Common Base Could End EU Patent Box, Transfer Pricing Disputes
Adoption of legislation for a common consolidated corporate tax base by 27 EU member states would resolve current patent box conflicts and end transfer pricing disputes that cost multinational companies hundreds of millions of dollars in double taxation, according to EU and industry officials.
Speaking at a Nov. 15 conference hosted by the Federation of European Accountants, Uwe Ihli, the chief architect of the October CCCTB proposal unveiled in October, said tax credits for research and development in the pending legislation are seen as a way to prevent harmful tax competition, triggered by the rush to attract investment by high-tech companies via tax breaks on intellectual property profits.
“We believe the research and development tax breaks in the new proposal will not only be a major attraction for businesses but they will also help resolve the divisions in the EU over patent box tax regimes,” Ihli said.
He added that the R&D terms are based on EU state aid rules and in line with the OECD’s modified nexus approach.
The commission called for a two-step legislative approach in its Oct. 24 CCCTB proposal, which entails a first-phase agreement on a common tax base, which would be mandatory for multinational companies with a turnover of 750 million euros ($802.5 million). The second step calls for a CCCTB that involves a “formulary apportionment” approach which requires some member countries transferring profits of multinationals to the treasury of another member country.
The tax breaks for research and development would be included as part of the first-phase CCTB. Commission officials including Ihli confirmed that they hoped the addition of R&D tax breaks to the CCTB would serve as a “sweetener. ”
Alfred de Lassence, the tax policy chief for French multinational Air Liquide S.A, and a speaker at the FEE CCCTB conference, said the research and development tax breaks in the CCTB-CCCTB proposal “were a big surprise” and very much welcome.
“They are a highlight and certainly have the support of industry,” Lassence said.
However, he warned that under the CCTB there is a risk that member states could end up adopting different and often conflicting interpretations on the tax breaks.
Transfer Pricing Key Attraction
At the same time, Lassence said the chief CCCTB attraction and “big hope” for multinational companies such as Air Liquide, which has operations in every EU member country, relates to transfer pricing.
“We see the CCCTB as a way to eliminate transfer pricing disputes which are still a major problem for multinational companies doing business in the EU and cost hundreds of millions of euros in double taxation every year,” Lassence said. “There are still multiple interpretations on issues such as the benefit test. The CCCTB could resolve these issues if it’s approved.”
European Commission and EU member state officials attending the conference told Bloomberg BNA they don’t expect CCTB and the CCCTB negotiations in the Council of Ministers to begin until 2017, when Malta will take over the rotating EU presidency.
Patent Box Disputes
The European Commission was tasked more than a year ago with determining whether the legislation for patent box arrangements among EU member states violated EU State Aid rules and triggered harmful tax competition.
Countries led by Germany have consistently complained to the EU executive body—empowered to police the EU single market—that some countries within the 28-nation bloc had regimes in contravention of EU state aid rules. The commission was due earlier this year to announce whether EU member state patent box regimes were in line with the patent box guidelines in the Organization for Economic Cooperation and Development’s base erosion and profit shifting reform.
The rift among EU member countries over patent boxes erupted in September because of objections to French tax breaks for research and development. Some member states insist the French patent box regime violates the modified nexus approach and is an example of a “race to the bottom” when it comes to corporate tax rates.
The French government however insists that its measures are defensive and necessary because of the low corporate tax rates in a host of EU countries, including Ireland and Bulgaria.
Meanwhile, members of the European Parliament are also piling pressure on the commission to deliver a judgment on EU member state patent regimes.
2021 Target Date
“The goal is to get an agreement by 2021 on the CCCTB,” said Gabriele Annolino, an Italian government tax negotiator in the Council of Ministers who also spoke at the FEE conference.
However Fabian Zuleeg, the director of the European Policy Centre, told the conference the biggest obstacle to an agreement on the CCCTB is the “religious” opposition that some EU member countries still have to tax legislation.
“These countries are likely to pose serious obstacles to an agreement on the CCCTB,” said Zuleeg without naming any countries.
Consequences for Failure
Ihli added that if some EU countries do block the CCCTB, there will eventually be consequences.
“Member states will not stand by and watch their tax base be eroded by another member country,” Ihli said.
“In the interest of a successful EU single market, a CCCTB should be approved in order to establish a harmonized approach to dealing with corporate tax,” he said.