ANALYSIS:Some fear that an optional taxation scheme will in time become compulsory

PROPOSALS FROM the European Commission to change how multinationals are taxed in Europe, due to be unveiled next Wednesday, aim to make Europe more attractive to business, according to European commissioner Algirdas Semeta.

The commission’s plan for the introduction of a Common Consolidated Corporate Tax Base (CCCTB) has generated concern in Irish political and business circles, despite the view of many that it will take years to implement and may never ultimately come into being.

The biggest fear is that a scheme, which the commission says will be optional for companies, will in time become compulsory.

The details will be announced in Brussels by Semeta, after they have been adopted by the European Commission. Semeta, a Lithuanian economist and former finance minister, was appointed the European commissioner for taxation and customs union, audit and anti-fraud in 2009.

Asked about the proposal, Semeta’s spokeswoman Emer Traynor, an Irishwoman, was anxious to point out first of all what it was not.

“The first thing to underline is that it is not in any way about tax rates. The commission has absolutely no intention of proposing any harmonisation of corporate tax rates, and this will remain an issue for each member state to decide for themselves.”

Nevertheless the establishment of a CCCTB certainly has the potential to nullify the benefits to Ireland of its low corporation tax regime.

To understand the idea of a CCCTB, it is worthwhile first to consider the tax arrangements of companies currently operating in a number of EU countries.

A company with subsidiaries in different countries will produce tax returns and pay taxes in those countries, and then produce consolidated accounts in the jurisdiction where the holding company is located.

The group’s accounts can be consolidated but its tax bills cannot. The losses of a subsidiary in one country cannot be set off against those in another.

In broad terms, the commission is proposing a system whereby a common tax base would be created, meaning the same tax relief rules would apply across the community.

“At the moment, companies operating cross-border in the EU have to abide by up to 27 different rulebooks for calculating their tax base or the amount of profit they have to pay tax on,” says Traynor.

The commission’s policy to introduce a union-wide set of rules would end up with the company having to only file one tax return, to the tax administration in its “principal member state”, as Traynor puts it.

The commission’s view is that this new system would hugely reduce the administrative and compliance costs of companies operating across borders in the EU. It would also allow losses in one country to be set off against profits in another (consolidated).

It is at this point that the proposed model gets interesting.

Under a CCCTB arrangement, the tax paid by the multinational to the coffers of whatever state is its principal base in the EU, would be divided up between the exchequers of the countries in which it does business.

Deciding who gets what would be done by way of an apportionment mechanism. The rates of corporate tax that apply in each country would continue to be a matter for each country.

This is the bit that worries Ireland. The apportionment mechanism would use criteria such as sales, number of employees, and capital to decide how much of a company’s taxable profit should be apportioned to a particular jurisdiction.

In broad terms, the system seeks to address the complicated question of where the profits of a multinational company are generated. A consequence of the CCCTB system is that it blunts the abilities of small states to attract foreign investment, and corporation tax receipts, through the use of tax competition.

To use an extreme example, a company with its base in Ireland selling throughout Europe that currently locates almost all its profits in Ireland would, under CCCTB, allocate a portion of its profits to those countries where its sales are made.

“The proposal specifically excludes intellectual property,” notes Joe Tynan, a tax partner with PricewaterhouseCoopers in Dublin. “The countries with the big markets will benefit.”

Employers’ group Ibec, the Irish Taxation Institute and the Department of Finance are among those that have argued that the proposed system will not reduce companies’ administrative or compliance costs.

For Irish Taxation Institute president Andrew Cullen, the key question is CCCTB’s effect on the EU as a location for global investment. “It would be unwise to reach a position where we could lose out to Switzerland and Singapore.”

Crucially, the commission says the system is optional for companies. On that basis, if the analysis of Ibec and others is correct, multinationals based here are unlikely to opt to use the system, and Ireland’s attractive corporate tax rate will continue to have relevance.

Traynor says Ibec’s negative view is in a minority. “The business community [in the EU] is very much in favour of the CCCTB – we have studies showing that around 80 per cent of businesses in the EU would like it to be introduced,” she says.

She also says it is very unlikely the optionality will, in time, be dropped. “The commission thinks an optional approach is best in that companies that will actually benefit from the CCCTB can choose to join, but those that have no need or desire for a harmonised EU system will not have to needlessly change to a new tax system.”

Critics say that means tax authorities will have to operate two systems while also finding a way to monitor the crucial apportionment process and deal with the disputes that will inevitably arise over the sharing of the loot. Already some countries are understood to be arguing that the system could only work if it was compulsory.