Toward a Neutral Corporate Tax for the Transportation Industry – Rethinking the Transportation Industry Formula of the Common Consolidated Corporate Tax Base Directive Proposal under EU Law

Abstract

This paper explores how the Common Consolidated Corporate Tax Base (CCCTB) Directive Proposal under the EU law should be designed to allocate cross-border income earned from MNE taxpayers of the transportation industry. The transportation activity is mobile in nature, and thus creates the difficulty of designing the relevant tax law. Allocating sovereign States’ taxing rights on the cross-border income of the transportation industry is inherently disputed. The OECD Model Convention, as an important starting point for negotiating bilateral tax treaties, has established the ‘effective place of effective management’ (POEM) as the criterion for allocating the primary taxing rights to one single State, where a taxpayer‘s effective place of effective management (POEM) is found. It is an all-or-nothing rationale. Formulary Apportionment (FA) follows an opposite rationale other than the all-or-nothing mentality, by using a formula consisting of different weighting factors to allocate taxing rights for all jurisdictions involved. Taking the metaphor of cross-border taxable income as a pie, a formula would be a knife. At the sub-regional level, such as States of the US, FA is widely adopted. The CCCTB Proposal is the EU’s attempt to transplant FA from the US. Some jurisdictions also adopt a formula in their national corporate tax law for the shipping industry. To our surprise, the CCCTB proposal follows the POEM criterion established in the international tax regime and excludes the shipping and airline industry from its scope of application. Therefore, this paper further discusses if the shipping industry provision under the current CCCTB Proposal is still rational. This paper compares the CCCTB to experiences from OECD and US to seek an answer to this question. In conclusion, since the CCCTB has adopted formulary apportionment as its basic setting, it does not need to follow the traditional international tax regime’s approach of ‘POEM’ adopted by OECD, or the residence criterion adopted by the US, because neither of them can reflect the mobile (while highly-integrated) feature of the international transportation industry or address the old tax-planning scenarios. Instead, this paper argues that the CCCTB should include the transportation industry in the scope of application, and uses both ‘departure’ and ‘arrival’, being equally weighted, for the sales factor of the transportation industry.