THE European
Commission has initiated an alternative mechanism to overcome the obstacles
of transfer pricing in taxation for companies operating in more than one
EU member state.
The EC has proposed a Common Consolidated Corporate Tax Base (CCCTB) for businesses
operating within EU. It is a one-stop-shop system for filing with one tax administration,
a single, common, consolidated corporate tax return for all the group company
activities, which would overcome the fundamental problem of dealing with up
to 27 different tax systems.
At present, while tax administrations in member states follow a complex system
for determining tax on intra-group transactions, corporates cannot offset their
losses in one member state against profits in another. As a result, large businesses
face huge costs and complexities while smaller businesses are often deterred
from expanding within the EU.
The CCCTB proposal is expected to significantly reduce the administrative burden,
compliance costs and legal uncertainties for businesses in the EU to comply
with up to 27 different national systems for determining their taxable profits.
The CCCTB would be optional. Companies opting for this system would calculate
their taxable profits on the basis of a single set of rules for a minimum period
of five years. Such companies operating within the EU territory would consolidate
all their profits and losses. Other characteristics of this system include
an asset depreciation system, with one set of depreciation rules that contains
an in principle 25 per cent over four years and innovation friendly rules which
provide an immediate and full deduction for expenditure on research buildings.
According to the CCCTB proposal, the company's consolidated taxable profits
would be shared out to individual group companies among the member states,
according to a specific formula that takes into account assets, labour and
sales. Upon apportioning the tax base, member states would be entitled to levy
tax according to their own corporate tax rate. The apportionment would be processed
by the tax authorities of the company's principal member state.
Member States would maintain their full sovereign right to set their own corporate
tax rate. The European Commission has estimated that, every year, the CCCTB
would save businesses across the EU €700 million in reduced compliance
costs, and €1.3 billion through consolidation. In addition, businesses
looking to expand cross-border would benefit from up to €1 billion in
savings. The CCCTB could also make the EU an attractive market for foreign
investors.
To come into effect, the Proposal would have to be laid down as a Directive
to be implemented by all the member states of the EC. However, this is a controversial
issue as EU member states are reluctant to shift their national tax jurisdiction
to the EU as they could lose budgetary control and tax competitiveness.
This issue is more than 10 years old. After its introduction in 2001, a public
consultation was held in 2003 concerning the use of International Accounting
Standards as a possible starting point for a common EU tax base. In September
2007, a technical outline was constructed by the Working Group, consisting
of experts drawn from all 27 member states, for establishing the principles
of the CCCTB into a coherent set of rules.
The CCCTB in policy documents aimed to remove obstacles to the Single Market
and stimulate growth and job creation within the EU. The CCCTB is expected
to make it easier, cheaper and more convenient for corporates to do business
in the EU besides increasing global competitiveness.
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