The Tax Base for CCCTB: The Role of Principles

The European Commission is working on a proposal for a Common Consolidated Corporate Tax Base (CCCTB). A draft Directive is expected to be published during the course of 2008. The proposal aims to tackle some fundamental problems encountered as a result of lack of corporate tax harmonisation, especially in the areas of cross border losses and transfer pricing. There are several difficulties that must be tackled to make the proposal workable, not least the question of formulary apportionment of the consolidated profits of the corporate group as between Member States. This paper does not attempt to discuss the entire range of issues to which the CCCTB gives rise, important though they are, but focuses on the question of the tax base itself.

The CCCTB project presents an opportunity to rethink the tax base. For the purposes of this paper it is assumed that there will be no radical re-appraisal of the way in which we tax corporations for the time being, but that the tax base will continue to be based on a concept of ‘profit’. This paper supports the use of International Financial Reporting Standards (IFRS) as a starting point in ascertaining profit. It acknowledges that some deviations will be necessary from IFRS for tax purposes and suggests that these deviations should be explicit and based on autonomous tax principles. Partial convergence gives rise to issues about the relationship between accounting and tax principles. Conceptual clarity is needed to manage the questions that will arise and appropriate institutional mechanisms need to be developed to deal with the task of interpretation and regulation of the evolving relationship between accounting developments and tax law.

If the CCCTB is to be successful it must provide a comprehensive and autonomous set of rules. In fact it must be a Comprehensive Common Consolidated Corporate Tax Base (CCCCTB or C4TB) In view of the complexity of the issues arising in creating and applying the rules for a tax base, it is impossible to produce a Directive that will cover every necessary detail. Instead it needs to refer to IFRS as at the date of the Directive and to contain a set of tax principles as well as setting out institutional arrangements capable of managing the relationship. National tax law and national accounting standards are an inappropriate default for a C4TB. Thus the Directive should provide both a reference point for determining the scope of the tax base and a constitutionally valid framework for interpretation and application of the Directive and its implementing legislation in Member States. 

Judith Freedman and Graeme Macdonald