This article appears in the following Oxford Review of Economic Policy issue: BUSINESS TAXATION IN A GLOBALIZED WORLD [View the issue table of contents]
The European Commission's proposal for a common consolidated corporate tax base
* Oxford University Centre for Business Taxation, e-mail: clemens.fuest{at}sbs.ox.ac.uk
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The European Commission is currently preparing a proposal for a directive on the introduction of a common consolidated corporate tax base (CCCTB). This paper reviews the current state of the European Commission's preparation of the CCCTB proposal and discusses the implications for efficiency and fairness of the tax system. The analysis concludes that more evidence of significant economic benefits from introducing a CCCTB would be required to generate widespread support for the project.
Key Words: EU tax coordination • common consolidated tax base • tax competition
The author would like to thank two anonymous referees, Ana Agundez-Garcia, Michel Aujean, and participants in ‘Business Taxation in a Global World’, the Oxford University Centre for Business Taxation Summer Symposium, June 2008, for very helpful comments and suggestions. The usual disclaimer applies.
1 See European Commission (2007a,b,c 2008a,b). These papers are available on the webpage of the working group.
2 At least, this is what most national tax systems stipulate. EU law requires that national tax systems must not discriminate between national and border-crossing loss-offset regimes. Depending on the national regimes, this may force countries to create some room for border-crossing loss offset.
3 In fact, consolidation for tax purposes is much more complex, see, for example, Scientific Advisory Board of the German Federal Ministry of Finance (2007).
4 In principle, it would be possible to allow member states to also provide tax credits for certain companies or certain types of investment. But this is not part of the concept developed by the CCCTB working group.
5 In this paper, we do not discuss measurement issues, mainly for reasons of space. For a discussion of these issues see European Commission (2007b, pp. 7–14).
6 All taxable income, i.e. business income (income earned in the ordinary course of trade and business) and non-business income (passive income, such as interest, royalties, and dividends), should be consolidated and apportioned on the basis of a given formula. Alternatively, one could think of using different allocation mechanisms for different types of income.
7 See European Commission (2007b, p. 6).
8 See, for example, Wilson and Wildasin (2004) or Fuest et al. (2005).
9 There are several other relevant distortions, such as violations of capital import neutrality or ownership neutrality. Assessing the impact of the CCCTB on these dimensions of tax distortions would be beyond the scope of this paper, though.
10 See McLure (1980) and Gordon and Wilson (1986). Empirical evidence for this type of distortion is provided by Goolsbee and Maydew (2000) and Riedel (2008).
11 In a recent paper, Hines (2008) develops a method to measure the magnitude of ownership distortions caused by different formulae. He argues that ownership distortions arise to the extent that the distribution of income across firms under separate accounting differs from the distribution of factors entering the formula.
12 Van der Horst et al. (2007) use a computable general equilibrium model to analyse the welfare effects of introducing CCCTB. They find that these welfare effects are negligible, mainly because distortions of real economic activity increase.
13 Of course, profit shifting to third countries remains a problem and may even be intensified. For a theoretical discussion of this issue see Riedel and Runkel (2007) and Becker and Fuest (2007).
14 The CCCTB working group offers an interesting interpretation of the ability-to-pay principle: ‘The ‘ability to pay’ could be relevant when considering whether or not unrealized profits should be taxable’ (European Commission, 2004, p. 3). This points to the important relationship between taxation and liquidity, an issue which is neglected in standard tax theory but highly important in tax practice.
15 Even if one takes into account that ability to pay should refer to individuals, such as the ultimate owners of a firm, it is unlikely that fairness defined as taxation according to ability to pay will call for taxing firms which do not make profits.
16 On this issue, see also Sinn (1997).
17 One should note, though, that economic presence in a country does not necessarily imply that the income of a firm is also generated in this country. For instance, the fact that a firm has a large number of employees in a country does not mean that a corresponding share of the firm's income is generated in that country.
18 One should take into account that payroll is a deductible item, i.e. an increase in payroll ceteris paribus reduces profits. The empirical results in Hines (2008) suggest that the distribution of payroll or the number of employees across firms is more or less unrelated to the distribution of income.
19 There may be a number of reasons for the difference between this result and that of Fuest et al. (2007), including the differences in the data used. Note, however, that a decline in the tax base may be compatible with even positive tax-revenue effects because part of the tax base is shifted from low- to high-tax countries.
20 In Germany, the local business tax base of firms operating in more than one jurisdiction is shared using an apportionment formula based on payroll.
21 See, for example, Schön (2004, p. 428). This also avoids the financial accounting standards facing pressure from national governments or business motivated by the tax consequences of standard setting.
22 For a more detailed discussion of this issue see Freedman and MacDonald (2008).
23 This is not without problems because it is not clear how it can be avoided that the differences between the national GAAPs translate into differences in the effective taxation of companies in different member states.
24 See European Commission (2008a), p. 5.
25 It should be taken into account that taxes levied to finance social insurance systems such as income taxes may drive up wage levels, so that these taxes are also effectively deductible from the common tax base. But whether this is a full compensation remains an open question.
26 Since 2008, the German local business tax has no longer been deductible from the corporate income tax, so that the question of its deductibility under CCCTB may no longer be relevant.
27 Here, the term ‘switch over’ refers to situations where the tax law would normally exempt repatriated foreign profits from domestic taxation, but special circumstances, such as a very low foreign tax rate, allow the domestic tax authorities to switch to the tax credit method and tax the dividend.
28 As a threshold for this switch over, a foreign corporate tax rate of 10 per cent or of 40 per cent of the average tax rate in the EU is discussed.
29 It should be noted that CFC rules also apply to retained earnings of foreign subsidiaries, whereas switch-over rules only apply when earnings are repatriated, so that switch-over rules cannot really replace CFC rules (see European Commission, 2008b, p. 6).
30 Empirical research has demonstrated that these incentive problems do affect tax collection as one would expect (see, for example, Baretti et al., 2002).
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