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Thursday, 27 October 2016 14:31

A new, major corporate tax reform proposal for the EU

This week the European Commission announced the plan of a monumental corporate tax reform proposal, which can influence certain tax payers having activities in the territory of Hungary. In our newsletter we are aiming to investigate and review the proposal.

The freshly announced, so-called Common Consolidated Corporate Tax Base (hereinafter: CCCTB) initiation is a renewed revival and development of an earlier process, that has been launched in 2011. According to the planned regulation, the determination of the tax base in the corporate tax, and thus the approved costs, the increasing and decreasing items will be coherently managed from Portugal to Sweden.

Why these measures are necessary and what we are talking about?

Up to now, the income (profit) tax being determined in the individual Member States and being paid by the companies was handled at Member State levels. 28 Member States applied 28 different corporate tax systems, and they individually strived to create incentives and conditions in order to be able to attract the working capital into their states, and also to accelerate their own economies’ development. Exactly this special, differing nature of the regulations have been exploited by the larger, mainly multinational corporates, who attained – because of this regulation and other EU and OECD regulations – to be able to avoid or minimalize the amount of the corporate tax. 

Against all these – and also to enhance the European economy’s competitiveness – acted the European Union and initiated to unify the corporate tax on Europe level and to place it to a single base. Pursuant to the recently published news, the CCCTB formulates such propositions, according to which

  • it will be mandatory for companies with global revenues exceeding EUR 750 million a year to pay taxes where they really make their profits;
  • the loopholes currently associated with profit-shifting for tax purposes will be tackled;
  • it will encourage companies to finance their activities through equity and by tapping intomarkets rather than turning to debt;
  • it will support innovation through tax incentives for Research and Development (R and D)activities which are linked to real economic activity.

Corporate tax rates are not covered by the CCCTB, as these remain an area of national sovereignty.

The recently announced proposal formulates further positive suggestions, for instance to

  • resolve double taxation disputes in the EU.
    • The current dispute resolution mechanism is a rather slow and burocratic process, and the Commission is aiming to change this. For further information for the planned dispute resolution relating double taxation, see this link.
  • to tackle negative taxation practices relating to non-EU countries.
    • The main aim of the regulation relating to non-EU countries was to stop companies from exploiting loopholes, known as hybrid mismatches, between the Member states’ and non-EU countries’ tax systems to escape taxation. Hybrid mismatches occur when countries have different rules for taxing certain income or entities. Companies can abuse this to avoid being taxed in either country.

The above-mentioned legislative proposals will now be submitted to the European Parliament for consultation and to the Council for adoption.

In relation to these news the Hungarian Ministry of National Economy has not published any standpoint yet, but as a matter of course, as soon as the Ministry expresses its official point of view, we will amend our newsletter and inform our Clients.