Documents considered by the Committee on 18 March 2015 - European Scrutiny Contents

16 Taxation

Committee's assessment Legally and politically important
Committee's decisionNot cleared from scrutiny; further information requested
Document detailsDraft directive about a common consolidated corporate tax base
Legal baseArticle 115 TFEU; consultation; unanimity

Document numbers

HM Treasury

(32617), 7263/11 + ADDs 1-2, COM(11) 121

Summary and Committee's conclusions

16.1 In March 2011 the Commission presented a draft Directive to create an EU common consolidated corporate tax base. We and the Government have shared considerable concerns about this proposal.

16.2 The Government now reports to us Council working group consideration of the draft Directive since May 2011.

16.3 We are grateful to the Government for its detailed, albeit tardy, account of developments on this draft Directive. We are sure that our successor Committee will expect to have more frequent accounts of developments and that it will wish to recommend, at an appropriate moment, a debate on the proposal. Meanwhile the document remains under scrutiny.

Full details of the documents: Draft Directive on a common consolidated corporate tax base (CCCTB): (32617), 7263/11 + ADDs 1-2, COM(11) 121.


16.4 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. In February 2007, in its Annual Policy Strategy for 2008, the Commission announced its intention to introduce a proposal for a CCCTB in 2008 — however this did not happen. 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.

16.5 In March 2011, the Commission sought, with this draft Directive 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.

16.6 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.

16.7 We have been 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. Although the House has debated and adopted, on our recommendation, a Reasoned Opinion on the proposal, we have not yet thought the time right for a debate on issues other than subsidiarity. However, when we last considered the draft Directive we saw no further advantage in debating with the Government the issue of the correct legal base, our view being that Article 115 TFEU was not appropriate for approximation of direct taxation.

The Minister's letter of 16 March 2015

16.8 The Financial Secretary to the Treasury (Mr David Gauke) writes now about recent developments in negotiations on the draft Directive. Recalling the substance of the proposal, the Minister says that:

·  the Government's position on this matter was as expressed in the Reasoned Opinion, which we had suggested and which set out the view of the House that the CCCTB proposal contravenes EU principles of proportionality and subsidiarity, and is therefore unlawful;

·  in addition, the Government is not convinced by the economic arguments for a CCCTB; and

·  it will not, however, stand in the way if other Member States want to push forward with the proposal and has committed to engaging constructively in negotiations.

16.9 The Minister then reports that:

·  official-led technical discussion on the Commission's draft Directive began in May 2011;

·  following an initial comprehensive read-through of the text in the Council working group, Member States agreed to set aside the articles dealing with consolidation and formulary apportionment for the time being, and focus on the detail for a common tax base;

·  the Irish, Lithuanian and Greek Presidencies therefore concentrated on issues such as depreciation, intangibles, detailed definitions, and compatibility with the International Accounting Standards;

·  in addition, they led discussions on anti-avoidance, including on a General Anti-Abuse Rule, and generally sought to achieve a common understanding so as to ensure a consistent implementation of the proposal;

·  considering that the technical analysis of the tax base was sufficiently advanced to move on to issues related to consolidation, the Italian Presidency focused on international aspects, in particular on issues closely linked to Base Erosion and Profit Shifting (BEPS) such as mismatches, controlled foreign companies rules and interest deductibility;

·  the Latvian Presidency intends to continue discussions on this basis;

·  negotiations to date have been slow with little willingness among Member States to make substantial progress on the dossier whilst work on the G20/OECD BEPS project is still in progress;

·  however, in light of the international focus on corporate tax avoidance, the CCCTB has received increased attention;

·  in November 2014, the Economic and Finance Ministers of France, Italy and Germany wrote to Commissioner Moscovici calling for tax harmonisation in the EU;

·  the new Commission has interpreted this as a new-found appetite for a CCCTB and, keen to build momentum, has been promoting the proposal as the long-term solution to BEPS issues;

·  several Members of the European Parliament are echoing calls for progress on the dossier;

·  the Government does not believe that a CCCTB would contribute towards tackling BEPS — the proposal was not designed to prevent tax avoidance and it is unclear how it would do this;

·  the system would only apply to the EU and companies could decide whether to opt in or not — this would risk creating mismatches both within and outside the EU, and hence even more opportunities for aggressive tax planning;

·  on the other hand, Member States would be less inclined to sign up to a compulsory system because of the substantial concerns it would raise around tax sovereignty;

·  moreover, the Commission's impact assessment suggests that the negative economic impacts of a CCCTB would be greater if optionality were removed; and

·  it is, instead, essential that the Government secures global agreement on the G20/OECD BEPS recommendations due to be published this year, as this is the most efficient way to ensure that profits are taxed where they are generated.

16.10 The Minister concludes that:

·  the Government will continue to engage constructively in discussions at the technical working group level in order to help shape the proposed Directive;

·  thus far, such engagement has helped to identify and mitigate certain risks to the UK's competitiveness and tax code that would manifest if a version of the proposal were to be adopted, or if a smaller group of Member States pressed ahead under EU enhanced cooperation rules;

·  for instance, officials have supported amendments to strengthen anti-abuse provisions in the Directive and, together with other Member States, have advocated a closer link to the International Accounting Standards;

·  at the same time, the Government has maintained a scrutiny reservation and made clear that it retains overarching concerns on the proposal; and

·  for the reasons he has set out the Government will continue to challenge the assertion that a CCCTB would solve BEPS issues.

Previous Committee Reports

Twenty-seventh Report HC 428-xxv (2010-12), chapter 2 (4 May 2011), Fortieth Report HC 428-xxxv (2010-12), chapter 5 (7 September 2011) and Forty-third Report HC 428-xxxviii (2010-12), chapter 11 (19 October 2011).

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Prepared 27 March 2015