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European Union: Draft Directive on a Common Consolidated Corporate Tax Base

(June 3, 2011) The European Union is composed at present of 27 dissimilar tax systems, in which each Member State has its own rules for computing the tax base for associated enterprises. As a result, companies seeking to start businesses across the EU are hampered by a number of obstacles, including market distortions due to different tax systems. For this reason, on March 16, 2011, the European Commission came up with a proposal for a directive designed to harmonize the corporate tax base by establishing a common set of rules pertaining to computing and consolidating the tax bases of associated enterprises. (Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) [hereinafter Proposal], COM/2011 121/4 (last visited June 1, 2011).)

The Proposal is not intended to harmonize the tax rates nor does it establish minimum tax rates. EU Member states will still retain the authority to determine their own corporate tax rates. Participation in the system is not mandatory for companies. Thus, companies that do not qualify and those companies that decide not to participate in the CCCTB will remain subject to the existing national rules. The scope of the Proposal extends to companies established under the laws of a Member State, under the condition that the company has one of the forms listed in Annex I of the Proposal and is subject to one of the corporate taxes listed in the document's Annex II, as well as to companies established under the laws of a foreign country that have branches in the EU. (Id.)

Once the Proposal is implemented by the EU Member States, national tax authorities will be responsible for the operation of two distinct tax schemes, the CCCBT and the Member States' respective national corporate income tax. As noted in the explanatory memorandum, this is expected to result in fewer disputes and consequently fewer lawsuits reaching the EU courts. (Id.)

In the long run, the Proposal, if adopted, is expected to create more favorable conditions for foreign companies to invest in the EU, because companies would apply a common set of tax rules throughout the EU and would communicate with one tax administration (a one-stop shop). Groups of companies that make use of the CCCTB would also file a single consolidated tax return for all their activities in the EU. Individual companies would share the consolidated taxable profits of the group on the basis of a formula consisting of three equal factors: assets, labor, and sales. Each EU Member State would then tax the profits of the companies in its territory at the national tax rate. (Press Release, Questions and Answers on the CCCTB, MEMO/11/171 (Mar. 16, 2011), EUROPA website.)