The European Commission is considering a common model of corporate taxation for the European Union that cannot possibly work. Instead, it should consider a simpler, and more viable, alternative that already exists.
Corporate income in the EU is currently taxed under widely divergent national rules, based on separate accounting (SA) of income earned in each country. Cross-border intra-company transactions are accounted for according to market prices for similar transactions – the so-called “arm’s-length principle” (ALP).
The system is complex, expensive to administer, and can result in double taxation because members usually do not allow full write-offs for losses and tax liabilities incurred abroad. It is also prone to tax evasion, owing to different definitions of corporate income in the member states and the vast opportunities for cheating offered by ALP (since reference market prices often do not exist), not to mention profit-shifting to low-tax jurisdictions.
The Commission is now proposing that EU companies operating in more than one member state be taxed on a common definition of earned income – the Common Consolidated Base Taxation (CCBT). Earned income would be calculated on a consolidated basis for the group and then “apportioned” among the member states according to a formula reflecting each business unit’s contribution to overall group income. The formula could include such factors as sales, payroll, and tangible assets, as in Canada and the United States, or value-added, adjusted to exclude imports in order to measure the value-added “produced” in each country. Each member state would remain free to decide the tax rate applicable to its portion of group income.