84 / 150
THE STATE OF THE EUROPEAN UNION
84
Once a company’s tax base was calculated as
described above, it would then be apportioned
amongst the various Member States in which it
had business operations according to a set for-
mula. This formula would take three equally
weighted parameters into account: i) assets,
which would include but not be limited to a
company’s fixed tangible assets such as real es-
tate and machinery, R&D costs and advertising
and marketing expenses; ii) labour, which would
encompass both its number of employees and
payroll; iii) and sales measured “at destination”,
which is to say the points from which products
are shipped or received or the location at which
services are rendered.
Given that it would suppose the abandon-
ment of the practice of computing corporate
tax base on the basis of a company’s accounting
profit, the implementation of a formulaic sys-
tem would produce an authentic paradigm
shift. The new system calls for corporate taxes
base to be computed on the basis of a compa-
ny’s
operating income
– which provides a much
clearer picture of a company’s economic capac-
ity and true business activities. The practice of
calculating a corporate tax base on the basis of
accounting profit has several serious downsides,
not the least of which are the challenges gov-
ernment tax authorities face when they try to
navigate the growing technical complexity of
international accounting standards applicable
to large corporations. The second problem is
that computing corporate tax bases on the basis
of accounting profit makes it much easier for
companies to artificially transfer profits, espe-
cially by means of financial operations, which
are taken into account in accounting profits but
do not figure in the calculation of operating
profits. In brief, given that the elements of the
proposed CCCTB formula are more difficult to
manipulate or move than accounting items, the
implementation of this system would make it
more difficult for multinational companies to
artificially transfer funds from one country to
another for the purposes of lowering their tax
burdens.
The question as to which elements should
integrated into the new formula and the weight
each should have is clearly the greatest bone of
contention between Member States, each of
which seeks a combination that will maximinise
its own tax revenues. Whereas some place
greater importance on factors such as the con-
tribution a country makes toward the creation
of intellectual property, others argue that sales
(and therefore the geographic points where
markets exist and clients are captured) is more
important. The formula finally arrived at aside,
it is clear that the implementation of the new
system will boost the overall tax base.
The CCCTB proposal has two important
drawbacks. To start with, as it would only in-
volve the harmonisation of corporate tax bases,
it would fail to address the possibility of coun-
tries competing amongst themselves in terms of
tax rates. Member States would be free to set
their own national tax rates on the part of the
overall profits apportioned to them. It would
make sense to determine a minimum rate, as
was done with VAT, to avoid the outbreak of an
intracommunity tax rate war.
Secondly, it suffers from a severe and limit-
ing defect, which is that adherence will be com-
pletely voluntary. The proposal leaves individual
companies free to decide whether to opt for
taxation computed on a common consolidated
EU tax base or continue to have their tax bases
determined at the national level. The existence
of two separate regimes within a single jurisdic-
tion is bound to complicate the mechanics of
taxation. Furthermore, large companies are
bound to opt for the CCCTB system only when