Following a first progress report in 2006 (IP/06/448), the European Commission has adopted a second Communication on the progress towards a Common Consolidated Corporate Tax Base (CCCTB). The Commission, in this Communication draws the attention of the other EU institutions to the work that has been done and the work that has to be done at experts level, identifying the problems and the possible options to solve them, before making a formal proposal in 2008.
| László Kovács, European Commissioner for Taxation and Customs Union |
The Commissioner told a delegation from Ireland last week, that he hoped to put forward a legislative proposal next year on harmonising the corporate tax base - which is the method used to calculate what constitutes a company's taxable earnings.
The Commission says it would also increase transparency in comparing national tax regimes. Like the US, individual member states would be free to set their own tax rates.
But there is a proposed mechanism to share tax revenues between states, by applying tax where the business transaction takes place, not where the business is headquartered. For multinationals based in Ireland, this would mean a company selling goods to Europe would pay part of its tax in the state to which the goods were being sold.
(SEE: Ireland and a Common Consolidated Corporate Tax Base )
Today's report had to be revised following criticism by Internal Markets and Services Commissioner Charlie McCreevy (a former Irish Minister for Finance) and a number of other Commissioners. The revised version is not yet available online.
The Commission says that the CCCTB would enable companies to follow the same rules for calculating the tax base for all their EU-wide activities, rather than in accordance with the existing 27 systems, thereby, simplifying procedures, improving efficiency and reducing compliance costs (IP/04/1091). The consolidated tax base would be distributed between Member States in accordance with an agreed fair sharing mechanism which will also form part of the proposal. Member States will retain full sovereignty over their tax revenues as they will continue to set their own national tax rates. The Commission confirmed that it will not make any proposal on harmonizing tax rates.
"I am very pleased with the work already achieved and thank the Member State experts for their active participation and input. We are now entering the crucial phase where technical fine tuning and strong political support are needed", LĂˇszlĂł KovĂˇcs, the Commissioner for Taxation and Customs Union, said. "I know this project is an ambitious one and has raised some scepticism from certain Member States and questions that are to be answered. I expect all the stakeholders in favour of the project to advocate the CCCTB as the solution to eliminate existing fiscal obstacles throughout the European Union, help companies to improve their competitiveness and make Europe a more attractive place to do business."
Why a Common Consolidated Corporate Tax Base?
The European Commission says that the CCCTB constitutes a comprehensive solution to tackle in one go all the company tax obstacles arising when companies carry out cross border activities within the Internal Market.
Indeed, in addition to reducing compliance costs for companies operating across the Internal Market, the CCCTB will eliminate many of the existing intra-community transfer price difficulties, allow cross-border loss offsetting, simplify many international restructuring operations and avoid many situations of double taxation. It will contribute to greater simplicity and transparency in the 27 existing company tax systems, thereby promoting fair and open tax competition within the European Union. The European Commission has no intention to link the CCCTB with any proposal to harmonise tax rates.
The Commission advocates that:
The CCCTB should be broad, simple and uniform with as few exceptions as possible;
The tax base could be consolidated and optional for companies.
This communication highlights the necessity to elaborate issues like:
the extent to which, and manner in which, the financial sector should be incorporated into the CCCTB from its inception,
the administrative framework of the CCCTB, in particular how cooperation and mutual assistance can be improved and how the necessary new working methods at Community level can be introduced.
The Commission says that its tax policy is an integral part of its comprehensive strategy to create more growth and jobs in the EU and to boost the competitiveness of EU companies.
The Commission concentrates on the improvement of a more favourable tax environment so that business and citizens can benefit from the full potential of the internal market. Attracting investment can be done in many ways and taxation plays a part in this.
The CCCTB constitutes a comprehensive solution to remove tax obstacles that EU companies face when operating in several Member States.
ITI says EU tax report remains "dangerously fuzzy"
The Irish Taxation Institute (ITI) has said that the report outlined today by EU Commissioner for Taxation, LĂˇszlĂł KovĂˇcs for common corporate taxes in all EU Member States remains "dangerously fuzzy".
Commenting on the Commissioner's statement on CCCTB, Mark Redmond, CEO of the ITI said moves towards a common means of paying corporate taxes in the EU is bad for Ireland and bad for Europe.
He said: "The more you harmonise taxes, the more tax rates will rise, the more compliance costs will rise and the more unemployment will rise. These proposals remain dangerously fuzzy. They fail to come clean on the burden they will bring on both domestic and international businesses and they fail to address the widely held belief that it will mean higher corporate tax rates by the backdoor.
"Taxation policy has been central to the Irish success story and attempts to wrestle control on tax policy away from individual Member States should be fiercely resisted.
"A common tax rate is bad for Ireland and bad for Europe. To grow and sustain our economy we have got to stay competitive and one key way of doing so is through sound tax policies. If tax costs start to creep upward in Europe, the instinct of multi-nationals and other key employers will be to look to the Far East."
Redmond said the proposal to widen CCCTB to the financial services sector was worrying. In 2006, IFSC companies alone contributed â‚¬1.1billion in tax revenues to the Irish exchequer.
Redmond also said the proposal to establish an overall EU Revenue Authority would mean another costly bureaucratic layer for business to grapple with. He said that a single Revenue authority would also serve to undermine the positive role played by the Irish Revenue.
Banking sector to vehemently oppose Kovacs corporate tax proposals
The Irish Banking Federation (IBF) is vehemently opposed to any attempts to introduce a Common Consolidated Corporation Tax Base (CCCTB), as this would prove very damaging to business in Ireland and to the interests of the wider economy.
IBF regards the latest proposals as deficient in their own right and as a gateway to a common corporate tax that would be very damaging for Ireland.
IBF is opposed to the CCCTB proposals for the following reasons.
Competitiveness: These proposals will seriously undermine Ireland's competitiveness. Moreover, the Commissioner LĂˇszlĂł KovĂˇcs has not produced any analysis in support of his claim that they will enhance European competitiveness.
Inflexibility: Every Member State annually amends its tax system to reflect its policy priorities. This flexibility would be lost under the Commissioner's proposals and, in effect, will lead to a diminution in Ireland's sovereignty in respect of tax matters.
Uncertainty: The introduction of a CCCTB will give rise to greater uncertainty for business in any Member State that operates such a system. Just as the introduction in the past of new taxation legislation across Europe has given rise to major (and costly) interpretation issues, it can be expected that CCCTB would have a similar impact.
IBF Chief Executive, Pat Farrell, stated today: "As an open, trading economy operating in a very challenging global environment, it is imperative that we maintain what competitive advantages we have and that we continue to sharpen our competitiveness at every opportunity. This is as true for financial services as it is for any other sector of our economy.
We strongly oppose the CCCTB proposals because they are in themselves very deficient and because they are the gateway to a common EU corporate tax that will further undermine Ireland's competitiveness. That would spell bad news on the jobs front, for our standard of living and for the economic and social well being of people generally. This is why IBF is now working with a wide range of other parties here to oppose these proposals.'"
IBEC rejects most recent Commission proposals
IBEC, the business lobby group reiterated its strong opposition to attempts by the Commission proposals.
IBEC said it believes that the most recent proposals published today, contrary to Commission claims, would not strengthen the competitiveness of the EU and would be particularly damaging to the economies of smaller member states such as Ireland.
IBEC Chief Economist David Croughan said: "This proposal would almost certainly lead to an increase in companies' tax bills by transferring taxable profits to the regions with large populations. This would also result in lower revenue from corporation profits in smaller countries, which could lead to other taxes being increased to offset this loss of revenue. It would effectively result in a transfer of resources from smaller countries to larger ones.
"In the case of Ireland, which exports the greater part of its output to the larger central economies of the EU, companies would see part of their profits, currently taxed at 12.5%, apportioned to other higher taxed member states such as Germany or France. Such countries, who have made no secret that they see the introduction of CCCTB as a first step to tax rate harmonisation, would benefit from higher tax revenue earned by companies located in Ireland.
"The effective transfer of part of corporation tax to a sales tax would not reward the more efficient producers. This flies in the face of the EU's goal to make Europe the most competitive economy in the world. The introduction of CCCTB, with its unknown consequences for companies, will generate uncertainty in the sensitive area of taxation, to the detriment of foreign direct investment.
"A flexible tax system is a prerequisite for a competitive economy. Policy makers must be able to react rapidly to changing economic circumstances and developments in other tax jurisdictions. The CCCTB will ultimately reduce the flexibility of the EU's corporate tax system as the agreement of a large number of member states will be required in order to make any changes. The additional administrative layer will also make change more difficult," concluded Croughan.