Common consolidated corporate tax base

The concept of Common Consolidated Corporate Tax Base is one of the solutions, proposed by the European Commission, for harmonizing direct tax system in the member countries. CCCTB refers mainly to CIT * Corporate Income Tax.

The basis of CCCTB is harmonizing national tax law in a way, that the tax base (for the purposes of CIT) will be calculated on the same conditions in every member country. That would increase transparency of national tax systems and the comparability between countries' tax systems. Once the method of calculating the tax base is harmonized, we have to apply it to the companies, that conduct their business in more than one member country or to whole European capital groups. Now, according to harmonized principles, the tax base is calculated in every member country. The next step is to sum up calculated tax bases. The most important stage of the whole CCCTB idea is to divide the aggregated tax base to particular member countries, according to a specific key. The key has to be agreed between member countries firstly. Once the aggregated tax base is divided between member states, they will apply national CIT rates to the partial tax rates, they were given according to the key.

The biggest challenge for the European Commission

The key that would be used for dividing aggregated tax base to member countries is the most difficult part of introducing CCCTB. The key would determine how big the budget incomes of particular member states will be. After introducing the key there would be less possibilities of attracting foreign direct investments by member countries. Thus, every member country is going to fight for the most beneficial way of setting the key. As we can see reaching the consensus will be difficult.

That is why many politicians and economists see introducing the concept only up to determining the same principles of calculating the tax base as sufficient. It would still reduce costs of compliance to some extent and would not be so controversial.

Advantages and disadvantages of CCCTB

The main advantages of CCCTB are:

• harmonizing national tax rules according to estimating the tax base,
• increasing tax systems transparency,
• increasing tax systems comparability,
• reducing compliance costs connected with staying in line with various tax base estimating rules,
• eliminating the need for transfer pricing regulations,
• eliminating double-taxation,
• the possibility of calculating aggregated loss (by summing up all national tax bases).

The main disadvantages are taking away from member countries tools of fiscal policy and reducing tax competitiveness of countries representing the lowest CIT rates.

Examples of Common consolidated corporate tax base

• Harmonization of Tax Rates: In this example, the European Commission proposes that member countries harmonize their corporate income tax rates to a uniform rate. This would help to reduce tax avoidance and evasion, as companies would not be able to shop around for the lowest possible rate.
• Consolidation of Member States’ Tax Bases: This example proposes that all member countries consolidate their corporate income tax bases, so that companies are taxed on a single basis throughout the EU. This would help to reduce the administrative burden for companies operating across multiple countries and eliminate the need for companies to file multiple tax returns.
• Harmonization of Tax Rules: The European Commission also proposes that member countries harmonize their tax rules, such as rules on depreciation, transfer pricing, loss-offsetting, and so on. This would help to reduce the complexity of the corporate tax system and make it easier for companies to comply with the law.
• Consolidation of Tax Revenue: Finally, the European Commission proposes that member countries consolidate their corporate tax revenue, so that profits are taxed where they are generated. This would help to reduce the extent of profit-shifting and ensure that corporate profits are taxed where economic activity takes place.

Other approaches related to Common consolidated corporate tax base

In addition to the Common Consolidated Corporate Tax Base (CCCTB) approach, the European Commission has proposed other solutions to harmonize direct tax systems in the member countries.

• Common Corporate Tax Base (CCTB): This approach focuses on a single corporate income tax base that applies across the EU. It seeks to reduce administrative costs and eliminate double taxation by harmonizing the tax rules and bases of different member states.
• Controlled Foreign Company (CFC) Rules: This approach seeks to prevent companies from artificially shifting profits to other countries in order to avoid taxation. It does this by providing for the taxation of profits generated by subsidiaries located in other countries.
• Parent-Subsidiary Directive: This approach seeks to eliminate double taxation of dividends by allowing for a tax exemption or credit for dividends paid by a subsidiary company to its parent or group company.
• Interest and Royalties Directive: This approach seeks to eliminate double taxation of interest and royalty payments made between companies located in different countries, by allowing for a tax exemption or a tax credit in the country of the recipient.

In summary, the European Commission has proposed a number of approaches to harmonize direct tax systems, including Common Consolidated Corporate Tax Base (CCCTB), Common Corporate Tax Base (CCTB), Controlled Foreign Company (CFC) Rules, Parent-Subsidiary Directive, and Interest and Royalties Directive.

Common consolidated corporate tax base — recommended articles

Accumulated Earnings Tax — Taxation principles — Gross price — Output tax — Tax principles by Adam Smith — Depreciation rate — Royalty fee — Extension pricing — Etatism

References

• Wittendorff, J. (2011). Common Consolidated Corporate Tax Base. International Transfer Pricing Journal, 404-406.

Author: Maciej Sawicki