New EU rules would put an end to companies’ ability to use loopholes to avoid paying taxes— for example by shifting profits to EU countries with lower taxes.

On 14 March, MEPs will discuss plans to establish a “common consolidated corporate tax base” (CCCTB), which is a common set of rules that companies operating in the EU could use to calculate their taxable profits instead of having to follow different rules for each EU country they are located in. They will talk about two pieces of legislation that will make it harder for companies to shift profits to those EU countries where corporate taxes are lower.

French EPP member Alain Lamassoure, who wrote the report on the common consolidated corporate tax base, welcomed a recent initiative by the European Commission to name EU countries involved in aggressive tax planning. These countries include Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta, and the Netherlands.

“[With the new legislation] any attempt to set up aggressive tax planning schemes, artificially drawing fiscal revenues towards some member states at the expense of others will become obsolete,” Lammasoure said.

Dutch S&D member Paul Tang, who wrote the report on the common corporate tax base, said: “National and EU leaders are beginning to understand that the current systems are outdated and leave citizens and small companies worse off. The momentum is there, we keep up the pressure.”

New tax rules

The European Commission proposes to introduce a common consolidated corporate tax base in two phases. The first phase sees the introduction of a common corporate tax base, which is one set of rules to calculate companies’ taxable profits in all EU countries. Currently, companies operating in different EU countries calculate subsidiaries’ profits according to different tax codes.

This will be followed by the introduction of a common consolidated corporate tax base in phase two. This would allow companies to add profits and losses of all their subsidiaries in the EU and come up with a net profit figure to be taxed.

Profits would be taxed in the EU countries the company operates subsidiaries. Profit sharing would be calculated according to a formula, considering the buildings, machinery, number of employees, and sales the company has in different EU countries.

For its part, “Parliament introduced a new factor, based on data collection, in the formula which determines how corporate fiscal revenues are distributed among member states,” Lamassoure said.

MEPs also looked at how major digital players should be taxed. Personal data is an intangible but highly valuable asset mined by firms like Facebook, Amazon, and Google to create their wealth, but it is currently not considered when calculating their tax liabilities.

“We need a digital tax as soon as possible," Tang said. “Our research showed that the tax revenue loss from Google and Facebook is around €5.1 billion in three years’ time, so it’s time to change the rules so we can play a fair game again.”

Background

The Economics and Monetary Committee approved the CCCTB in February by 38 votes to 11 votes, with five abstentions. A separate, complementary measure creating the Common Corporate Tax Base was approved by 39 votes to 12, with five abstentions. Together, the two measures aim to create a tax system for the 21st century global and digital economy.

Proposals included benchmarks to determine whether a firm has a “digital presence” within an EU member state which might make it liable for tax even if it does not have a fixed place of business in that country.

The Economic and Monetary Affairs Committee also urged the EU Commission to monitor technical standards for the number of users, digital contracts and the volume of digital content collected which a company exploits for data-mining purposes. These measures should produce a clearer picture of where a firm generates its profits, and where it should be taxed.

Firms would calculate their tax bills by adding up the profits and losses of their constituent companies in all EU member states. Taxable profits would then be allocated to each member state where the firm operates according to a sharing formula based on sales, assets, and labour, as well as their use of personal data. The aim is to stamp out the current practice of firms moving their tax base to low-tax jurisdictions.

Once the proposals take effect, a single set of tax rules would apply in all member states.  Firms would no longer have to deal with 28 different sets of national rules, and would also be accountable to a single tax administration. 

Under the Commission proposals, the legislation would cover groups of companies with a consolidated turnover exceeding €750 million.  MEPs want that threshold to be lowered to zero within seven years.

“This is a fabulous opportunity to make a giant leap in the field of corporate taxation,” Lammasoure said. “Not only would this legislation create a model that is more suitable to today’s economies through the taxing of the digital economy, but it would also put a halt to unfettered competition between corporate tax systems within the single market, by targeting profits where they are made.”

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