5.3.4.2 Highlights of the CCCTB

CCTB and CCCTB

The CCTB incorporates mandatory rules for the corporate tax base of all Member States for certain companies. It is proposed that the rules should apply to a consolidated group for financial accounting purposes with a total consolidated group revenue of more than EUR 750 million.1 For entities that are part of a group that does not reach the EUR 750 million threshold, the scheme may be applied optionally. The CCTB contains detailed rules on the determination of the base. The basic principle here is that all profits are part of the taxable basis. Subsequently, exceptions are made to this rule. The CCTB also includes various anti-abuse provisions.

The CCCTB goes a step further than the CCTB. This proposed Directive prescribes a consolidated profit base for multinational companies with a consolidated group turnover in excess of EUR 750 million. The consolidated result is taken into account by the principal taxpayer. This taxpayer declares the result of the CCCTB group in the Member State of establishment by means of a tax return. The profit basis is then allocated to the Member States in which the CCCTB group operates using an apportionment key. The proposed apportionment key is based on labour, turnover and assets. The profits allocated are taxed by the various Member States under their own tax rate.2 Under the CCCTB transfer pricing will no longer be necessary with respect to intra-group EU transactions. However, transfer pricing remains relevant for transactions with non-EU group entities as well as for transactions with related entities within the EU that do not form part of the group.3 Moreover, due to the consolidation automatic cross-border loss compensation within the EU is applied.4 Under the CCCTB proposal, there would be no withholding taxes or other source taxes on intra-group transactions.5

The goals of the CCCTB

The goals of the CCCTB are to enhance the fairness of the tax system and to stimulate growth and investment.6 The fairness of the tax system7 is enhanced as the proposal aims to reduce cross-border tax planning possibilities. According to the EC, formulary apportionment as included in the CCCTB provides a better tool against base erosion and profit shifting than the currently existing transfer pricing methods.8 Additionally, it creates a more equal level playing field between domestic and multinational companies. Also, it allegedly ensures that taxpayers pay a fair share of the tax burden. The EC claims that the formula to allocate income is an effective tool to attribute income to where value is created.9 Lastly, the proposal aims to enhance the general taxpayer morale.10

The second general policy objective of the CCCTB is to stimulate growth and investment, by removing single market tax obstacles. In this regard, the general tax base can help to simplify the current highly complex international tax system within the EU and can lead to a reduction of the compliance costs and administrative burden. Furthermore, the CCCTB proposal aims to eliminate double taxation risks within the EU and to eliminate discrimination and restrictions.11 Apart from that, the proposal provides an approach to profit taxation without distorting investment and financing decisions. Consolidation is seen as a step towards improving the tax neutrality between domestic and cross-border activities, to ‘better exploit the potential of the Internal Market.’12 Finally, the EC aims to create more incentives to invest in the EU.13

It is remarkable that the EC explicitly refers to the formula as an effective tool to attribute income to the place where value is created. This happens to be the overall goal of the OECD BEPS project.14 There is a clear shift in approach from the perspective of the EC with regard to presenting the formula. In 2011, it was merely labelled as the ‘necessary evil’, while it is currently presented as the best medicine against base erosion and profit shifting.15

The CCCTB formula

The CCCTB formula consists of three equally weighed factors. According to the EC, this reflects a balanced approach to distributing taxable profits amongst eligible Member States. An eligible Member State is a state where there is a taxable presence (i.e., a subsidiary or a permanent establishment).16 As the CCCTB follows the definition of a permanent establishment that is currently applied internationally, it does not give a solution for the taxation of the digital economy. Therefore, the profit allocation rules as proposed by the CCCTB may not sufficiently capture the digital activities of a company.17

The factors chosen for the CCCTB formula are labour, assets and sales by destination.18 With the three factors the EC aims to reflect both the state of the production (supply side, via labour and assets) and the state of demand (sales to destination), in order to properly describe economic activity.19 In designing the formula the EC used four basic principles. First of all, the formula should be as simple as possible for taxpayers and tax administrations. Second, it should be difficult to manipulate for taxpayers. Therefore, no factors that can be easily relocated are included in the formula. Third, the distribution of the tax base should be done in a fair and equitable manner. Fourth, the formula should not lead to undesirable tax competition. Thus, a uniform formula20 across the EU, with the same factors and weights for all Member States is required.21 In determining the formula to be used the EC derived insights from the apportionment mechanisms that are used in Canada and the United States.22 Below the three factors are briefly discussed.

Labour

The factor labour is divided into payroll and number of employees23 at year-end, each item counting for half.24 This is done to account for differences in wages, thus providing a fairer distribution. In this manner both the Member States with a knowledge-based economy and Member States that host industries with less expensive labour can be served.25 If only payroll costs would have been taken into account, this would have led to difficulties arising from differences in labour productivity between Member States. In a Member State with a low labour productivity, labour costs influence the profits more than in a similar entity in another Member State with a higher labour productivity (and, consequently, lower labour costs). If apportionment would take place solely based on labour costs, this would imply that a bigger share of the tax base would be allocated to a Member State in which a less productive entity is located.26 By taking both payroll and number of employees into account, the formula will more easily be acceptable for both high-wage states as well as for low-wage states.27

Employees are in principle included in the labour factor of the group member that pays their remuneration.28 To prevent the possibility to influence this factor, two exceptions to this general rule are provided. Outsourced employees are allocated to the labour of the respective group company if that company is the ‘economic employer’, i.e., the company that has control over the employees and is responsible for them.29 Second, persons that perform similar tasks to those performed by employees are included in the labour factor of a group company to prevent influencing the factor through external outsourcing of employees.30

Is the fact that payroll costs are chosen for the labour factor an issue? Payroll costs include all costs of salaries, wages, bonusses and other compensation paid to employees.31 The costs are valued at the amount of expenses that are treated as deductible by the employer in a tax year.32 At a first glance this method seems advisable, as it is easy to apply and transfer pricing issues are reduced. Smit states that the amount of payroll costs and the number of employees as such not necessarily corresponds with the place where the income generating activities are carried on, i.e., where the significant people functions33 are performed.34 It can thus be questioned whether this part of the formula fully leads to income attribution in line with value creation. However, Vella questioned whether significant people functions contribute to value creation, as this mainly means that a significant value for the business would come from middle management.35

Assets

The factor assets is focused on the value of all fixed tangible assets (owned, leased, or rented).36 For land as well as other non-depreciable fixed assets the original costs are taken into account.37 Individually depreciable fixed tangible assets are valued at the average value for tax purposes.38 Assets are allocated to the economic owner.39 A specific exception is included to prevent influencing the allocation via intra-group leasing or renting. The asset can be allocated to the asset factor of the company that is effectively using the fixed asset.40 Additionally, there is a rule to combat manipulation of the formula when selling assets to third parties. If an asset has been transferred within the group within two years prior to the sale outside the group, the asset must be included in the asset factor of the transferring company.41 However, a taxpayer can provide counter evidence by demonstrating that there were sound business reasons for the transfer within the group prior to the third party sale.

Intangibles42 and financial assets are excluded from the formula. The reason for this is their mobile nature, which might lead to possibilities to circumvent the system. On top of that, intangible assets are difficult to value. This would require specific valuation rules. Not including intangibles in the formula leads to the question whether the value creation of a company can truly be reflected this way.43 It creates the perception that the sharing formula is not fair.44

Sales

By taking into account sales a fair participation of the Member State of destination can be ensured. The factor consists of the proceeds from the overall sale of goods and supplies of services of a group member. Exempt revenues and intra-group sales of goods and supplies are amongst others45 excluded because they do not contribute to the tax base. Dividends are also excluded from the factor as they have no identifiable geographic location.46 An exception to this rule exists if the exempt revenues etc. are earned in the ordinary course of trade or business. In that situation, the EC proposal includes these revenues in the sales factor of the beneficiary.47 This origin-based allocation of mainly mobile income might be easy to manipulate.48

The destination of the sales of goods is the Member State where the dispatch or transport of the goods to the person acquiring them ends.49 The destination of the supply of services is the Member State where the services are physically carried out or actually supplied.50 Additionally, the proposal also includes a specific rule that addresses situations in which ‘nowhere sales’ might be created.51 Such ‘nowhere sales’ could be the outcome if there is no group member52 in the Member State of destination, or if the state of destination is a third country. The proposed rule is a ‘spread throwback rule’. The ‘nowhere sales’ must be included in the sales factor of all group members in proportion to their labour and asset factors.53

The sales factor is the most controversial factor, as it is contrary to the internationally accepted source of income to allocate taxing rights to the market jurisdiction.54 In this regard it should be mentioned that sales by destination not necessarily corresponds to the place where a company earns its profits.55 Additionally, intra-group third country transactions could be used to inflate the sales factor.56