On the 25th October 2016, the European Commission made public its plans to completely overhaul the system that governs how companies are taxed in the Single Market. The aim of the proposal, which includes a Common Consolidated Corporate Tax Base (“CCTB”), will act as a powerful weapon in the ongoing fight against tax avoidance, whilst making it cheaper and easier for companies to do business in the Single Market.
The concept of this corporate reform package was first developed in 2011 as a response to increasing pressure from governments, the media and members of the public to modernise the current corporate tax framework whilst closing various loopholes that allowed businesses to avoid their tax obligations. Pressure has been mounting from all business spheres to find a solution to ensure that the system becomes fairer, easier and more compatible with economic growth.
A key element of the three-pronged approach is the CCTB which will lay out a single set of rules to calculate companies’ taxable profits within the EU. The CCTB will require cross-border companies to only comply with one single EU system when calculating their taxable income, as opposed to the myriad of different national rulebooks that exist today. Companies will also be able to file one tax return to cover all their EU activities and they will be able to offset any losses in one Member State against profits in another.
Furthermore, it is hoped that through this approach, the concept of the Single Market will be improved. This will be mainly achieved by reducing red tape and compliance costs, reducing tax avoidance by making the CCTB mandatory for all large companies (with an annual turnover exceeding €750 million), and defending Member States against base erosion and profit shifting to non-EU countries, whilst supporting growth, jobs and investment in the EU. It is anticipated that the CCTB will be implemented in two steps- firstly the implementation of the common base, and then the consolidation will be put in place shortly afterwards.
Another aspect of the CCTB is that it will be mandatory for large multinationals, in order to ensure that it covers those with the greatest capacity for tax planning. On the other hand, the system will remain optional for smaller companies that are not captured by the criteria of the mandatory scope. It will also offer a so-called “super-deduction” for companies that give importance to Research and Development spending and thus invest in economic growth and the jobs market. The CCTB will give similar incentives for equity financing to address the debt bias in taxation and ensure greater economic stability.
Two further proposals were also announced with the aim of reinforcing existing anti-abuse rules and improving the existing dispute resolution system for EU double taxation.
Pierre Moscovici, Commissioner for Economic and Financial Affairs stated that:
“The many conversations I’ve had as Taxation Commissioner has made it crystal-clear to me that companies nee simpler tax rules within the EU. At the same time, we need to drive forward our fight against tax avoidance, which is delivering real change.”
These legislative proposals are by no means set in stone and the Maltese government are anticipated to mount pressure on the Commission to block or at least amend the proposed rules. Suggestions first need to be submitted to the European Parliament for consultation before being passed to the Council for adoption and it is expected that Malta, along with Luxembourg and the Netherlands will voice their discontent. Malta’s financial services regime is based on incentives offered to foreign companies who can benefit from its flexible corporate tax regime. These companies contribute significantly to Malta’s economy and any changes could signal the ‘beginning of the end’ for Malta’s flourishing financial services sector. There is still an unanimity safeguard in place because such proposals require the agreement of all 28 Member States before they can be approved and as things stand, unanimous approval is unlikely to happen.
These legislative proposals will now be submitted to the European Parliament for consultation and then to the Council for adoption. To find out how these plans could affect your business, contact [email protected]