Taxation: a common consolidated corporate tax base Contents

1Taxation: a common consolidated corporate tax base

Summary and Committee’s conclusions

Committee’s assessment

Legally and politically important

Committee’s decision

Not cleared from scrutiny; a draft Reasoned Opinion recommended for debate; drawn to the attention of the Treasury Committee

Document details

(a) Proposed Council Directive on a Common Corporate Tax Base; (b) Proposed Council Directive on a Common Consolidated Corporate Tax Base

Legal base

Article 115 TFEU, special legislative procedure, unanimity

Department

HM Treasury

Document Number

(a) (38210), 13730/16 + ADDs 1–3, COM(16) 685;

(b) (38211), 13731/16 + ADDs 1–3, COM(16) 683

1.1Direct taxation is a matter for which individual Member States have a particularly strong interest as it not only governs the revenue available to each Member State but is also inextricably linked to their social and other policy choices. This is reflected in the fact that powers in this area can only be exercised by the EU if Member States unanimously agree. Therefore the principle of subsidiarity in this area needs to be exercised with particular rigour.

1.2In 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” (CCCTB). In March 2011, it sought, with a proposed Council Directive, to introduce a CCCTB, which would have provided for a single set of harmonised rules for calculating the tax base for taxable profits of companies resident in Member States, allowed companies to opt into this CCCTB or to continue to operate within national tax systems, allowed groups of companies to calculate their total EU-wide consolidated profit for tax purposes, provided 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 provided that Member States would then tax the profit apportioned to companies in their Member State at their own corporation tax rate. This House and seven other national parliament chambers issued reasoned opinions that this proposal failed to comply with the principle of subsidiarity.

1.3Achieving agreement on the proposal proved very difficult so the Commission has now formally withdrawn it and replaced it with two proposed Council Directives. One would introduce as a first step a common corporate tax base (CCTB) with application from 1 January 2019 and the other would introduce as a second step a CCCTB with application from 1 January 2021. Although the two proposals would largely repeat the content of the original proposal, the system would only be mandatory for companies in large groups. For others it would be voluntary. The Commission has also proposed additional provisions concerning allowances for growth and investment and for research and development and to address a bias, inherent in present taxation rules, towards debt for investment, rather than equity.

1.4The Government makes only a cursory reference to the possibility that the new proposals continue to breach the subsidiarity principles. However, it does repeat to us its belief that:

1.5Clearly the Commission is determined to push on with its attempt to introduce a CCCTB for the EU. We will keep these proposals under scrutiny pending developments in their negotiation, which we imagine may end with the Government having to veto them (as unanimity would allow). This would open the way for enhanced co-operation should a sufficient number of willing Member States want to proceed among themselves.

1.6Meanwhile, the Government, in its very late Explanatory Memorandum has completely failed to provide either any substantive analysis or its view on whether the proposals are compatible with the principle of subsidiarity. However, we have considered this matter and recommend that the House issue a reasoned opinion for the reasons set out in the annexed draft. We are also drawing these proposals to the attention of the Treasury Committee.

1.7Given the Government’s stance on these proposals we are surprised that it felt able to acquiesce in paragraphs 6, 7 and 8 of the ECOFIN Council Conclusions of 6 December 2016 about an EU corporate tax system.1

Full details of the documents

(a) Proposed Council Directive on a Common Corporate Tax Base: (38210), 13730/16 + ADDs 1–3, COM(16) 685; (b) Proposed Council Directive on a Common Consolidated Corporate Tax Base (CCCTB): (38211), 13731/16 + ADDs 1–3, COM(16) 683.

Background

1.8In 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 then 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.

1.9In March 2011, the Commission sought, with a proposed Council Directive, to introduce a CCCTB. The proposal would have:

1.10Allocating 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. These proposals would (a) provide for a single tax base applicable across all Member States and (b) allow large cross border groups to provide a single consolidated corporation tax return for the group to one Member States’ tax authority, with the share of the tax base being then apportioned according to a formula intended to reflect economic activity. Member States would continue to be able to set their own corporate tax rates applicable to their share of the tax base.

1.11Our predecessor Committee was 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. On its recommendation the House debated and adopted a Reasoned Opinion on the proposal.2 However, it saw no advantage in further debating with the Government the issue of the correct legal base, its view being that Article 115 TFEU was not appropriate for approximation of direct taxation.3

1.12In June 2015 the Commission presented an Action Plan it had developed to review the corporate tax framework in the EU. It discussed a series of measures, focused on five areas for EU action: a relaunch of its proposal for 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. The Government told us that it would support those measures that would help to prevent aggressive tax planning by multinational enterprises and enable the international tax rules to be applied more effectively. But it emphasised that the UK would not sign up to any measure that would undermine its tax sovereignty, or damage the prospects for growth in the EU.4

The documents

1.13The Commission now presents its relaunch of its March 2011 CCCTB proposal (which was formally withdrawn) in the form of a proposed Council Directive to introduce a Common Corporate Tax Base (CCTB), document (a), and a proposed Council Directive for a CCCTB, document (b). The CCTB proposal is the first step and the CCCTB proposal is the second step of the Commission’s proposed legislation for a common and consolidated corporate tax base in the EU. Its aim is for the proposed CCTB Directive to come into effect from 1 January 2019 and for the proposed CCCTB Directive to come into effect from 1 January 2021. The two legislative proposals are presented as a package and are accompanied by a single Impact Assessment common to both.

1.14The objective remains the same: a single set of rules for calculating companies’ tax bases across the EU, making them accountable to a single tax administration, and attributing income to where the value is created through a formula based on three equally weighted factors—assets, labour and sales. Consolidation of the tax base of companies in a group would provide automatic cross-border loss relief. Transfer pricing rules would not apply within the group, with revenue distribution carried out through a formulated apportionment. The relaunched initiative would provide new mandatory rules for groups above a certain size to enhance resilience, which the 2011 original proposal did not have. The Commission suggests that work on the consolidation element should be postponed until agreement is reached first on rules for a common base, that is, the CCTB.

1.15The proposed CCTB Council Directive would be mandatory for companies with a permanent establishment in a Member State, of defined types subject to certain defined taxes, in groups with consolidated revenue exceeding €750,000,000 (£676,500,000) during the financial year preceding the relevant financial year. It would be voluntary for such companies which are not part of a group. There are provisions as to how for companies, with a permanent establishment in a Member State, which are part of third country groups would come within scope. The original proposal would have applied to all groups. The definition of a permanent establishment for tax purposes differs from the 2011 proposal by covering only those situated within the EU and belonging to a resident taxpayer.

1.16The proposed CCTB Council Directive would also:

1.17The proposed CCCTB Council Directive, also differing from the original proposal, would have mandatory and voluntary applicability criteria and many definitions very similar to the CCTB proposal. A two-part test would be used for the eligibility of a consolidated tax group based on controlling more than 50% of voting rights and ownership of more than 75% equity or profits, with a nine consecutive month requirement for establishing group membership. Business reorganisation, withholding taxes preventing circumvention of tax exemptions, formulary apportionment, and taxation of losses and unrealised capital gains provisions are unchanged from the 2011 proposal. The administrative procedures of the new proposal differ from 2011, with the common administrative rules limited to the consolidated group. Single taxpayers who opt to apply the rules under the first step would fall within their national administrative provisions. Groups would deal with a single tax administration in the EU, referred to as the “one-stop-shop”, which would be based in the Member State where the parent company of the group was resident for tax purposes.

1.18The Commission would be required to review both proposed Council Directives five years after their entry into force and to report findings to the Council.

1.19The Commission, in discussing the consistency of its proposals with existing policy provisions in relation to taxation, notes that a CCCTB is one of five key areas identified in its 2015 Action Plan5 and that the relaunched CCCTB would include rules to address key actions of the OECD Base Erosion and Profit Shifting (BEPS) project.6 It says that a CCCTB is one of the initiatives supporting its aim of fairer taxation. Asserting that both proposals fall within the ambit of Article 115 TFEU, the Commission:

1.20In support of its proposals the Commission says that:

The Government’s view

1.21In her Explanatory Memorandum of 29 November 2016 the Financial Secretary to the Treasury (Jane Ellison) first, in relation to subsidiarity, says merely that:

“The Reasoned Opinion [of 11 May 2011] sets out Parliament’s view [actually that of the Commons alone] that the CCCTB proposal contravenes EU principles of proportionality and subsidiarity, and is therefore unlawful.”

1.22On the policy and financial implications the Minister says that:

1.23The Minister comments further that:

1.24Of the Impact Assessment it says that:

Previous Committee Reports

None.

Annex: 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 Corporate Tax Base8

Draft Directive on a Common Consolidated Corporate Tax Base9

The proposals have been presented by the Commission as a package accompanied by a single Impact Assessment. This reasoned opinion covers both and, to the extent that they are separable, each.

The proposals substantially follow a former single proposal for a Directive on the Common Consolidated Corporate Tax Base10 (subsequently withdrawn by the Commission) which attracted reasoned opinions from: the Bulgarian National Assembly, the Dáil Éireann, the House of Representatives of the Netherlands, the Polish Sejm, the Romanian Chamber of Deputies, the National Council of the Slovak Republic, the Swedish Parliament, and the House of Commons.

The subsidiarity objections of the House of Commons to the previous proposal were: that the Commission had assumed, without clear evidence, that the objectives could not be achieved by informal co-ordination by Member States; and also assumed, without clear evidence, that the burdens identified by the Commission amounted to an impediment to the functioning of the internal market: and that the negative impact on investment, employment and GDP at the EU level outweighed savings in compliance costs and benefits for Member States which were in any event questionable.

The main stated objectives of these proposals are:

The proposals seek to do this by providing (a) a common corporate tax base which is compulsory for large cross border groups (and optional for smaller groups), which incorporates specific tax avoidance measures and specific allowances for research and development and innovation; and (b) by requiring the group accounts to be submitted to the tax authorities of a single Member State which then apportions the tax base amongst other Member States according to a fixed formula intended to reflect economic reality.

Direct taxation is a matter for which individual Member States have a particularly strong interest as it not only governs the revenue available to each Member State but is also inextricably linked to their social and other policy choices. This is reflected in the fact that powers in this area can only be exercised by the EU if Member States unanimously agree.

With this consideration in mind the House of Commons does not consider that these proposals adequately satisfy the principle of subsidiarity for the following reasons:


2 HC Hansard, 11 May 2011, cols 1282–1304.

3 (32617), 7263/11 + ADDs 1–2: see Thirty-seventh Report, HC 219-xxxvi (2014–15) chapter 16 (18 March 2015), Forty-third Report HC 428-xxxviii (2010–12), chapter 11 (19 October 2011), Fortieth Report HC 428-xxxv (2010–12), chapter 5 (7 September 2011) and Twenty-seventh Report HC 428-xxv (2010–12), chapter 2 (4 May 2011).

4 (36940), 9949/15 + ADDs 1–2: see First Report HC 342-i (2015–16), chapter 80 (21 July 2015).

5 Op Cit.

7 (37480) 5636/16 + ADD 1: see Twenty-fifth Report HC 342–xxiv (2015–16), chapter 7 (9 March 2016).

8 COM(2016) 683.

9 COM(2016) 685.

10 COM(2011) 121.




8 December 2016