Changing the way companies are taxed

Sheila Killian: As reported by the Irish Times, yesterday, the European Parliament approved a resolution proposing amendments to the CCCTB (the common consolidated corporate tax base). So what is this all about? Well, the CCCTB aims to streamline the basis on which companies pay tax in the different countries in the EU, and to allow companies established in any EU country to make a single tax return covering all EU states. The tax base would then be allocated among the countries on the basis where the assets are located, where the payroll bill is, or where the sales are made. So if a company made most of its sales in France, for example, and had all its assets and payroll in Ireland, then France would be entitled to tax some of the company’s tax base at French rates, while Ireland would tax the remainder at Irish rates.

This is a fundamental change from our current residence rules, which allow a company resident and operating here in Ireland, but making sales all over the EU to pay all of their tax in Ireland. The idea behind it is to streamline administration for companies operating in the EU, eliminate double taxation and double non-taxation more efficiently than bilateral treaties would, and essentially make irrelevant intra-group transfer pricing arrangements within the EU.

Not surprisingly, the CCCTB is seen in Ireland as a threat to our ability to raise taxes from companies operating here. More significantly it’s seen as damaging to our policy of seeking foreign direct investment on the basis that our 12.5% rate will apply to all their profits.

Up until now CCCTB has been proposed by the European Commission as a voluntary system: companies could opt-in to the system at their discretion. Furthermore there was a sense that the relatively slow process of decision-making at EU level would mean a long lead-in to the operation of the CCCTB. Yesterday, however, the European Parliament passed a vote to make the CCCTB mandatory for all but the smallest companies within the next five years.

The resolution passed by the Parliament also had three other interesting aspects, which were less widely reported. Most importantly, they recommended a change to the weighting between the three factors – assets, payroll and sales. The European Commission's original idea was that these three would be equally weighted. The Parliament proposes putting a 45^ weight on each of assets and employees, and only 10% on sales. This amendment would be good for Ireland, and seems fair in the sense that most profit is generated through the workforce and assets. http://www.blogger.com/img/blank.gif

Parliament also proposed that if some countries were not ready to embrace CCCTB, then others could move ahead without them. This is an idea that would have seemed far more radical a few years ago, before the Fiscal Compact. Finally, the parliament’s amendment specifically includes a review of the usefulness of corporate tax harmonisation when the CCCTB comes up for review after five years.

The vote means that the interesting times promised by the CCCTB are more immediate than before. A focus on the relative weightings of the three criteria for apportioning the tax base – assets, workforce and sales – is now of critical importance. There may be scope for making the CCCTB both more politically palatable and more fair with an increase in the weightings of assets and workforce.

Posted in: Taxation • Taxation • Europe • Taxation

Tagged with: corporationtax • tax EU regional policy • eu • CCCTB

Dr Sheila Killian     @sheilakillian

Dr Sheila Killian is Assistant Dean, Research and Director, Principles for Responsible Management Education at the Kemmy Business School, University of Limerick. Her research addresses sustainability, accountability and the common good, with a focus on professional expertise, tax policy and business school education. She holds a PhD in taxation from UCD.

Prior to joining UL, Dr Killian worked as a tax advisor with Arthur Andersen, KPMG and Ernst & Young, and in air-finance and educational software development. A Fellow of the Institute of Chartered Accountants of Ireland, she is the author of Corporate Social Responsibility: a Guide with Irish Experiences (2012).