Annexes to SEC(2011)316 - SUMMARY OF THE IMPACT ASSESSMENT Accompanying document to the Proposal for a COUNCIL DIRECTIVE on a Common Consolidated Corporate Tax Base (CCCTB) - Main contents
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| dossier | SEC(2011)316 - SUMMARY OF THE IMPACT ASSESSMENT Accompanying document to the Proposal for a COUNCIL DIRECTIVE on a Common Consolidated ... |
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| document | SEC(2011)316  |
| date | March 16, 2011 |
According to a study commissioned to Deloitte, the CCCTB is expected to translate into substantial savings in compliance time and outlays in the case of a multinational setting up a new subsidiary in a different Member State. On average, the tax experts participating in the study estimated that a large enterprise spends over €140,000 (0.23% of turnover) in tax related expenditure to open a new subsidiary in another MS. The CCCTB will reduce these costs by €87,000 or 62%. The savings for a medium sized enterprise are even more significant, as costs are expected to drop from €128,000 (0.55% of turnover) to €42,000 or a decrease of 67%. Additional evidence gathered from a sample of existing European multinationals (PWC study) points to more moderate but still significant reduction in the compliance burden for recurring tax related tasks. The savings expected from the introduction of the CCCTB would amount to 8 percentage points of the compliance time.
5.3. Economy wide impacts
The CGE model CORTAX is used to assess the economy-wide impacts of the different reforms. The model, conceived to simulate tax policy changes for the EU Member States, has been extended and refined for the purpose of this impact assessment3. However, like any general equilibrium model, CORTAX includes simplifying assumptions and specifications that are not undisputed, and cannot take away the uncertainty about the strength of certain behavioural effects of tax policies. More importantly, CORTAX does not capture the long run dynamic gains from further integration in the Internal Market, e.g. in terms of an increase in the number of internationally active firms. The removal of cross-border tax barriers is expected to translate into reduced distortions in the allocation of capital, as it will increase the substitutability between domestic and cross-border investment, on the one hand, and enhance the attractiveness of the EU as whole for multinational investors, on the other. The increased allocative efficiency is expected to translate into productivity and employment gains, stemming also from the economies of scale that can be exploited in the larger market.
The four different policy options – optional CCTB, compulsory CCTB, optional CCCTB and compulsory CCCTB – are compared to the status quo scenario. In the optional scenarios it is assumed that all multinationals, but no domestic companies, opt for the alternative tax systems, whereas in the compulsory scenario also domestic companies need to apply the new tax provisions. This assumption might lead to an underestimation of the welfare gains in the optional scenarios as it can be expected that in practice multinational firms would opt in the new system only if that would not lead to lower net profits than dealing with the different national tax systems. In all scenarios it is assumed that corporate tax revenues are kept constant ex-ante adapting the tax rate, so that the government budget is balanced before companies react to the new policy environment.
The important economic mechanisms in the CGE analysis of the CCTB is the trade-off between a low effective marginal tax rate (result of a narrow base and high statutory tax rate), which minimises distortions in investment, and a low statutory corporate tax rate (coupled with a broad base), which reduces multinational profit shifting to outside locations and improves the attractiveness of a location in the case of discrete investment choices. Base-broadening implied by the new definition of the common tax base -, and the consequent rate reduction are found to decrease aggregate welfare in the EU4.
On the other hand, the main positive effect of the CCTB reform stems from the assumed reduction in compliance costs. All in all, a compulsory CCTB leaves welfare at a European level nearly constant while the introduction of a CCTB optional for multinationals renders slight welfare gains.
Compared to the CCTB, the welfare effects of the CCCTB options are more favourable under any of the analysed scenarios. The overall final impact is a small net positive welfare gain of around 0.02% of GDP in aggregated terms for the EU, which amount to roughly € 2.4 billion (2009 figure). Disentangling the effects of the different elements of the reforms shows that:
- The lion's share of the positive economic impact of consolidation and formula apportionment is due to lower compliance costs.
- The move from separate accounting to formula apportionment exerts a negligible effect on GDP and welfare. It is the result of different offsetting effects: fewer incentives to shift profits and capital from high tax countries, but additional distortions in the allocation of formula factors to low tax economies.
- Loss consolidation tends to shrink the tax bases. Hence, given the model assumptions, certain increase in corporate tax rates may be required to balance the government budget. The combination of a lower tax burden via loss consolidation and a higher tax burden due to higher rates may raise overall the cost of capital. Accordingly, investment slightly falls but employment expands due to lower labour costs. On balance, GDP slightly falls, whereas the net effect on welfare is negligible.
6. Comparison of options
The removal of all the three types of identified corporate tax obstacles – possible under the CCCTB policy options – would allow business to make sounder economic choices thus improving overall economic efficiency in the EU. On the basis of the quantified economic impacts, the optional CCCTB and the compulsory CCCTB are preferred to the alternative options given the savings in compliance costs they can generate. However, the macroeconomic evidence points to the optional CCCTB as the overall preferred policy option of the scenarios analysed.
The reforms under analysis are potentially associated with important dynamic effects in the long run. The reduction in uncertainty and in the costs (actual and perceived) that firms operating in multiple jurisdictions incur is the main channel through which these effects are expected to materialize. Ultimately, this will translate into increased cross border investment within the EU, stemming both from further expansion of European and foreign multinationals and from de novo investment of purely domestic firms into other Member States. By the same token, to the extent that the current fragmented landscape of corporate tax systems acts as a barrier to entry into international markets, small and medium sized enterprises (SMEs) might be particularly advantaged by the level playing field created by the reforms under analysis. The elimination of additional compliance costs associated with having to deal with different tax rules and the introduction of the 'one-stop shop' principle in tax administration is likely to enhance SMEs' capacity to expand cross-border.
7. Monitoring and evaluation
The proposed policy intervention will exert effects on a number of variables that should be monitored. At the microeconomic level, the effects of the policy options on firms' tax related compliance costs and on their investment behaviour across national borders should be assessed. To overcome the well-known difficulties in obtaining reliable estimates of actual and perceived compliance costs, ad hoc surveys should be designed, and particular attention devoted to the representativeness of the selected samples. Propensity to expand abroad by SMEs might be particularly revealing on the expected long term impacts of the policy options. Such effects can be gauged both by means of surveys among the relevant companies and by analysing observed changes in actual investment choices.
At the macroeconomic level, consistent with the general objectives of improving the allocation of productive capital in the EU, evidence should be gathered on foreign direct investment flows directed to the EU and among EU countries.
The evaluation of the consequences of the application of the legislative measure could take place five years after the entry into force of the legislative measures implementing the Directive. The Commission could then submit to the European Parliament and the Council a report on the technical functioning of the Directive.
The content of such a report would vary according to the scope of the Directive as finally agreed in the Council.
Table 1: Ranking of policy-options (1 = best option)
| Option 1: status-quo | Option 2: Optional CCTB | Option 3: Compulsory CCTB Optional CCTB | Option 4: Optional CCCTB Optional Optional CCCTB | Option 5: Compulsory CCCTB Compulsory Compulsory CCCTB | |
| PWC-study (compliance costs) | 2 | 3 0.00 1 0.09 | 1 2 0.00 | ||
| Deloitte-study (compliance costs) | 3 | 2 0.00 | 1 0.09 | ||
| CORTAX-study (macroeconomic variables ) | 4 | 3 | 5 | 1(2) | 2(1) |
1Overall, in the sample used, the combined effect of the new tax base provisions unrelated to consolidation (which tend to broaden the tax base) and the introduction of immediate cross-border loss consolidation (which tend to shrink it) realised in the CCCTB scenarios tends to keep the aggregate tax bases roughly constant compared to the current ones (for the companies concerned).
2Ernst & Young Transfer Pricing Survey.
3The extensions concern the inclusion of (i) tax havens, to capture the opportunity for profit shifting outside the EU, (ii) loss probabilities, to precisely quantify the economic effects of loss consolidation, and (iii) discrete location choices, to model the infra-marginal choices of firms on where to invest, preliminary to the decision on how much to invest.
4In the model a policy of base-broadening cum rate-reduction results in welfare gains when applied separately by individual countries, and particularly by high-tax countries that suffer from profit shifting. However, a generalized implementation of such policy at the European level reduces the beneficial effects of lower corporate tax rates. In fact, the comparative location advantage of a country does not improve if all other Member States reduce their tax rate too. Only location choices vis-à-vis third countries will be affected. On balance, a multilateral policy of base broadening and rate reduction is therefore less likely to be welfare improving than a unilateral policy.
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