assessment, that the impact of the proposal on the revenues of Member States would depend on their responses to the new regime, including possible tax rate adjustments, whether the Government thought that this could amount to an indirect interference in Member States' sovereign control of such rates. We noted that these questions of legality would also have a bearing on any proposal for enhanced cooperation, since this was only permitted "in one of the areas covered by the Treaties" (Article 329 TFEU).

5.7 Thirdly, we noted that, although the Government had not suggested to us any provisions in the draft Directive's 27 recitals, 136 articles and three annexes which gave particular cause for concern, the implication of its comment that it would "engage in discussions to help shape a CCCTB that does not undermine the competitiveness of the EU or the UK" was that there were provisions of particular concern. We asked to hear from the Government what these were.

5.8 Turning to subsidiarity and proportionality we first set out three concerns in relation to proportionality, on which we asked for the Government'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 did not include, for instance, financial assets, might excessively disadvantage Member States with large commercial sectors.

5.9 As for subsidiarity we recommended that, pursuant to Article 6 of Protocol (No 2) on the Application of the Principles of Subsidiarity and Proportionality, TFEU, the House should send to the Presidents of the Council, the European Parliament and the Commission a Reasoned Opinion that the draft Directive did not comply with the principle of subsidiarity. (This recommendation was debated on the Floor of the House, and the Reasoned Opinion approved, on 11 May 2011.)

5.10 Finally, we said that we did not wish yet to release the draft Directive from scrutiny. Rather we intended to consider it again when we had 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 added that we might wish, at a later stage, to recommend a further debate in European Committee B, to cover issues other than subsidiarity. We also asked, given the importance of the matter, the Treasury Committee 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.[40]

The Minister's letter

5.11 The Exchequer Secretary to the Treasury (Mr David Gauke) writes now to comment on a number of the issues we raised in our previous report. First he says that:

  • the Government shares the conclusion of the House's Reasoned Opinion that the draft Directive does not respect the principle of subsidiarity and believes there is not a sufficiently strong single market case for the proposal;
  • it has raised the issue of subsidiarity with the Commission during Working Group discussions;
  • in response, the Commission has highlighted that the number of Reasoned Opinions received did not represent one third of all the votes allocated to national parliaments, that it is, therefore, under no obligation to review the draft Directive and that there will be no formal review;
  • the Commission said that it will respond formally to all the Reasoned Opinions, but that the process is taking longer than expected because some parliaments raised wider concerns as well as the issue of subsidiarity.

5.12 Noting that, during the House's debate on the Reasoned Opinion and whether or not the proposal complies with the principle of subsidiarity, the issue of the proposal's legal base was raised number of times and that we had said that "There is … no express provision in the Treaty for the harmonisation of direct taxation", the Minister sets out the Government's view on this matter.

5.13 The Minister says that:

  • Article 113 TFEU is the legal base for adopting provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the single market and to avoid distortion of competition;
  • to adopt such provisions the Council must act unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee;
  • Article 114 TFEU provides the legal base for the adoption of measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the single market;
  • to adopt such measures the European Parliament and the Council must act in accordance with the ordinary legislative procedure and after consulting the Economic and Social Committee;
  • decisions made under the ordinary legislative procedure involve the Council acting by a qualified majority;
  • Article 114(2) TFEU expressly states that Article 114(1) TFEU shall not apply to fiscal provisions — so measures for the approximation of fiscal provisions cannot be adopted in accordance with the ordinary legislative procedure and this protects the Member States' veto on tax measures proposed by the Commission;
  • whilst there is no treaty article which explicitly provides for measures for the approximation of direct taxation, Article 115 TFEU provides for Directives for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the single market;
  • the explicit statement in Article 114(2) TFEU that Article 114(1) TFEU shall not apply to fiscal provisions does not apply to Article 115 TFEU;
  • if it is accepted that a Directive for the approximation of fiscal provisions of the Member States directly affects the establishment or functioning of the single market, the Government believes Article 115 TFEU would be the appropriate legal base for such a Directive;
  • this generally accepted view is supported by the European Court of Justice (Case C-338/01 Commission v Council); and
  • to adopt such a Directive under Article 115 TFEU the Council must act unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee — this protects the Member States' veto on tax measures proposed by the Commission.

The Minister adds a reiteration of the sentiments expressed by the Economic Secretary to the Treasury (Justine Greening) during the House's debate on the Reasoned Opinion — namely, that the Government does not believe that a CCCTB is necessary for the single market to function effectively and it does not accept the assumptions that appear to underpin the Commission's proposal.

5.14 Regarding our question as to whether, in reference to the Commission comment, in its impact assessment, that the impact of the proposal on the revenues of Member States would depend on their responses to the new regime, including possible tax rate adjustments, the Government thought that this could amount to an indirect interference in Member States' sovereign control of such rates, the Minister tells us that it does not believe this to be so, saying that:

  • Member States choose to change their tax rates as and when they see fit to suit their own economic circumstances and in response to international competition; and
  • ultimately, Member States retain the right to veto tax measures proposed by the Commission or opt out of any enhanced co-operation.

5.15 Turning to our enquiry as to whether there are any provisions in the proposal which give particular cause for concern, the Minister says the Government is concerned about a number of aspects of the draft Directive, citing:

  • the use of implementing and delegated acts which would which give Member States less control over decisions on tax, and the anti-abuse rules, which the Government believes should be strengthened;
  • the indication in the Commission's impact assessment that the proposal would have a largely negative short-term impact, particularly at a time when the EU should be prioritising growth; and
  • the Government's concern that it retain the ability to define its own tax base, as well as tax rate, and to make the decisions that will affect the UK economy.

5.16 As for our concerns in relation to proportionality the Minister says that:

  • the Government sees a CCCTB as introducing an optional 28th corporate tax system in the EU, rather than introducing 27 new systems;
  • it does not believe the introduction of a CCCTB would require renegotiation of the UK's existing tax treaties — their provisions would still operate to allocate taxing rights and to minimize double taxation between the UK and Member States which choose to join a CCCTB;
  • but it acknowledges that the introduction of a CCCTB featuring formulary apportionment might introduce administrative challenges to the reduction of double taxation where taxation responsibilities are divided between participating Member States and a country outside any CCCTB area; and
  • certain types of assets, such as financial and intangible assets, are largely not included in the apportionment formula — their inclusion would be likely to alter the allocation of profits between companies making up a group and thus could impact on Member States' tax revenues.

5.17 The Minister concludes by saying that the Government will not agree to any proposal that would jeopardize its ability to shape its own tax policy and stop it from achieving the objective of creating the most competitive corporate tax regime in the G20.

The Treasury Committee's Opinion

5.18 The Chairman of the Treasury Committee wrote to our Chairman on 12 July 2011 with the Opinion we had requested of that Committee. He tells us that the Treasury Committee sought the independent expert advice of three major accountancy bodies, the Association of Chartered Certified Accountants (the ACCA), the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales (the ICAEW), about the technical merits of the proposal.

5.19 The Chairman says that on the basis of the submissions of these bodies the Treasury Committee make four broad points:

  • there is support in the accountancy profession for improving the taxation of multinational companies operating across EU borders, however, significant potential costs and problems with implementation have been identified in the submissions;
  • if adopted by the UK a CCCTB could restrict the UK's ability to determine its corporate tax base (although not the rate) — the Government has indicated it will not sign up to proposals that would limit its ability to make tax policy;
  • the evidence base supporting the draft Directive proposal does not appear to be strong and the proposals are not yet in a final form; and
  • if CCCTB were introduced on an enhanced cooperation basis it would be likely to have an impact on UK competitiveness and the nature of that impact would depend on the final proposal — the Government should be involved in discussions over its design regardless of whether it intended to participate.

5.20 The Chairman's letter and the submissions from the three accountancy bodies are published on the Treasury Committee's website.[41]


5.21 We are grateful to both the Minister and the Treasury Committee for their comments. However, we do not think the time is yet right for the debate we wish to recommend on the non-subsidiarity aspects of this proposal.

5.22 We take this opportunity to respond to the Minister's helpfully set out argument in favour of Article 115 TFEU as being an appropriate legal base for a proposal to approximate direct taxation.

5.23 Amendments introduced by the Lisbon Treaty reversed the order of Articles 94 and 95 of the EC Treaty, so that Article 115 TFEU is now to be read without prejudice to Article 114 TFEU. Additionally, Article 114 is no longer to be applied by way of derogation from Article 115, as Article 95 was from Article 94. These amendments must have a purpose,[42] which from textual analysis should be construed as follows.

5.24 There is now additional emphasis on Article 115 being read without prejudice to Article 114, the residual internal market provision, which includes a prohibition on its application to fiscal provisions. This addition marks, in our estimation, a significant shift in emphasis in the relationship between these two provisions, and must have an effect on the way in which Article 115 can be interpreted.

5.25 In addition, if the Minister is right that Article 115 can be used for the approximation of direct taxation, as such power is implied rather than explicit there is nothing to prevent Article 115 from being used for the approximation of indirect taxation (so long as the measure concerned was a Directive).

5.26 We do not think that an interpretation that could make Article 113 TFEU redundant in this way should be preferred. Rather we think that if the drafters of the TFEU wanted to confer a power on the EU to approximate direct taxation, such power would have been explicitly provided for as a lex specialis, similar to Article 113, under chapter 2 of Title VII TFEU, which is entitled "Tax Provisions". No such specific power has ever been transferred to the EU, the EC or the EEC.

5.27 In light of these considerations, we urge the Government to reconsider its conclusion that Article 115 TFEU is an appropriate legal base. Although we are aware that the Government does not argue that the CCCTB will "directly affect the establishment or functioning of the internal market" (we note in passing the different internal market test in Article 115), the inapplicability of Article 115 to direct taxation measures is of far wider legal significance, affecting for example whether enhanced cooperation can be pursued.

5.28 We look forward to a response to the above from the Minister. In the meantime, the proposal remains under scrutiny.

38   (22808) -: see HC 152-xiv (2001-02), chapter 4 (5 February 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

39   (28417) 6788/07: see HC 519-I (2006-07) (18 July 2007). Back

40   See headnote. Back

41   See Back

42   Case C-338/01 pre-dates the entry into force of the Lisbon Treaty. Back

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