In 2011, its first attempt came to no good. Five years later, the European Commission is to try its luck again, proposing its revised version of the common consolidated corporate tax base (CCCTB) on Wednesday 26 October.
The overall game plan has been no secret since the Juncker Commission took up office. Whilst the 2011 proposal provided for an optional CCCTB (see EUROPE 10338), the Commission now wants major groups to be required to subscribe to the CCCTB. According to a draft text of which EUROPE has had sight, the threshold to define large groups will be that of the OECD and its country-by-country reports to the tax administrations, or €750 million in consolidated annual turnover. Other companies may join in on an optional basis.
Initially, the Commission intends to define the common base, with the option for a group to consolidate its results to be the subject of a separate proposed directive. At this stage, the Commission is looking at 2020 for the new rules to enter into force with consolidation to follow in 2022.
The text does indeed contain a definition of the notion of permanent establishment, in other words the taxable presence of a company. This definition, which takes its inspiration from the OECD's work on actions to fight tax optimisation, BEPS, aims to "ensure that all concerned taxpayers share a common understanding and to exclude the possibility of mismatch due to diverging definitions". It will be basically the same definition as in 2011, but fleshed out a little. The Commission also explains that it saw no need to put forward a common definition of permanent establishments located in third countries.
A few exemptions in place. All income will be considered taxable unless it is explicitly exempted. This would mean that income consisting of dividends or generated by the sales of shares held in companies outside the group (for stakes of at least 10%) will be exempted, in order to prevent the risk of double taxation of direct foreign investments.
On top of the amounts already deductible for the costs of research and development, as per the 2011 proposal, the Commission is providing for the taxpayer also to be able to deduct an extra 50% of such costs each tax year. If research and development costs stand at €20 million or above, the taxpayer may also be able to deduct 25% of anything above this threshold.
A second derogation is likely to be agreed to. Taxpayers will be able to deduct 100% of research and development costs up to €20 million if it is not a listed company, employs fewer than 50 people and has an annual balance sheet total not exceeding €10 million.
Several anti-abuse measures. The Commission then goes on to tackle the 'debt-equity bias'. In most member states, the loan interest burden is tax-deductible, whereas equity financing is not. The Commission drew inspiration from the Italian system of notional interest. The allowance for growth and development authorises the tax deductibility of notional interest corresponding to the cost of equity. In Belgium, this system is notoriously used frequently for the purposes of tax optimisation. In order to prevent this niche from leading to loopholes, the Commission wishes to set in place anti-abuse measures, which it will specify in delegated acts.
These anti-abuse measures will focus on the following areas: - intra-group loans and loans involving associated enterprises; - transfers of participations; - the re-categorisation of old capital as new capital through liquidations; - and the creation of start-ups or subsidiaries, acquisitions of businesses held by associated enterprises.
The Commission reinstated the rule on limiting the tax deductibility of loan interest in this directive. This provision, which is included in the anti-tax avoidance directive (ATAD) approved earlier this year (see EUROPE 11575), limits this tax deduction to 30% of the company's earnings before interest, tax, depreciation and amortisation (EBITDA) or up to €3 million.
A further provision on exit taxation has also been borrowed from the anti-tax avoidance directive. This provides for all member states to apply exit taxation on assets transferred out of their territory. The rules on controlled foreign companies are also included. Readers may recall that these rules reallocate the income of a low-taxed controlled company to its parent company. In this scenario, the parent company is therefore liable for the tax on this income in the state in which it has its headquarters, generally a high-taxation country.
Lastly, the Commission included provisions on hybrid mismatches in its proposed common tax base. This covers situations in which instruments or entities defined differently in two different jurisdictions enjoy double non-taxation and therefore end up not being taxed anywhere.
On the same day as the CCCTB, the Commission is to present proposed amendments to the ATAD to cover situations with third countries. The text of the CCCTB has already included these provisions. It stipulates that if the hybrid mismatch involves a third country and the payment has its origin in the member state, then the member state must reject the deduction. If the payment has its source in the third country, the member state concerned must ask the taxpayer to include this payment in its taxable base, unless the third country has already granted the deduction or has asked for the payment to be included. A number of different specific situations are dealt with, as the article is a fairly long one, in particular situations in which a company has its tax residence in a state and in a third country.
As in 2011, the companies subject to the CCCTB may carry over their losses indefinitely (meaning that only real income is taxed) from one year to the next.
As this proposal leaves aside the consolidation aspect of the results of a group, it provides for a temporary loss relief mechanism with recapture. Under no circumstances may the reduction of a resident taxpayer's tax base lead to a negative amount, the Commission explains. Once the subsidiary making a loss is in profit again, this profit must be added to the tax base of the resident company.
In a separate proposal for a directive, the Commission proposes moving from this base to the consolidated base, leading to an end to intra-group transactions in Europe. Within a single group, there would be just one taxable result, which the countries would divide between themselves on the basis of a complex mathematical formula giving equal weight to factors such as turnover, labour force and assets held in the country in which the group is active. (Original version in French by Élodie Lamer)