European Commission seeks to align EU policy with BEPS
TAX ALERT |
On June 17, 2015, The European Commission (the Commission) published a new communication to the European Parliament and the [European] Council entitled, A Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action (the report). The report outlines steps that can be taken towards a more unified European tax system, incorporating many of the key aspects of the Organisation for Economic Co-operation and Development's (OECD) base erosion and profit shifting (BEPS) project. In the report, the Commission states that the current systems of taxation across the European Union (EU) member states leave certain gaps allowing multinationals to shift profits away from high tax jurisdictions. The Commission also believes that current tax systems do not maximize foreign direct investment into EU economies because they favor debt over equity financings, thereby reducing the desire to tap into EU capital markets for equity investment. With the goal of unifying European tax systems to enhance economic activity and investment, the Commission has outlined a number of proposals to change the EU tax system.
These proposals could have a very significant impact on companies doing business in the EU by limiting the effectiveness of multinational tax planning and possibly increasing the compliance burden. However, the proposals could also provide relief to companies that seek tax consolidation among their EU businesses and those involved in the dispute resolution process.
Specifically, the Commission seeks to achieve the following objectives, including:
- Re-establishing the link between taxation and where economic activity takes place
- Ensuring that member states can correctly value corporate activity in their jurisdiction
- Creating a competitive and growth-friendly corporate tax environment for the EU, resulting in a more resilient corporate sector
- Protecting the single market and securing a strong EU approach to external corporate tax issues, including measures to implement OECD BEPS, in order to deal with non-cooperative tax jurisdictions and to increase tax transparency
To further these objectives, and with the goal of integrating the OECD's BEPS project, the Commission has suggested five key areas for action.
Common consolidated corporate tax base
In the report, The Commission suggests the EU adopt a voluntary common consolidated corporate tax base (CCCTB), similar in nature to the U.S. consolidated return rules. Under the new proposal, the use of the CCCTB would be mandatory for all EU member states. The plan would create a single method for calculating taxable income across all EU countries. The Commission proposes a phased approach to implementation, recognizing that a single unified consolidation is complex and ambitious. The proposal's primary goal is to secure a common tax base in order to maintain equal growth and jobs throughout the EU while minimizing tax competition between the member states. To this end, Commission proposes to examine the beneficial treatment of research and development costs and address corporate debt/equity bias as it relates to companies that operate throughout Europe.
Ensuring effective taxation where profits are generated
The position of the Commission is that companies benefiting from the single market of the EU, and generate profits there, should pay tax in a way that is commensurate with the economic reality of their profit making activities. The Commission's proposal is aligned with BEPS Action Item 8, Guidance on Transfer Pricing Aspects of Intangibles.
Additionally, the Commission is seeking to implement the OECD's transfer pricing guidelines in a way that will ensure that EU corporate tax legislation preventing double taxation does not inadvertently lead to non-taxation. In order to facilitate this, the Commission will work with member states and businesses to develop coordinated and concrete transfer pricing rules that reflect the economic reality of the single market. The proposal includes increased transparency and information exchange that can help tax administrations identify intragroup transactions.
In addition, the Commission seeks to investigate current preferential regimes in the EU, such as patent boxes and research and development regimes, to make sure that benefits from these regimes are aligned with economic realities. The Commission seeks to implement the OECD's modified nexus approach that seeks to use transfer pricing to source taxable revenue to the location of actual value creation. Tax strategies that implement transfer pricing techniques to shift income are becoming more common in the digital age. If within 12 months of releasing specific guidance to EU member states the Commission finds that member states are not applying the new approach uniformly, it will prepare binding legislation to ensure proper implementation.
Additional measures for a better tax environment for business
The Commission seeks a corporate tax framework in the EU that would focus on creating parity in the tax regime that would encourage business and foster growth of the single market. The Commission is concerned that unfettered tax competition in the EU facilitates aggressive tax planning, creates competitive distortions for businesses, and fragments the single market. The Commission seeks greater unity between members on tax policy and seeks to increase measures that would reduce administrative burden, compliance costs and other tax obstacles in the single market. The Commission suggests that, until such time that the CCCTB consolidation is introduced, group entities should be able to offset profits and losses they make in different member states. Such a measure would remove a major tax obstacle in the single market for businesses. The loss regime would have a recapture mechanism for when the group entity is profitable again to make sure that one member state does not fully carry the burden of losses incurred in a separate state.
In addition to the multi-state loss system, the Commission has proposed improvements to the cross-border dispute resolution system in the EU. They recognize that the current system that utilizes the multilateral arbitration convention is inefficient and too narrow in scope as it only deals with transfer pricing disputes. In addition, there is no recourse to appeal the interpretation of these rules. The goal would be to develop a coordinated EU approach to dispute resolution that contains clearer rules and more stringent timelines, building and improving upon the systems currently in place.
Further progress on tax transparency
The Commission seeks to increase transparency and communication within the EU in order to ensure greater openness and cooperation between tax authorities that will help facilitate better protection of local tax bases. The proposal involves an automatic exchange of information on cross-border tax rulings. In addition, the Commission has identified other measures which should be taken to boost transparency in relation to third countries. The Commission is also developing mechanisms to identify non-cooperative tax jurisdictions. They would monitor member countries' lists of non-cooperative or blacklisted companies and update an EU wide list of such jurisdictions. The Commission would attempt to set EU wide policies for tax interactions with these nations. Additionally, the Commission is launching a public consultation on the use of country-by-country reporting, as outlined in the BEPS action plan as a way of increasing transparency in the EU.
EU tools for coordination
The Commission is investigating tools that could be an essential element in tackling tax avoidance through administrative cooperation between member state's tax authorities. The Commission is proposing greater cooperation and information exchange on tax inspections and audits. While the Commission has not fully developed these new tools, they are seeking ways to take a more strategic approach to controlling and auditing cross-border companies in the future. In addition, the Commission is seeking to revise the Code of Conduct for Business Taxation, by changing the working methods of the group to make it respond more effectively to instances of harmful tax competition.
The Commission's action plan is the first step in a framework to provide a foundation on which to build a fair and growth-friendly EU. The action plan identifies areas of priority for the Commission in the immediate, medium and long term future. The Commission does note that harmonization of tax rates is not currently part of this agenda.