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Tax Policy and Controversy Briefing, February 2011 - European Commission and the CCCTB - EY - Global

Tax Policy and Controversy Briefing, February 2011European Commission and the CCCTB

The CCCTB is not a marginal adjustment in corporate income taxation. It is a fundamentally different approach to taxing multinational corporations.

Summary:In 2011, European Member States will debate proposals for a Common Consolidated Corporate Tax Base (CCCTB). But with such a wide-ranging, fundamental change, getting the agreement of all countries will be an uphill struggle for the European Commission (EC).

CCCTB: Hard work ahead for the European Commission

The Irish Department of Finance has released an EY report that assesses the economic effects of the European Union’s (EU) CCCTB Proposal, expected to be proposed in early 2011.

If adopted, the CCCTB would:

  • Replace the EU’s current separate-country corporate income tax systems with a tax system that consolidates the taxable profits of a group of companies under common control.
  • Be allocated across the 27 EU member countries based on a three-factor apportionment formula, using the country-by-country distribution of sales, labor and assets.
  • Allow for one tax computation and one tax filing for corporate groups with operations across the whole of the EU, as opposed to the current system in which up to 27 different tax filings may be required.

The new system may reduce compliance costs and unlock some unconsolidated net operating losses (NOLs). But it would also redistribute corporate tax revenues among EU countries.

Our report: the pros and cons of three CCTB options

The EY study estimates this tax redistribution, as well as the expected economic effects on gross domestic product (GDP) and employment across the EU countries.

The report analyzed three CCCTB options:

  1. Mandatory CCCTB (including all EU companies meeting the ownership test) across all 27 EU Member States.
  2. Optional CCCTB for companies.
  3. Mandatory CCCTB adopted by a subset of the EU Member States under the enhanced cooperation framework.

Analyzing CCCTB economics

Study basics

The study estimates the change in taxes (“static” revenue impacts) by country if a CCCTB were adopted. The estimates are based on individual company income and balance sheet data for over 50,000 groups. Estimates of the value of the factors in the apportionment formula are then used to distribute the consolidated income across EU countries.

The CCCTB would subject the income from a new investment in Country A to a weighted-average tax rate reflecting the statutory tax rates in all EU countries where the group operates, as opposed to only the statutory tax rate in the investment country.

For example, an investment in Ireland could be subject to an effective tax rate in the upper 20% range, rather than the statutory Irish corporate tax rate of 12.5%. The estimated changes in effective tax rates are then translated into changes in each country’s business tax competitiveness. In the final step, the study models the impact of the tax change on each country’s economy measured in terms of employment, foreign direct investment (FDI), income and GDP.

EY developed an economic and revenue impact model for each of the 27 Member States to estimate the dynamic impact of corporate income tax changes for each EU country.

CCCTB winners and losers

The Ernst&Young study finds significant winners and losers (among both taxpayers and countries) if a CCCTB is adopted. The tax redistribution results from:

  1. Changes in the definition of the tax base
  2. The "unlocking" of unconsolidated NOLs
  3. The operation of the apportionment formula

The results are as follows:

  • While some CCCTB proposals would be close to revenue neutral, substantial changes in country-by-country tax collections would occur. Five countries would lose at least 5% of their revenues. Ten would gain revenues

Changes in corporate income taxes from adopting CCCTB

  • The CCCTB system would also redistribute jobs. Belgium, Spain and France would gain jobs. The remaining countries would lose jobs. Ireland, Luxembourg and Poland all experiencing job losses of at least 1.0%

Changes in employment from adopting CCCTB

  • Adopting the CCCTB would have larger negative impacts on FDI. Seven countries would experience FDI reductions of more than 4%.

Lessons learned from the US

Our study highlights lessons learned from the US:

  • Adopting a consolidated tax base with a uniform apportionment formula is unlikely to be either uniform or stable over time.
  • Consolidated corporate tax system without a unitary relationship requirement will result in substantial tax distortions affecting real economic activity.
  • From a tax controversy perspective, introducing a CCCTB may increase tension between taxpayers and tax administrators.

Implications, actions

The CCCTB is not a marginal adjustment in corporate income taxation. It is a fundamentally different approach to taxing multinational corporations.

It is important for policymakers within the EU Commission and the EU Member States, as well as corporate taxpayers, to understand the significant redistribution of taxes and economic activity that could result from adoption of a CCCTB.

Teams within finance ministries around Europe will be conducting in-depth revenue and economic analyses to assess the impact. For individual companies, the aggregate EU tax increases could likewise be quite substantial. The study finds that:

  • Almost 24,000 groups of taxpayers would face higher corporate income taxes under the CCCTB.
  • The increase would be an estimated €2.5b (US$3.36b).
  • The percentage increase in tax liabilities would be the greatest for agriculture and mining, financial services, real estate and transportation; taxes would go down slightly for manufacturers and more substantially for transportation companies.

For companies operating in Europe, now is the time to analyze the tax and economic effects of a CCCTB.

Stay up to date with the CCCTB proposals on our dedicated web page.

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