5.3.4.3 Pros and cons of the CCCTB system

The EC promotes the CCCTB as the ultimate solution to address base erosion and profit shifting by multinational enterprises. The consolidation mechanism as prescribed by the CCCTB has clear advantages for multinational companies. Within the EU group, the arm’s length principle no longer has to be applied. It can also be positive for taxpayers from an administrative point of view, as the taxpayer will mainly have to deal with one tax authority (the one-stop-shop). Another clear advantage is the fact that under the CCCTB cross-border loss compensation within the EU is possible. The CCCTB seems to end various classic tax avoidance opportunities within the EU, as the factual situation is taken into account rather than the juridical situation. The key tools for artificial profits shifting would no longer be available. Additionally, overtaxation and undertaxation resulting from an intra-EU cross-border investment in comparison with a domestic investment would be ended, which contributes to the neutrality of the tax system. Apart from that, the distortions resulting from different definitions of the taxable unit, the tax base and tax allocation mechanisms would be eliminated.1 To only difference that would remain is the tax rate, as national tax rates would not be harmonized.

The rationale underlying the CCCTB seems logical: looking at the group as such makes sense from an economic perspective. However, a major objection is the fact that the consolidation would be solely applied within the EU. Therefore, the arm’s length principle remains of major importance in the CCCTB proposal. There is no true global group approach. For transactions with group companies that are located in a third country, the ‘usual’ tax avoidance possibilities remain an issue. Moreover, the scope of the CCCTB is limited: it is only mandatory for large multinational companies. Additionally, as the currently applicable permanent establishment concept – which requires physical presence – is used for the CCCTB, it does not provide a proper solution for the taxation of the digital economy.

Another problem is the allocation formula. It does not do justice to economic reality, for example because intangible assets are not taken into account. Another disadvantage is that a formulary regime will provide an incentive for multinational companies to locate apportionment factors in low-taxing jurisdictions. There would be a potential for arbitrage and factor manipulation.2 Consolidation would be most beneficial if the system is made compulsory and the tax rates are harmonized.3