European Commission to launch controversial new tax proposals

The European Commission will next week launch controversial new proposals on corporate tax which could, in future, prevent multinational companies from negotiating secretive tax arrangements, RTÉ News has learned.

The plan will also seek to harmonise the tax base across the European Union.

The Commission has decided to break up a previous proposal into separate parts in the hope that a graduated approach will be more palatable to member states.

A draft of the proposals, seen by RTÉ News, reveals the Commission is seeking a tougher approach toward those multinationals that allegedly seek to avoid tax by taking advantage of a mismatch in different corporate tax regimes.

The proposals would also mean a closer link between where sales of a particular product take place and where the profits derived from those sales are taxed.

The shifting of multinational profits related to so-called "intangibles", such as intellectual property, from one tax regime to another was an element of Apple's tax arrangements in Ireland which have, in the past, drawn sharp criticism.

Under the Commission's beefed-up proposals such profit shifting would be unlawful.

All member states would have to sign up to the proposal for it to become law.

The question of managing corporate tax at EU level has been hugely controversial, with previous attempts by the European Commission to legislate drawing strong opposition from member states on the grounds of tax sovereignty and the complexity of what had been proposed.

The Commission will insist that the corporate tax rate, as opposed to the tax base, is not part of the new proposal and that corporate tax rates will remain a sovereign matter for member states.

Successive Irish governments have asserted that Ireland's corporate tax rate of 12.5% is sacrosanct.

While the government here has historically said it would "engage constructively" with the Commission and other member states on the issue of creating a common corporate tax base, it has always had reservations about plans that would intrude any deeper into the corporate tax realm.

However, business organisations have been supportive of the plans as they would make it simpler for companies with subsidiaries in different member states to comply with a multitude of tax regimes.

The relaunch of what is known as the Common Consolidated Corporate Tax Base (CCCTB) comes amid a growing clamour worldwide about multinational companies avoiding tax.

The Commission has also consistently argued that a CCCTB would simplify the tax liabilities of medium-sized and large companies who want to operate across borders as it would lower their tax compliance costs, thereby encouraging cross-border trade.

The Commission estimates that compliance costs could be lowered by as much as 7%.

The last time the Commission launched a proposal on a CCCTB in 2011, however, it failed to win sufficient support from member states.

The Commission will next week announce deep changes to the 2011 proposal, taking a tougher approach to multinationals, but offering sweeteners to SMEs, tech start-ups, and companies that engage in R&D.

The biggest change is that the CCCTB will be broken up into two parts, one addressing the question of the tax base, and the other addressing the question of how to consolidate the tax liabilities that a company faces if it has multiple subsidiaries across the EU – i.e., the "consolidation" part of CCCTB.

At present companies, or groups of companies, must deal with potentially 28 different corporate tax regimes across Europe.

The Commission will recommend that, instead, member states would sign up to a Common Corporate Tax Base (CCTB).

That would create a harmonised tax base so that a company which operates in several member states would know that in each member state its profits would be taxable the same way, and that exemptions, deductions and losses would be also be treated the same way for tax purposes.

Once a Common Corporate Tax Base was established, the next phase would be to create a system whereby tax liabilities would be "consolidated".

That would effectively operate on a formula that would apportion how much tax is due to which member state.

Under the proposal, a group of companies would be allowed to add its profits and losses from all subsidiaries together to reach a net figure.

Tax would then be paid on the group's net profit for the whole of the EU.

A key difference between the new proposal and the 2011 legislation, however, is that firms with an annual turnover of €750m would be obliged to sign up to the CCCTB, whereas the earlier proposal was voluntary.

A Commission source told RTÉ News the mandatory nature of the new proposal would mean that big multinationals would not be able to avoid tax by negotiating secretive tax rulings - or letters of comfort provided by tax authorities - or engaging in transfer pricing, i.e., artificially shifting elements of their operations around in order to artificially attract a lower rate of tax.

It is understood the Government here will take a constructive approach to the first part of the proposal, i.e., the idea of a harmonised tax base.

But it is likely to have strong reservations about the second "consolidated" leg of the proposal.

This is because it would mean the Commission having a more intrusive hand in calibrating the tax for which multinationals are liable.

The Commission will insist, however, the proposal does not involve any attempted harmonisation of corporate tax rates.

Fine Gael MEP Brian Hayes has welcomed the Commission's two-step approach to CCCTB as "the right approach".

However, he added: "Consolidation of the tax base, however, is a bridge too far and effectively represents wide-scale tax harmonisation through the back door.

"Consolidating a multinational's profits across its entities in different member states according to a complex formula is not the way to proceed.

"This cuts across how member states set their tax rates and policy and is a roundabout way of addressing cross-border tax losses," he added.

The Commission's relaunch of CCCTB will also attempt to encourage companies to finance their operations by issuing equity, rather than relying on debt.

At present companies can offset interest paid on loans against tax. The new proposal will provide an incentive for companies instead to opt for equity financing.

The draft proposal reads:  "Given the risks that such a situation entails for the indebtedness of companies, the re-launch proposal for a CCTB will include a rule against debt bias, in order to neutralise the current framework that discourages equity financing."

It also proposes a "super-deduction for R&D costs into the already generous R&D regime of the proposal of 2011.

It states: "The baseline rule of that proposal on the deduction of R&D costs will thus continue to apply; so, R&D costs will be fully expensed in the year incurred (with the exception of immovable property).

"In addition, taxpayers will be entitled, for R&D expenditure up to €20m, to a yearly extra super-deduction of 50%. To the extent that R&D expenditure reaches beyond €20m taxpayers may deduct 25% of the exceeding amount."

If agreed, the R&D sweeteners could have implications for Ireland's so-called Knowledge Development Box, a system whereby multinationals can strip out expenditures on R&D and subject them to a lower rate of tax.

Under the Commission's new CCCTB proposal, multinationals would not be permitted to avail of both the CCCTB's R&D concessions and any related to a "knowledge" or "patent" box.

The relaunch of CCCTB has been widely flagged given the widespread unease over tax avoidance by multinationals, especially following the revelations of the so-called Luxleaks scandal.

However, with the proposal being split into two chunks it could take a long time for member states to agree.

The issue of taxation requires unanimity, and Ireland would be likely to veto either part of the proposal if it is not satisfied with how it works, or if it feels there is too much infringement on its corporate tax regime.

From rte.ie (19/10/2016)