Controversy over the exploitation by companies of national tax rules and guidance has prompted a European Union action plan to steer corporate taxation reform
This article was first published in the May 2016 international edition of Accounting and Business magazine.
Growing concerns that companies are exploiting contrasting national taxation rules and guidance in the European Union (EU) to cut tax bills to unsustainably low levels have prompted a wide-ranging response from the European Commission (EC).
In June 2015, it issued an Action Plan for Fair and Efficient Corporate Taxation in the European Union, to steer an ongoing revamp in the 28-nation bloc. The plan sets out a series of initiatives, including a strategy to relaunch its proposals for a common consolidated corporate tax base (CCCTB), enabling crossborder companies to calculate EU taxable profits by the same method. These proposals were initially put forward in 2011 but have yet to be approved by the EU Council of Ministers, representing member states, even though its goal is to ensure tax is paid where profits are generated.
June’s action plan backed up a tax transparency package that the commission had released just three months earlier in March, tackling the most pressing issues, such as automatic exchange of information on crossborder tax rulings. But the action plan took the revision further, with initiatives to tackle tax avoidance, secure sustainable revenues for member states and strengthen the single market for business. Alongside the plan, the commission launched a consultation on disclosure, including country-by-country tax reporting (CbCR) for multinationals.
An EC statement on the action plan explained that current EU corporate taxation rules are ‘out of step with the modern economy. Uncoordinated national measures are being exploited by some companies to escape taxation in the EU. This leads to significant revenue losses for member states, a heavier tax burden for citizens and competitive distortions for businesses that pay their share.’
‘Corporate taxation in the EU needs radical reform,’ said Pierre Moscovici, EU commissioner for economic and financial affairs, taxation and customs, at the launch of the action plan. ‘In the interests of growth, competitiveness and fairness, member states need to pull together and everyone must pay their fair share.’
Moscovici made it clear that the ball was now in the member states’ court: ‘The commission has laid the foundation for a new approach to corporate taxation in the EU. Member states must now build on it.’
The linchpin of the plan is the CCCTB, which would enable crossborder companies to avoid having to comply with 28 different rulebooks when working out their EU taxation. However, the commission will have to work hard to get the idea past the council, given that member states have proved unwilling to yield national turf and approve the 2011 proposals.
Notably, the commission proposes delaying ‘consolidation’, the most controversial of the elements which have stymied progress on the 2011 proposal. Consolidation involves a group that operates through different companies in different locations having a single tax number rather than one for each of those locations. The commission plans to issue a separate proposal on consolidation, which would allow companies to offset losses in one member state against profits in another, ‘as early as possible in 2016’.
Mandatory for multinationals
The stepped approach is not the only difference from the 2011 proposal. The new proposal would create a mandatory system, at least for multinational companies, whereas previously it was to be optional. The commission said when releasing the action plan that since 2011, the CCCTB’s potential as an anti-avoidance tool has been more widely recognised, yet ‘large companies that benefit from the current loopholes are unlikely to opt in’; so, to have real impact on tax avoidance, it must be mandatory.
The key question now is whether member states will go for the revised proposal. ‘There is absolutely no quick-fix answer to CCCTB,’ says Chas Roy-Chowdhury FCCA, head of taxation at ACCA. He warns that not adopting consolidation at the outset would reduce its appeal to big business, but adds: ‘Even if the commission drops the consolidation it will still be a difficult sell. Since the financial crisis, member states are even more reluctant to divest themselves of any tax sovereignty. The measure requires unanimity [under EU council voting rules] and I think there will be a really long road ahead to achieve that.’
However, he says: ‘ACCA is keen to engage and see the commission and EU succeed. We are purely trying to instil a realistic slant to timeframes.’ He continues: ‘With so many states now part of the EU, we are really stuck for making quick changes. Almost all aspects of the corporate taxation plan will take time to implement and we need to be prepared for that.’
Apart from the European People’s Party, which is commission president Jean-Claude Juncker’s own political group, the reaction in the European Parliament has also been lukewarm, with MEPs saying it was a step in the right direction but that more needed to be done.
Roy-Chowdhury says the commission would need staying power: ‘I do not see any quick fix in terms of withdrawing or augmenting the proposals as a fast-track way forward. We need to move step-by-step and realise that it will all take quite some time to progress through,’ he explains.
Action on tax havens
A key aim of the package is for companies to pay tax in the country where the profits are made, but that is not always easy to determine, says Roy-Chowdhury. ’It is very difficult to properly allocate profits, but companies generally will do the best they can in this respect, as the transfer pricing rules are a big part of the global tax landscape and they do not wish to fall foul of those.’
Alongside the action plan, the commission also published the first EU blacklist of ‘third-country non-cooperative tax jurisdictions’, to promote a more uniform approach to tax havens. The EU list builds on national blacklists and will be used ‘to screen non-cooperative tax jurisdictions and develop a common EU strategy to deal with them’.
Roy-Chowdhury notes that on the whole the EU has the economic muscle to force tax transparency reforms on tax havens: ‘It is very important that [non-EU jurisdictions]… can comply, take action and be able to be removed from the list.’
One advantage for the EU plan is that it dovetails with international thinking on Base Erosion and Profit Shifting (BEPS) – a concern to governments worldwide. This concern has inspired the development of a 15-point action plan by the Organisation for Economic Cooperation and Development (OECD) and the G20 group.
In its response to the commission consultation on tax transparency, the Federation of European Accountants (FEE) argued that the commission should wait for the final OECD BEPS action plan to emerge before moving forward with the EU rules. The FEE said this would help ensure companies in Europe do not end up having to comply with two different sets of rules.
In its answer, it said: ‘The impact of public disclosure on EU competitiveness can’t be predicted, therefore it may be better that the EU keeps pace with international developments (including implementing the OECD’s BEPS recommendations) but does not go beyond current initiatives at this time.’
However, the commission countered, saying that not all EU member states are in the OECD and, unlike the EU proposals, compliance with the recommendations that emerge from the BEPS project will not be mandatory.
FEE also warned that the EU rules would be difficult to enforce on businesses based outside the European Economic Area – the 28 EU member states plus Iceland, Liechtenstein and Norway – and warned that this was ‘a possible competitive disadvantage for EU companies and a risk that they will relocate outside the EEA’.
Sara Lewis, journalist based in Brussels
"Member states have proved unwilling to yield national turf and approve the 2011 Brussels proposals"