Common corporate tax system could change how business is done in the EU
For enterprises operating from a single location in the EU or major multinationals with a number of locations within the EU, the way that tax liabilities are calculated could change dramatically in the coming years.
The proposed system
On 17 June 2015, Pierre Moscovici, the EU Commissioner for Economic and Financial Affairs, Taxation and Customs, announced that he will seek to introduce a common system of corporate taxation across the whole of the EU. Gone would be the special reliefs and allowances offered as incentives to entities to do business in particular territories. Gone would be the ability of governments to offer incentives for particular types of business or those operating in a particular industry.
Governments would still be allowed to set their own rates of taxation. Currently Germany, for instance, has a headline rate of company taxation three times that of Ireland and, under the proposed system, national variations would still be possible.
For multinationals with a headquarters in the EU or elsewhere, EU taxable profits, as computed, would be aggregated and then apportioned to the territories where the enterprise operates. Taxable profits would be calculated with reference to the location of sales, assets or labour, a combination of these three or, possibly, a different set of criteria.
Predictably, the ‘mischief’ targeted by this proposal for a Common Consolidated Corporate Tax Base is tax avoidance.
Third time lucky?
This is the third attempt to introduce such a system in the EU. Previous attempts in 2006 and 2012 failed. However, the economic landscape has changed and it is possible that this time it may succeed.
If the Commissioner is successful, it is probable that the concept would be applied to other taxes within the EU, as was the intention back in 2006.
For many the proposed system has an appeal because it could provide a solution to some of the issues that arise when doing business in multiple states within the EU, such as dealing with only a single tax authority over the calculation of taxable profit and avoiding disputes over inter-territory transfer pricing. However, there would be significant hurdles to overcome, not least the removal of sovereign powers over tax policy and the task of establishing how taxable profits are apportioned between territories.
Given that opinion was divided in 2006 and 2012 and that approval is now required from all 28 member states, the proposal may fail again. However, in the face of the current political tensions within the EU, it may also succeed as a part of a deal on other matters.
For further information on these proposals, a more detailed report is available at: /assets/publications/The-Common-Consolidated-Corporate-Tax-Base.pdf
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