by Paulus Merks, Jian-Cheng Ku, and Jesse Peeters, DLA Piper, Amsterdam
Today the European Commission published three tax directives which will potentially have a significant impact on multinationals operating in the in 27 EU member States (28 minus the UK): the Common Consolidated Tax Base (CCTB) directive, the Common Consolidated Corporate Tax Base (CCCTB) directive, and the Anti-Tax Avoidance Directive (ATAD II).
The aim of the CCTB directive and CCCTB directive is to combat tax avoidance by multinational companies in the EU and, at the same time, reduce compliance costs and improve legal certainty. The directives are expected to be the subject of fierce debate among EU member states.
The ATAD II directive contains anti-abuse rules with regard to hybrid mismatch arrangements involving third countries.
The CCTB directive and CCCTB directive would be mandatory for all multinational groups with a consolidated revenue of EUR 750 million.
The CCTB proposal contains common rules to calculate and determine the tax base in each member state, thus limiting planning opportunities for multinational groups. As a benefit to taxpayers, the CCTB directive also contains a significant deduction for R&D expenses and a temporary mechanism for cross-border loss relief.
Under the CCCTB directive, the profit of multinational groups in the EU is consolidated for corporate tax purposes. Consequently, profits of multinational groups are allocated by means of a formulary appointment, instead of the current transfer pricing rules. If adopted, both the CCTB directive and the CCCTB directive would enter into force on 1 January 2020.
The third directive, the ATAD II directive, follows the ATAD directive (ATAD I), which was adopted on 23 June and will enter into force on 1 January 2019. Whereas ATAD I contains anti-abuse rules applicable to hybrid mismatch arrangements within the EU, under the ATAD II directive, published today, anti-abuse rules with respect to hybrid mismatch arrangements are proposed to apply in relation to third countries. This second ATAD II directive will potentially also enter into force on 1 January 2019.
Brief history — ATAD II, CCTB and CCCTB directives
The initial CCCTB proposal, which included tax consolidation and common rules with respect to the calculation and determination of the tax base, was presented by the European Commission in 2011.
The proposal was incredibly ambitious at the time and was dismissed by the EU member states primarily out of fear of losing corporate tax income and tax sovereignty. However, in light of recent developments, such as the OECD/G20 base erosion profit shifting (BEPS) action plan and the state aid cases against Apple and other multinationals, the CCCTB proposal was granted a new lease of life.
In 2015, the European Commission decided to apply a two-stage approach towards an EU-wide corporate tax system. The first stage, the CCTB proposal, contains common rules with regard to the calculation and determination of the tax base in each member state in the EU. The second stage is to have tax consolidation of the revenues of multinational groups within the EU.
The EU member states will first have to agree on the CCTB directive and subsequently start negotiations on the CCCTB proposal. In this regard it should be pointed out that the Brexit of June this year has improved the likelihood of the CCTB and the CCCTB directives will be adopted, due to the fact that the UK was regarded as the most important opponent of the initial CCCTB proposal.
The ATAD directive was presented by the European Commission on 1 January, shortly after the publication of the final BEPS action plan, and was adopted on 23 June. The ATAD directive contains certain anti-abuse rules against tax evasion of multinational groups. The ATAD directive contained a statement that requests the Commission to put forward a proposal by October 2016 on hybrid mismatches involving third countries.
EU CCTB directive
The EU CCTB proposal will have a significant impact on the corporate tax system applicable to multinational companies in the EU. Going forward, it would impose a common set of rules to calculate and determine the taxable profits in all EU member states.
If implemented, the tax base of multinational companies will be based on all revenues, including dividend income and capital gains from companies outside the multinational group (i.e., interest of less than 10%). The CCTB directive also provides general rules with regard to depreciation and valuation of assets and transactions between related enterprises.
In addition, the CCTB directive contains interest deduction limitations, exit taxation, a switch over clause for untaxed foreign income, a general anti-avoidance rule (GAAR), rules on tax residency mismatches, and controlled foreign company (CFC) rules.
Having regard to the above, multinational groups that operate in the EU will be confronted with the same anti-abuse rules in every EU member state, thus limiting tax planning opportunities and making it less attractive to finance operations with borrowed capital.
However, the CCTB proposal also contains certain advantages for multinational groups. The CCTB directive provides a temporary mechanism for cross-border loss relief with subsequent recapture that will apply until the introduction of the CCCTB.
In addition, the CCTB proposal contains a significant deduction for R&D costs. Besides the normal deduction of R&D costs, a yearly extra deduction of up to 50% is granted for R&D expenditure up to a EUR 20 million threshold and a 25% extra deduction is granted for R&D expenditure above that threshold.
EU CCCTB directive
Under the EU CCCTB proposal, profits are not allocated by means of transfer pricing, but allocated among the EU member states by a formulary appointment. The factors that determine this formulary appointment calculation are labor, sales, and assets.
In this regard it should be pointed out that intangible assets (i.e, intellectual property, brands, logos) are not taken into account in the formulary appointment because intangible assets are, according to the European Commission, easily movable and thus provide taxpayers with an opportunity to circumvent the tax system.
EU member states that rely on a strong services economy, such as Denmark and the Netherlands, oppose the proposed formulary appointment out of fear of losing corporate tax income and a decrease in foreign investment. At this stage, it is unlikely that EU member states will reach an agreement on the CCCTB proposal within a short period of time.
EU ATAD II directive
In addition to the CCTB and CCCTB directives, the ATAD I directive contains general anti-abuse rules against tax evasion by multinational companies, such as interest deduction limitation rules, enhancement of CFC rules, and rules against hybrid mismatch arrangements.
The ATAD II directive contains anti-abuse rules with regard to hybrid mismatch arrangements involving third countries. Under ATAD II, member states are not allowed to grant a deduction, if a payment gives rise to double deduction or deduction without corresponding taxation.
Entry into force
The CCTB directive will enter into force as of 1 January 2020, provided that the member states adopt it. Both the CCTB and the CCCTB directive must be adopted by all EU member states unanimously.
In this respect the European Commission envisages that the CCCTB proposal will enter into force at the same time as the CCTB directive (i.e., on 1 January 2020). However, at present, it is highly uncertain whether the member states will agree on these directives before 1 January 2020.
The tax consolidation of multinational companies within the EU has been subject to fierce debate among member states. When the dust settles, these directives require all intra-group transactions with the European Union to be eliminated due to the fact that all profits and losses that arise from transactions that are directly carried out by group members will be ignored for corporate tax purposes.
Because of opposition of states such as Denmark and the Netherlands, at this stage it is unlikely that EU member states will reach an agreement on these proposals within a short period of time. In contrast, the ATAD I directive is already adopted by EcoFin and will enter into force as of 1 January 2019. Presumably, the amendments of ATAD II will also enter into force on 1 January 2019.