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Campaigners welcome ‘common tax base’ proposal

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The European Commission has proposed an optional ‘one-stop-shop’ system allowing companies to consolidate all profits and losses arising across the EU and file a single tax return.

The stated aim of the proposal, first advanced ten years ago, is to ‘significantly reduce the administrative burden, compliance costs and legal uncertainties that businesses in the EU currently face’ in having to comply with up to 27 different national tax systems.

In particular, the Commission said, the transfer pricing system for intra-group transactions ‘is particularly expensive and burdensome for businesses operating within the EU, and can lead to disputes between member state administrations and result in double taxation of companies’.

The Commission said EU member states would maintain the right to set their own corporate tax rate. It estimated that every year the Common Consolidated Corporate Tax Base (CCCTB) ‘will save businesses across the EU €700 million in reduced compliance costs, and €1.3 billion through consolidation’. But a compulsory CCCTB would be ‘out of line with the principle of subsidiarity’, it said.

A company's ‘tax base’ – the amount of a company’s profit to be taxed – would be shared out among the member states in which it is active, according to a formula taking account of assets, labour and sales. Each member state would be allowed to tax its share at its own corporate tax rate.

Campaigners welcomed the announcement. ‘Make no mistake – this is a proposal to curb abusive tax haven, or secrecy jurisdiction, activity,’ the Tax Justice Network said. The anonymous author of the ‘Progressive Tax Blog’, a new blog offering 'an insider's view' on international tax issues, claimed that the CCCTB would reduce the ability of multinational groups to avoid tax through ‘artificial’ intra-group transactions.

The Commission published a draft Council Directive and a series of questions and answers on the CCCTB. The policy was first ‘established’ in 2001 when the EC proposed a number of initiatives to achieve ‘a more efficient internal market without internal tax obstacles’.

‘The vast majority of businesses (80%) have come out in support of the CCCTB, seeing the benefits it offers in terms of reduced administrative burden, lower compliance costs and the avoidance of transfer pricing disputes,’ the Commission said, citing a KPMG study conducted in 2007.

But a recent study conducted by Ernst & Young, featuring five multinational groups, suggested that the CCCTB could result in a ‘significant increase’ in tax compliance costs and ‘substantial one-off costs’ in the transition to the new system.

Chris Sanger, the firm’s Global Head of Tax Policy, said the majority of businesses surveyed found that their corporate income tax burden would increase. Writing in Tax Journal (11 March), Sanger said it was felt that a ‘lack of recognition of intellectual property and entrepreneurial risk’ would result in ‘large differences between the location of taxable profit under the current regime and the CCCTB’.

Peter Cussons, Head of PwC’s EU direct tax group, said: ‘Classic tax planning involving financing, [intellectual property] planning, entrepreneur structures or hybrids within a CCCTB group is accordingly unlikely to continue to work effectively, given the harmonised base and aggregation [of profits and losses] and reallocation [to member states].’

Ernst & Young’s report was published by IBEC, the Irish Business and Employers Confederation. It concluded that although ‘some savings’ would occur in the area of transfer pricing, businesses reported that ‘these savings could in fact be eroded by additional costs associated with managing the impact of the introduction of formulary apportionment’.