In the second step, after the approval of the CCTB Directive, tax consolidation covered in the proposal of the CCCTB Directive should be examined and discussed without delay. The CCCTB proposal, like the previous CCTB proposal, is consis- tent with other Union policies and falls within the ambit of Article 115 of the Treaty on the Functioning of the EU. Further, it does not restrict Member States’sover- eignty to determine their desired amount of tax revenues in order to meet their budgetary policy targets, and it does not affect Member States’right to set their own corporate tax rates.
The following part will focus only on the basic rules and provisions that are the key elements of the CCCTB proposal. The CCCTB proposal provides a single set of rules for the determination of the consolidated corporate tax base via an apportion- ment formula, i.e., companies operating across borders in the EU would add up all profits and losses to determine their consolidated taxable profit and then shared it between the Member States according to an apportionment formula. On this basis, these companies would therefore no longer have to deal with 28 different set of national rules when calculating their taxable profits. Moreover, under the CCCTB, companies would be accountable to a single tax administration, the so-called “one- stop-shop”.
The CCCTB proposal suggests making the tax system compulsory only for a subset of firms, based on their size. Thus, micro-enterprises and SMEs are exempted from the mandatory application of the CCCTB. According to Article 2 of the CCCTB proposal,mandatory applicationis set for groups with a consol- idated turnover above EUR 750 million. This threshold is coherent with the approach taken in the other EU initiatives to counter tax avoidance. However, the CCCTB proposal also suggests the possibility to opt into the CCCTB system and benefit from the advantages of this system. Further, based on Article 5 of the CCCTB proposal,eligibility for the consolidated tax groupwill be determined in accordance with a two-part test based on (1) control (more than 50% of voting rights) and (2) ownership (more than 75% of capital) or rights to profits (more than 75% of rights giving entitlement to profit). The two-part test shall be met through- out the tax year; otherwise, the failing company will have to leave the group immediately. In addition, the threshold must be met for at least nine consecutive months for establishing group membership in order to prevent a manipulation of the tax results through companies entering and leaving the group in the short term.
The key element of the CCCTB proposal is the apportionment of the positive common consolidated corporate tax base, via an apportionment formula, which consists of three equally weighted factors: (1) a company’s assets in the Member State, (2) the company’s labour in the Member State, and (3) the company’s sales in the Member State, as can be seen in Eq. (6.4).
ShareXẳ 1 3
SX Sgroupþ1
3 1 2
PX PGroupþ1
2 EX EGroup
þ1 3
AX AGroup
CCCTB ð6:4ị
where S represents the sales of goods and services by destination, P is payroll (comprising wages and salaries, bonuses and other compensation),Erepresents the number of employees (employed for at least a period of 3 months) andAdenotes assets (including fixed assets, buildings, aircraft, boats and machines). The choice of a three-factor formula is based on the extensive analysis conducted by the CCCTB Working Groups,49 academic experts and stakeholders, which proved that the three-factor formula best fulfils the principles that have guided the design of the sharing mechanism. Moreover, the choice of three factors stems from the need to reflect both the state of production (i.e., supply side, measured by assets and/or labour payroll) and the state of demand (i.e., sales to destination) to describe the economic activity properly. Thus, this combination of factors should reflect a balanced approach to distributing taxable profits among eligible Member States and ensure that profits are taxed where they are actually earned.
With regard to individual factors of an apportionment formula, the CCCTB proposal sets different rules for their composition. To account for differences in the levels of wages across the European Union and thus allow for a fair distribution of the consolidated tax base, the labour factor is subdivided into two equally weighed components: payroll and number of employees as measured by year.
Moreover, in accordance with Article 32 of the CCCTB proposal, where an individual employee is included in the labour factor of a group member, the payroll relating to that employee is allocated to the labour factor of the same group member. Pursuant to Articles 34 and 35 of the CCCTB proposal, theasset factor will consist of all fixed tangible assets owned, rented or leased by a group member, which are allocated to the economic owner or to the legal owner if the economic owner is not identifiable. Intangibles and financial assets are excluded from the formula owing to their mobile nature and the risks of circumventing the system. In accordance with Articles 37 and 38 of the CCCTB proposal, the sales factor consists of the proceeds from the total sale of goods and supplies of services of a group member, including permanent establishment, after discounts and returns, excluding value added tax, other taxes and duties. Exempt revenues, interest, dividends, royalties and proceeds from the disposal of fixed assets shall not be included in the sales factor, unless they are revenues earned in the ordinary course of trade or business. Intra-group sales of goods and supplies of services are excluded from the sales factor. The sales factor is attributed to group members on a “destination” basis, i.e., where the dispatch or transport of the goods to the person acquiring them ends. In case of the supply of services, they shall be included in the
49The results of CCCTB Working Group can be found at the following web-page:http://ec.europa.eu/
taxation_customs/taxation/company_tax/common_tax_base/article_3831_en.htmandhttp://ec.europa.
eu/taxation_customs/taxation/company_tax/common_tax_base/article_4381_en.htm
6.4 Proposal of the CCCTB Directive 153
sales factor of the group members located in the Member State where the services are physically carried out or actually supplied.
Furthermore, the CCCTB proposal includes special apportionment rules50 for four industry sectors (financial institutions,51insurance undertakings, oil and gas,52 and transportation53), as the general scheme of the formulary apportionment cannot address the specificities of those types of industries and in order to better fit the needs of those sectors.
To sum up, the CCCTB apportionment mechanism constitutes a comparable system to what has been used in Canada and the US,54which is presented by a uniform formula and equally weighted factors, by the exclusion of intangible assets and the provision of sector-specific formulae.
With respect to administrative procedures, groups will deal with a single tax administration through the principal tax authority55 in the EU. This system is called “one-stop-shop”, which is considered to be one of the benefits of the CCCTB system. However, it is essential to lay down common procedural rules for its administration. After that, this approach should decrease compliance with taxation. Regarding audits, they should be conducted in accordance with the national legislation of the Member State in which they are carried out, but audits should be initiated and coordinated by the principal tax authority. Based on the CCCTB proposal, an audit may also be initiated at the request of a competent authority of Member States. Further, if disputes between taxpayers and tax authorities arise, they should be dealt with by an administrative body in the first instance, in order to reduce the number of cases that reach the courts. This body should be structured and operated in accordance with the law of the Member State of the principal tax authority and the body should be competent to hear appeals in the first instance.56
50For more details see Article 40–43 of CCCTB proposal.
51Financial institutions and insurance undertakings have different approaches to the calculation of assets and sales factors; for more details, see Articles 40 and 41 of the CCCTB proposal.
52Based on the Article 42 of the CCCTB proposal, sales of a group member conducting its principal business in the field of the exploration or production of oil or gas shall be attributed to the group member in the Member State where the oil or gas is to be extracted or produced.
53In accordance with the Article 43 of CCCTB proposal, the revenues, expenses and other deductible items of a group member whose principal business is the operation of ships or aircraft in international traffic or the operation of boats engaged in inland waterways transport shall be excluded from the consolidated tax base and not be apportioned. Instead, those revenues, expenses and other deductible items shall be attributed to that group member on a transaction-by-transaction basis.
54For more details see Sect.6.2.
55In accordance with Article 3(27) the principal tax authority means the competent authority of the Member State in which the principal taxpayer is resident for tax purposes or, where it concerns a permanent establishment of a non-resident taxpayer, the Member State in which that permanent establishment is situated.
56For more details about appeals see Article 60–62 of CCCTB proposal.
To sum up the CCCTB proposal, this system brings benefits in the form of a single set of corporate tax rules with a consolidation of corporate tax base,57which will be allocated through formulary apportionment. Another important benefit is the administration of a corporate tax system via a one-stop-shop approach that will result in a decrease in the compliance costs of taxation. Specifically, in accordance with impact assessment (2016), compliance costs are expected to decrease alto- gether in the amount of 10% in compliance time and 2.5% in compliance costs.
Moreover, the cost of setting up a subsidiary would decrease by up to 67%, mainly owing to the elimination of transfer pricing issues and the establishment of common corporate tax rules, supporting companies (including SMEs) to become internationalized. In addition, the expected economic benefits of the CCCTB proposal would be an increase in investment (up to 3.4%), employment (up to 0.6%) and growth (up to 1.2%).58