On October 2016, the EU published its corporate reform package proposal. The following is the first of a series of articles aimed at taking a closer look at the some of the more salient features of this project, starting with one of its key elements: the decision to re-launch the Common Consolidated Corporate Tax Base (CCCTB) project, after the initial 2011 attempt.
In the Commission’s own words, “the CCCTB will overhaul the way in which companies are taxed in the Single Market, to ensure a fairer, more competitive and more growth-friendly corporate tax system”. Multinational groups would only need to comply with a single system for calculating their taxable base and then would file a single return for all their EU activities. The group would also be able to offset losses in one Member State against profits in another. Finally, the consolidated taxable profits would be shared between the Member States in which the group is active, using an apportionment formula. Each Member State would then tax its share of the profits at its own national tax rate.
The project, as put forward by the Commission, is intended to be implemented in two phases. Hence, two separate directives have been proposed: first the Proposal for a Council Directive on a Common Corporate Tax Base (CCTB) and then the Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB). The Commission has set an ambitious timeline, since it has indicated that the CCTB rules would enter into force already as from January 2019 and the second-tier CCCTB rules as from January 2021.
Scope of the initiative
One of the main changes with respect with the previous 2011 EU effort is the fact that the new rules are intended to be mandatory for companies belonging to large groups, defined as groups the total consolidated revenue of which would be in excess of € 750M. This reference, in the CCTB rules designed for single companies, to consolidated groups and total consolidated revenue is designed to achieve a degree of coherence between the two steps: the mandatory scope of the CCTB proposal is addressed to companies within a consolidated group, so as to ensure that, once the full initiative materialises with the CCCTB rules, all taxpayers under the CCTB rules will automatically move into CCCTB.
It is worth noting that the CCTB rules would also be available, although as an option as opposed to as an obligation, for all companies including permanent establishments in other member states, whether belonging to a consolidated group not within the mandatory CCTB scope or not belonging to any group at all.
Strong R&D incentives
The CCTB Directive proposal includes what the Commission has termed “a new super-deduction for companies that invest in R&D spending”, the justification for which would rest on the importance of such investment for growth and jobs. The full cost of R&D expenses would be deductible but, on top of such deduction, an additional 50% would be allowed for expenses up to € 20M, whereas this additional deduction would amount to 25% in the case of expenses over such € 20M threshold. Moreover, start-up companies would benefit from a more advantageous regime since such R&D expenses, up to € 20M, would be 200% deductible.
Incentive for equity financing
CCTB rules would also give companies “similar benefits for equity financing to what they currently get for debt financing, to address the debt-bias in taxation and encourage more solid financing structures and greater economic stability”. In this regard, the proposal includes an Allowance for Growth and Investment (AGI), whereby a defined return over the company’s equity increase would be considered deductible.
Very summarily, the deduction would be calculated by multiplying the increase in the company’s “equity base” over a ten-year period by a fixed rate amounting to the yield of the euro-area 10-year government benchmark bond in December of the preceding tax year. The proposal provides that this “equity base” be calculated by subtracting the tax value of the holding in the capital of qualifying subsidiaries, so as to prevent the AGI from applying more than once over the same amount of capital invested.
It is important to note however that the AGI can turn into a taxable income should there be an equity decrease, instead of an increase.
The project includes a cross-border loss relief mechanism, which bears some similarities to the old Spanish portfolio depreciation deduction. This mechanism should be temporary and would be in force only until the introduction of the CCCTB rules. Its objective is, therefore, to make up for temporarily depriving taxpayers from the benefits of the tax consolidation.
Under these provisions, the taxpayer would be allowed to deduct both the losses in its immediately qualifying EU subsidiaries, in proportion to the holding, and in its EU permanent establishments. This relief would be accompanied by a recapture mechanism, whereby deducted amounts should be added back to the tax base to the extent that the subsidiary or the permanent establishment become profitable. Additionally, an automatic add-back would apply after 5 years, to the extent that there has been no recapture of the losses deducted.
It is worth noting that, whereas consolidation allows for a full offset of profits and losses within a group and for the elimination of intragroup transactions, this loss compensation mechanism would only be temporary and would only allow for an upstream offset of losses within the group.
The CCTB project would also include anti-BEPS elements and rules deriving directly from the EU Anti-Tax Avoidance Directive (ATAD), such as limitations on interest deductibility, controlled-foreign company rules, rules on hybrid mismatches and a general anti-avoidance provision. Moreover, the CCTB rules would bring back the switchover clause, aimed at preventing dividend exemption in cases where such dividends originate from profits not taxed at a minimum rate and which has to be dropped from ATAD due to lack of consensus.