CCCTB 2018 - Profit Allocation And A Fourth Factor: Data (Germany/France CCTB proposal)

Taxing multinational enterprises in a global market poses the challenge of factoring in economic reality when deciding upon a tax base. In this context, the European Commission published a proposal for a Council directive on a Common Consolidated Corporate Tax Base (CCCTB) in 2011, seeking to harmonize the 28 different corporate tax codes of the Member States into one set of rules.

It is viewed by the European Parliament as a way to improve growth and lead to more jobs in the EU by reducing administrative costs and red tape for companies. There is no need for a corporate group within the EU to deal with different corporate tax codes alongside bilateral tax treaties between these member states and to determine taxation of intra-group transactions which are highly complex and often lead to costly disputes. However, the 2011 proposal was blocked in the European Council for many years and now the re-launched 2016 CCCTB proposal will once again face the Council.

Two-step Approach Re-launched

On October 2016, following the lack of progress in the Council, the Commission re-launched the CCCTB project in a two-step approach with the publication of two interconnected proposals: on a common corporate tax base (CCTB), and on a common consolidated corporate tax base (CCCTB).

The 2016 CCCTB proposal was built on the 2016 CCTB proposal, introducing the consolidation aspect of this double initiative. Companies operating across borders in the EU would no longer have to deal with 28 different sets of national rules when calculating their taxable profits. Consolidation means that there would be a ‘one-stop-shop’– the principal tax authority – where one of the companies of a group, that is, the principal taxpayer, would file a tax return.

Formulary Apportionment System

As argued by the supporters of the CC(C)TB, MNEs should be taxed according to the real economic substance of where they actually do business. To distribute the tax base among Member States concerned, a formulary apportionment system is introduced. The formulary apportionment system was made of three equally weighted factors (labour, assets, and sales by destination). All three factors would have equal weight. The labour factor consists of two parts, payroll and number of employees.

In this regard, CCCTB puts tax technology in an extremely important position. It requires a high level of abilities of tax collection and administration. For example, tax administrations need to tackle the tax avoidance, possibly achieved via ‘factor-shifting’ because of the non-harmonized corporate tax rates among member states.

Fourth factor - Data

According to the Parliament’s opinion adopted in plenary on 15 March 2018, it is proposed to modify the apportionment formula by adding a fourth factor, data. The additional factor of ‘data’ approved by the Parliament is a measure targeting tech companies that do not require a strong physical presence (labour) or infrastructure (assets) to generate profits in the EU. Although calculating profits based on mining of personal data sounds promising, technical issues such as what would amount as data has not been worked out. So there is also urgent need to figure out practical measures in tax technology in order to address the pressing issue of profit-shifting by tech giants.

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