New EU corporate tax rules announced
After five years of negotiations, the European Commission has finally announced its plans to overhaul the way in which companies are taxed in the Single Market.
The revised Common Consolidated Corporate Tax Base (CCCTB) is aimed at making it easier and cheaper to do business in the Single Market and to act as a powerful tool against tax avoidance – including by multinationals.
The CCCTB was first tabled in 2011, but while member states made considerable progress on many of its core elements, they were unable to reach a final agreement.
Companies will for the first time have a single rulebook for calculating their taxable profits throughout the EU. Compared to the previous proposal in 2011, the new corporate taxation system will be mandatory for large multinational groups which have the greatest capacity for aggressive tax planning, making certain that companies with global revenues exceeding €750 million a year will be taxed where they really make their profits. It will also tackle loopholes currently associated with profit-shifting for tax purposes.
Corporate tax rates are not covered by the CCCTB, as these remain an area of national sovereignty. However, the CCCTB will create a more transparent, efficient and fair system for calculating the tax base of cross-border companies, which will substantially reform corporate taxation throughout the EU.
Companies will now be able to file one tax return for all of their EU activities. With the CCCTB, time spent on annual compliance activities should decrease by eight per cent while the time spent setting up a subsidiary would decrease by up to 67 per cent. Companies will also be able to offset profits in one member state against losses in another.
The CCCTB will eliminate mismatches between national systems which aggressive tax planners currently exploit. It will also remove transfer pricing and preferential regimes, which are primary vehicles for tax avoidance today. It also contains robust anti-abuse measures, to stop companies shifting profits to non-EU countries.
Finally, the CCCTB will take steps to address the bias in the tax system towards debt over equity, by providing an allowance for equity issuance. A set rate, composed of a risk-free interest rate and a risk premium, of newcompany equity will become tax deductible each year. Under current market conditions, the rate would be 2.7 per cent. This will encourage companies to seek more stable sources of financing and to tap capital markets. It would also provide benefits in terms of financial stability, as companies with a stronger capital base would be less vulnerable to shocks.
“The current corporate tax system treats debt financing of companies more favourably than equity financing. Reducing this debt-equity bias in the tax system is an important element of the Capital Markets Union Action Plan and underlines our commitment to deliver on this project,” vice-president Valdis Dombrovskis said.
These proposals will be submitted to the European Parliament for consultation and to the Council for adoption.