Corporate taxation: Digital component added to Common Consolidated Corporate Tax Base

European Parliament has adopted Committee report

The vote of MEPs in the European Parliament will bring EU Member States a step closer to more tax fairness at the end of February. Long overdue, but significant is the addition of the definition of the term digital permanent establishment to the Commission proposal. Based on the digital permanent establishment, Internet companies such as Facebook or Amazon shall be taxed; because of a lack of physical presence, they are frequently not paying any tax at all. However, the Conservative majority in Parliament again rejected the necessary setting of a minimum rate.
The European Parliament also asks the Council to agree to this proposal and urges for its early implementation.

The Common Consolidated Corporate Tax Base CCCTB shall ensure that companies pay tax where they are operating and make their profits. This would make currently applied strategies of tax avoidance – due to the different tax bases and tax reliefs between countries – more difficult and could counteract such practices.

The preparations by EU institutions, to implement a Common Consolidated Corporate Tax Base for the Member States have been dragging on for years. The latest proposal of the Commission from 2016 suggests an implementation in two stages. The initial intention is to determine a common tax base, whereby consolidation should only take place in a second step. Based on this consolidation, profits are distributed to Member States in accordance with the added value formula. Whilst the European Parliament rejects the Commission’s proposal of a two-stage implementation, both drafts provide for a turnover threshold of € 750 million annual turnover. Only from this limit, companies shall be obliged to pay tax in accordance with the new rules. We still consider this threshold as being too high and demand to set a limit of € 40 million, analogue to the Directive on Annual Financial Statements.

We still consider the threshold of € 750 million annual turnover as being too high and demand a limit of 40 Mio Euro, analogue to the Directive on Annual Financial Statements.

Race to the bottom

The fact that the fight for the lowest tax rate has been won does not mean that the match has been won. The countries damage themselves in the mutual race for the lowest tax rate. Reducing the corporate tax rate means that countries lose significant yields in their budget. Fixing a minimum tax rate is inevitable.