Tax competition and the proposed common tax base … · Tax competition and the proposed common tax base for Corporate Income Tax in Europe: ... 6Tax competition and the proposed

Tax competition and the proposed common tax base for Corporate Income Tax in Europe: suggested strategiesMay 2016

Contents

4 Challenges of a common tax base in Europe

9 Tax competitiveness and Corporate Income Tax among European countries

14 Comparative profile of Corporate Income Tax

18 Attractiveness to companies of the different CIT regimes in Europe

20 Maps of tax treaties signed by certain European countries

21 Where should start-ups be located in Europe from a CIT perspective ?

23 The potential impact of the adoption of CCCTB and consequences for businesses

28 Assessment of the compliance of States’ fiscal policies with CCCTB and budgetary impacts

32 What will be the impact of the CCCTB on companies ?

34 CCCTB: positioning in relation to start-ups

36 Appendices

4 | Culture et fiscalité en Europe : de la cacophonie à l’harmonie conquérante4 | Tax competition and the proposed common tax base for Corporate Income Tax in Europe: suggested strategies

State in the studyMember State of the Euro zoneMember State of the EFTA

Member State of the UEOut of the scope of study State in the studyMember State of the Euro zone

Member State of the EFTAMember State of the UEOut of the scope of study

Europe is facing many different major challenges.The European Union, with its unique economic, monetary and political construction, has reached a precarious balance between the centripetal forces – bringing its members up to 28 - and centrifugal forces at play (Grexit, Brexit, etc.).

Challenges of a common tax base in Europe

| 5Tax competition and the proposed common tax base for Corporate Income Tax in Europe: suggested strategies

The financial crisis, followed by the budgetary and economic crises, resulted in a “scissor effect”: the shortfall in tax revenues resulting from the recession coinciding with the need to revive economic activity amidst an environment under the strain of public debt.

The pressure on public finances, and consequently tax receipts, has directly raised the question of tax havens and more generally the means available to taxpayers to avoid tax.

Against the backdrop of a globalised economy, States have decided to establish a more integrated worldwide tax framework and reexamine many branches of international tax law. The G20 Saint Petersburg summit thus commissioned the Organisation for Economic Cooperation and Development (OECD) to propose effective measures in response to the challenges of the Base Erosion and Profit Shifting (BEPS) plan. This work was based on 15 actions covering the various aspects of the subject.

The European Commission has also set processes in motion.It has already launched major reforms to Value Added Tax (VAT), which falls within the competence of the EU, and, in its last action plan, targeted the fight against tax evasion and the necessary reforms to an economy deeply impacted by the digital revolution. Yet it remains bound by the exclusive jurisdiction of Member States on the issue of Corporate Income Tax.

Although transparency and exchange of information, promoted notably by the BEPS action plan, correspond to States’ desire for cooperation, the issue of a common definition of a tax base for Corporate Income Tax (CIT) has a direct impact on States’ fiscal policy and incidentally on their sovereignty.

The European Commission intends to follow up on this series of reforms very soon by presenting its proposed Common Consolidated Corporate Tax Base (CCCTB).

The announcement of the revived CCCTB plan is the opportunity to examine the respective positions of the Member States with respect to CIT and the impact of the CCCTB on the definition of their CIT.

An analysis of tax competitiveness must be based on two key components: the tax rate and base.

Fifteen States considered as representative and indicative of fiscal policies in Europe have been selected for this study. EU Member States of varying sizes and economic characteristics:

Belgium Estonia France Germany

Greece Hungary Ireland Italy

LuxembourgNetherlands Poland Spain

Sweden United Kingdom

but also Switzerland, not a Member State of the EU but at its core geographically and a major economic player recognised for its tax competitiveness.For the purposes of this study, “Europe” will refer to these States.

6 | Culture et fiscalité en Europe : de la cacophonie à l’harmonie conquérante6 | Tax competition and the proposed common tax base for Corporate Income Tax in Europe: suggested strategies

This study aims to contribute to the debate by presenting:• a status report of the tax base choices made by EU Member States;• a summary assessment of the competitiveness of their Corporate Income Tax;• an analysis of the changes necessary if the proposed common consolidated tax base is

adopted and the resulting budgetary consequences;• some final conclusions that may be drawn in terms of fiscal policy.

Indeed, the CIT remains a symbol of tax sovereignty of European States today (but for how much longer ?) and the most commonly used indicator to assess competitiveness and therefore States’ tax attractiveness.

The changes stemming from the Commission’s plans will have a genuine impact both on economic policy choices made by the States, and on budgets with respect to the balancing of public finances. What is at stake, beyond this issue, is that States would potentially relinquish de facto their freedom to determine their fiscal policy mix. And yet still today, the debate is defined on essentially technical grounds rather than in terms of sovereignty or a conception of European - federal or otherwise - construction.

This study thus aims both to propose keys for a rational understanding of an apparently technical subject, and to clarify a more political debate which exceeds this strict framework in that it can influence the way in which a people’s Europe is built.

The study highlights the following key points:• the tax base choices made by the States in the panel show contrasted approaches, partly

driven by considerations of economic policy and by the desire for attractiveness ;• taking the rates into account accentuates the competitive differences already observed in

terms of tax base, thus further widening the gap between the countries ;• all else being equal, notably if tax rates were to remain unchanged, it emerges that the

implementation of a common tax base is likely to lead to budgetary losses overall at a time when the public finances of European Member States are encountering difficulties ;

• paradoxically, the countries which have publicly shown the most reticence with respect to the CCCTB are those that would be most favorably positioned to deal with it and would probably benefit most in terms of relative tax competitiveness.

Given the heavy economic constraints and political consequences likely to arise as a result of the plan, the final remarks incite readers and decision-makers alike to consider the question of the true objectives pursued.

This report is therefore based on the following two analyses:1. Tax competitiveness of European countries in terms of CIT

2. The potential impact of the adoption of the CCCTB and consequences for businesses

1 Tax competitiveness and Corporate Income Tax among European countries

Tax competition and the proposed common tax base for Corporate Income Tax in Europe: suggested strategies10 |

Corporate Income Tax (CIT) has always symbolised tax competition in Europe. Over the years, the conditions of this competition have evolved significantly, resulting in four successive, sometimes enmeshed, versions.

Institutional recognition of the four fundamental freedoms (free movement of goods, services, capital and people) which were the guiding principles behind the single European market at the outset, triggered competitive practices in the late 1980s and throughout the 1990s. These initially focused on organised policies of targeted or “niche” mechanisms, which the smaller countries pursued in a bid to specialise their economies in labour-intensive or high value-added sectors of activity.

The Neumark report of 19621 had already implicitly identified how tax competition could jeopardise the common market, but the notion of harmful tax competition was only truly addressed in the Ruding2 report in 19923. The Commission referred the matter in detail to the informal ECOFIN Council of Ministers of Verona in April 1996, pursuant to which a Code of Conduct was adopted on 1 December 1997, as part of the Monti package aiming, first, to eliminate tax policies that generated harmful tax competition in light of the code (“dismantling”) and second, not to introduce any new measures having this effect (“freeze”).

When the code was adopted, the Council nevertheless acknowledged that unfair competition could have some beneficial effects. The code was thus devised to focus only on measures that distort where economic activities are located within the Union insofar as they only target non-residents and grant them a more favorable tax treatment than that normally applicable in the Member State concerned.

To ensure objective analysis, the following criteria were set, enabling identification of any potentially harmful measures:

• a level of effective taxation distinctly lower than the general level of the country concerned ;

1. Report of the Fiscal and Finance Committee, 1962

2. Report of the Committee of Independant Experts on Company Taxation (Ruding Commission), European Commission 1992

3. Cf. « Les raisons d’être du Code de conduite contre la concurrence fiscale dommageable » (« The rationale behind harmful tax competitiveness », M. Aujean and C. Maignan, Revue de Droit fiscal, no. 25, 20 June 2013 p. 25 et seq

• tax benefits reserved for non-residents ;

• tax incentives in favour of activities without any relation to the local economy, such that they have no impact on the national tax base ;

• granting of tax benefits, even in the absence of any actual economic activity ;

• rules to determine the profits of companies belonging to a multinational group, which depart from the internationally generally accepted standards, notably those approved by the OECD ;

• the lack of transparency of tax measures.

A “code of conduct” group was thus set up by ECOFIN, in order to assess the tax measures falling within the scope of the code of conduct related to corporate taxation. This code, despite having no legal force, has become an instrument which undeniably materialises a political force enabling many tax measures considered as harmful to be dismantled.

In its findings dated 8 March 2016 on the code of conduct, the European Council reasserted the position already upheld on 8 December 2015 concerning the future of the code of conduct, advising a strengthening of the code, by updating the criteria, increasing transparency, introducing new working methods and governance and extending its mandate.

This code of conduct, still being applied and under construction, but also the development of the Commission’s investigations on the matter of State aids, have established a framework for the competitive tax policies of European States, without prohibiting them. Indeed, fiscal attractiveness policies have continued to develop over the years 2000 following three different approaches:

• The first is a reduction of the statutory CIT rates, initiated by Luxembourg, Ireland and Germany. This phenomenon has gradually spread to an overall decrease of the average CIT rate in Europe, a trend halted or at least curbed by the financial crisis of 2008.


CIT rate trend between 2008 and 20164

• The second concerns the development of general non-sector-specific measures, such as exoneration of capital gains on the disposal of shares, application of notional interest, recourse to patent box mechanisms, and even development of research tax credit: all instruments allowing a reduction of the CIT base or reducing the final tax burden by way of tax credits.

• The final line of approach concerns the developing practice of advance tax rulings in certain countries such as Belgium, Luxembourg, the Netherlands, Ireland or the UK. Recourse to this instrument has been challenged by the European Commission in 20155 on the issue of State aid and is now subject to collective monitoring by the adoption of a directive organizing the automatic exchange of information between Member States6.

The latitude for fiscal attractiveness policies is now strictly controlled for the Member States of the European Union. Indeed, a fiscal policy for CIT must be deemed compliant with the code of conduct, the European regulations on state aids, and the Treaties, notably the non-discrimination principle of which the Court of Justice of the European Union (CJEU) is the custodian ; and if such a policy takes the form of advance tax rulings, the

4. Source: Worldwide corporate tax guide //OECD Tax Database

5. See: http://europa.eu/rapid/press-release_IP-15-5880_fr.htm ; http://europa.eu/rapid/press-release_IP-15-6221_fr.htm

6. For a full presentation, see: http://ec.europa.eu/taxation_customs/taxation/tax_cooperation/mutual_assistance/direct_tax_directive/index_fr.htm

latter must be communicated directly to the other Member States which may take action, where applicable.

This body of rules specific to the European Union now combines with works instigated by the G20 and actions devised by the OECD (the BEPS action plan) which include many proposed anti-abuse measures precisely aimed at not only putting an end to inconsistencies in the linkage with domestic regulations applied to cross-border transactions, but also at counteracting excessively lenient or aggressive fiscal policies.

Very recently, the European Commission has presented a package of measures to draw relevant conclusions on this precise issue7.

Thus, in a “post-BEPS” world, tax competitiveness of the EU Member States is more than ever monitored and subject to constraint.

Yet does this mean the end of tax competitiveness ? Has it brought countries closer together ? This is the issue discussed in the first part of the analysis.

Studies comparing the CIT situation in Europe often purely focus on the analysis of their rates alone.

7. http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/index_fr.htm

10

20

30

40

50

60

France

Belgium

Germany

Luxembourg

Greece

Italy

Netherlands

Spain

Sweden

United Kingdom

Switzerland

Poland

Ireland

Estonia2016201520142013201220112010200920082007200620052004200320022001200019991998

http://europa.eu/rapid/press-release_IP-15-5880_fr.htm



http://ec.europa.eu/taxation_customs/taxation/tax_cooperation/mutual_assistance/direct_tax_directive/index_fr.htm

http://ec.europa.eu/taxation_customs/taxation/tax_cooperation/mutual_assistance/direct_tax_directive/index_fr.htm

http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/index_fr.htm


CIT rates in 2016

In fact, the most recent, publicised announcements by European governments concern the decrease in rates. Thus, Luxembourg announced a progressive decrease in its CIT rate from 21 to 18 % in 2018, bringing its overall tax rate to 26 % by the forecast horizon. The UK, which had already lowered its CIT rate to 20 %, also stated, in its 2016 budget, its new aim to reduce CIT progressively to 17 % by 20208. Northern Ireland should reach a reduced rate objective of 12.5 % for 2018.

This approach, however significant it may be, allows only one, indeed the easiest, component of tax competition to be identified. In so doing, it disregards the primary component, i.e., the determinants of the tax base.

Indeed, calculation of CIT is generally based on the same principles as personal income tax: a rate (progressive, digressive or neither) is applied to a net income base (the “tax base”).

This “tax base” aims to take account of part or all of the company’s results, i.e. the addition of the various items of income

8. https ://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax

after deduction of expenses related to its activity (operating, financial and exceptional). The question is then what benchmark may be used to determine the result serving as a basis to tax. The accounting result is most often taken as the source, possibly adjusted for tax purposes, allowing the result subject to CIT (the “taxable income”) to be determined.

Although the EU has promoted the adoption by Member States of IFRS rules for large companies, it has nevertheless left States free to continue to apply national, unharmonised accounting standards. It is on the basis of these domestic standards that most States determine the “tax base”, further to various tax adjustments.

There may, however, be no correlation whatsoever between the taxable income and the accounting items.

The States may, therefore, use very different references in order to determine the taxable income.

0 5 10 15 20 25 30 35

France

Belgium

Italy

Germany

Luxembourg

Greece

Spain

Netherlands

Sweden

United Kingdom

Poland

Hungary

Switzerland

Ireland

State out of the scope of study

33.99%

34.43%

25%

20%

12.5%

22%

20%

19%

19%

30%25%

17.92%

31.4%

29%

29.22%


Accounting standards used to determine the tax base in Europe

In certain States, for example, the “tax base” may result from very precise information (the case for Estonia, for example, see below), for others, the wish to have an overall view of the company’s situation gives rise to a detailed request for explicatory, documented information. This quantified data is even “adjusted for tax purposes” revealing highly specific tax policies (e.g. non-deductibility of certain expenses, limited deductibility of financial expenses or, conversely, total or partial exoneration of certain income).

Comparing tax bases is therefore a far more complex exercise than the mere comparison of tax rates. Yet, it is just as essential if we wish to determine the effective result of a tax regime as regards CIT: a high rate applied to a narrow tax base can easily give rise to effective taxation that is lower than that resulting from a lower rate applied to a broad base. This effective taxation may give rise to tax which is payable but not necessarily disbursed if the company has tax credits…

Indeed, the amount of tax due may be reduced by various credits aimed either at removing a tax burden borne domestically or elsewhere in the world, or at influencing the operational or investment-related decisions of the economic player concerned.

Altogether, there are therefore three kinds of information to be taken into account in order to calculate CIT:• A tax basis• A rate• Any tax credits

The purpose of the first part of this study is therefore to compare the choices of tax bases used by a panel of 15 European countries, some of which are not EU Member States.

The following countries were chosen so as to guarantee the most varied and exhaustive panel: Belgium, Estonia, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, Spain, Sweden, Switzerland and the UK.

The different strategies and choices made for the CIT base, beyond accounting disparities, may be assessed by a method using 12 key components of the tax base, classified into four different themes:

Group taxation• Tax group regime• Disposal of shares• Tax regime for losses

Financing taxation• Ordinary-law dividends• Parent-subsidiary dividends• Financial interest• Limitations on financial charges

Taxation of traditional or “old economy” investments• Depreciation of tangible assets• Disposal of other assets

Taxation of intangibles and of research• Depreciation of intangible assets• Royalties• Research and development

This analysis makes it possible both to establish a footprint for the tax base of each country on the panel analysed, and also to compare, for each component, the relative attractiveness of the different States on the panel.

This approach gives us an unprecedented picture of the drivers behind the individual tax competitiveness of each of the countries analysed.

The findings can be commented on by subject area or by country.

Local accounting rules

IFRS

Choice between the local accounting rulesand the IFRS

Out of the scope of study


Comparative profile of Corporate Income Tax This chart shows the CIT “profile” in the States analysed in the study. The circumference of the “spider’s web” shows the marginal tax rate in the State analysed. The tax competitiveness of the tax base of the various subject areas of the study is illustrated inside the circle.

France

Germany

Luxembourg

Netherlands

Unite

d Kingdom

Ireland

Switzerland

Spain

Sweden

Hungary

Italy

Be

lgium

Greece

Poland

Estonia

Tax regime for losses

Disposal of other assets taxation of interest

Depreciation of intangible assets Limitations on financial expenses

Depreciation of tangible assets Parent-subsidiary dividends

Royalties Ordinary-law dividends

R&D Disposal of shares

Tax group regime


France

Germany

Luxembourg

Netherlands

Unite

d Kingdom

Ireland

Switzerland

Spain

Sweden

Hungary

Italy

Be

lgium

Greece

Poland

Estonia

16 | Tax competition and the proposed common tax base for Corporate Income Tax in Europe: suggested strategies

France/Germany: Amidst publication of the “Green paper of Franco-German cooperation – points of common ground on corporate taxation” in February 2012 attesting to the will of both countries to converge, both tax bases are similar regarding the treatment of innovative activities, groups and capital but diverge in other areas.

UK / Netherlands: These countries with comparable tax attractiveness ambitions present a similar approach to innovative activities, group and capital regimes, but have taken very different directions with respect to traditional activities, the regime of tax losses and indebtedness.

UK / Germany: Without any commitment or even common line of approach, the two most economically powerful European countries present many similar structural choices: treatment of innovative and traditional activities, group and capital regimes. The striking differences concern the UK’s taxation of interest and Germany’s restrictive regime of tax losses.

Luxembourg / Switzerland: These two small yet tax-driven and attractiveness-geared States, have taken the same approaches with respect to the treatment of innovative and traditional activities, the group regime, the regime of tax losses and indebtedness. It remains to be seen whether their current deliberations further to the BEPS action plan will cause them to diverge.

Comparative profile of Corporate Income TaxThe findings of the study are presented as a “spider’s web” so as to establish the footprint or CIT “profile” in the States analysed, and show an immediate picture comparing the reality of similarities and differences, strengths and weaknesses of the various components of the bases analysed. The closer the footprint is to the target centre, the more competitive the profile is, comparatively.

10

20

30

40

50

Germany United Kingdom

R&D

Royalties

Depreciation of tangible assets

Depreciation of intangible assets

Disposal of other assets


Taxation of interest

Parent-subsidiary dividends

Ordinary-law dividends

Disposal of shares

Tax group regime

Limitations on financial expenses

Analog footprint

10

20

30

40

50

Netherlands United Kingdom

R&D

Royalties








Disposal of shares

Tax group regime

Analog footprint


10

20

30

40

50

France Germany

R&D

Royalties









Disposal of shares

Tax group regime

Analog footprint

10

20

30

40

50

Luxembourg Switzerland

R&D

Royalties








Disposal of shares

Tax group regime


Analog footprint


Innovative activities

Capital

Debt

Traditional activities

Belgium/ Ireland: Both these countries have sought to build tax attractive policies, and yet a comparison reveals radically opposite approaches in virtually every area.

Poland / Sweden: Both States have a tax footprint that is partly similar (for innovative and traditional activities and group regimes) attesting to a comparable economic development policy based on the actual economy, and partly divergent (for capital regimes, indebtedness and losses).

Spain / Italy: With two exceptions (taxation of interest and ordinary-law dividends), both countries have a similar “tax footprint”.

Hungary / Greece: This comparison highlights the contrast between a country that has made clear choices in terms of tax positioning for attractiveness purposes (Hungary) and a country that has opted for a deliberately broad tax base for budgetary reasons (Greece).

The unique example of Estonia: Estonia does not have a corporate income tax system resembling other European countries. Tax resident companies in Estonia are subject to CIT at a 20 % rate on distributions of profits made by companies to their shareholders only. However, retained earnings are not subject to tax. The issue of the tax base in the case of Estonia is therefore ineffective, excluding it de facto from the scope of the comparative study.

10

20

30

40

50

Spain Italy

R&D

Royalties








Disposal of shares

Tax group regime


Analog footprint

10

20

30

40

50

Poland Sweden

R&D

Royalties








Disposal of shares

Tax group regime


Analog footprint

10

20

30

40

50

Belgium Ireland

R&D

Royalties








Disposal of shares

Tax group regime


Analog footprint

10

20

30

40

50

Hungary Greece

R&D

Royalties








Disposal of shares

Tax group regime


Analog footprint


The left-hand chart shows the “tax footprint” of each State classified according to the attractiveness of their tax bases, the lighter-coloured section of each bar indicating the resulting CIT based on 2016 rates.

The right-hand chart shows the attractiveness ranking of European States taking into account the combined bases, rates applied and signed tax treaties (as set out on page 20).

Ireland and the UK are leaders in this competitiveness summary due to the combined effect of the choice of tax base, an attractive rate policy and an extensive network of tax treaties. Although Luxembourg is in the top three for tax base purposes, Switzerland ultimately takes third position due to its lower tax rates.

Capital: The Netherlands, an attractive location for holding companies in Europe come top of this ranking, which also shows Ireland, the UK, Luxembourg and Switzerland predictably very well-positioned. The ranking nevertheless reveals attractiveness of lesser-known states, such as Hungary, Italy and Sweden. Greece ranks last with a tax regime that provides for no exemption on disposals of share.

Debt: The European States analysed clearly converge in policies of tighter tax treatment of indebtedness - with the notable exception of Belgium, which presents a series of characteristics, including its notional interest regime that sets it apart.

Attractiveness to companies of the different CIT regimes in EuropeThese charts show the tax competitiveness of Member States taking into account the 12 criteria of the study.

0 10 20 30 40 500 10 20 30 40 50

Greece

Belgium

Poland

Germany

France

Spain

Switzerland

Luxembourg

Sweden

United Kingdom

Italy

Ireland

Netherlands

Hungary

0 2 4 6 8 10 12

Greece

Germany

Belgium

France

Italy

Netherlands

Poland

Luxembourg

Spain

Sweden

Hungary

Switzerland

United Kingdom

Ireland

0 10 20 30 40 50

Greece

Poland

Germany

Netherlands

Switzerland

Belgium

Hungary

France

Italy

Spain

Sweden

United Kingdom

Luxembourg

Ireland

United Kingdom

0 10 20 30 40 50

Greece

Switzerland

Spain

France

Ireland

Poland

Luxembourg

Hungary

Sweden

Netherlands

Germany

Italy

Belgium


Tax losses: Subject to use with respect to income of an identical nature, Ireland and the UK, which do not provide for time or quantitative limitations for use of tax losses, are the most attractive countries in Europe in this area. Conversely, the countries at the bottom of this ranking (the Netherlands, Hungary, Poland) have multiple limitation rules: change of control ; offsetable time or quantitative limitations.

Traditional activities: Switzerland and Luxembourg are clearly the two most competitive countries allowing a choice in the depreciation method, possible tax deferral mechanisms and total deductibility of capital losses. At the bottom of the league table, Greece does not provide for any favorable transfer regime and provides for a straight-line depreciation requirement.

Tax group regimes: Spain, the Netherlands, Ireland, France and the UK have very exhaustive group regimes. There are however still many States in Europe that do not have any such regime: Hungary, Switzerland, Belgium and Greece.

Innovative activities: The most competitive States are those which allow depreciation of intangible assets, notably ongoing businesses, such as Ireland, Spain and Hungary. On the other end of the spectrum are the States which have opted against any favorable policy with respect to royalties or R&D, while certain States (Germany, Poland) allow depreciation of the goodwill.

0 10 20 30 40 50

Greece

Ireland

Italy

Poland

Netherlands

Hungary

Spain

Sweden

France

Germany

United Kingdom

Belgium

Luxembourg

Switzerland

0 10 20 30 40 50

Poland

Hungary

Netherlands

Germany

Greece

Italy

Belgium

Spain

Switzerland

Luxembourg

Sweden

France

Ireland

United Kingdom

0 10 20 30 40 50

Greece

Belgium

Switzerland

Hungary

Poland

Luxembourg

Sweden

Italy

Germany

United Kingdom

France

Ireland

Netherlands

Spain

0 10 20 30 40 50

Greece

Germany

Poland

Switzerland

Sweden

United Kingdom

Netherlands

Italy

Luxembourg

Belgium

France

Hungary

Spain

Ireland

This CIT profile, whether intentional or not, is obviously a key factor in the choice of location, investment, financing, legal structuring, and distributions carried out by companies.

Depending on their activity, profile, economic and financial situation, these choices made by companies are more or less influenced and affected by the decisions, or lack thereof, that determine and structure the States’ different fiscal policies.

This question arises even more specifically in the cases of start-ups or “unicorns”.


Maps of tax treaties signed by certain European countries

France

Luxembourg

Switzerland

Spain

Countries with which tax treaties have been signed

Netherlands

United Kingdom


Where should start-ups be located in Europe from a CIT perspective ?Where a start-up is initially established is a question also raised as regards the tax impact of the choice. The European mapping of fundraising for start-ups illustrates the key countries to ensure their launch and development1, and the tax footprint of the

1. EY Study in the context of the Start-up of the Year Grand prix Prize awarded by l’Express and EY, 2015

various countries is also particularly critical for the founders and executives of start-ups in their choice of location, above and beyond the taxation to which they are subject.

Fundraising for start-ups in each country of the study in proportion to the number of residents

If the tax rate is an important factor and is even subject to favorable ordinary law rates for SME’s or young businesses in many countries, but the definition of the tax base or tax credits and subsidies is even more crucial for companies launching their activity, often starting in a loss-making position with available tax loss carryforwards.

Start-ups: CIT rates in Europe

In the light of the EY study conducted as part of the Start-up of the Year Grand Prix, the stakeholders of this sector reveal the following key factors for companies:• The funding ;• any tax credits or subsidies ;• the development and management of intangibles ;• the management of available tax loss carryforwards ;

Tax base with the rates applicable to start-ups in Europe

It must be noted that the thresholds and criteria that define start-ups vary from one country to another (sales, number of employees, assets…etc.)

With the notable exceptions of Germany and Greece, all the countries in the study have set up favorable tax regulations for start-ups. Ireland, Hungary, Spain and France rank highest in the table due to their combined attractive tax base and rate policies.

States out of the scope of study

4.35$

8.26$

5$

49.49$

37.21$

32.86$

41.79$

0.82$

0.24$

24.42$19.47$

31.81$

1.17$

1.16$

38.77$

1France1 valued unicorn1.6 bn $

5United Kingdom5 valued unicorns 6.7 bn $

4Germany4 valued unicorns8.3 bn $

0 5 10 15 20 25 30 35

Italy

Germany

Luxembourg

Greece

Belgium

Sweden

United Kingdom

Netherlands

Poland

Switzerland

Spain

France

Ireland

Hungary

0 2 4 6 8 10 12

Greece

Germany

Italy

Luxembourg

Poland

Netherlands

Belgium

Sweden

Switzerland

United Kingdom

France

Spain

Hungary

Ireland

2 The potential impact of the adoption of CCCTB and consequences for businesses


The European Commission should present a new proposal in the near future to re-launch the plan for the Common Consolidated Corporate Tax Base (CCCTB).

As presented in 2011, the CCCTB project had two objectives, the first being to establish a single set of rules to calculate taxable profits, which can be used by companies operating within the EU. In contrast to the current rules1, companies would only have to comply with one system within the European Union to calculate their taxable income, rather than different rules in each Member State in which they operate2.

The second objective is to organise the allocation of the tax revenues thus calculated between the Member States. Indeed, groups subject to the CCCTB system should be able to file a single consolidated tax return for the whole of their activity in the EU. The consolidated taxable profits of the group would be shared out to the individual companies by a simple formula, allowing each Member State to tax the profits of the companies in its State at their own national tax rate3.

Although this proposal is quite technical, it quite clearly falls within the scope of the political development of the European Union, which has the characteristic aspects of an economic union for the 28 Member States, and of a monetary union for the Euro zone countries. However, at this stage it cannot yet be considered to be a political union, as it does not fulfil the criteria of the definition of a federation of States.

On this point, it is interesting to note that the tax impacts for the States vary according to their degree of economic integration. To use B. Belassa’s4 classification, each of the six degrees of territorial economic integration gives rise to increasing tax consequences:

• Economic cooperation or preferential trade areas, whose objective is to facilitate trade between members and to eliminate certain barriers to investment or establishment, with no consequences in terms of tax rules.

• Free trade areas, in which the partners freely exchange their goods thanks to the abolition of tariff and non-tariff barriers. The regulation of product exchanges with the rest of the world remains the subject of national commercial policies (the Member States maintain their own customs systems with regard to non-free trade area countries).

• The customs union, in which customs, quantitative and tariff obstacles are removed (as in free trade areas) but in which the Member States also set common external tariffs. Thus, they adopt a common customs policy.

• The Common Market, which are a result of the opening of all markets (for goods, labour, capital, and possibly services).

1. See the first section on tax competitiveness

2. http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm

3. http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm

4.Belà Belassa, The Theory of Economic Integration, R.D. Irwin, 1961, 308 p.

Thus they are based on the free movement of people and capital. This scenario includes harmonising the definition of indirect duties (including VAT), and eliminating tax discrimination – arising, for example, from withholding tax or CIT systems that distinguish between residents and non-residents.

• The Economic Union, which adds a harmonisation economic policies resulting in the Monetary Union or a single currency to a single market (if both are present, this is an economic and monetary union).

• The political integration, which is the last phase of integration, in which economic, tax and social security policies are unified. In this scenario, the CIT would have a single definition in all Member States.

The CCCTB reflects the European construction, which quickly took the form of an economic union (for 28 countries) and monetary union (for the Euro zone countries) without reaching the political union phase. Indeed, the CCCTB is not a European CIT within the strict meaning of the term, but a harmonisation of the CIT base between the various EU Member States plus a common definition of the rules for allocating its income.

The United States chose the opposite path. During the American Civil War, the United States voted for a direct tax to finance war expenses. Subsequent to an 1894 law that was ultimately held to be unconstitutional by the US Supreme Court, the 16th Amendment to the American Constitution was ratified on 3 February 1913, making direct taxes and customs duties the basis of the Union’s revenues and leaving indirect taxation in the hands of the constituent States.

Nowadays in Europe, transferring a sovereign area of local jurisdiction such as direct taxes to Europe is not an easy step for an established State to take.

This issue has been a recurring one since the founding of the European Communities, as a key aspect of establishing and then completing the Common Market.

Several major studies, such as the 1962 Neumark Report and the 1970 Tempel Report were followed by certain initiatives intended to introduce a minimum degree of harmonisation of CIT systems (in terms of both tax base and rate) were also taken. In this respect, the Commission presented a proposal for a directive in 1975, providing directives more focused on loss compensation in 1984 and 1985. These proposals were eventually withdrawn, due to the lack of unanimity between Member States. A 1988 draft proposal on the harmonisation of the tax base for companies was never tabled as a result of the reservations expressed by several Member States.


Recognising the lack of success in progressing existing initiatives, the Commission’s 1990 Communication on company taxation5 proposed that, subject to the principle of subsidiarity, all initiatives should be defined through a consultative process with the Member States6.

The slow emergence of the CCCTB

The approach adopted in 1990 was developed further in 1996-1997 in a Commission Communication7 on the “tax package”, which gave rise notably to the Code of Conduct for corporate taxation. The Single-Market driven approach was supplemented with the objectives of stabilising Member States’ revenues and promoting employment which are now taken up and re-assessed in the 2001 Communication on the priorities of EU tax policy8.

The European Commission’s 2001 Communication9 “Towards an Internal Market without tax obstacles: a strategy for providing companies with a consolidated corporate tax base for their EU-wide activities” was the start of reflection on developing a common, consolidated approach to the CIT base.

The project was truly launched following a clear political pressure in 2004. The Commission’s work resulted in the draft Council Directive of 16 March 201110 on a common consolidated corporate tax base.

Since then, the project has been at a standstill as it did not receive unanimous support from the Member States, who are unsure both about the principle of a harmonised tax base and a common mechanism to allocate income, and about which types of companies to which these new rules would apply.

The progress made at the international level under the aegis of the G20 and in the context of the OECD’s BEPS project, and the political will of the Commission to combat excessively aggressive

5. SEC(90)601

6. In this framework, on the basis of Commission proposals dating back to the late 1960s, three measures – two directives and a convention – were finally adopted in July 1990 [Mergers Directive 90/434/CEE, Parent-Subsidiary Directive 90/435/ and Arbitration Convention 90/436/CEE]. A proposal concerning arrangements for the taking into account by companies of the losses of their permanent establishments and subsidiaries in other Member States is still pending before the Council [COM(90)595]. In 1994, the Commission withdrew an initial proposal intended to eliminate withholding taxes levied on cross-border payments of interest and royalties between associated companies of different Member States. However, a new proposal was made in 1998 [COM(1998)67].

7. COM(97)495

8. http://ec.europa.eu/taxation_customs/taxation/company_tax/gen_overview/index_en.htm

9. COM(2011) 121/4 2011/0058 (CNS)

10. COM(2011) 121/4 2011/0058 (CNS)

tax policies, together with the public debate on the notion of “fair taxation” and the opportunity to take advantage of the dynamic they have created, have led the new European executive branch to take up this matter again.

This is therefore the environment in which the Commission should soon present a new proposal.

CCCTB, an analogy for European construction that will impact States

In its action plan of June 2015 for a fair and efficient corporate tax system, the Commission presented a strategy to re-launch the CCCTB, taking the opportunity to extend the initial considerations in a post-BEPS context by the fact the CCCTB would be a powerful tool to fight company tax avoidance by eliminating disparities between national systems and establishing common provisions to fight tax avoidance.

The Commission’s new proposal, expected by September 2016 at the latest, will feature two essential changes:

• firstly, the proposal would make a common tax base mandatory. This would make it possible to improve its capacity to prevent profit shifting, since an optional system is unlikely to be used by countries which wish to maintain competitive tax policies;

• secondly, it would propose a staged approach to implementing the CCCTB. It should be easier for the Member States to reach agreement on this basis. The primary focus should be on securing the common tax base, incorporating international aspects11 which are linked to the OECD’s BEPS project. Therefore, the Commission will propose deferring consolidation until the common tax base has been implemented.

Bearing these two issues in mind, it appears that the 2011 CCCTB draft Directive12 that was not adopted may provide a frame of reference for the main consequences that would arise from effective implementation of the CCCTB.

11. http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52015DC0302

12. Proposed Council Directive on a consolidated common company tax basis (CCCTB); COM(2011) 121/4 ; 2011/0058 (CNS)

17/06/15 Action PlanPublic Consultation from 08/10/15 to 08/01/16

The CCCTB as an obstacle to profit shifting

23/10/01European Commission

Communication

16/03/11 Proposal for a Directive

The New CCCTBproposal

Agreement on common anti-abuse/BEPS measuresCouncil debate

for consolidationCouncil debateon the CCCTB

Non-paper

European CommissionCommunication

[2007] [2015] [2017] [Post 2017][2001] [2011] [2016][2004]

http://ec.europa.eu/taxation_customs/taxation/gen_info/tax_policy/index_en.htm


According to the 2011 project, the tax base would be determined for each tax year and would correspond to “revenues less exempt revenues, deductible expenses and other deductible items13” (depreciation of fixed assets14).

All revenues should be taxable unless expressly exempted. The following would thus be exempt from CIT:• subsidies linked directly to the acquisition, construction or

improvement of fixed assets;

• proceeds from the disposal of fixed assets, including the market value of non-monetary gifts;

• received profit distributions;

• proceeds from the disposal of shares;

• income of a permanent establishment in a third country.

Under certain conditions, fixed assets would be depreciated for tax purposes. Long-term fixed assets would be depreciated individually, while others would be included in an asset pool. The following fixed assets would not be depreciable:

• fixed tangible assets not subject to wear and tear and obsolescence such as land, fine art, antiques or jewellery;

• financial assets.

Losses incurred in a fiscal year may be deducted in subsequent tax years15.

For a subsidiary to be eligible for consolidation16 (belonging to a group of companies) the parent company must have:• a right to exercise more than 50% of the voting rights;

• an ownership right amounting to more than 75% of the company’s capital or more than 75% of the rights giving entitlement to profit distributions.

A resident taxpayer could form a group with:• all its permanent establishments located in other Member

States;• all permanent establishments located, in a Member State, of

its qualifying subsidiaries resident in a third country;• all its qualifying subsidiaries resident in one or more Member

States;• other resident taxpayers which are qualifying subsidiaries of

the same company which is resident in a third country and fulfils the conditions.

The consolidated tax base shall be allocated among the group members for each tax year on the basis of a formula for

13. Article 10 of the 2011 proposal for a directive

14. Article 13 of said draft directive states of “Other deductible items” that “A proportional deduction may be made in respect of the depreciation of fixed assets in accordance with Articles 32 to 42”.

15. Article 43 of the proposal for a directive

16. Articles 54 to 69 of the proposal for a directive

apportionment. This formula gives equal weight to the factors of “sales”, “labour” and “assets”.

The purpose of the second part of this study is to determine, based on the criteria to compare tax competitiveness, set out in Part I, the main variances between this project defining a common tax base and the different definitions of the Member States, as well as the significant impacts on these countries in terms of financial yield and competitiveness.

In contrast, this study makes it possible to shed light, by way of comparison, on the correlated abandonment of the various incentive policies adopted by each State joining the CCCTB via use of a common standard for defining the tax base. On this point, Estonia is a particularly topical case, as the very foundation of its tax system would have to be entirely overhauled.

Of course, the scope of this withdrawal will be closely correlated to the choice of the companies who will have this new tax base applied to them.

There will naturally be a strong correlation between the extent of this abandonment of policies and the choice of companies subject to this new tax base.

While this approach is praiseworthy, it will require States to consider their latitude in defining their own tax policy, in light of the set of constraints that already exist (policies on State aid, etc.). Consequently, the only leeway left to the States will be tax rates, with no possibility of developing sector-based rates without falling under the State aid policy.

This would have a radical impact in terms of expressing the comparative tax competitiveness of the Member States. Indeed, until now, differentials in rates could be justified by differences in tax base. In the future, the comparison will be both simpler and harsher. On this criterion alone, States which have undertaken policies to decrease their nominal rates (Ireland, the United Kingdom, etc.) appear to be the main potential winners of the comparison resulting from the implementation of a common tax base.

Further, the road ahead for the others will be all the more difficult since their public finances have worsened and many do not comply with the deficit criteria imposed by the “Maastricht” approach. Article 126 of the Treaty on the Functioning of the European Union requires the Member States to avoid excessive government deficits based on deficit and debt criteria17:

• deficit criteria: government deficits become excessive when they exceed the reference value of 3% of gross domestic product (GDP) at market prices;

or• debt criteria: when debt exceeds 60% of GDP and the objective

of debt reduction by 5% (1/20) per year has not been met in the three prior years.

17. Regulation (EC) no. 1467/97 of the Council dated 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure


Further to the recent economic crisis, 25 of 28 European heads of State and governments (the United Kingdom and Czech Republic did not sign and Croatia was not yet a member at that time) came to an agreement on the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”. This treaty gives the Court of Justice of the European Union jurisdiction over the golden rules which should be implemented in the euro area States. Further, article 3 specifies that the structural deficit must not exceed 0.5% of GDP for the medium-term budget objective.

However, in exceptional circumstances beyond governments’ control or in States whose public debt is significantly below 60% of GDP, the structural deficit may be at a maximum of 1%.

Lastly, several specific directives were adopted by euro area Member States subsequent to the budget crisis.

Therefore, the budget changes necessary to improve attractiveness will be more significant the greater the variance between their nominal rate and that applied in the lowest-rate States.

This consequence should be contrasted with the findings of the study performed in 2001 at the request of the Commission18 to assess the best means to harmonise CIT in Europe and which concluded that “The overall national nominal tax rate is the most relevant tax driver affecting competitiveness, incentives to locate and financing decisions.”

The Communication adds that “simulating the impact of hypothetical harmonisation of particular features of taxation system in isolation shows that:

• Introducing a common statutory tax rate in the EU would have a significant impact by decreasing the dispersion - both between parent companies and between subsidiaries - of marginal and average effective tax rates across the EU countries. No other tax policy scenario has such a significant impact on the dispersion of effective tax rates.

• Scenarios implying a common tax base or a system consisting in applying the definition of the home country tax base to the EU-wide profits of a multinational tend to increase the dispersion in effective tax rates if overall nominal tax rates are kept constant”.

Above and beyond purely tax policy considerations, the budgetary consequences for States must also be assessed.

18. Communication from the Commission “Towards an Internal Market without tax obstacles”, 23 October 2001 - COM(2001) 582.

The study reveals that no State would experience an immediate positive budgetary impact from adoption of the new CCCTB rules. France and Germany, which are nevertheless fervent supporters of the project, would even be very negatively impacted. The same holds true for other countries, such as Italy and Luxembourg, which could also experience a potentially negative impact.

Conversely, the United Kingdom and Sweden would be only slightly affected and could probably suffer almost no budgetary consequences.

However, the majority of other countries (Spain, the Netherlands, Belgium, Poland and Hungary) would potentially face budgetary losses.

Budgetary impacts of the CCCTB and States’ positioning in relation to it

Very negative Impact

State in favour of the CCCTB

State against the CCCTBNear neutral Impact

positive impact

Fairly negative Impact

Luxembourg


Germany : the main negative consequences are related to the relaxing of financing rules (debt or capital) and of the tax loss carry-forward regime resulting from the CCCTB.

Spain: the relaxation of financing rules (debt or capital) results in negative consequences, while the tightening of depreciation rules should result in a financial gain.

Belgium: the overall budgetary situation is negative on all points: from a CCCTB standpoint, the tax positioning of the State excessively incentivises debt financing and is too rigid on other points.

The United Kingdom: the nearly neutral budgetary consequences of the CCCTB are notably expressed, positively, by a tightening of the depreciation system and, negatively, by the relaxation of the financing rules (debt or capital).

Assessment of the compliance of States’ fiscal policies with CCCTB and budgetary impacts

5101520253035

United Kingdom

Depreciation

Non-deductible expenses excluding interest


Financial charges

Exempted income

Tax group regime

510152025303540

Spain

Depreciation



Financial charges

Exempted income

Tax group regime

5

10

15

20

25

30

Germany

Depreciation



Financial charges

Exempted income

Tax group regime

Belgium

10

20

30

40

50

Depreciation



Financial charges

Exempted income

Tax group regime


Positive budgetary anticipated impact

Neutral budgetary anticipated impact

Negative budgetary anticipated impact

Hungary: this country has a tax policy which to date has no points in common with the CCCTB. Although its aspects that are attractive for holding companies will likely be subject to stricter rules which will be favourable for its public finances, its other characteristics – notably the rules concerning groups and losses – result in a budgetary cost which negatively impacts public finances.

Ireland: the CCCTB should be fairly negative in budgetary terms. Ireland would mainly be impacted by the hardening of the systems for exempted income and the modification of the rules on depreciation.

Italy: this country is mainly concerned by the increased flexibility of the loss and depreciation systems, while benefiting from gains related to the tightening of rules on non-deductible expenses.

Luxembourg: the negative impact arises primarily from the modification of the rules concerning exempted income and financial expenses.

10

20

30

40

50

Hungary

Depreciation



Financial charges

Exempted income

Tax group regime

5

10

15

20

25

30

Luxembourg

Depreciation



Financial charges

Exempted income

Tax group regime

5

10

15

20

25

Ireland

Depreciation



Financial charges

Exempted income

Tax group regime

5

10

15

20

25

Italy

Depreciation



Financial charges

Exempted income

Tax group regime


The Netherlands: this country diverges from the CCCTB rules only on the issue of tax losses and exempted income, resulting in a budgetary loss in this regard.

Sweden: whose budget will be only slightly impacted by the CCCTB, would have its group regime and exempted income rules modified by the project.

Poland: whose budget will be impacted by the CCCTB, would see its tax policy on depreciation, losses, financial expenses and exempted income challenged.

France: would be strongly impacted in budgetary terms by the CCCTB, primarily due to the relaxation of financing rules (debt or capital) and rules on losses.

Assessment of the compliance of States’ fiscal policies with CCCTB and budgetary impacts

510152025303540

France

Depreciation



Financial charges

Exempted income

Tax group regime

10

20

30

40

50

Sweden

Depreciation



Financial charges

Exempted income

Tax group regime

5

10

15

20

25

30

Netherlands

Depreciation



Financial charges

Exempted income

Tax group regime

5

10

15

20

25

30

Poland

Depreciation



Financial charges

Exempted income

Tax group regime


Positive budgetary anticipated impact

Neutral budgetary anticipated impact

Negative budgetary anticipated impact

Estonia: which has no taxable base such as exists in the various other European countries, would be completely revolutionized. Its unusual, currently highly attractive CIT system matches the standard of other countries and additionally has much higher tax revenues.

Switzerland: would be particularly impacted by the (hypothetical) entry into force of the CCCTB. Notably a group regime would be introduced, which is not currently the case.

Greece: with the least competitive system in the panel in terms of tax base, it would have to make major adjustments.

10

20

30

40

50

Switzerland

Depreciation



Financial charges

Exempted income

Tax group regime

10

20

30

40

50

Estonia

Depreciation



Financial charges

Exempted income

Tax group regime

10

20

30

40

50

Greece

Depreciation



Financial charges

Exempted income

Tax group regime


What will be the impact of the CCCTB on companies ?The tax policy consequences for States cause a direct change in environment for the companies concerned by this project. The questions relating to the CCCTB are not limited to the States – companies will also have to manage the consequences of this “fiscal revolution”. The following charts set out the consequences of this transition using the same criteria as before.

Capital: A relative loss of attractiveness for the Netherlands, Hungary, Ireland and Italy for the tax regime for capital, while in contrast, Greece, Belgium, Poland and Germany would benefit from this new rule in terms of relative competitiveness.

-6 -5 -4 -3 -2 -1 0 1 2

Hungary

Italy

Ireland

Luxembourg

Sweden

United Kingdom

Switzerland

Spain

France

Netherlands

Poland

Germany

Belgium

Greece

Debt: Only Belgium would decline in attractiveness in terms of the tax regime for debt, while the situation of most of the other countries in this study would improve.

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5

Belgium

Italy

Germany

Hungary

Sweden

Netherlands

Ireland

Poland

Luxembourg

Switzerland

United Kingdom

Spain

France

Greece

-7 -6 -5 -4 -3 -2 -1 0 1

United Kingdom

Ireland

Luxembourg

Sweden

Spain

Switzerland

Hungary

France

Italy

Belgium

Netherlands

Germany

Poland

Greece

0 1 2 3 4 5 6 7 8 9 10 11 12

Belgium

Greece

Luxembourg

Italy

Germany

France

Netherlands

Spain

Sweden

Hungary

Poland

Switzerland

United Kingdom

Ireland

Companies in Greece would particularly benefit from the CCCTB (see left-hand chart). Poland, Germany and the Netherlands would also offer a more favorable treatment, whereas, on the other end of the spectrum, companies appear to be slightly impacted by the common tax base in the UK, Ireland and Luxembourg. In this scenario, companies seem to “benefit” overall in most European countries.

The ranking of States’ competitiveness in a common tax base context highlights the disparities of rates and conventional networks. Ireland, the UK and Switzerland, with their low rates and widespread treaty networks, thus appear to remain dominant in terms of attractiveness for CIT purposes. Luxembourg appears to lose out most in terms of attractiveness of its CIT regime for ordinary law companies.


At this stage, uncertainty remains as to whether, in the proposal to be made by the Commission, certain incentives can still apply in this new context, notably recourse to the tax credit mechanism. According to the Member States, this concerns many branches of economic activity.

Similarly, the 2011 draft directive and the information published by the Commission on the project re-launched in 2015 do not discuss the issue of the future of and impact on tax-free zones or taxation applied according to zone.

As this very often involves reduced tax rates, the issue, if not taken into account in the CCCTB directive, may only possibly fall within the scope of the restrictions on regulations as regards State aids.

Innovative activities: Overall, the CCCTB rules applicable to innovative activities are in line with those of most countries. Only the regimes in Ireland, Spain and Hungary would be stricter. Conversely, companies would benefit in Poland, Germany and Greece.

-20 -15 -10 -5 0

Ireland

Netherlands

Spain

United Kingdom

Germany

France

Sweden

Italy

Poland

Switzerland

Hungary

Luxembourg

Greece

Belgium

Losses: the CCCTB’s regime for tax losses is quite often more favorable than the current rules. Only the United Kingdom and Ireland would lose out in relative terms, while the situation of most other European States would improve.

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2

United Kingdom

Ireland

France

Luxembourg

Sweden

Switzerland

Spain

Belgium

Greece

Italy

Poland

Hungary

Germany

Netherlands

Traditional activities: the new CCCTB system concerning traditional activities would be a particular disadvantage to companies except in Spain, Hungary, the Netherlands and Poland. However, it would cause the existing situation in Italy, Ireland and Greece to improve.

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6

Luxembourg

Belgium

Switzerland

United Kingdom

Germany

France

Sweden

Hungary

Spain

Ireland

Poland

Netherlands

Italy

Greece

Group regimes: The group regime as envisaged by the CCCTB project includes rules that are more flexible than most of the different current national rules; it would improve the situation of all of the more attractive States and would put an end to certain cases in which there is no regime for groups.

-1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0

Belgium

Ireland

Spain

Luxembourg

Hungary

Netharlands

Sweden

France

Italy

Switzerland

Germany

United Kingdom

Greece

Poland


CCCTB: positioning in relation to start-ups

As part of its priority policy to create a Single Digital Market intended to “remove barriers in order to

maximise the possibilities offered by the Internet”, the European Commission wishes the EU to be a start-up incubator1. What would their position be in relation to the CCCTB?

Would they be exempt from the application of this rule or be subject to it like all other companies?

Initially, the new CCCTB rules will probably target large international companies. Such a choice appears consistent with the approach apparently emerging from the Commission regarding companies concerned by Country by Country Reporting on tax matters like its public counterpart. In this respect, neither the European Commission’s draft directive nor its communications since 2015 commit to a threshold of application. Although the 2011 draft was based on a principle of optional application for companies, basing its arguments on decreased costs and simple management, which are particularly attractive for SMEs, the 2015 draft (forthcoming) provides for mandatory application although no concrete proposals for a threshold have been made at this late stage.

Similarly, at this stage, nothing would prevent certain States – subject to their own constitutional constraints – from broadening the scope of companies subject to this common tax base or even to generalise it. If this tax base is less attractive and more restrictive overall than the existing domestic tax bases, it is unlikely that States would choose this voluntarily. Indeed, this is the finding resulting from our study.

1. https://ec.europa.eu/priorities/digital-single-market_fr

Proportional rate footprint for start-ups

By applying the current CIT rates in the different States to the new CCCTB and comparing them to current notional tax burdens, it seems possible to anticipate three key movements impacts for start-ups:

1. Neutral overall for start-ups established in Switzerland, France, Hungary, Luxembourg, Italy and Sweden;

2. Negative overall for start-ups established in the UK, Belgium, Spain and Ireland;

3. Very positive overall for start-ups established in Greece, Germany, Poland and the Netherlands.

This initial analysis thus implies that start-ups should not be subject to the CCCTB system, which does not appear to be in line with the tax characteristics generally considered as optimum for them.

-6 -5 -4 -3 -2 -1 0 1

Ireland

Spain

Belgium

United Kingdom

Italy

Luxembourg

Sweden

Hungary

Switzerland

France

Netherlands

Poland

Germany

Greece


Conclusion

The European Commission’s CCCTB project, intended notably to eliminate harmful tax competition between Member States, is not without implications both for States and companies.

Its impact on each State and on the companies concerned needs to be documented in detail in order to ensure the most informed final decision possible.

The issue of managing the transition from current tax bases to the target tax base also warrants more profound analysis. Given the potential financial and budgetary impacts, an abrupt shift from one system to another is indeed probably not the most effective way to proceed.

One possible solution – if the potential number of companies concerned or the related budgetary issues were significant – would be to set up a convergence mechanism spread over a few years, such as that used for the transition to the Euro. Such an approach would allow Member States to move progressively towards the target system while managing the various effects of the transition as effectively as possible.

However, that is a subject for another debate and perhaps another study.


This study is intended solely to indicate trends and call attention to the most significant impacts of the adjustment resulting from the transition to this new tax base. Only a fine-tune country-by-country budget analysis would allow effective evaluation of the financial impacts of this transition. Similarly, the nature and number of companies concerned will be decisive parameters in assessing the effective budgetary consequences.

APPENDIX 1 – SCALE OF COUNTRY COMPETITIVENESS BY SUBJECT AREA

Method• Scoring of each tax regime from 0 (the least competitive) to 50 (the most competitive)• Study of the tax regimes of 14 European Union Member States and Switzerland

ScaleDisposal of shares

Capital gains• Full exemption: 50 points• Exemption and share of costs and expenses/partial exemption: 40 points• Taxation at reduced rate: 20 points• Taxation at full rate: 0 points

Capital losses• Deductible: 10 points• Not deductible but offsettable against future or realised capital gains:

5 points• Not deductible or offsettable: 0 points

Disposal of other assetsCapital gains• Taxable at full CIT rate: 0 points• Option to roll over: 30 points• Special competitive regime: 10 points

Capital losses• Not deductible: 0 points• Not deductible but offsettable against future capital gains

on assets of the same type: 5 points• Deductible: 10 points

Depreciation of tangible assets• Depreciation possible: 50 points• No possibility of depreciation: -50 points• No choice between straight-line method and accelerated method: -20 points• Possibility of straight-line or accelerated depreciation: 10 points• Special attractiveness regimes: 2 points per attractive regime

Depreciation of intangible assets• Amortization possible: 50 points• No possibility of amortization: -50 points• No choice between straight-line method and accelerated method• Possibility of accelerated amortization: 10 points• Amortization of goodwill: 10 points

Ordinary-law dividends• Full exemption: 25 points• No withholding tax: 25 points• Partial exemption: 10 to 20 points• Exemption and share of costs and expenses: 15 points• Tax credit and withholding tax: 15 points• Taxation at full CIT rate: 0 points

Parent-subsidiary dividends• Full exemption: 25 points• Exemption and share of costs and expenses: 15 points• No withholding tax: 25 points• Taxation at full CIT rate: 0 points• Partial exemption: 10 to 20 points

Limitations on financial expenses• No limitation: 40 points• Special attractiveness regimes: 10 points• Deductibility rates defined by law: -10 points• Limit related to EBITDA/equity: -10 points

• Existence of exemption: 2 points• Limit related to the tax rate on interest applied by the lender: -10 points• Limite liée à l’EBITDA/ capitaux propres : -10 points• Existence d’exemption : 2 points• Limite liée au taux de taxation des intérêts chez le prêteur : -10 points

Interest• No withholding tax or CIT: 50 points• Withholding tax: -25 points• CIT: -25 points• Favourable regime (base or rate): 10 points

Royalties• No withholding tax or CIT: 50 points• Withholding tax: -25 points• CIT: -25 points• Favourable regime (base or rate): 10 points• Patent Box: 20 points

Tax regime for losses • No limitation: 30 points• Time limitation: -5 to -10 points• Limitation on amount: -5 to -10 points• Limitation of offsetting/type of losses and profits: -10 points• Carry-back: 20 points• Losses that could be jeopardised in the event of change of activity/control:

-10 points

Tax group regime • Neutrality of intragroup transactions: 25 points• Temporary nature of neutrality: -10 points• Tax consolidation of income: 25 points• Conditions relating to formalities for eligibility for the regime (ease of use):

-10 points• Conditions relating to grounds of eligibility for the regime (ease of use):

-10 points

R&D• No regime: 0 points• Super-deductibility

•• From 100% to 200%: 5 points•• Over 200%: 10 points

• Tax credit rate:•• Under 30%: 5 points•• Over 30%: 10 points

• Carry-forward:•• Under five years: 5 points•• Over five years: 10 points

• Reimbursement of tax credit: 10 points• Limit of total benefit:

•• Up to €3m 0 points•• € From €3m to €5m: 5 points•• Over €5m: 10 points

Treaty network• Tax treaties entered into with the main OECD States: 10 points• Tax treaties entered into with the BRICS countries (Brazil, Russia, India, China,

South Africa): 10 points• Tax treaties entered into with most African States: 10 points• Tax treaties entered into with most Asian States: 10 points• Tax treaties entered into with most South American States: 10 points

Appendices


APPENDIX II –SCALE OF CCCTB COMPLIANCE BY SUBJECT AREA

Method• Scoring of each tax regime from 0 (identical to the CCCTB) to 50 (least like the CCCTB)• Study of the tax regimes of 14 European Union Member States and Switzerland

ScaleDepreciation

CCCTB: depreciation by the economic owner, tangible and intangible asset depreciation on a straight-line basis, amortization of purchased goodwill, pooled assets, rollover: 0 points

• Choice of depreciation method for tangible assets: 10 points• Choice of amortization method for intangible assets: 10 points• Only the legal owner may depreciate: 15 points• No rollover: 5 points• No pooled assets: 5 points• No amortization of purchased goodwill: 5 points

Tax regime for lossesCCCTB: indefinite carry-forwards, no carry-backs, no losses that could be jeopardised in the event of change of activity/control: 0 points

• Time limitation: 5 to 10 points• Limitation on amount: 5 to 10 points• Losses that could be jeopardised due to change of activity/control:• 12.5 points• Carry-back: 5 points• Tunnelling: 12.5 points

Exempted incomeCCCTB: subsidies linked to the acquisition/construction/improvement of a depreciable business asset, proceeds from disposal of assets (5% share of costs and expenses), distributions of profits received (5% share of costs and expenses), proceeds from sale of shares (5% share of costs and expenses), income from a permanent establishment located in a third country: 0 points

• Dividends taxed at full CIT rate: 15 points• Dividends exempt from CIT: 5 points• Capital gains on disposal of securities exempt from CIT: 5 points• Capital gains on disposal of securities taxed at a lower rate/partially

exempted: 10 points• Capital gains on disposal of assets taxed at the full CIT rate:• 15 points

Non-deductible expenses excluding interestCCCTB: profit distributions and repayment of equity or debt, 50% of representation costs, appropriation of retained earnings into equity reserves, CIT, bribes, fines and penalties, the 5% share of costs and expenses, monetary gifts and donations except for patronage, costs relating to the acquisition, construction or improvement of fixed assets (except those relating to R&D) : 0 points

• 5 points per expense (2.5 points if same principle of deductibility but with different deductibility rate)

Financial chargesCCCTB: interest received by lender is insufficiently taxed or its rate is not arm’s length: 0 points

• Special regimes such as notional interest: 12.5 points• Limit imposed by law: 12.5 points• Limit related to EBITDA: 12.5 points• Limit related to equity: 12.5 points

Tax group regimeCCCTB: group regime, tax consolidation of income, elimination of intragroup transactions: 0 points

• No group regime: 50 points• No tax consolidation of income: 25 points

Clémence Boissonnat

Jean-Pierre LiebEMEIA Tax Policy & Controversy Leader

Heather Jones Hessas

Alison Claizergues

Nicolas Salmon

Samara Hiscock

Joyce Diallo

FranceJean-Pierre Lieb (Tax Policy Leader)Mélanie Pinto

IrelandKevin McLoughlin (Tax Policy Leader)

SpainEduardo Verdun Fraile (Tax Policy Leader)Juan Angel Cobo De Guzman PisonJuan Machuca Menendez

United KingdomChris Sanger (Global Tax Policy Leader)

BelgiumHerwig Joosten (Tax Policy Leader)Steven j. ClaesKen Lioen

NetherlandsArjo van Eijsden (Tax Policy Leader)Charlie Bruijsten

LuxembourgMarc Schmitz (Tax Policy Leader)John HamesKatia Agazzini

#team

Ariel Musicant

Marie Masson

Nicolas Genestier

Eliza Mason

Constance Le Tarnec

GreeceStefanos Mitsios (Tax Policy Leader)Konstantina Galli Nasia Kasidou

ItalyGiacomo Albano (Tax Policy Leader)Alessandra Cantoro

HungaryBotond Rencz (Tax Policy Leader)Balazs Szolgyemy

GermanyHermann Gauß (Tax Policy Leader)Cornelia KindlerRoland F Nonnenmacher

PolandZbigniew Liptak (Tax Policy Leader)Michal Wielowieyski

EstoniaRanno Tingas (Tax Policy Leader)Hedi Wahtramae

SwedenErik Hultman (Tax Policy Leader)

SwitzerlandWalo Staehlin (Tax Policy Leader)Marlene Kobierski

ContactsJean-Pierre LiebPartner, Attorney at law, EMEIA Tax Policy & Controversy Leader, Ernst & Young Société d’AvocatsDirect : +33 1 55 61 16 10Mobile : +33 6 34 16 72 [email protected]

Nicolas GenestierAttorney at law, Ernst & Young Société d’Avocats Direct : +33 1 55 61 18 58Mobile : +33 7 78 20 02 [email protected]

Also took part in the Study: Mélanie Pinto, Clémence Boissonnat, Marie Masson, Ariel Musicant, Constance Le Tarnec, Joyce Diallo, Samara Hiscock, Caroline Bruneau, France de Roquemaurel, Nicolas Salmon, Eliza Mason, Heather Jones Hessas and Alison Claizergues

Ernst & Young Société d’Avocats

EY Société d’Avocats is one of the French leading firms in tax and law. Through our membership in a global organization, we put our expertise to serve a sustainable and responsible performance. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our clients, for our people and for our communities.

Ernst & Young Société d’AvocatsRegistered with the Hauts-de-Seine Bar (France)Member of Ernst & Young Global limitedEY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2016 Ernst & Young Société d’Avocats.Tous droits réservés.Studio EY France - 1605SG750SCORE N° 2016-024Photos : © Fotolia ED none

In line with EY’s commitment to minimize its impact on the environment,this document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey-avocats.com

Documents

Tax competition and the proposed common tax base … · Tax competition and the proposed common tax base for Corporate Income Tax in Europe: ... 6Tax competition and the proposed