Thin Capitalization Rules in the Context of the CCCTB


In the context of the proposed European CCCTB there is clearly a perceived need for the introduction of a common thin capitalization rule. This rule would be aimed at dealing with inbound investment emerging from both third countries, and from Member States opting out of the CCCTB. The principal aim of this paper is to establish whether such a need does indeed exist, and if so, which considerations should guide the design of a thin capitalization rule for the CCCTB. The paper starts by providing a broad summary of the varying approaches of Member States to thin capitalization. It then makes the case for the introduction of a thin capitalization rule in the context of the CCCTB, from both an economic and a legal perspective, and sets out the general principles which should guide the design of such a rule.

Research Highlights


The economic effects of EU reforms in corporate income tax systems

This report was commissioned by the European Commission as part of its Impact Assessment of the proposal for a Common Consolidated Corporate Tax Base (CCCTB) in the European Union. It uses an applied model developed for the purpose that analyses the economies of all 27 EU member states; it models corporate taxes in detail to assess the impact of reform on investment flows, employment, GDP and economic welfare. The research finds that there would be considerable variation in the economic effects of the new tax system on EU countries. The precise estimates depend on the definition of the proposed tax system, but in a typical case, UK GDP would fall slightly, by around 0.05 percent. For other countries the effects on GDP would vary from a rise of 2 percent in Belgium, to a fall of 3 percent in Ireland. Overall, GDP in the EU would also fall slightly, by around 0.15 percent. Capital expenditure would fall a little, by 0.74 percent, but there would be virtually no net effect on employment or wages in the EU.

Michael Devereux



Corporate tax harmonisation in the EU

This project explores more widely the economic consequences of proposed EU reforms for a Common Consolidated Corporate Tax Base. To take the analysis further, we use a numerical computable general equilibrium (CGE) model for the EU. This model encompasses several decisions of companies such as the scale of investment, location decisions, and profit shifting. Simulations using the model suggest that consolidation does not yield substantial welfare gains for Europe: there is considerable variation in the effects across countries. The effects of consolidation with formula apportionment, as in the CCCTB, depend on the choice of the apportionment formula. The CCCTB does not weaken incentives for tax competition.

Michael Devereux and Simon Loretz



What would be economic consequences of the CCCTB?

If implemented, the European Commission’s plans for a Common Consolidated Corporate Tax Base (CCCTB) would be the most radical reform of international corporate taxation in Europe for a century. The Centre has undertaken significant research on a number of aspects of this proposal, and has been commissioned to undertake an impact assessment by the Commission.

Using unconsolidated accounting data for several thousand companies, we have investigated the likely impact on tax revenues in EU member states. Taking pre-tax profit as given, we estimate that overall EU corporation tax revenues would fall by 2.5% if companies have the option to participate. By contrast, if companies were denied this option, overall revenues would rise by more than 2%. This would leave some countries – such as Spain, Sweden and the United Kingdom - better off, but others – such as Denmark, Finland, Ireland and Italy - worse off. We investigate how sensitive these results are to the apportionment factors used.

We also assess the impact of the CCCTB on incentives to locate investment in different member states, taking into account the advantages of consolidation across member states, as well as the effects of apportionment. The results suggest that the CCCTB would significantly improve the balance of competition between companies resident in different countries. However, it would have only a small effect in reducing the impact of taxes on location decisions.


Rita de la Feria and Ana Paula Dourado