Bob van der Made

On December 12 2006, the European Commission will hold its second joint consultation meeting on the CCCTB with business and academics in Brussels. This meeting will be followed by a meeting the next day between the Commission and EU member state experts in the Common Consolidated Corporate Tax Base (CCCTB) Working Group. The aim of these meetings will be to take stock of progress in 2006 and discuss how to further build the CCCTB. The working assumption of the Commission is still that a legislative proposal for a CCCTB can be presented to Council and Parliament by the end of 2008.

Since 2004, the Commission has been advocating the CCCTB as the only viable alternative to the current system of separate accounting and pricing of internal group transactions at arm's length that will reduce compliance costs, remove transfer pricing difficulties, enable cross-border loss relief and eliminate any other remaining tax barriers for companies in the Internal Market. Although it is unlikely that all 25 (soon 27) EU member states will join the CCCTB, they have all been involved in the work of the working group so far, and the progress has been impressive. In the meantime, until December 2008, many technically complex aspects of the CCCTB still need to be addressed. A few indicative examples are discussed here.

Determining the base CCCTB

The CCCTB has no previously defined basis on which to determine the taxable amount and taxable profit. It is, for instance, proposed by the Commission to use the International Financial Reporting Standards (IFRS) as a base for the CCCTB. As accounting and tax standards serve different purposes, IFRS rules should only be used where they are consistent with tax principles and can be converted one to one, from commercial profit (IFRS) to tax profit, without raising the tax burden for the companies opting for the CCCTB due to the inappropriate use of IFRS rules in the tax base.

Taxable income

In the CCCTB, only one set of rules applies to a consolidated profit for establishing the tax position of an entire company or group. Abolishing transfer pricing in the CCCTB will not take away the need for a fair allocation of the taxable income per member state. In the absence of a harmonised rate, the apportionment method would indirectly determine the amount of tax due in each member state depending on which criteria are used, what profits are apportioned to it and at which rate. The most discussed and proposed method is formulary apportionment where member state tax authorities determine which part of the consolidated taxable income they can tax at their own rate using a predetermined formula based on the factors that are deemed to generate the group income such as assets, labour costs and sales. This is an imposed formulary-based approach which can be more prone to arbitrary and unfair results. On the other hand, the formulary apportionment systems in the US and Canada seem to be working reasonably well and are not really contested. Any apportionment mechanism will have its advantages and disadvantages and the working group will need to do more analysis and decide on the most appropriate apportionment mechanism.

Consolidation/group taxation

Consolidation of the common tax base would be the best way to significantly reduce compliance costs for European companies but raises problems regarding the definition of a group and the best method for consolidation. The method used in some countries with a group relief system, where each individual company of a group can freely opt in or opt out of the group as long as they meet the criteria, is preferred by many European companies. Nevertheless, the methods for eliminating inter-company transactions in Europe are insufficient for a CCCTB. Even the most advanced regimes in the EU require that each member of a consolidated group keeps separate documentation at national level of inter-company transactions between the members of that group.

International aspects

Another important question is which companies will be covered by the CCCTB tax and on what income will they be taxed? CCCTB residents should be taxed for CCCTB income while non-CCCTB residents with foreign income (that is, income/gains earned by residents from sources outside of the state of residence) should not be covered by the CCCTB. Here again companies should be able to opt in or opt out of the CCCTB at their own discretion. Whether the foreign income should be included in the CCCTB or left to the member states needs to be further analysed by the working group. It will also have to choose between the credit method and the exemption method for CCCTB profit allocation purposes. The first method is based on worldwide taxation of income for CCCTB purposes, while the second one is based on the territoriality principle, where income from sources outside the EU would not be subject to CCCTB tax. For many European companies, the prevention of double taxation of foreign income of a CCCTB resident can best be dealt with under the exemption method, but most member state expert appear to favour the credit method, so it is at present not sure which method will be chosen, or whether perhaps a mix of both could be contemplated. The CCCTB should cover only profits arising in CCCTB member states and foreign income of CCCTB resident companies from non-CCCTB member states, and the latter should as far as possible be exempted. Many European companies believe that any anti-avoidance rules should be kept at a bare minimum to make CCCTB resident companies competitive outside the CCCTB. The complexity arising from CFC regimes also needs to be dealt with. But since the recent ECJ judgement in the Cadbury Schweppes case this should be more manageable.

What's left

From the above, it is clear that a lot still needs to be done before the full CCCTB legislative measure is ready. Many technical hurdles will have to be taken, as well as political ones. However, under the most positive situation, the CCCTB could come into effect two or three years after the proposal has been submitted to Council and Parliament, which means only five years from now. Companies and their advisers should follow this development closely therefore and familiarise themselves with and prepare themselves for the possible consequences of its introduction, as the CCCTB will not go away. A complete overview of the work of the CCCTB Working Group can be found on the Commission's website. More than that, the proactive input of daily tax practitioners is required to assist the CCCTB Working Group with offering solutions for the many complex technical issues in the meantime and to try to make the CCCTB as business-friendly as possible.

Bob van der Made (bob.van.der.made@nl.pwc.com), Rotterdam and Brussels