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Home / ... / June 2006 / Common Consolidated Corporation Tax Base

In our last issue, we reported on comments made in Dublin by Commissioner Kovács, in relation to the EC's promotion of a Common Consolidated Corporation Tax Base. A working group (WG) chaired by an official from the Taxation and Customs Union Directorate general of the Commission, and comprising principally of experts from the 25 Member States, has been created to discuss the issue. The fact that all Member States are represented should not be taken as indicating unanimous support for the concept.

The European Commission has published a series of papers summarising the discussions the latest of which, at the time this article was written, is dated 17 February 2006. The comments in this article are based on that material.

There has been considerable debate and discussion of CCCTB within the tax secretariat of the Commission and more importantly by the Member States. Contributions from the business community throughout Europe do not appear to be as significant, which may not be surprising.

At its first meeting in Brussels in November 2004 where all States were represented, Members were hesitant about the participation, on a regular basis. of non-governmental experts.

If there were participation on a permanent basis, some (unidentified) States were reported as fearing tax administrations would be put under pressure and that the discussion would not be open and clear. That said, the working group could be extended on an ad hoc basis to include experts from business and academia. The language was hardly encouraging.

Whether or not the views of accountants coincide fully with those of government, it is important to bring them forward into the discussions that are currently taking place in Brussels. There are three stages to the discussions:

- Defining the common base; - Structuring the consolidation; - Allocating the consolidated results to the member States in which the group operates.

The Commission is quite firm that a common tax base on its own will not be sufficient; the two elements of common and consolidated have equal relevance for the Commission.

THE COMMON BASE

Anyone who has calculated the tax charge on an Irish company operating solely through a foreign branch will know that it is highly unlikely that the calculations of the taxable profit after add-backs and deductions for things like capital allowances, will coincide in each jurisdiction. Add to that the difficulties of, potentially, 25 such calculations, and one can readily see a need for a common system of computing taxable profits if intra-community business is to flourish.

Closer to home, the different tax regimes in Northern Ireland and the Republic clearly inhibit cross-border activity. The case for a common tax base is clear: it is the different bits of the calculation that raise the problems.

Up until now time the discussions have focused almost solely on the common base. It makes some sense to do this but strategically it has the effect of parking out of sight certain problems arising from consolidation and allocation.

A series of possible principles has been informally outlined but failure to develop these more formally may in part be a recognition that tax principles are normally dealt within the context of an overall system comprising:

- The base on which profits are computed for tax purposes; - The rate of tax (which emphatically is not part of the EC programme); - The company; - The shareholder (who is also outside the loop for the moment).

The CCCTB is also seen as working best where the tax base is simple and transparent, and where incentives have been reduced.

But, while incentives in Ireland are being reduced and assuming business accepts that policy at present, will it always be so? A future re-introduction of incentives may be problematic.

Apart from this, a flexible tax policy is one of the few tools of economic management remaining to us post Maastricht. Does a Common European tax base have sufficient flexibility to help that cause?

The working groups have made some progress on three main elements of a common base:

- Fixed assets, capital allowances and capital gains; - Reserves, provisions, and liabilities, - Taxable income.

FIXED ASSETS

There are problem areas. Member States have varying views on capital allowances using the pooling method but the Commission’s weight is behind it. There is broad acknowledgment within the EC papers that capital gains and losses should be taxed together with ordinary business income but unrealised gains should be ignored. As our own tax legislation tells us, unrealised gains may not be so untouchable in sectors such as life insurance. The above acknowledgement may need to be tempered on further reflection to allow that gains might be ring-fenced from ordinary trading income while there may also be exceptions to the treatment of unrealised gains.

Broadly the members thought that involuntary disposals should be entitled to some - as yet undetermined - roll-over relief; but opinions on roll-over varied where the disposal was by choice.

RESERVES, PROVISIONS AND LIABILITIES

The EC report in this area arrives at one surprising conclusion when it observes that granting a tax deduction when a provision is created rather than waiting for the expenditure to be incurred ‘only’ advances the deduction. The potential loss of revenue to a tax administration, adds the report, is ‘only’ the time value of early recognition. Unfortunately, no clear view is apparent of the appropriate tax treatment of such issues including the problem of reserves legally required of a business.

TAXABLE INCOME

There is more certainty among member States as to defining taxable income though some issues are still unclear including the concept of a tax balance sheet where provisions are allowed in advance of actual expenditure.

OTHER 'COMMON' ISSUES

International aspects of CCCTB still have to be finalised and reviews are proposed of gains and losses on financial assets and the taxation of financial institutions. There is also the question of the legal framework. These are all targeted for completion in the current year.

At the moment then, there is little certainty about the structure of the common base despite discussions that have taken place for over a year. There is still scope, therefore, for business to express its views on this aspect of CCCTB.

CONSOLIDATION AND ALLOCATION

Consolidation: Currently, where a group operates across EU borders, there is no common tax base. Each group member has its profits separately calculated. Tax adjustments may include arms length adjustments (including transfer pricing) which may be required by domestic law of the State in which the group member operates. Tax treaties must also be taken into account.

At present, and particularly in the Irish context, groups of companies start their tax computations from the distinct accounts of each group member and adjust them for tax. If it is an Irish group, there is a common tax base dictated by Irish law. But we do not consolidate and consolidated accounts have little relevance in tax law here.

It is claimed as an advantage for CCCTB that it will ensure that losses are fully relieved.

That may be so but if we compare the effects for an Irish group with the results for an Irish parent with more than one branch operation, the group has the advantage of being able to decide exactly where it wishes to use/surrender the losses incurred in any one location. A company with Irish branches has no equivalent choice.

Translate that into a European cross border context and the disadvantage of consolidation potentially remains.

Irish legislation already deals with domestic tax arbitrage, so one would not expect an Irish subsidiary to surrender losses advantageously to a high tax rate jurisdiction. That is just one potential problem. With a potential for twenty-five different tax rates in Europe, consolidating losses may not be that straightforward

Allocation: The formulae for allocating income to the jurisdiction of those member States where they are to be taxed have not really been discussed at this stage.

There could be a number of factors used, e.g. capital assets, labour costs and sales, or value added or created by a company in each member State, and each factor might need a weighting to iron out inequalities.

However, it is apparent that in the current economic environment one cannot ignore the contribution of intangibles such as patents, know-how, software, and simple knowledge.

It is therefore questionable whether the attractions of the low Irish CT rate would remain quite so transparent after such blurring by the formulae. We also cannot be sure as to when and how such formulae may be revised. In short, this aspect of the discussions seems to be just as problematic as the first two strands of the process. Indeed one would expect the big guns of Europe to throw their weight behind formulae which would maximise their tax return and which in consequence must diminish Ireland's.

CONCLUSION

The EC does not expect to see their work come to fruition before 2008. That is a short time frame given progress to date. Finally, I would like to acknowledge the invaluable comments of my Institute colleague, Brian Keegan, on the content of this article.

Gerald Murphy is Taxation Executive with The Institute of Chartered Accountants in Ireland.

are wages taxable income and if so where can i find the law that says it is. thank you. mylo.