An outline of the CCCTB (Common Consolidated Corporate Tax ...

An outline of the CCCTB (Common Consolidated
Corporate Tax Base) and some focal points 1
1. Introduction
The CCCTB initiative is the result of a lengthy process which began with the
debates on the Code of Conduct on harmful tax competition and a study conducted
by the European Commission in 2001. 2
In March 2000, the European Council put this study, the most extensive study of
corporate taxation in Europe ever conducted, into a new perspective when it
adopted the strategic goal of making the economy of the European Union "the
most competitive and dynamic knowledge-based economy in the world, capable of
sustainable economic growth with more and better jobs", thereby assigning an
important role to the corporate-tax initiative in the effort to establish tax systems
capable of contributing to the efficient operation of the internal market and of
increasing the competitiveness of European enterprises.
In spite of the establishment of the internal market and of economic and monetary
union, the allocation of resources and the distribution of economic activities as well
as investment choices are still affected by the enduring tax barriers, which have
become increasingly significant as other than tax obstacles to the operation of the
internal market have been removed.
The priority objective is therefore the elimination of tax obstacles to corporate
cross-border activity in a single market with a view to enhancing the effectiveness
of the internal market. To this end, the 2001 study set out the views of the
Commission on the measures it was necessary and realistic to take in the realm of
corporate taxation in the EU. The study presents an exhaustive list of the tax
obstacles and an analysis of the proposed remedies in the form of targeted short-
1 This document was prepared by Michel Aujean and Marie Pierre Hoo on behalf of Taj, Société d’Avocats
with the help of its partners and assistants. The use of this document or its copy must be respectful of its
contents and must mention the origin of such document
2 .
See also Company taxation in the Single Market - Commission Staff Working Paper SEC (2001) 1681 of
23 October 2001. See The CCCTB Project and the Future of European Taxation – to be published in May
2008 as Conference Papers - Vienna University of Economics and Business Administration and the Institute
for Austrian and International Tax Law, February 2008, on Common Consolidated Corporate Tax Base: the
possible content of Community law provisions.
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term or medium-term solutions – one solution for each listed obstacle – and a
general solution.
In fact, the Commission also concluded that, in the long term, the Member States
should reach an agreement to authorise EU businesses to use a single common
consolidated tax base to calculate the tax payable on their profits on an EU-wide
basis in place of the 27 national tax systems that currently exist.
The following are the main obstacles relating to corporate taxation, which were
listed with the aid of a panel representing employers’ and employees’
organisations 3 and other economic stakeholders:
- the coexistence of 27 different systems,
- transfer-pricing issues (documentation and double taxation / arbitration),
- the general lack of cross-border loss-offset,
- the fact that existing directives do not do enough to eliminate tax obstacles,
- double-taxation problems and the inadequacies of bilateral agreements, and
- the obstacles to reorganisation and restructuring.
Any general solution will have to be able to encompass and resolve most of these
difficulties.
For this reason, the Commission has launched a two-pronged follow-up: on the
one hand, it has presented various ‘targeted solutions’ designed to solve specific
problems that arise in the domain of corporate taxation; 4 on the other hand, it has
formulated options for a general long-term solution, the aim being to adopt a tax
base that is common to the companies in a group as well as being consolidated.
In November 2003, the Commission adopted a follow-up communication (COM
(2003) 726) on corporate taxation which reaffirmed the commitment made in the
2001 strategy. In that communication, it presents two approaches with the potential
to eliminate the constraints affecting the taxation of profits earned by companies
operating in the internal market:
- home-state taxation, a solution based on the “mutual recognition” principle that
will ultimately be reserved for SMEs 5 in view of the risks of distortion of competition
it might entail;
3 See the list of members in “Company Taxation un the Single Market” – Commission Staff Working Paper
SEC (2001) 1681 of October 23, 2001; op.cit. Pag. 5.
4 To this end, the existing directives (the Parent-Subsidiary Directive and the Mergers Directive) were
amended in 2003 and 2005 respectively in order to extend their excessively limited scope, which had often
been a significant tax barrier.
5 See COM(2005) 702 final of 23 December 2005 – Communication from the Commission : Tackling the
corporation tax obstacles of small and medium-sized enterprises in the Internal Market – outline of a possible
Home State Taxation pilot scheme. The idea was to set up a pilot scheme in which groups of small and
medium-sized enterprises would be authorised to apply the taxation rules of the parent company’s home state
in order to calculate their taxable profits on an EU-wide scale (home-state taxation), to consolidate them and
apportion them on the basis of a distribution formula, each Member State applying its tax rate to the share of
the tax base apportioned to it.
http://ec.europa.eu/taxation_customs/taxation/company_tax/home_state_taxation/index_en.htm
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- the common consolidated corporate tax base (CCCTB), a general solution
designed chiefly for multinational groups of companies.
The present paper focuses on an analysis of the latter approach.
2. The general approach to the CCCTB
A technical working group was established in the autumn of 2004 to help the
Commission to formulate elements of an appropriate general solution 6 in the form
of a common consolidated tax base. The group comprises experts from the 27
Member States, although some of the latter indicated their opposition to such an
approach from the outset. The working group’s aim is to provide technical
assistance and deliver opinions to the Commission. Its opinions are not binding,
but merely consultative. Moreover, Member States are not bound by positions
adopted by such groups and are under no obligation to enter into political
commitments. The group has met 13 times to date and has now produced an initial
description of the whole system in the context of its discussion of Working
Document No 57, entitled CCCTB: Possible elements of a technical outline. 7
The present outline is based on Working Document No 57 and on discussions that
have taken place with the business and academic communities, particularly at a
major conference held in Vienna from 21 to 23 February 2008. 8 It is important to
recall that decisions relating to tax matters require the unanimous approval of the
27 Member States. Accordingly, this paper posits a unanimous decision by the 27
Member States. This means that situations which could arise in cases where not all
of the Member States were willing to adopt a proposal will not be subjected to
detailed examination at the present stage.
The legal basis of the Commission’s proposal
The Commission plans to propose a directive based on Article 94 of the EC
Treaty. Some specialists, particularly within the academic community, would prefer
a regulation so as to guarantee uniformity of application. Nevertheless, the
Commission services consider this is the only legal basis provided by the Treaty.
Any amendment of the CCCTB directive would be subject to the conventional
legislative procedure.
6
All of the group’s working documents are accessible on the following website:
http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm
7
CCCTB : Possible elements of a technical outline' (CCCTB/WP/057 - annotated).
8
The conference papers are due to be published shortly by the Vienna University of Economics and Business
Administration.
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It is also intended, in accordance with the ‘Comitology’ Decision, 9 that the Council
would be able to delegate responsibility for the detailed implementation of certain
measures of enforcement prescribed in a basic instrument – in this case the
planned directive – to the Commission. This means that the CCCTB Directive
would create a comitology committee and would specify the scope of the
implementing powers to be delegated to the Commission; the detailed
implementing provisions drafted by the Commission would then be subject to
approval by the comitology committee. The potential implementing measures that
could be enacted by means of the comitology procedure are currently defined in
paragraphs 10, 16, 25, 46 and 66 of document CCCTB/WP/057 and in paragraphs
16, 25, 30, 32, 35, 45 and 60 of document CCCTB/WP/061 10 .
In addition, with regard to the possible treatment of certain transactions not
envisaged by the directive where there is no formal link with the IAS/IFRS
standards, 11 the Commission has announced its intention of relying in the initial
stages on national accounting rules (GAAP). The idea of defining a number of
general tax principles to which the directive would refer is now the favoured
approach.
As a result, this point was the subject of lengthy debate at the Vienna conference,
where some speakers asked whether it would not be preferable to invoke ‘general
tax principles’ than to refer to generally accepted accounting principles. To this
end, the Commission has very recently suggested the following wording as a basis
for discussion by the CCCTB working group:
‘A suggested clause could be as follows:
TAX PRINCIPLES
The tax base shall be computed in accordance with the following general principles
unless otherwise stated.
(a) The accruals principle
(b) Profits and losses shall only be recognised when they are realised.
(c) Transactions and taxable events shall be measured individually.
(d) The calculation of the tax base shall be carried out in a consistent manner
unless exceptional circumstances justify a change.’
The architecture of the CCCTB is as follows:
• Definition of the common tax base: a body of rules would be defined on the
basis of which a single profit or loss figure would be calculated for all
activities carried out in the territory of the EU by all the entities within a given
group.
9 See Council Decision 1999/468/EC of 28 June 1993 laying down the procedures for exercising the
implementing powers conferred on the Commission (referred to in the present paper as the ‘Comitology
Decision’). Article 5 of the Decision lays down the role of the regulatory committee. For a more detailed
appraisal of the discussion, see the Explanatory note on the comitology procedure – CCCTB/WP/062.
10 See ACCIS /WP061\doc\fr « ACCIS : Set-up of an administrative framework »
11 See below.
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• Consolidation: in accordance with what is known as the ‘all-in or all-out’
principle, the profit or loss figures for all eligible entities within a given group
would be aggregated to make a cumulative total.
• Income from shares, income from foreign sources and other passive income
would be included in the tax base.
• Apportionment of the tax base: a distribution key would serve to determine
the portion of the group’s net income that would be taxable in each Member
State.
• Application of national tax rates to each portion: each Member State would
thus be free to set its own tax rate.
• The system would administered by a single body in accordance with the
‘one-stop shop’ principle.
Guidelines
No formal link would be established with the International Accounting
Standards (IAS) and the International Financial Reporting Standards (IFRS),
in spite of the fact that this would provide a common starting point and allow the tax
base to evolve over time in line with the IAS and IFRS. The reasons for this are
that the great majority of Member States do not allow the use of the IAS and IFRS
for individual accounts of companies established on their territory and that not all of
the IFRS are necessarily suitable for application to tax accounts. Most companies
would therefore operate on the basis of accounts drawn up in accordance with
national GAAPs (generally accepted accounting principles) and would have to
make the requisite adjustments to satisfy the rules and definitions of the CCCTB
and produce a statement of account specifically indicating their pre-tax profits. The
directive will not describe any ‘bridges’ for the adjustment between accounts based
on national accounting principles and the uniform tax base since the required
adjustments will be, by nature, different.
(There were comments on this guideline from several Member States and from
Business Europe. Some of the comments expressed the wish for a stronger link,
but no miracle solutions were proposed.)
Scope and group consolidation: The proposal is primarily intended to cover
companies belonging to a group with operations in two or more Member States of
the EU.
As far as group consolidation is concerned, the document n°57 makes a distinction
between the entities within a group whose profit or loss figures will actually be
consolidated (they will be able to opt for consolidation, and their profits or losses
will be included in the cumulative total) and the entities within the group whose
profit or loss will not be consolidated (entities recognised as part of the group which
can therefore opt to use the CCCTB but whose profit or loss figures, though
calculated on the basis of the common rules governing the CCCTB, will not be
consolidated).
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In fact, working document No 57 states that companies with more than 50% but
less than 75% of their voting rights in common ownership 12 are recognised as
members of a group and can therefore opt to use the CCCTB, but their profit or
loss is not included in the consolidated trading result for tax purposes. Companies
with 75% or more of their voting rights in common ownership are recognised as
members of a group and can opt to use the CCCTB and have their profit or loss
included in the consolidated group total for tax purposes.
Nevertheless, changes are foreseen on this issue. The existence of this double
threshold – eligibility to opt for the CCCTB if more than 50% of the voting rights of
the company is in common ownership, and consolidation if 75% or more of the
voting rights is commonly owned – is hotly contested, and most participants in the
meeting of the extended CCCTB working group in December 2007 indicated their
preference for a single opting and consolidation threshold. This, in fact, would
serve to avoid the situation in which one group has two or more principal taxpayers
– one principal taxpayer for opting purposes whose trading results would not
necessarily be included in the consolidated tax base and one principal taxpayer for
each consolidated 75% subgroup in a 50% opting group. With regard to the single
threshold to be applied, the business experts unanimously proposed that the
consolidation threshold be lowered from 75% to 50.1%. The effects of this lower
consolidation threshold, however, would conflict with the interests of minority
shareholders. The Member States, for their part, would generally prefer a single
threshold set at 75%.
As of today, a “double threshold approach” (50% for a CCCTB group, 75% for
identifying the consolidated entities) seems definitively abandoned.
Nevertheless, a reflexion is lead with respect the threshold of consolidation. This
could conduct to require both a 75% ownership in capital (including rights to
dividends) and a minimum of 50% in terms of voting rights (or other modalities in
order to avoid manipulations due to a single threshold of 75% of voting rights). In
fact, the issue generated by a single threshold of 75% of the voting rights is that a
company would be intended to hold only 74% of these voting rights (slightly under
the 75% threshold) in order to avoid the consolidation.
In practice, the proposal will have to make provision for the following situations:
1. a single resident company in a Member State of the EU;
2. a single permanent establishment in the EU of a non-EU-resident company;
3. a single resident company with one or more permanent establishments in
the EU;
4. a single non-EU-resident company with more than one permanent
establishment in the EU;
12 The calculation of all the shareholding thresholds is based on the ownership of voting rights. Other
cumulative criteria were proposed by the business and academic communities but are unlikely to be adopted.
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Formatted: Bullets and Numbering

5. a group of related companies which, though more than 50% owned, are not
consolidated for tax purposes (commonly owned voting rights greater than
50% but less than 75%); 13
6. a group of companies that are consolidated for tax purposes (commonly
owned voting rights of 75% or more).
Application and optional character: It is essential to note that the Commission,
with the support of business community, intends to propose an optional
arrangement, whereby eligible groups of enterprises could opt into the CCCTB or
could choose not to. This freedom of choice would enhance the incentive effect of
the CCCTB by encouraging Member States to make it competitive and uniform. On
the other hand, the coexistence of two systems could impose a heavy
administrative burden on the Member States.
A majority of Member States is not favourable to an optional arrangement. Some of
them have indicated that they would favour a mandatory common basis with an
option for consolidation.
Corporate tax liability as such would remain subject to national legislation,
reflecting the principles underlying each Member State’s own fiscal policies. The
directive, for its part, would specify which of the companies liable for national
corporation tax could opt to use the CCCTB. Its provisions would apply to the types
of company listed in an annex which were subject to corporate income tax or an
equivalent form of taxation in a Member State (the relevant forms of taxation would
also be listed in an annex) as well as companies not resident in the EU which had
a similar form to EU companies and which were subject to one of the taxes that
applied in the EU. Companies in these categories would be known as eligible
companies.
Eligible EU-resident companies could opt to use the CCCTB, while eligible
companies based outside the EU could opt in on behalf of their permanent
establishments in the EU. The option would be valid for five years and be
automatically renewed for successive three-year periods thereafter, unless notice
were given to the contrary. The companies in a group in which at least 75% of
each company was in common ownership would have to opt in en masse or all
remain outside the CCCTB scheme (‘all-in or all-out’ principle) for the duration of
a validity period. In the event of company or group that had opted in being taken
over by a group that had not, the option would remain in operation until the end of
the current period, after which the new enlarged group would have to opt in or else
withdraw its newly acquired company or group.
Companies that opt in are referred to in the present paper as ‘taxpayers'. EUresident
taxpayers would be liable to corporate tax on their worldwide income,
without prejudice to the provisions of double-taxation agreements. Non-resident
taxpayers would be liable for tax on business income attributable to a permanent
establishment in the EU (the definition of a permanent establishment would be
13 Subject to the thresholds debate referred to above.
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ased on the OECD definition, but more detailed and/or uniform criteria could be
established by means of the comitology procedure.
There would be no withholding taxes or other forms of taxation at source on
payments of any kind made between taxpayers belonging to the same
consolidated group. No decision, on the other hand, has yet been taken on
payments made between two single taxpayers or separate consolidated groups,
and this matter is currently the subject of a consultation process. 14 Withholding
taxes and other taxation at source on payments made by a taxpayer to a nontaxpayer,
whether EU-resident or not, would continue to be governed by the
applicable national, Community or treaty provisions, as appropriate.
(There have been numerous comments, especially from the Member States, on the
lists, the need for common criteria, the treatment of transparent entities and the
definition of a permanent establishment. Business Europe has expressed support
for the elimination of withholding taxes on payments between taxpayers in
separate consolidated groups too.)
3. The common tax base
The tax base of individual companies: Unless otherwise provided in the context
of consolidation, the calculation of the tax base would be the same for all
companies that had opted into the CCCTB, whether or not they were eligible for
consolidation 15 . It would be calculated as the difference between income subject to
tax less exempt income (net of VAT and other taxes and duties) and deductible
expenses and other deductible items (net of VAT, unless the VAT were nondeductible),
calculated on an annual basis.
(The tax year would be any 12-month period; detailed rules on opening and closing
years and changes of tax year would still be required).
Income would be defined to include income of any kind, whether monetary or nonmonetary,
including not only trading income but also proceeds from the disposal of
assets and rights, interest, dividends and other profit distributions, royalties,
subsidies and grants, gifts, compensation and ex gratia payments. Income would
not include equity or loans raised by the taxpayer.
Both for the sake of adherence to the principle of a broad tax base and low tax
rates and because of the difficulty involved in harmonising excessively divergent
approaches, the definition of taxable income would be as broad as possible, and
exempted forms of income would be kept to a minimum.
14 The choice here is between (a) eliminating taxation at source in respect of such payments and (b)
introducing common rules on taxation at source and on double-taxation relief for the recipients of such
payments. The latter solution would, in turn, raise the question of the apportionment of withholding tax and,
in the case of a consolidated recipient, the cost of granting credits.
15 Under the reserve of the debate on the above mentioned thresholds.
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The following would be exempted income:
- subsidies directly linked to the acquisition, construction or improvement of a
depreciable business asset,
- proceeds from the disposal of pooled assets, and 16
- certain income from dividends and permanent establishments and capital gains
(see rules on shareholding exemption below).
Deductible expenses would mean all expenses incurred by the taxpayer for
business purposes in the production, maintenance or securing of income, including
costs arising from research and development or from the raising of equity or loans
for business purposes.
(Business Europe remains opposed to this ‘business-purpose test’, which, it says,
would introduce too many uncertainties: checking that expenditure is used for
business purposes is a matter for shareholders, not the tax administration. It is a
tricky issue. There is nearly a consensus among the Member States on a
mandatory test. The Commission will have a difficult choice to make as regards this
issue).
This definition would be accompanied by a list of non-deductible expenses,
which would include:
- profit distributions, repayments of equity or loans or any payments made or
expenditure incurred for the benefit of shareholders or associated persons,
- expenses relating to assets treated as non-business assets,
- 50% of entertainment and representation costs,
- appropriation of retained earnings which formed a part of equity (reserves),
- corporate income tax,
- bribes,
- fines and penalties payable to a public authority for breach of any legislation,
- management costs to the extent to which they were incurred by a company in
deriving exempted income from dividends, permanent establishments and capital
gains,
- monetary gifts and donations except to charitable bodies meeting common
criteria to be established under the comitology procedure, and
- costs relating to the acquisition, construction or improvement of fixed assets
except those relating to research and development. 17
All expenditure on staff would be treated as business expenditure on the
assumption that Member States would subject any private element or benefits in
kind to personal income taxation as they saw fit. Similar considerations would
apply to assets purchased wholly or partly for the benefit of an employee.
16
The results of the disposal of the pooled assets will therefore reduce the balance sheet of the pool which
will be written off in future years.
17
This results in an effective 100% deduction of research and development expenditure, even where it is
tantamount to the acquisition of fixed assets.
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In this respect, the question of the deductibility of social-security contributions was
subjected to a separate examination, which is summarised in the box below.
Deductibility of social-security contributions
At its meeting of 12 September 2006, the CCCTB Working Group examined the
question whether contributions to social-security schemes could or could not be
deductible from the tax base. 18
Costs met by companies in connection with social-security schemes represent a
labour cost and should, in principle, be deductible for tax purposes.
The systems for funding social-security benefits, however, diverge widely
from one Member State to another. Some are funded from fiscal revenue, others
by means of distinct contributions based, for example, on a percentage of each
employee’s pay. The various funding methods would have an impact on the
consolidation and apportionment of the tax base.
Three options were therefore envisaged by the CCCTB Working Group.
Under the first option, all compulsory and voluntary contributions would be
deductible.
Under the second option, Member States would be asked to make a distinction
between compulsory contributions, which would be deductible in full and
voluntary contributions, the deductibility of which would be capped.
Lastly, under the third option, only compulsory contributions would be
deductible.
The working group seems to have favoured the second option, i.e. general
deductibility with a ceiling on the deductibility of voluntary contributions. That
option, in fact, would serve not only to prevent any attempts at tax avoidance but
also to encourage employers to contribute to their employees’ social-security
scheme.
The deductibility of taxes other than corporate income taxes was likewise
examined by the working group, whose findings are set out below.
18 WP 045. Summary record of the meeting of the Common Consolidated Corporate Tax Base Working
Group, held in Brussels on 12 September 2006.
WP 043. Common Consolidated Corporate Tax Base Working Group: meeting of Tuesday,
12 September 2006, to discuss an overview of the main issues that emerged at the fourth meeting of the
Subgroup on Taxable Income.
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Taxes other than corporate income taxes
In most Member States, direct taxes or charges levied locally or nationally can be
deducted from the tax base for corporate income tax.
It would be difficult to transpose the deductibility of local taxes to the
CCCTB, because in some Member States local authorities are financed by means
of specific taxes, whereas in others they are funded by government grants.
Deductibility of local taxes would impact on the consolidation and apportionment of
the tax base. If, for example, no local taxes were levied in Member State A, but
they were levied in Member State B, A would lose out twice over, for A would not
collect any tax revenue except its portion deriving from the CCCTB, while that
portion would be reduced by the amount of the deducted taxes. State A would be
sorely tempted to create taxes and charges similar to those collected by State B.
To avoid this phenomenon, four options were considered. 19
The first option would be to limit deductibility to taxes and charges collected in
return for specific services that a company had freely decided to receive.
This, however, would entail significant amendments to the tax system in some
Member States.
The second option would be the same as the first but would also provide for
the deduction of other taxes after apportionment of the tax base. This option,
however, would only be available in a few exceptional cases, otherwise the
degree of standardisation of the CCCTB could be diminished.
The third option would allow the taxes and charges (other than corporate income
tax) that affected income to be deducted after apportionment and other taxes
and charges to be deducted before apportionment. This option appears difficult
to implement because the distinction between these two types of income is blurred,
and there is little justification for treating them differently.
Finally, the fourth option would permit the deduction of every tax or charge that
constituted a mandatory expense. This option, however, would reduce the tax
base considerably and would therefore conflict with the desire to establish the
broadest possible tax base.
The second option was favoured by the CCCTB Working Group, subject to the
aforementioned reservations regarding its application.
During the last technical working group held April 14-15, 2008, the Commission
services presented another option, i.e. identify taxes which represent significant
revenue in a Member State (based on a percentage of a Member State’s CIT total
revenue) and subsequently exclude the deduction of these significant taxes under
19 See documents CCCTB/WP 43 and 45
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CCCTB regime. Other taxes (non significant revenue, with thus a limited impact on
CCCTB) would still be deductible under CCCTB regime.
Fixed business assets would be tangibles, intangibles, financial assets and
proprietary benefits acquired by the taxpayer where they were capable of being
valued and were used for business purposes for more than 12 months. Where the
cost of its acquisition, construction or improvement was EUR 1 000 or more, such
cost would be depreciable; if not, it would be immediately deductible.
(Some assets, such as yachts and hunting and fishing rights are currently the
subject of discussion. Such assets are sometimes considered to be inherently nonbusiness
assets).
Tangible assets not subject to wear and tear and obsolescence, such as land, fine
art and antiques or jewellery and intangible assets with an indefinite life and also
financial assets would not be depreciated unless the taxpayer demonstrated that
such an asset had permanently decreased in value. Financial assets in respect of
which any gain would be exempt would not be depreciable in any circumstances.
Recognition and timing: Income and expenditure would be recognised on an
accruals basis in the tax year to which they related. This reflects the IFRS
framework and general accounting practice. Each expense and its amount should
be established in order to be accrued. However, when an amount arising from a
legal obligation (the Member States are satisfied that these provisions would be
confined to legal or equivalent obligations) could be reliably estimated, the expense
would be deductible in the current tax year. Obligations that had accrued during the
current tax year or in previous tax years in respect of future pension payments
would be deductible. (It is most certainly desirable to arrive at uniform treatment of
the various pension schemes, but some Member States take a narrower view!)
However, it is obvious that at the time the CCCTB come into force, the future
pension payments should be deductible, except any recapture for the past. All of
these amounts would be reviewed and adjusted on an annual basis.
It has been suggested that a general correspondence principle be adopted
(“matching”), whereby all costs would be assigned to the same tax year as the
income to which they related.
The total amount of deductible expenses for a tax year would be increased by the
value of inventories at the beginning of the tax year and reduced by the value of
inventories at the end of the tax year.
For long-term contracts, the principle laid down in IAS 11 would be followed,
whereby the percentage of the income and expenditure assignable to each tax
year is determined by the progress towards completion of the contract work.
Provision for bad debt would not be deductible unless an amount corresponding to
the receivable had previously been included in the tax base and the taxpayer had
taken all reasonable steps to pursue the payment.
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(Consultation with the Member States and Business Europe has been focusing on
criteria relating to recovery costs, the position of related parties, inclusion in the tax
base of claims recovered or bad debts, etc).
Income and expenditure are measured (in euros or converted into euros;) by
reference to:
- the monetary consideration for the relevant transaction, such as the price of
goods or services,
- the market price where the consideration for the transaction is wholly or partly
non-monetary, and
- the arm’s-length price in the case of transactions between related parties (defined
below).
In the case of loan transactions, both the amount of interest and the amount of the
loan must be arm’s length.
(Business Europe is opposed to this extension of transfer pricing.)
Inventories would be valued on the last day of the tax year at cost or net realisable
value, whichever was the lower. Items that were not interchangeable would be
valued on an individual basis, while other inventories would be valued on the basis
of the first-in-first-out (FIFO) or weighted-average method. The important thing is to
adhere to a continuous and consistent method.
(Business Europe would like a last-in-first-out (LIFO) option; when a group elected
to adopt the CCCTB regime, it would have to choose whether to use the FIFO or
LIFO method throughout the option period.)
Depreciation: Long-term assets such as buildings, ships or planes would be
depreciated on an individual basis, whereas short-term to medium-term assets
would be pooled for depreciation purposes; in other words, categories of goods
would be written down.
(There were numerous comments from Member States opposed to pooling,
although the arguments advanced were none too convincing; some wonder
whether it does actually simplify matters; Business Europe seems strongly in
favour of this simplification. Nevertheless, the Commission could enlarge to other
cases the scope of assets depreciated on an individual basis).
The depreciation base would comprise the cost of acquiring, constructing or
improving a fixed business asset plus directly linked ancillary costs, less the value
of any subsidies.
(As regards the depreciation of improvements, Business Europe would prefer to
start the clock again for improvement costs and treat them as a new asset for the
purposes of depreciation. This solution would be compatible with pooling).
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Depreciation in respect of business assets would be deducted exclusively by the
economic owner of the asset, in other words the person who enjoys the benefits
and incurs the risks attaching to an asset. If a single economic owner could not be
identified, depreciation would be deducted by the legal owner.
The acquisition cost of intangible assets would be depreciated individually on a
straight-line basis over the period for which the asset enjoyed legal protection or for
which the right was granted or, if that period could not be determined, for 15 years.
(This solution was well received by the Member States).
Assets depreciated on an individual basis (long term assets): The cost of
acquiring, constructing or improving a business asset would be depreciated
individually on a straight-line basis
- at 2.5% per tax year in the case of buildings, and
- at 4% per tax year in the case of long-term tangible assets.
A long-term tangible asset would mean a tangible asset the useful life of which was
25 years or more (could be replaced by a 15-year reference period), or the
acquisition or construction costs of which exceeded EUR 5 000 000 (criterion that
should be abandoned).
(Several Member States commented that this amount was too high, that the cost
criterion was not linked to the useful life of the asset Business Europe took the
opposite view, commenting that the amount was too low. The Commission now
seems to be considering a 15-year threshold.)
Where an individually depreciated asset was disposed of during a tax year, its
written-down value for tax purposes would be deducted from the taxable base in
that year. If the proceeds were reinvested in a replacement asset within a certain
period, the excess of proceeds over written-down value should be deducted from
the tax base in the year of disposal and from the depreciation base of the new
replacement asset. This would mean that the taxation of gains on disposals of
assets could be spread over the lifetime of replacement assets. The same would
apply to pooled assets.
Assets depreciated on a pooled basis: The declining-balance method would be
applied at a rate of 20% per annum, and proceeds from disposals would be
deducted from the residual value of the pool.
(Business Europe asked for this rate to be raised to 30% because the decliningbalance
method diminished the effective depreciation rate from year to year.)
The depreciation base would be the written-down value of the assets pool at the
beginning of tax year plus the acquisition, construction or improvement costs of
business assets acquired or created during the year, less the proceeds from
disposals of business assets and the sum of any compensation received for the
loss or destruction of such assets during the tax year. If the depreciation base thus
calculated were a negative amount, a balancing figure would be added to bring the
depreciation base to zero, and the same figure would be added to the tax base. If
14

the depreciation figure were a positive amount, it would be reduced by 20% to
obtain the written-down value of the pool for tax purposes.
4. Consolidation
Consolidation is at the heart of the project and undoubtedly constitutes the
principal benefit of the CCCTB scheme and the main reason why industry supports
it. By freeing companies from compliance with intra-group transfer-pricing rules and
allowing an immediate profit and loss consolidation, a consolidated base should
help to make Europe a highly attractive area in which to do business as well as
helping to establish a stable tax base in a competitive global environment.
Consolidation would be based on the ‘all-in or all-out’ principle, which means
that consolidation would be mandatory in all groups which had opted to use the
CCCTB , for the qualifying companies as defined below and the permanent
establishments located in a Member State of the EU.
For a subsidiary to qualify for consolidation, at least 75% of its voting rights
would have to be owned directly or indirectly (i.e. through a chain of
ownership). This is the working assumption retained by the Commission, but it
could be amended due to the potential manipulations as regards the 75% voting
rights threshold and minority interests issue. For the purpose of calculating the
parent company’s level of indirect ownership, the percentage stakes held by the
companies in the ownership chain would be multiplied. Where a direct holding
amounted to 75% or more, it would count as 100% for the purposes of this
calculation, thereby ensuring that all subsidiaries in which the parent company
directly or indirectly controlled 75% of the voting rights would be included in the
consolidation and avoiding the fragmentation of groups. Conversely, a direct
holding of 50% or less would count as zero. This would avoid manipulations
designed to include in a group entities in which the group did not have a controlling
stake.
(Some divergent views were expressed by Member States regarding the
consolidation threshold, one favouring a higher threshold of 90% and another
arguing for a lower threshold of more than 50%. One Member State argued for
strict multiplication of holdings to determine indirect ownership.
Business Europe is in favour but would prefer a single 50% threshold for opting
and consolidation.)
A group would comprise an EU-resident parent company and its EU-resident
subsidiaries, including permanent establishments 20 .
20
See in Appendix to this document, the different shareholding schemes triggering an application of the
CCCTB regime.
15

The fact that the EU-resident parent company was itself controlled by a non-EU
parent would not be an obstacle to consolidation of the EU-based part of the
ownership chain.
Likewise, the CCCTB would also cover a group of EU-resident subsidiaries under
the common control of a non-EU-resident parent. The fact that the ownership chain
of a group of EU companies included a non-EU link company (the so-called
'sandwich' situation) would not break the chain; this would ensure that taxpayers
did not try to split single groups into multiple groups.
A taxpayer would be part of a group from the date on which the 75%
threshold was reached, and the same would apply to a subsidiary that fulfilled the
aforementioned conditions, provided it met the criteria for at least six months. A
taxpayer would be deemed to be 75% owned and therefore included in a
consolidated group if it passed the 75% test at the beginning and at the end of the
tax year and if the level of ownership never dropped to 50% or lower at any time
during the tax year. The taxpayer would leave the group on the day when the
ownership of voting rights
- fell to 50% or below at any moment, or
- fell below the 75% threshold and remained below it until the end of the tax year.
The same would apply to a taxpayer’s subsidiaries. Companies entering and
leaving a group should therefore start to consolidate on the date they enter the
group and cease on the date they leave; their transitional tax year would thus be
split into two parts. (Business Europe finds this preferable to any other solution but
a discussion is still open regarding these rules which could thus be subject to
future amendments.)
Consolidation would not be proportional; it would cover the entire tax base
of all entities belonging to a given group, subject to the rules applicable to
transparent entities which need further clarification, and so it might not necessitate
compensation of minority interests, since each member of a group would be
apportioned a share of group profits and losses.
Losses incurred by a taxpayer before entering a CCCTB group would not be taken
into account in the consolidation. Such losses would be offset against the share of
the future consolidated profits attributed to this taxpayer in accordance with
national rules.
Where consolidation resulted in an overall loss for the group, this loss would be
carried forward at group level and set off against future consolidated profits before
the net profits were shared out (net of the loss carried forward by the consolidated
group) in order to guarantee that there were no ‘trapped' losses.
For the sake of consistency with the principle of treating a group as far as possible
as a single entity, no losses would be attributed to a taxpayer leaving a group.
When a company was disposed of, any unrelieved losses carried forward at group
level would therefore remain in the group.
16

When a group ceased to exist, unrelieved group losses would be attributed to the
taxpayers belonging to the group at the moment of termination on the basis of the
sharing-mechanism calculations for the date of termination.
Intra-group transactions would have to be factored out: Companies belonging
to a CCCTB group would be due to consolidate their tax bases since they reach
the 75% threshold, thus entailing to factor out intra-group transactions in order only
transactions between the group and third parties enter into the consolidated tax
base. The consolidated tax base would not include any profits or losses on intragroup
transactions between members of the consolidated group. This would relate
to any profits or losses on the disposal of stocks, fixed assets, shares in
consolidated companies or other tangible or intangible assets. Nor would the tax
base include intra-group provisions.
Factoring out intra-group transactions
When the 75% ownership threshold was reached, companies in the CCCTB group
would have to consolidate their profits and losses.
In order to ensure that intra-group transactions 21 did not become subject to the
rules on transfer pricing, such transactions would have to be factored out.
In order to determine which intra-group transactions should be netted off, the
services of the European Commission favour the enactment of a general rule,
which would be accompanied by an indicative list of transactions to be factored
out.
Factoring-out methods would vary according to the type of asset.
In the case of a non-depreciated asset, the European Commission considered
three methods of factoring out intra-group transactions:
� The first would involve completely ignoring intra-group transactions
when calculating the tax base. The advantage of this method lies in its
simplicity. The main drawback, however, is that it would result in the
disappearance of some essential accounting data. These data could be
useful if, for example, a company were sold or if the tax administration
applied the rules on transfer pricing that are used in respect of third parties.
� The second method would involve asking each company in the CCCTB
group to calculate its tax base in accordance with the customary rules. This,
by contrast, would mean that all internal transactions would be recorded
21 Intra-group transactions are transactions between companies belonging to the same consolidated group.
17

at cost. This method, which is more complex, would serve to net off intragroup
profits while retaining the accounting data.
� The third method would be to include intra-group transactions in the tax
base and then net off the profit or loss generated by these transactions
when consolidation was carried out.
In any event, Member States should not be free to apply whichever method
they choose. If that were the case, a group of companies with structures in
various Member States could find itself compelled to use different methods,
depending on the location of each entity.
Two questions remain unanswered: which method will be preferred, and will
groups be free to choose a method?
A depreciated asset would have to be recorded at its written-down value for
tax purposes. In such a case, in fact, the object of the exercise is that the
accounting records transcribe sales to third parties accurately, so that tax checks
can be conducted locally.
Where the asset is stock purchased within the group, the services of the
European Commission believe that all of the adjustment methods could be
permissible, on condition that they were used consistently.
Reinsertion of factored-out profits
Eliminated profits would have to be factored in again as soon as the transaction
that was initially factored out became a transaction conducted with a third
party.
The declared objective of this reinsertion is to guarantee the taxation of all
profits.
According to the experts in the CCCTB Working Group, such reinsertion would be
necessary in the following circumstances:
- where the elements at the root of intra-group profits and losses were the
subject of a transaction with third parties, or
- where the company holding the asset or liability left the group and the
asset or liability therefore ceased to be held by the group.
Sales of assets or shares would be taxed in accordance with the normal rules (in
practice, these would be tax exempt in most cases, under certain conditions). If
intra-group asset transfers were carried out at fiscal written-down value, there
would be no effect on the consolidated tax base.
The project provides for general exemption of shares (see the box on the treatment
of shares at the end of the following section). Accordingly, if a group sold shares in
18

a group company and that company left the group, such an operation would not be
taxable (see below). The question then arises as to whether it would be necessary
to have a mechanism for taxing the unrealised gain on underlying assets of the
departing company (see the box on anti-abuse provisions).
Treatment of income from shares and foreign sources and other passive income
The proposed scheme is based on the taxation of worldwide income. The directive
would take precedence over any agreement concluded between Member States in
the event of conflicting provisions, but current agreements with non-EU countries
could not be ignored. 22 The rules on the taxation of foreign income would therefore
have to provide an adequate level of protection for the tax base while minimising
potential conflict with existing bilateral agreements. To this end it might be
necessary to allow Member States to derogate temporarily from the directive in
certain cases in order to honour existing obligations under agreements with
countries outside the EU.
Four broad types of income need to be considered:
- income from permanent establishments,
- income from major shareholdings (a 10% minimum ownership, threshold applied
for the benefit of the parent-subsidiary regime),
- income from portfolio shareholdings (financial investments – i.e. ownership under
10%), and
- other ‘passive’ income – royalties, patent income, interest, etc.
For each of these categories it would be necessary to distinguish between income
from non–EU countries and income from EU sources.
As regards income from countries outside the EU, the principle of capitalimport
neutrality (CIN) would apply, meaning that such income would be exempt if
it took the form of dividends received from major shareholdings and the foreign
earnings of permanent establishments. At this stage, however, an anti-abuse
mechanism is envisaged in the form of a switch-over to the credit method where
the corporate tax rate in the source country is low, i.e. less than 40% of the
average rate in the participating Member States.
As for portfolio dividends (income from financial investments) and other passive
income, these would be taxed, and a credit would be granted for tax paid at
source.
In all cases where the aforementioned categories of foreign income accruing to a
member of a consolidated group were taxable, the income would be apportioned
among the Member States in accordance with the distribution key, and the same
22 On this sensitive issue it should, however, be noted that, at the Conference held in February 2008 by Vienna
University of Economics and Business Administration, some members of the academic community held that
the regime established by the CCCTB would be a new form of taxation that was not covered by bilateral
agreements or Article 2 of the OECD Convention (a view which was far from unanimous) and that a
provision on this matter was therefore unnecessary.
19

would apply to the ‘cost’ incurred by Member States as a result of granting tax
credits for tax paid abroad. A mechanism for calculating the limit of the credit to be
granted by each Member State would also be required.
As regards income from an EU source, where this was income from a
permanent establishment it would always be consolidated with the tax base of the
group or single company on which the permanent establishment depended.
Dividend income from major shareholdings would be consolidated (and
consequently factored out from consolidation) if the ownership requirements for
consolidation (75%) were met and would otherwise be treated in the same way as
income from non-EU countries, subject to an examination of the applicability of the
Columbus Containers judgment to the switch-over. In practice, the threshold for
switch-over mechanism is assessed in a way no EU Member State will fall into the
scope of this regime.
Income in the form of portfolio dividends (returns on financial investments) would
undergo the same treatment as dividends from non-EU countries, as would other
passive income: these dividends would be subject to tax, with a credit granted in
case a withholding tax would have been paid in the Member State where this
income has its source Income from EU sources would include domestic income.
(Numerous Member States have submitted comments because they have a
problem with this approach, although they have not proposed a more acceptable
solution. Most of them emphasise the great complexity of dealing with foreign
income, the difficult relationship with bilateral agreements concluded with countries
outside the EU, the calculation of tax credits and the difficulty of apportioning the
profit or loss of permanent establishments among the Member States in view of
their bilateral agreements with the source countries, particularly in the case of
Member States in which the foreign company has no permanent establishments.
Some Member States have suggested that potential derogations from the CCCTB
rules that would be implemented in order to fulfil the requirements of the existing
Tax Treaties concluded with countries outside the EU should not be subject to time
limits so as to avoid creating tension in the renegotiation of agreements with non-
EU countries.
Shareholdings
Dividends, capital gains and interest
The tax regimes that apply to shareholdings diverge widely from one Member State
to another.
In fact, some Member States consider that exemption of share dividends is, to all
intents and purposes, nothing more than a mechanism for the avoidance of double
taxation and that loan interest payable in connection with the acquisition of these
shares is therefore a deductible expense. Other Member States, conversely, take
20

the view that, since the exemption of share dividends is a genuine exemption,
interest on loans taken out for the purpose of acquiring these shares is not
deductible. In the light of these divergences, the formulation of a common regime
in the CCCTB framework is turning out to be a delicate operation.
At the present time, the services of the Commission are planning the following
mechanism: 23
Regime for dividends from major shareholdings
A distinction must be made between dividends from foreign sources and those
from EU sources:
Dividends from foreign sources would be exempted. If, however, the rate of
corporate taxation in the foreign country were low, the switch-over mechanism
would apply, i.e. instead of exempting the dividend income, the home state of the
recipient company would switch to the method whereby it taxes the dividend and
grants a tax credit.
Dividends from EU sources would be consolidated with the tax base of the
group, provided that the consolidation requirement of 75% ownership was met.
This operation would have no net fiscal impact, given the consolidation of the
profits or losses of the two entities in question. Below that threshold (at least 10%
but less than 75%) the tax regime for dividends from foreign sources would apply.
It should be noted that dividends from permanent establishments would always be
consolidated with the tax base of the non-consolidated group or company on which
the permanent establishment depended.
The exemption of income from major shareholdings would be extended to income
accruing to permanent establishments in order to avoid differential treatment. The
same would apply to a non-resident taxpayer if the shareholding were linked to
activities pursued by the non-resident taxpayer through a permanent establishment
in a Member State.
Be that as it may, management costs relating to the holding from which the
exempt distribution of profits is derived should be treated as non-deductible
expenses. A flat rate of 5% of the distributed profits would be regarded as a fair
representation of these management costs unless the taxpayer was able to
demonstrate the validity of a different figure.
The conditions of exemption would be derived from those that are used in the
implementation of the parent-subsidiary regime. It is most probable that a
minimum ownership threshold of 10% of the capital or voting rights in a
company and an uninterrupted holding of at least 12 months’ duration would
be required.
23 WP 057. Common Consolidated Corporate Tax Base Working Group meeting of Thursday and Friday, 27
and 28 September 2007 on the subject of CCCTB: possible elements of a technical outline.
21

Capital gains from the disposal of shareholdings should be exempted, subject
to the conditions set out above (minimum ownership of 10% of capital or voting
rights for at least 12 months).
Interest on loans taken out for the purpose of acquiring shareholdings
would, in principle, be deductible. Unless this was the case, the CCCTB would
not actually be an attractive proposition for European groups with subsidiaries
outside the territory of the EU.
On this point, however, the Commission services are examining whether there is
a need to create mechanisms for the prevention of tax-avoidance stratagems,
particularly the artificial conversion of taxable income into exempt (dividend)
income.
Considering that there is an important balance to be struck between providing
adequate protection for the tax base and creating a system that is competitive,
workable and not unduly complex, it is intended to incorporate anti-abuse
rules 24 into these provisions. The following box contains more details.
What anti-abuse rules are needed?
The services of the Commission, at the urging of the Member States, have been
examining whether there is a need to incorporate various anti-abuse rules into the
CCCTB framework. It is still too early, however, to know the final content of the
Commission’s proposal.
An anti-abuse rule may be specific or general.
A general rule would enable tax authorities to redefine transactions deemed to be
artificial, unless the taxpayer demonstrated their commercial justification.
A specific rule would serve to combat a given practice. In particular, it might:
- limit the deductibility of interest payments (provisions designed to curb
overleveraging),
- combat virtual zero taxation of dividends (switch-over mechanism),
- prevent resident companies from avoiding national tax by transferring receipts
to subsidiaries in low-tax countries (CFC rules),
- prevent abuses of consolidation rules by redefining disposals of shareholdings
(exempt) as disposals of assets (taxable),
- eliminate any scope for the double deduction of the same charge in so-called
‘sandwich’ situations, i.e. where an ownership chain contains a non-EU link,
and
24 This type of mechanism was the subject of discussions in the CCCTB Working Group at its meeting of 14-
15 April 2008; see document CCCTB WP 065 on anti-abuse rules and the box below.
22

- limit manipulation of the tax-base apportionment factors, particularly the assets
factor.
5. The sharing mechanism
Once the common consolidated tax base had been determined, it would have to be
apportioned among the various entities in the consolidated group so that the
national tax rate could be applied to the share of the tax base accruing to each
member entity of the group in order to establish the amount of corporate income
tax payable by each entity. The mechanism, in other words, would apportion a
share of the tax base to each entity, not to each Member State.
This apportionment mechanism derives directly from the consolidation of profits
and losses within a group. Accordingly, it is not intended to replicate the existing
distribution, which could pose problems for some Member States in terms of
budgetary revenue, but would apply to a different, and possibly broader,
consolidated tax base. It is also important to reiterate that apportionment would
apply only to EU-resident entities, subsidiaries and permanent establishments.
Relations with non-European entities would continue to be based on the arm’slength
principle. On the other hand, the mechanism would apply to groups whose
entities (subsidiaries and permanent establishments) were all located in the same
Member State in order to ensure that each member of the group knew the amount
of its apportioned tax base so that it could offset any tax credits or pre-existing
losses. Lastly, since consolidation and apportionment are designed to eliminate
obstacles resulting from the application of transfer pricing, it is essential to ensure
that this aim would actually be achieved and, in particular, that the apportionment
mechanism would not in any circumstances result in a recurrence of the need to
calculate and document transfer prices.
In the view of the Commission services, the planned mechanism must adhere to
a number of basic principles:
• It must be as simple as possible for taxpayers and tax administrations to apply
and easy for tax administrations to audit.
• It must be difficult for taxpayers to manipulate. In other words, the mechanism
should not be based on factors that could be easily relocated with a view to
artificially shifting all or part of the consolidated tax base in order to take
advantage of differences between rates of corporate taxation in the EU.
• It must apportion the tax base among the various entities concerned in a way
that may be considered fair and equitable.
• It must not produce undesirable effects in terms of tax competition.
23

After considering the various possible apportionment methods, the services of the
Commission have opted for one based on a distribution formula which uses data
specific to the companies, reflecting as far as possible the reality of their economic
activity. This is to say that the formula is based on the microeconomic factors which
have helped to generate the tax base, i.e. the profits, of each individual taxpayer.
One reason for this choice was that such an approach is already familiar from other
countries, such as the United States and Canada. Another consideration was that
a formula involving three different factors increases the chances of adherence to
the principles referred to above.
In consideration of the supply/production and demand sides of corporate income
generation, the following three factors were selected: on the supply side, (i) labour,
measured by the value of the payroll and possibly by the number of employees,
and (ii) capital, measured on the basis of the company’s fixed assets; on the
demand side, (iii) sales by destination. The weighting of these three factors would
be determined in the light of the political debate once the impact of the various
weighting options was known.
The key to this mechanism is that a single formula should apply to all the Member
States. In this respect, while variants are evidently required for some specific
sectors, such as financial institutions, the formula used for any such sector must
also be uniformly applicable throughout the EU. Lastly, the sharing mechanism
would apply to all taxable income – not just income from economic activity but also
passive income, such as interest, royalties and dividends to the difference of
United States and Canada where some passive income are directly attributed to a
given jurisdiction.
Assessment of the selected factors
One of the advantages of a three-factor formula is that it reduces the impact of any
manipulation of one factor or of any simplification of the way in which the value of a
particular factor is assessed.
For the assessment of the labour factor, it was considered useful to base this on
two elements in order to take account, at least temporarily, of differences between
pay levels and the underlying productivity levels. These two elements are the value
of the payroll and the number of employees, which would be equally weighted. The
labour in question is that provided by the whole workforce of a given entity,
including those agency staff and temporary staff who perform similar tasks to those
of the regular workforce. Subcontractors’ employees are not included unless the
subcontractor belongs to the same group. The labour cost is represented by the
amount of remuneration, including welfare contributions, benefits in kind, share
options, etc., that was deemed to be deductible when the tax base was calculated.
The location of labour is, in principle, the place of work indicated in the staff
register, except in cases of secondment.
The assessment of the value of fixed assets is not without difficulties. With regard
to the definition of assets, the Commission services suggest that they be confined
24

to tangible fixed assets to the exclusion of intangible, financial and movable assets,
including stock, so as to limit the risk of manipulation and minimise assessment
problems. The assessment of assets would be based on their written-down value
for tax purposes (historic cost less fiscal depreciation). This value derives either
from the calculation of the tax base for individually depreciable assets or from the
written-down value of a category of pooled assets at the end of the tax year. It
should be borne in mind that pooled assets would not include stock inventories or
financial assets, because these are not depreciable, or intangible assets, which are
written down individually. The location of the assets would be the plant or site
where they are actually used. 25
This subject continues to evoke quite widely varied responses. Many Member
States consider that the increasingly significant role of intangibles in the generation
of profits in our economies means that they cannot be disregarded. However, the
fact that they are open to manipulation and not conducive to straightforward
regulation (for their valuation or their location) and that they are reflected to some
extent in other factors makes it appear that the restriction to tangible fixed assets is
the only option at the present time.
The consideration of sales has also provoked discussion. It derives from the idea
that sales are an apportionment factor inasmuch as they contribute to the
generation of profits. They are also invariably part of the formulae used in the
United States and Canada, a point that emerged very clearly from the discussions
of the enlarged Working Group in December 2007, which was attended by experts
from those countries. Although most experts from the Member States would favour
assessment of sales by origin, i.e. the place from which goods are shipped, the
Commission services prefer the assessment of sales by destination (the place to
which goods are ultimately delivered) as a more accurate reflection of the market
situation, a view that was also endorsed by the US and Canadian experts. The
main reason for this preference lies in the lower risk of manipulation, since sales by
origin, like assets and payrolls, are easier for companies to control.
A number of Member States are not yet convinced of the need to include sales in
the formula; those that accept the principle prefer the assessment of sales by
origin, but the contributions by the US and Canadian experts have helped to
increase understanding of the role of sales by destination in the operation of a
distribution formula.
The assessment of sales would focus only on sales of goods and the provision of
services; needless to say, it would exclude intra-group sales. It would also exclude
other receipts, such as those relating to exempted income like capital gains and to
passive income, which would be apportioned but would not be part of the formula.
Their value would be the figure used in the calculation of the tax base. As far as
their location is concerned, the logical suggestion is that sales of goods be
attributed to the group entity located in the Member State where the sales to third
25 This is reflected in special provisions for rented or leased assets, which would be taken into consideration
by both the lessor and the lessee in cases where the assets were rented or leased to or from third parties or
related non-consolidated entities, because they generate two different categories of income.
25

parties took place (the place of ultimate physical delivery, if known; the VAT rules
could help here). In the case of services, the general practice would be to attribute
them to the place where customers actually used or enjoyed them. For immovable
property and related services, the location of the asset would be the determinant
factor.
The criterion of geographical connection (‘nexus’) makes it possible to deal
with sales that take place in a Member State where the group has no taxable
physical presence in the form of a subsidiary or permanent establishment.
Although the principle of a mere economic presence would be more in tune with
current economic trends, it was deemed preferable to rely on apportionment
concepts derived from OECD principles, and for this reason a physical presence
would remain an essential prerequisite for a share in the apportioned tax base.
Consequently, sales made in a Member State where the group had no presence in
the form of a subsidiary or permanent establishment would be attributed to the
sales factors of the entities in the group on the basis of their proportionate share of
the other two factors, i.e. labour and assets. 26
On the whole, the proposed choices are also designed to allow recourse to existing
corporate data as far as possible in order to minimise the cost of applying the
distribution formula. Moreover, the Commission services stress the need for close
monitoring of results, proposing that a review take place once the formula has
been operating for five years and suggesting that an escape clause might be
needed to cover the eventuality that the outcome of the apportionment process
was manifestly unfair on a particular company. Of all the elements of the CCCTB
system, the sharing mechanism certainly has the potential to trigger the most
heated political discussions.
6. The administrative framework
Administration of the CCCTB would be based on three key concepts, namely the
one-stop shop, the principal taxpayer and the principal tax authority. These three
concepts are the cornerstones of an affordable, competitive and effective CCCTB
regime.
Nevertheless, such an approach would require a level of administrative
cooperation and mutual assistance never experienced in the past.
The group of companies applying the CCCTB, and especially the principal
taxpayer, would be in contact with only one tax administration at all stages of the
fiscal procedure (opting arrangements, filing of tax returns, etc.).
The principal taxpayer would normally be the parent company if the latter were
resident in a Member State. Otherwise the role would devolve on the parent
26 This method, known as ‘spread throw-back’, is derived from the US nexus system.
26

company of an EU subgroup chosen by the group or, in the absence of EU
subgroups, on any other company chosen by the group.
This status of principal taxpayer would be conferred for as long as the group
remained subject to the CCCTB, and the appointed company would be under
obligation to ensure compliance with the relevant administrative requirements.
The principal tax authority, for its part, would be the revenue administration for the
place where the principal taxpayer was resident for tax purposes. If the principal
taxpayer were not resident in the EU, the principal tax authority would be the tax
administration for the location of a permanent establishment.
The drawbacks of this system could be the curtailment of the Member States’ fiscal
sovereignty and the risk of a lack of impartiality on the part of the competent
administration, the principal taxpayer being, by definition, resident in the territory of
the sole competent authority. Moreover, some experts fear the emergence of a
phenomenon they describe as ‘principal-tax-authority shopping’, whereby the main
taxpayer would be chosen on the basis of the characteristics of the tax authority
with which it would necessarily be associated.
Opting for the CCCTB
Groups would have to notify the competent tax authority of their intention to opt into
the CCCTB regime at least three months before the start of the relevant tax year.
On the basis of the ‘all-in or all-out’ principle, the option would apply to all
companies included within the consolidation perimeter. .
Notice of the intention to opt should be deemed to have been accepted six months
after receipt unless explicitly rejected by the competent tax authority.
Company and group tax returns and tax-base procedure
Taxation would be based on a system of self-assessment. Each taxpayer in the
CCCTB group would therefore be required to complete its own tax return. In cases
where the group was consolidated, however, the principal taxpayer would be
responsible for submitting a single consolidated tax return on behalf of all group
members.
This tax return would have to be submitted no later than nine months after the end
of the tax year to which it related.
Inspections and investigations in the company’s premises would be decided jointly
by the principal tax authority and the other competent tax authorities. The findings
of these inspections and investigations would be collated by the principal tax
authority, which, by agreement with the other authorities, would issue an amended
assessment. The notification of this assessment would be made by each of the
concerned tax authorities, as well as the notification of the enforceable notice of
assessment authorising recovery of the said amount.
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Inspections and investigations would also result from a common agreement
between the principal tax authority and the other competent tax authorities. It is
important to note that the principal tax authority should not be vested with powers
enabling it to give instructions to other tax authorities. Moreover, local tax
authorities should always remain responsible for the practical conduct of inspection
and audit procedures in their own territories. This ought to reduce the risk of
partiality.
A limitation period of three years from the deadline for submission of the
consolidated tax return should be set. It could be extended if a dispute were
examined by an arbitration panel or if an anomaly were discovered. In the latter
case, a period of six years would apply, or even twelve years if the anomaly were
liable to give rise to criminal proceedings.
Disputes between tax authorities
An arbitration panel would be responsible for hearing and determining all kinds of
disputes between tax administrations. It would comprise three to five experts,
selected from a list drawn up by the Member States, and would have six months to
deliver its decision. In principle, its decisions should be taken unanimously. If a
unanimous decision is inconceivable, a majority decision should suffice. The
panel’s decision should bind the parties.
Appeals by taxpayers
Two kinds of redress would be open to taxpayers, namely a right of administrative
appeal and a right of judicial appeal.
Administrative appeals
Taxpayers should have 60 days from the date of receipt of a decision or notice to
lodge an appeal. This appeal would not have suspensive effect.
The body that would consider the appeal in the first instance should comprise one
representative of the appeals body of each Member State in which the tax
authorities concerned were located. If any of these states did not possess an
appeals body, a representative would be designated.
This body would have the power to confirm or amend the decision or notice or
annul it and refer the matter back to the principal tax authority. Such decisions
would be taken by majority. The time limit available to the body to deliver its ruling
should be six months from the date on which the appeal was lodged. The absence
of a response within that time limit would be tantamount to confirmation of the
original decision or notice.
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Where a new decision was taken, it would then be possible to lodge an
administrative or judicial appeal within 60 days of receipt of the decision.
Finally, if an appeals body confirmed or amended the decision, the principal
taxpayer could appeal to the courts with jurisdiction over the principal tax authority
against the decision of that authority within 60 days of receipt of the decision or on
expiry of the six-month period, whichever was earlier.
Judicial appeals
Judicial appeals against the decisions of the principal tax authority would be
governed by the national provisions of the Member State to which that authority
belonged.
Outstanding issues
Exchanges of information between Member States and administrative
cooperation
The Commission services is recommending the definition of a new framework
governing exchanges of information, and indeed the provisions of Directive
77/799/EEC of 19 December 1977 on mutual assistance would be inadequate for
application to the CCCTB.
The new mechanism would provide for the sharing of all information available to
the tax administrations of the various Member States through a central database.
This sharing of information should no longer be an occasional occurrence but a
regular and perhaps even automatic practice. No obstacle to the circulation of
information should be tolerated.
Three systems for exchanging information would coexist, namely the system
established by the Mutual Assistance Directive, the one created by domestic law
and international conventions and the one envisaged as part of the CCCTB
framework. This would create a risk of confusion between the systems.
Be that as it may, some questions about the CCCTB remain unanswered. Do
taxpayers have a right of scrutiny? Who has access to information? How can this
information be used? Some international agreements concluded with third
countries prohibit the disclosure of information obtained by those countries.
Similarly, countries outside the EU could have access to information that ought not
to be in its possession, simply because it has a permanent establishment in the EU
which is in a so-called ‘sandwich’ situation in a chain of ownership. How can these
and other problems be resolved?
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7. Some elements of a conclusion
As will be evident from all the preceding details, the CCCTB is a huge project and
constitutes per se a fundamental transformation of the tax landscape in Europe. 27
Besides the numerous technical issues that still need to be resolved and on which
the European Commission will have to make choices, some of them very difficult, a
number of important political and institutional questions remain unanswered.
Whether they refer to the optional nature of the regime, to consolidation, to the
sharing mechanism or to the one-stop-shop method of administration, none of the
choices is simple or devoid of implications, and each of them must be approached /
valuated with care.
What does seem to be firmly established, by contrast – as the interest aroused in
the academic world testifies – is that Europe is confronted by a formidable
challenge and by a choice that will, to a certain extent, be crucial to its future
development. The work that has been done, however, shows that there is a
solution which is appropriate and consistent with the fundamental aim of the single
market and, above all, that there is no alternative.
It should be re-emphasised that the CCCTB would eliminate the main tax
obstacles to cross-border business activity, for taxation would no longer be based
on the principle of separate accounting systems and transfer pricing, the offsetting
of profits and losses would be immediate, obstacles to corporate reorganisations
would be virtually eliminated, domestic investment would no longer receive
preferential tax treatment, and the weight of the administrative costs borne by
businesses would be sharply reduced, as would the risks of double taxation.
To be as effective as possible, the common tax base must be broad enough to
facilitate agreement among the Member States, which would otherwise seek to go
on clinging to their national derogations, to enable any Member States that so wish
to lower their nominal tax rates and, above all, to create a simple system that
offers operators greater legal certainty and limits the potential distorting effects of
economic decisions.
It remains to be seen how the Commission’s proposal, which is expected in
September 2008, will ultimately be received by the Member States. Not all of the
national positions are fully known at the present time. Some Member States have
expressed support, especially those that have indicated a wish to chair technical
subgroups (Germany, Italy, France, Spain and Denmark), and France in particular
has stated that this subject would be one of the priorities of its presidency. Others
have expressed scepticism (Britain) or fairly outright opposition (Ireland) from the
outset.
27 See the excellent presentation of this topic by Joann Martens-Weiner in Company Tax Reform in the
European Union – Guidance from the United States and Canada on Implementing Formulary Apportionment
in the EU, Springer Science+Business Media, New York, 2006.
See also “EC Tax review” n°3 and 4, 2008 on CCCTB
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At this stage, then, it is difficult to imagine this proposal obtaining unanimous
support, even in the medium term, and it could therefore be the first opportunity for
the European Union to test its ability to engage in enhanced cooperation in a
particularly sensitive area. There certainly seems to be no legal obstacle to its
adoption under enhanced cooperation if a minimum of eight Member States – or
nine after ratification of the Treaty of Lisbon – so request. It would therefore be the
first use of that legal basis if a qualified majority decided to invoke it.
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