CCCTB proposal in European Commission draft EU directive package of October 2016 (pp.175-6)
[I]ncluded in that package is a proposal to revamp the way that companies are taxed by adopting a common consolidated corporate tax base (CCCTB)….
1. Companies that are tax-resident in the European Union and EU-located branches of third-country companies would have one common set of rules for computing taxable income….
2. Companies within the same group would consolidate their individual results. On consolidation, transactions carried out between group members would be eliminated in order to compute consolidated taxable income. Under the proposed definition of a group, a common EU parent is not required.
3. The group's consolidated taxable income would be allocated among the individual group members on the basis of a set formula. The proposed formula gives equal weight to three factors: sales, labour, and assets. The labour factor is further divided and gives equal weight to two factors: payroll and number of employees….
Potential for negative ACB gains to arise if earnings for surplus purposes are determined on an apportionment basis (p. 178)
If earnings are computed as the amount determined by the apportionment formula, the surplus balance of the foreign affiliate may no longer mirror the cash available for distribution….
Potential surplus shifting with jettisoning of transfer pricing controls (p. 180)
Another potential concern may be the lack of transfer-pricing controls within the European Union after the implementation of the CCCTB….Without transfer-pricing controls, inappropriate surplus movements could result….
CCCTB proposal in European Commission draft EU directive package of October 2016 (pp.175-6)
[I]ncluded in that package is a proposal to revamp the way that companies are taxed by adopting a common consolidated corporate tax base (CCCTB)….
1. Companies that are tax-resident in the European Union and EU-located branches of third-country companies would have one common set of rules for computing taxable income….
2. Companies within the same group would consolidate their individual results. On consolidation, transactions carried out between group members would be eliminated in order to compute consolidated taxable income. Under the proposed definition of a group, a common EU parent is not required.
3. The group's consolidated taxable income would be allocated among the individual group members on the basis of a set formula. The proposed formula gives equal weight to three factors: sales, labour, and assets. The labour factor is further divided and gives equal weight to two factors: payroll and number of employees….
Potential for shifting of surplus (due to disproportionate underlying tax) where earnings for surplus purposes are determined on a pre-apportionment basis but taxes reflect CCCTB (p. 180)
[i]t may be more appropriate to determine the earnings as the pre-consolidated before-tax income computed in accordance with the CCCTB. Under this approach, taxes determined in accordance with the CCCTB could still shift surplus inappropriately from one foreign affiliate to another….
CCCTB proposal in European Commission draft EU directive package of October 2016 (pp.175-6)
[I]ncluded in that package is a proposal to revamp the way that companies are taxed by adopting a common consolidated corporate tax base (CCCTB)….
1. Companies that are tax-resident in the European Union and EU-located branches of third-country companies would have one common set of rules for computing taxable income….
2. Companies within the same group would consolidate their individual results. On consolidation, transactions carried out between group members would be eliminated in order to compute consolidated taxable income. Under the proposed definition of a group, a common EU parent is not required.
3. The group's consolidated taxable income would be allocated among the individual group members on the basis of a set formula. The proposed formula gives equal weight to three factors: sales, labour, and assets. The labour factor is further divided and gives equal weight to two factors: payroll and number of employees….
Distorting FAT effect of European taxes being computed on a potentially radically-different base than FAPI (pp. 182-3)
[T]he calculation of taxable income under the CCCTB proposals would only affect the calculation of FAT and not the calculation of FAPI, because in computing FAPI taxpayers must use Canadian rules. Thus, the amount of the income inclusion would not be altered by the allocation under the CCCTB. This mismatch of income and FAT could cause adverse results for taxpayers.
Difficulties under CCCTB in satisfying equity percentage test (pp. 185-6)
[C]onsider the wording in subparagraph (a)(ii) of the definition of FAT. The conditions in this subparagraph are met if another foreign affiliate that has an equity percentage in the particular foreign affiliate pays the taxes and it is that other foreign affiliate that is liable for the taxes under the laws of its country of residence….
[I]f EU Parent owned EU Sub and the FAPI was earned by EU Parent, but under the CCCTB formula, the majority of the income was allocated to EU Sub. In this case, the taxes paid by EU Sub would also not meet the condition above because EU Sub does not own any shares in EU Parent and does not have an equity percentage in EU Parent.
In the absence of compensating payments, in order to allow foreign taxes paid by a group member under the CCCTB to qualify as FAT, the Department of Finance would have to consider further amendments to the FAT definition. However, other issues arise even if compensating payments are made…
CCCTB proposal in European Commission draft EU directive package of October 2016 (pp.175-6)
[I]ncluded in that package is a proposal to revamp the way that companies are taxed by adopting a common consolidated corporate tax base (CCCTB)….
1. Companies that are tax-resident in the European Union and EU-located branches of third-country companies would have one common set of rules for computing taxable income….
2. Companies within the same group would consolidate their individual results. On consolidation, transactions carried out between group members would be eliminated in order to compute consolidated taxable income. Under the proposed definition of a group, a common EU parent is not required.
3. The group's consolidated taxable income would be allocated among the individual group members on the basis of a set formula. The proposed formula gives equal weight to three factors: sales, labour, and assets. The labour factor is further divided and gives equal weight to two factors: payroll and number of employees….
Difficulties under CCCTB in satisfying same country and consolidated determination tests (p. 187)
[T]wo key conditions in regulation 5907(1.3)(a) appear to conflict with the CCCTB:
1. Regulation 5907(1.3)(a) requires that each of the corporations must be resident in the same country. If EU FA 1 and EU FA 2 are resident in different EU countries, any compensation payment would not meet the conditions in regulation 5907(1.3)(a) and would not be prescribed to be FAT.
2. Regulation 5907(1.3)(a) requires that the foreign affiliates "determine their liabilities for income or profits tax payable to the government of that country for a taxation year on a consolidated or combined basis." The mechanics of the CCCTB proposals do not meet this condition because under the CCCTB, the EU foreign affiliates do not determine their liability for tax on a consolidated basis; instead, each foreign affiliate determines its liability for tax on an individual entity basis. As discussed above, the taxable income of the group is consolidated; however, each entity's liability for taxes is based on its allocated share of that income multiplied by the tax rate in the local jurisdiction.
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