Germany, France making progress on EU-wide corporate tax system

By Konstantin Sakuth, Linklaters LLP, Munich

The German government is moving forward with its plan to cooperate with France to develop a common corporate tax base (CCTB) for Europe.

On 5 June, Martin Kreienbaum (Director General, International Taxation, German Federal Ministry of Finance) said cooperation with France on a CCTB has much progressed. Germany is committed to support the CCTB proposal and to bring all the other EU Member States on board, said Kreienbaum, speaking at the 2018 OECD International Tax Conference in Washington DC, co-sponsored by the OECD, USCIB, and BIAC.

Moreover, in responses made publicly available 31 May, the German government confirmed that it still intends to issue a joint position paper with France on a CCTB proposal by the end of 2018 and clarified aspects of coming proposal.

Background

For several years there have been efforts to harmonize corporate taxation at the European level. More recently, these efforts were evidenced by the October 2016 relaunch of proposals for a Council directive on a common (consolidated) corporate tax base (CCCTB). However, a lot is at stake and the requirement of unanimity among the Member States impedes a final agreement.

Nonetheless, the introduction of a CCTB/CCCTB is high on the agenda of the two European powerhouses, Germany and France. In her first government declaration in March 2018 as reelected German chancellor, Angela Merkel reaffirmed Germany’s commitment to cooperate with France to achieve harmonization of the tax base for corporate tax purposes.

Latest announcements

In its 31 May announcements, the German government has followed up on the Chancellor’s statement, confirming that representatives of the German (Bundesministerium der Finanzen) and French (ministère de l’Économie et des Finances) Federal Ministry of Finance will work to produce a joint position paper on a CCTB proposal by year-end. Other Member States are not involved but were informed about the cooperation.

The German government said that EU tax harmonization is needed to improve EU competitiveness. Tax harmonization would reduce compliance costs of internationally operating taxpayers, providing more funds for investment. A CCTB would also benefit foreign investors by offering more transparent rules. The increased transparency would also help prevent of tax avoidance, the government said.

Partnerships excluded

The CCTB directive proposal only applies to corporate taxpayers. Partnerships are of particular importance for the German economy. Thus, a few clarifications were made in that respect.

The German government states that the role of partnerships is taken into account in the negotiations because, although German partnerships are not subject to corporate income tax, they are subject to trade tax at the municipality level. Since the determination of the trade tax base is linked to the general (corporate) income tax provisions, any changes to the latter would also affect partnerships, the government said.

Minimum tax?

Amendments to corporate income tax rates are not discussed. However, with respect to a potential minimum tax, the German government states that Germany and France are both working to prevent a “race to the bottom” in corporate tax rates.

Questions dealing with fiscal unity, research funding, loss set-off, depreciation methods, thin capitalization rules, and the German royalty barrier are not addressed in the German statement as they are the subject of ongoing negotiations with France.

Outlook

It remains to be seen whether the efforts of Germany and France will turn out to be fruitful.

At the OECD conference, Kreienbaum acknowledged that a major obstacle seems to be that some Member States are reluctant to waive their sovereignty and to give more competences to a supranational body.

Nonetheless, Kreienbaum said Germany is committed to continuing its cooperation with France to bring a common tax system to Europe.

–Konstantin Sakuth is an Associate in the tax team of Linklaters LLP in Munich. Konstantin holds an LL.M. in International Tax Law from WU Vienna.

 

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