New legislative proposals re-launch EU Common Consolidated Corporate Tax Base initiative.
These proposals also include new measures to combat hybrid mismatches (including those involving non-EU countries), and to improve the existing procedures that resolve disputes involving double taxation within the EU.
The original plan was proposed in 2011 and suggested an optional system where companies could use a common set of rules to compute taxable profits. It would also have given companies the ability to form a consolidated group wherever they were based in the EU. Its main objective was to facilitate EU cross-border business activities.
The re-launched proposals consist of two separate draft directives, one for a common consolidated tax base (CCTB) and the other for a common consolidated corporate tax base (CCCTB). Hybrid mismatches are addressed under the CCTB proposal.
The draft directives contain provisions intended to mirror the measures that were included in the Anti-Tax Avoidance Directive that was adopted in July 2016, including hybrid mismatch measures, interest limitations, and GAAR and CFC rules. If approved by all EU Member States, the CCTB proposals would apply from 2019 and the CCCTB proposals from 2021. Together, both aim to facilitate cross-border investment while countering tax avoidance. Unlike the 2011 proposal, the new rules would be mandatory for large corporate groups (i.e. with consolidated revenue exceeding EUR 750 million), but the system would be optional for other companies, in order to reduce the risk of domestic groups falling under the mandatory system. The proposed rules would generally be limited to EU-resident companies and permanent establishments (PEs) situated in the EU.
The CCTB proposal provides rules for calculating the corporate tax base and includes anti-tax avoidance rules. Unlike the 2011 proposal, administrative provisions are limited to notification procedures, and taxpayers would generally continue to fall under their domestic administrative provisions. As proposed in 2011, realized income is, in principle, taxable unless specifically exempted or reduced by deductible expenses and other deductible items.
Hybrid Mismatch Arrangements
The proposed directive will amend the Anti-Tax-Avoidance Directive in regards to how it addresses hybrid mismatches. If adopted, the new provisions would apply from 2019, which is in line with the main provisions of the current Anti-Tax-Avoidance Directive. The hybrid provisions would not only apply to mismatch arrangements within the EU, but also to mismatches arising in relation to third countries. They would also deal with mismatches involving PEs, imported mismatches, hybrid transfers and dual resident mismatches.
For hybrid entities and instruments involving Member States, the proposals are in line with those in the Anti-Tax-Avoidance Directive.
The CCCTB proposal lays down the conditions for formulating a consolidated tax group and sets out the mechanism for allocating the consolidated tax base to the respective Member States, and provides rules for entering and leaving a group (including the treatment of losses). There are also anti-avoidance provisions to prevent abuses of the consolidation and apportionment systems, for instance, involving business reorganizations and the intra-group transfer of assets. Special provisions would adapt the CCTB rules to groups that become subject to the CCCTB rules, so that, for example, the interest limitation rules would be applied by reference to the CCCTB group.
In explanatory documents accompanying the new proposals, the EC points out that double taxation has a negative impact on cross-border investment and leads to economic distortions and inefficiencies. Disputes between Member States on how to eliminate double taxation need to be solved. For companies within the CCCTB system, the EC says double taxation should be significantly reduced by these new proposals, however, issues may still arise with non-EU companies or companies outside the CCCTB system. The EC also points out that the EU Arbitration Convention on the elimination of double taxation has substantial shortcomings regarding access for taxpayers to those mechanisms, coverage, timeliness and conclusiveness. Moreover, the traditional methods of resolving disputes no longer fully fit with the complexity and risks of the current global tax environment. The current proposals therefore include a draft directive to improve these mechanisms within the EU. The intention is that the new rules will have a wider scope, be more effective, work quicker and be less costly.
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Information is current to November 01, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500