THE RULES GOVERNING how tax is calculated for companies differs in each country in the EU. Harmonising those rules seems like an obvious step forward.
The EU commission is promoting the Common Consolidated Corporate Tax Base (CCCTB) as a single set of rules to calculate companies’ taxable profits in the EU. It also sets out a formula to allocate the tax collected between different countries.
With the CCCTB, cross-border companies will only have to comply with a single EU system for computing their taxable income, rather than many different national rule books.
Companies can file one tax return for all of their EU activities, and offset losses in one member state against profits in another.
The consolidated taxable profits will be shared between the member states in which the group is active according to a formula. Each member state will then tax its share of the profits at its own national tax rate.
So what are the benefits to the CCCTB? Well, according to the European Commission it will do a number of things:
Improve the single market for businesses by cutting compliance costs. It would allow companies to offset profits in a member state against losses in another.
Combat tax avoidance. The CCCTB will be mandatory for the largest groups in the EU. It will use a formula to determine how profits are allocated between member states. The EU sets the formula, so it eliminates avoidance – at least within the EU.
Support growth jobs and investment in the EU. According to the EU, the measures could lift investment in the EU by 3.4% and economic growth by up to 1.2%. The reason for this is that, with the CCCTB in place, companies would spend less on compliance costs for transfer pricing, money which can be spent on investment and R&D.
These appear to be significant benefits, so what’s not to like?
Ireland already has a relatively straightforward approach to compliance. Indeed, a report that PwC prepares in conjunction with the World Bank ranks Ireland as the easiest European country in which companies can file and pay taxes.
If we are the easiest, then when the rules get agreed by all member states, they are unlikely to be easier.
It sounds seductively easy to say let’s agree a common set of rules. However, the rules evolved over time to reflect our requirements.
For example, in Ireland, a policy decision was taken that business entertainment costs are not tax deductible. However, they are deductible in some European countries.
Would we be comfortable if this was reversed? Likewise, we have very specific rules on ‘expensive’ cars – those that cost more than €24,000 – and cars with higher emissions, encouraging companies to use energy-efficient equipment.
Also, we have very specific rules to encourage companies to undertake R&D in Ireland. The EU commission is suggesting different rules which would not suit Ireland.
In 2012 France and Germany committed to bringing in a common tax base for their two countries by 2013. We have seen no progress on this. If two countries find it difficult to agree on common tax rules, how will 27 reach agreement?
For Ireland, agreement would lead to a significant change in our tax base and it is unlikely to be simpler – given our current regime is quite straightforward in comparison to the rest of Europe.
How will the tax be allocated between countries?
However, let’s assume we can agree a common base. How will the tax be allocated between countries?
Tax is allocated to countries based on a simple formula. It is calculated based on sales, labour and assets. This formula would not suit Ireland. Let me explain why.
Ireland is a large exporter of goods, accounting for €111 billion at the end of 2015. Ireland is the largest exporter of pharmaceuticals in Europe, with half of all exports from the region coming out of Ireland.
Ireland is also the second largest exporter of computer and IT services in the world. As a large exporter with a small home market, most goods we produce are sold elsewhere.
The first part of the formula for allocating taxes looks at where goods are sold. We will lose out as a relatively small amount of goods are sold in Ireland compared to what we produce.
The next part of the formula is assets. But in a throw-back to the industrial age, it only fixed tangible assets such as machinery, buildings and factories, and will not include assets such as intellectual property.
Ireland, as a modern economy, has plenty in the way of intellectual property assets and relatively few factories and fixed assets. Again, we would lose out.
The CCCTB will also take labour into account when calculating a company’s taxable income. The formula takes employee numbers and payroll costs into account.
Ireland has a workforce of approximately 2 million. However, Irish productivity is relatively high. The formula will just look at payroll costs and number of employees. Again this would not seem to suit Ireland.
While a common system of company taxation appears attractive and it may indeed suit some European countries, Ireland is likely to lose out. Tax allocated to Ireland under the new rules is likely to be significantly less that we currently collect from companies.
Also, while a number of factors determine where companies locate, tax is one of them. If tax between European countries is based on a fixed formula, then it will no longer be a factor.
Other factors such as ease of market access would become more important. Again, Ireland would lose out under this scenario.
At least six other countries have indicated to the EU commission that they share our concern. These are mostly the smaller territories, as the formula appears to favour the larger countries.
A number of leaders – including the incoming president of France, Emmanuel Macron – are in favour, so expect a lively debate in Europe.
There are benefits to the CCCTB – unfortunately, the benefits appear to be mostly for the larger countries and it is hard to see advantages for a small, export-oriented country like Ireland.
Joe Tynan is head of tax at PwC Ireland.
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