Action Plan for Fair and Efficient Corporation Taxation in the EU
Corporate taxation in the EU needs to be fundamentally reformed. Today’s corporate tax systems in EU Member States were conceived in the 1930s, when cross-border trade was more limited, business models were simpler and products were tangible. But as business evolves, so too must the tax system. The current rules no longer work in a globalised, digital, mobile and services orientated business environment. The out-dated system is inefficient and creates opportunities for companies to use sophisticated tax-planning schemes to escape taxes. Some companies currently generate large profits in the Single Market but pay little or no tax in the EU.
This corporate tax avoidance results in significant revenue losses for Member States, a heavier tax burden for citizens and local companies and competitive distortions for businesses not structured to play the tax avoidance game.
It also undermines EU growth and competitiveness. Member States are pulled into intense competition to attract or to keep companies profits in their own territories. Through this competition, they often undermine each other’s ability to collect legitimate revenues or to focus on growth-friendly taxation. In addition, Member States’ unilateral efforts to protect their tax bases with uncoordinated anti-abuse measures are creating obstacles for business in the Single Market besides the proliferation of legal disputes. The lack of coordination between Member States on corporate taxation also causes uncertainty, administrative burdens and compliance costs for business and investors. This undermines the EU’s goals of creating a stronger, more competitive Single Market.
The new Action Plan presented by the Commission in June 2015 therefore sets out a series of measures for the short, medium and long term, to overhaul the EU Corporate Tax framework and make it fair, efficient and more growth-friendly.
In particular, the Action Plan aims to establish a new approach to corporate taxation in the EU to tackle tax avoidance, ensure sustainable revenues and foster a better business environment in the Single Market.
But it should not be forgotten that Member States have already committed themselves to a non-binding Code of Conduct on Business Taxation,[1] which sets out the criteria to assess whether national tax measures create harmful competition. This assessment is carried out by the Code of Conduct Group, which is made up of Member States representatives. In recent years, the Code has become less effective tool for tackling harmful tax regimes. This is partly because the criteria in the Code are no longer adequate to assess certain modern and complex tax regimes and partly because the Code Group lacks a strong enough mandate to act decisively.
In the short term the Commission will make a proposal to reform of the Code of Conduct to enable it to better react to modern cases of harmful tax competition. This will include extending the Group’s mandate and changing its working methods. The Code Group should also be active in screening for cases of harmful tax competition in non-EU Countries as part of a EU approach to non-cooperative jurisdictions.
The Action Plan provides for Five key Areas for the Commission legislative proposals. It seems to be important to underline that the measures in the Action Plan are very much aligned with the OECD Base Erosion and Profit Shifting (BEPS) reforms.[2]
Re-launching the Common Consolidated Corporate Tax Basis (CCCTB)
Negotiations on the CCCTB proposals, which were put forward by the Commission in 2011, are currently stalled, largely due to its sheer scale. In November 2014, President Junker announced that the Commission would examine how to re-launch the CCCTB in order to break this deadlock. This idea was well received by Member States, MEP’s, businesses and many other groups, as the benefits of the CCCTB are widely recognised.
The Commission has therefore announced that it will come forward with a new proposal within 18 months to revive the CCCTB. The proposal will be for a mandatory CCCTB, introduced through a step-by-step approach.
Fair Taxation where profits are generated
The fundamental principle of corporate taxation is that companies should pay tax where they make their profits. Some companies make large profits in the Single Market, but they pay little or no tax on them in the EU. They take advantage of the Treaty freedoms, national mismatches and provisions in EU corporate tax law to shifts profits between Member States and out of the EU, untaxed.
A new proposal is being prepared by the Commission while at the same time the Council continues to work on some aspects of the common tax base, linked to the BEPS project.
Creating a better business environment
Any reform of the corporate tax system must have a strong focus on improving the tax freedom for business. A cohesive EU approach to corporate taxation would remove many of the tax obstacles, legal uncertainties, compliance costs and competitive distortions that many businesses face today. At the end of 2015 the Commission will set out some proposals for eliminating competitive disadvantage for smaller companies that do not have the means for aggressive tax planning. A transparent tax system is conductive to growth. In addition a number of actions will address specific elements of corporate taxation which should promote growth.
SME’s will benefit greatly from the business friendly elements in the Action Plan. The CCCBT and other measures to improve the business environment will make it easier and cheaper for SME’s (particularly start-ups) to expand and operate cross-border.
Increase transparency
In March 2015 the Commission proposed an ambitious Tax Transparency Package.[3] It set out measures to ensure greater openness between Member States on their corporate tax regime and to make companies more accountable for their tax practice.
The Transparency Package also announced that the Commission would begin impact assessment work on possible requirements for companies to publicly disclose their tax information.
In addition, it is useful to remember that the Commission published a list of non-cooperative jurisdictions[4]. This pan-EU list of third-country non-cooperative jurisdictions will allow Member States to compare their national list in a easy and transparent way.
Improving coordination between Member States
This means that measures are envisaged to coordinate corporate tax matters. The Action Plan focuses on better coordination between Member States to achieve fairer and more efficient taxation in the EU. All the actions include elements which would promote cooperation, transparency and common approach between national authorities, with a view to creating a solid EU framework for corporate taxation. There are currently a number of instruments aimed at ensuring coordination between Member States on corporate tax matters. However, these could be used to better effect and the Action Plan sets out how to achieve this.
[1] The Code of Conduct Group (Business Taxation) was set up by ECOFIN on 9 March 1998. It mainly deals with assessing the tax measures which fall within the scope of the Code of Conduct (adopted in December 1997) for business taxation and overseeing the provision of information on those measures. The Code of Conduct is not a legally binding instrument but its adoption requires the commitment of Member States to: (i) abolish existing tax measures that constitute harmful tax competition; (ii) refrain from introducing new ones in the future. The Group mainly works on: anti-abuse rules; transparency and exchange of information in the area of transfer pricing; administrative practices; promotion of the principles of the code of conduct in non-EU countries. An Anti-abuse Sub-group was created under the Irish presidency of the Council in 2013. It reports to the Code of Conduct Group and works on hybrid mismatches. Next meetings will take place on 19 September and 21 October 2015.
[2] OECD and G20 Countries have agreed three key elements that will enable BEPS Project: a mandate, an implement package and some criteria’s (see BEPS Reports , February 2015, OCDE Homepage).
[3] See Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation, COM(2015) 135 final, 2015/0068, of 18 March 2015, and Communication from the Commission to the European Parliament and the Council on tax transparency to fight tax evasion and avoidance, COM(2015) 136 final of 18 March 2015.
[4] Annexed to the Staff Working Document available on http://ec.europa.eu/taxation_customs/index_en.htm.
