European Commission's CCCTB proposal 'will not fix the problem of transfer pricing and corporate tax dodging'
Tuesday October 25 2016 Today, Eurodad reacted to the upcoming proposal from the European Commission for a Common Consolidated Corporate Tax Base (CCCTB).
Tove Ryding, Tax Justice Coordinator for the European Network on Debt and Development (Eurodad) said: "The European Commission is talking about a new and improved tax system, with so-called "consolidation" of the tax base. If this happened, the transfer pricing loophole, which allows multinational corporations to dodge taxes in the EU, would finally be closed.
"However, while the Commission is talking about ‘consolidation’, it is not actually suggesting that Member States start negotiating consolidation. This discussion is postponed until some unspecified date in the future.
"Instead, the Commission has now launched another proposal, which does not include consolidation, and therefore will not fix the problem of transfer pricing and corporate tax dodging. This proposal is a mixed bag of a few fixes to the current tax system, but also introduces some new loopholes, which is the last thing we need."
In 2011, the European Commission put an ambitious proposal, with consolidation, on the table. However, due to resistance from the EU Member States, the proposal did not get adopted.
Ryding said: "The Member States have promised to make multinational corporations pay their taxes, and therefore we need to pull them back to the negotiating table. Unfortunately, this is not what the Commission has done. Instead of putting the proposal for a real, new EU tax system back on the table, the Commission has invited the Member States to yet another discussion about making tweaks to the existing system."
Media contact: Julia Ravenscroft, email@example.com or +32 486 356 814.
Notes to editors:
Loopholes in the EU tax system
Background: In the spring, EU Member States decided on a weak mechanism to combat profit shifting through internal loans and interest payments between subsidiaries of multinational corporations. The EU decided on a complicated method which limits tax deductions for interest payments to 30% of a company’s “earnings before interest, tax, depreciation and amortisation (EBITDA)”.
The OECD has highlighted
“Results show that for the year 2009, 69 out of 77 companies had a net interest expense to EBITDA ratio below 10 per cent, including 15 companies which had net interest income. In 2013, 75 out of 79 companies had a net interest expense to EBITDA ratio below 10 per cent, including 18 companies which had net interest income.” The OECD adds that: “The results were confirmed through similar analysis carried out by 9 countries that participate in this work. These countries also looked at the net interest expense to EBITDA ratios for the 10 largest non-financial groups headquartered in their country. Fifty-five per cent of those groups have a ratio below 10 per cent and eighty-five per cent have a ratio below 20 per cent.”
This indicates that the EU’s interest deduction rules will not have a large impact, and thus that there is still a high risk of tax avoidance through internal interest payments in multinational corporations.
Commission’s new proposal
In the CCTB proposal, the Commission now recognises that the tax rules create an incentive for multinational corporations to use loans rather than equity to finance their business. However, rather than limiting the tax deductions for interest payments, the Commission has now proposed a new mechanism called ‘Allowance for growth and investment’, which calculates an amount of tax deductions for equity funded corporations. This is a new tax incentive, which will in reality allowcorporations tax deductions for expenses they haven’t had.
Research and Development
One common type of tax avoidance by multinational corporations is through internal royalty payments for patents held by the multinational corporation. This in particular happens through so-called ‘patent boxes’, which more and more EU Member States have introduced. During the negotiations on the Anti-Tax Avoidance Package earlier in 2016, the EU – in theory – had an opportunity to ban patent boxes.. Instead, the EU decided to adopt a standard for how patent boxes should be constructed.
The Commission’s CCTB proposal
In the CCTB proposal, the Commission has now proposed an alternative to patent boxes. The proposal would not only allow multinational corporations to deduct all expenses related to research and development, but would award corporations large additional tax deductions, depending on the amount they spent on research and development. For expenses up to €20 million, the Commission proposes to award corporations an extra tax deduction of 50% of the amount spent. This is a new tax incentive, which will allow multinational corporations to deduct large amounts of profits from their tax base.
The diversity of tax rules in the EU, as well as between the EU and the rest of the world, has created loopholes, which multinational corporations can use to avoid taxes. In the spring, the EU adopted a package which includes rules to prevent these types of ‘mismatches’ inside the EU.
The Commission’s new tax package
With the new package, the Commission proposes to address the issue of mismatches between EU rules and third country rules by addressing double-non-taxation, where two countries fail to tax the profits of a multinational corporation. This will close a loophole which can, at the moment, be used by multinational corporations to avoid taxes.Julia Ravenscroft