Documents considered by the Committee on 21 July 2015 - European Scrutiny Contents


80 Corporate taxation

Committee's assessment Legally and politically important
Committee's decisionCleared from scrutiny; drawn to the attention of the Treasury Committee
Document detailsCommission Communication — A Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action
Legal base
Department

Document numbers

HM Treasury

(36940), 9949/15 + ADDs 1-2, COM(15) 302

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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