Sharing the Benefits of the EU’s Common Consolidated Corporate Tax Base within Corporate Groups

Abstract

One of the main features of the CCCTB Draft Directive, the formulary apportionment of the consolidated group income, leads to a significant change in corporate income taxation paradigms. Currently, corporations are taxed on a separate entity basis using the arm’s length principle to evaluate intra-group transactions. Similarly company law uses a separate entity approach with regard to transactions between related parties. The CCCTB Draft Directive will regularly lead to allocation results that are explicitly not at arm’s length as the arm’s length principle will not be necessary anymore for tax purposes. However, without a corresponding change in company law paradigms – which is not foreseeable – the current lockstep between corporate income tax law and company law will cease to exist. Yet, not only the proposed CCCTB regime but also existing group taxation systems produce taxable outcomes that are not in accordance with the domestic company laws’ single entity approaches. This article therefore analyses group taxation systems currently employed by EU Member States and shows that the vast majority of group taxation systems employ instruments to (re-)unite the results from the joint taxation with company law’s separate entity approach. These accompanying mechanisms ensure a fair distribution of the advantages and disadvantages of the respective intra-group loss-offset system to all group members. However due to various reasons, one being the fact that every group member of the CCCTB will be responsible for a share of the group’s overall tax liability, another being the fact that different tax rates will apply within one CCCTB group, these currently employed mechanisms and techniques are not suitable for the CCCTB concept. Therefore this article develops a distinct mechanism to share the benefits of the CCCTB concept within the whole group. The current international debate on the suitability of the arm’s length to continue as a standard for the allocation of taxing powers in intra-group transactions and the new impetus for the common tax base in some EU Member States may suggest that there is a new potential momentum to make progress in the introduction of formulary apportionment within the European Union.