80 Corporate taxation
| Committee's assessment
| Legally and politically important |
| Committee's decision | Cleared from scrutiny; drawn to the attention of the Treasury Committee
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| Document details | Commission Communication — A Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action
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| Legal base | —
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| Department
Document numbers
| HM Treasury
(36940), 9949/15 + ADDs 1-2, COM(15) 302
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Summary and Committee's conclusions
80.1 As cross-border activity has increased, particularly following
development of the single market, EU attention has focussed on
various aspects of corporate taxation.
80.2 With this Communication the Commission presents
an Action Plan it has developed to review the corporate tax framework
in the EU. The Commission discusses a series of measures, focused
on five areas for EU action: a common consolidated tax base; ensuring
effective taxation where profits are generated; additional measures
for a better tax environment for business; further progress on
tax transparency; and EU tools for coordination.
80.3 The Government tells us that it will support
those measures that will help to prevent aggressive tax planning
by multinational enterprises and enable the international tax
rules to be applied more effectively. But it emphasises that the
UK will not sign up to any measure that would undermine its tax
sovereignty, or damage the prospects for growth in the EU.
80.4 This Communication foreshadows measures,
including importantly a revised proposal for a common consolidated
corporate tax base, which will require close scrutiny, once presented.
So, whilst clearing the document from scrutiny, we draw it to
the attention of the Treasury Committee.
Full
details of the documents: Commission Communication:
A fair and efficient corporate tax system in the European Union:
5 key areas for action: (36940), 9949/15 + ADDs 1-2, COM(15)
302.
Background
80.5 As cross-border activity has increased, particularly
following development of the single market, EU attention has focussed
on various aspects of corporate taxation. For example the Parent-Subsidiary
Directive and the Interest and Royalties Directive have sought
to deal with issues of double taxation and the Commission has
suggested other matters it asserts need attention, such as a Common
Consolidated Corporate Tax Base (CCCTB)[ 526]
or greater cooperation between tax authorities.[ 527]
The document
80.6 The Commission has developed an Action Plan
to review the corporate tax framework in the EU, which it says
in this Communication is driven by the following objectives:
· to
re-establish the link between taxation and economic activity;
· to ensure
that Member States can correctly value corporate activity in their
jurisdiction;
· to create
a competitive and growth-friendly corporate tax environment for
the EU, resulting in a more resilient corporate sector; and
· to protect
the single market and secure a strong EU approach to external
corporate tax issues.
80.7 With the Action Plan itself the Commission discusses
a series of measures to meet these objectives, focused on five
areas for EU action:
· a
CCCTB;
· ensuring
effective taxation where profits are generated;
· additional
measures for a better tax environment for business;
· further
progress on tax transparency; and
· EU tools
for coordination.
A COMMON CONSOLIDATED CORPORATE TAX BASE
80.8 The present proposed Directive, to introduce
a CCCTB on which the House and eight other chambers raised reasoned
opinions, 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.[ 528]
80.9 The Commission now says that:
· it
intends to publish a new legislative proposal for a CCCTB in 2016;
· while
preserving the existing objective of improving the environment
for businesses in the EU, the Commission will propose removing
the optional aspect, which it asserts would risk introducing additional
avoidance opportunities;
· it hopes
that, by making the CCCTB compulsory, at least for multinational
entities, this would eliminate mismatches, through a common tax
base, and possible manipulation of transfer pricing rules, through
the consolidation of group profits;
· it recognises
that the CCCTB is an ambitious initiative and that consolidation
has been the most difficult aspect in Member States' negotiations
on the present proposal;
· it proposes,
therefore, a step-by-step approach focused primarily on agreeing
and implementing a common tax base, which would also include an
element of cross-border loss relief, allowing groups to offset
their EU-wide losses against their profits; and
· full
consolidation proposal would then be re-introduced at a later
stage.
ENSURING EFFECTIVE TAXATION WHERE PROFITS ARE GENERATED
80.10 The Commission proposes that, while the new
CCCTB proposal is being prepared, work should continue on the
international aspects of the current proposal. This would include
definition of a "permanent establishment", which determines
the level of economic presence required in a jurisdiction for
it to be able to tax the profits of a non-resident business, and
Controlled Foreign Company rules, which prevent the diversion
of profits that should be taxed in the jurisdiction in which a
multinational group is resident.
80.11 The Commission recognises there is a link with
the ongoing G20/OECD Base Erosion and Profit Shifting (BEPS) project,
which is due to conclude in 2015, and invites the Council to achieve
consensus on these elements within 12 months. It says that it
will work with Member States and businesses in order to build
on the BEPS Transfer Pricing guidelines and ensure the coordinated
implementation of these at EU level.
80.12 The Commission says that it will explore ways
to ensure the effective taxation of profits, while creating a
competitive and growth-friendly corporate tax environment. In
particular, it recommends that the Code of Conduct for Business
Taxation criteria are modified, so that the Code of Conduct Group[ 529]
can ensure effective taxation, and that the proposed recast of
the Interest and Royalties Directive[ 530]
be adopted, so that the benefits of the Directive are only given
if the interest and royalty payments are subject to effective
taxation elsewhere in the EU. The Commission says further that
it will continue to provide guidance to Member States on intellectual
property regimes in line with the approach agreed by the Code
of Conduct Group in 2014, with the possibility of preparing binding
legislative measures if Member States do not apply this new approach
consistently over the next 12 months. (The agreement was based
on the BEPS "modified nexus approach", which links the
income deriving from an intellectual property asset to the research
and development expenditure that was undertaken to create it.[ 531])
ADDITIONAL MEASURES FOR A BETTER TAX ENVIRONMENT
FOR BUSINESS
80.13 As part of its revised CCCTB proposal, the
Commission will recommend cross-border loss relief for group entities
within the EU, which would later be followed by full consolidation.
It will also recommend, before the summer of 2016, ways to improve
the multilateral Arbitration Convention,[ 532]
which is the current mechanism to resolve double taxation disputes
in the EU.
FURTHER PROGRESS ON TAX TRANSPARENCY
80.14 In an annex to the Communication, the Commission
has published a consolidated version of Member States' independent
lists of third country non-cooperative tax jurisdictions, featuring
those jurisdictions identified by at least ten Member States.
The Commission suggests that further work on third countries and
tax good governance standards should be undertaken in the context
of the Code of Conduct Group within the next twenty-four months.
80.15 The Commission says that it is also launching
a public consultation on various options for the disclosure obligations
of certain corporate tax information, including public country-by-country
reporting — this consultation will feed into a cost-benefit
analysis of these options to be concluded in the first quarter
of 2016.
EU TOOLS FOR COORDINATION
80.16 In consultation with Member States, the Commission
will work on a proposal to review the Code of Conduct Group, in
order to ensure that the Group can react efficiently to cases
of harmful tax competition. The Commission has also decided to
prolong the mandate and expand the scope of the Platform on Tax
Good Governance.[ 533]
CONCLUSION
80.17 In conclusion the Commission says:
"This Action Plan provides the foundation
on which to build a fairer, growth-friendly corporate tax framework
for EU. Measures proposed will contribute to achieving revenue
stability, a stronger Single Market, greater corporate resilience
and efficiency and a fair and level-playing field for businesses.
"This Action Plan has identified the core
areas of work for the immediate, medium and long-term future.
The harmonisation of corporate tax rates is not part of this agenda.
The aim is to coordinate Member States tax systems so that they
can better combat aggressive tax planning.
"In the short term, some issues related
to base erosion and profit shifting can usefully be discussed.
The issue of effective taxation of profits in the Single Market
also needs to be addressed. The Commission would urge the current
and upcoming Presidencies to concentrate their efforts on making
progress on these issues in the context of existing legislative
proposals and by reforming the Code of Conduct for Business Taxation.
The Commission expects good results to be achieved in the EU over
the next 18 months, following the BEPS agenda.
"In the medium to long term, the revised
CCCTB proposal will offer a strong tool to establish fair, predictable
and efficient corporate taxation in the EU, including the final
objective of consolidation. This will only materialise if Member
States are committed and invest sufficiently in the new proposal.
Strong political commitment will be necessary to achieve successful
results on a post-BEPS corporate tax agenda for the EU.
"This Action Plan will be the basis for
Commission work on corporate tax policy over the next years. Work
will evolve to take account of the input of the European Parliament,
contributions of other EU institutions and stakeholders, and outcomes
of the OECD BEPS initiative. The Commission will keep progress
under review.
"Ultimately, the key to reforming corporate
taxation in the EU, to make it fairer and more efficient, is in
the hands of the Member States. Member States need to overcome
their differences for the sake of fairness, competitiveness and
efficiency. It is therefore time to move forward."
80.18 The Communication is accompanied by a Staff
Working Document, which summarises the discussions held on this
topic at a stakeholder meeting of 13 April, assesses tax competition
in the EU, summarises empirical evidence in relation to profit
shifting by multinational companies and outlines a number of options
for addressing this problem.
The Government's view
80.19 In his Explanatory Memorandum of 29 June 2015
the Financial Secretary to the Treasury (Mr David Gauke) says
first, that whilst noting that this Action Plan is not binding,
the Government will consider the detail of the proposals as these
are published, and. He then comments that:
· the
fight against tax avoidance and aggressive tax planning is a UK
priority and the Government welcomes Commission consideration
of what EU-level actions may be appropriate in this area;
· as corporate
tax avoidance is, however, a global problem, EU action must build
on agreements reached at OECD level, in order to ensure a coherent
approach that is effective;
· therefore,
the Government welcomes the Commission's focus on ensuring that
Member States are able to implement the BEPS outcomes, for example
in relation to new rules relating to the permanent establishment
definition or transfer pricing;
· these
will strengthen tax administration within the EU, and help to
counter aggressive tax planning by multinational enterprises;
· the
Government also welcomes the Commission's support for a competitive
and fair tax system in the EU that supports economic growth, including
the principle that profits should be taxed in the jurisdiction
where the economic activities that give rise to them are located;
· the
Government's view is that action at EU level must be effective
and proportionate; and
· the
UK will not sign up to any measure that would undermine its tax
sovereignty, or damage the prospects for growth in the EU.
80.20 The Minister also says that the Government
does not endorse the publication of a list of third country non-cooperative
tax jurisdictions — it is the Government's view that this
gives a misleading impression of the position on tax transparency
of a number of jurisdictions on the list, including the UK's Overseas
Territories and the Crown Dependency included in the list.
Previous Committee Reports
None.
526 (32617), 7263/11 + ADDs 1-2: see 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), Forty-third
Report HC 428-xxxviii (2010-12), chapter 11 (19 October 2011),
Thirty-seventh Report HC 219-xxxvi (2014-15), chapter 16 (18 March
2015) and HC Debs, 11 May 2011, cols 1282-1304. Back
527 (36764), 7374/15 (36763), 7375/15: See Thirty-ninth Report HC
219-xxxvii (2014-15),chapter 14 (24 March 2015). Back
528 Ibid. Back
529 The Code of Conduct Group (Business Taxation), set up by the ECOFIN
Council in 9 March 1998, deals mainly with assessing the tax measures
which fall within the scope of the December 1997 Code of Conduct
for Business Taxation and overseeing the provision of information
on those measures. Back
530 (33374), 16907/11 + ADDs 1-2: see Forty-ninth Report HC 428-xliv
(2010-12), chapter 17 (14 December 2011). Back
531 See BEPS modified nexus approach Back
532 See Transfer Pricing and the Arbitration Convention. Back
533 See Platform on Tax Good Governance. Back
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