In depth: EU's consolidated tax base plans to draw line under 'sensitivities'

THE EUROPEAN COMMISSION relaunched perhaps its most ambitious taxation proposals ever, tabling a new directive on forging a corporate consolidated tax base system within the European Union (EU).

Mindful of the need to secure approval from all 28 member states within the EU Council of Ministers (which for the time being includes Brexiting Britain), the Commission has stressed that its proposal preserves the sovereign right of member states to set their own corporate tax rates.

But the proposal includes much detailed hard law on how national tax authorities should go about assessing tax takes, and – crucially – says multi-national groups should submit one consolidated return for all EU activities to one member state.

This will help fuel the commission’s key political argument behind the package, that it will make multinational tax returns more transparent, and reduce their ability to shift profits to low tax jurisdictions within the EU.

‘Strict conditions’ for loss recognition

That said, the commission’s draft law does allow some consideration on one member state tax liability of losses made in another, but the text stresses this will only be allowed under “strict conditions” and that such relief will be tempered by reallocation of profits made elsewhere.

The system would be compulsory for all EU companies or groups with an annual turnover exceeding €750m (£670m).

Announcing the package in Brussels, commission vice-president for financial policy Valdis Dombrovskis said: “Today’s proposals aim to boost growth and investment, support enterprise and ensure fairness. The current corporate tax system treats debt financing of companies more favourably than equity financing. Reducing this debt-equity bias in the tax system is…important.”

Dombrovskis and economic and financial affairs, taxation and customs commissioner Pierre Moscovici will drive the proposal forward in the council, (for this proposal, the European Parliament only has a consultative role).

Avoiding sensitivities

And they will need to be politically astute. A previous proposal to forge an EU consolidated tax base, made in 2011, failed to secure comprehensive support in the council. For that reason, the new proposal largely avoids the sensitive topic of actual tax payment consolidation, rather focusing on the way member states assess taxes and how returns can be rationalised.

The commission has also, separately, proposed two additional tax reforms that could be more palatable for member states. One is a proposed directive laying down new systems for resolving double taxation disputes between EU member states. And the other is new anti-tax avoidance proposals to stop companies from exploiting hybrid mismatches (different rules for taxing certain income or entities) between EU and non-EU countries’ tax systems.

Keith Nuthall is a freelance journalist