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Germany, France Issue New EU Common Corporate Tax Proposals

Tuesday, June 26, 2018

France and Germany have put forward new proposals for a common corporate tax base (CCTB) in Europe.

The two countries have issued a common position paper on the European Commission's proposal for a directive establishing a CCTB. The paper was released on June 19, following a meeting of French President Macron and German Chancellor Angela Merkel.

The Commission has proposed a two-stage approach to corporate tax harmonization. In the first instance, it hopes to introduce harmonized rules on the calculation of a company's tax base in all member states, which would form the CCTB element of the scheme. After that, a common consolidated corporate tax base (CCCTB) would operate, under which tax revenues would be collected and distributed among member states under a formulary apportionment approach, whereby revenues would be allocated based on factors, such as for instance turnover, sales, and employment levels.

According to the position paper, both France and Germany share the objective and substance of the Commission's proposed directive and are now focusing on "modifications aimed at completing or amending the CCTB Directive on certain specific points."

The two governments have recommended the following:

  • The scope of the CCTB Directive should be extended, making it compulsory for all companies subject to corporate tax, irrespective of their legal form or size;
  • The proposed general principles for profit and loss recognition should be supplemented with a general rule providing that the tax base is determined on the basis of accounting principles and calculated by applying the business asset comparison method;
  • A harmonized corporate tax base should not feature any tax incentives;
  • Provisions on cross-border relief should be discussed at a larger stage, as part of the negotiation on the CCCTB Directive;
  • It should be expressly stated in the CCTB Directive that national group taxation systems will remain in force until the CCCTB Directive is implemented;
  • There should be a transitional period of at least four years ahead of full implementation of the CCTB;
  • Special purpose levies (such as bank levies) should not be deductible under the CCTB;
  • The tax exemption of distributions and capital gains under the proposed participation-exemption rule should provide for a flat-rate deduction of non-deductible operating expenses;
  • The Directive should define hidden profit distributions to capture cases where a taxpayer has waived their appropriate payment for goods or services, and provide for their inclusion in the tax base;
  • The Directive should include a minimum taxation of profits, where loss carry-forwards are limited to a certain percentage of the taxable profit after deduction of a basic amount of EUR1m (USD1.3m); and
  • The Directive should provide for the possibility of a one-year loss carry-back in an amount of up to EUR1m.