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The Proposed CCCTB is not Attractive for International Business from a Cypriot Perspective
The proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) released by the EU Commission on March 16 2011 has fueled the on-going fierce debate among academics, politicians and tax experts on its rationale and potential effects on national economies and cross-border businesses. Taxand Cyprus looks at the proposed directive, and the detrimental impact it will have on foreign investment for Cyprus.
As the freedom of fiscal policy lies in the core of the national sovereignty, taxation has always been a particularly sensitive area for the countries, especially in the framework of the EU with its delicate balance of competences distributed between the Member States and the Union.
Generally being very cautious, the Commission's proposal is extremely bold, and a move that will have unpredictable and far-reaching consequences. Presented as a step towards encouraging "fair competition" in the common market, the CCCTB is, undoubtedly, an encroachment into Member States' prerogatives to determine the rules and regulations for determining the taxable base for residents and for certain categories of non-residents.
By its nature, the CCCTB is a new, "EU" tax system. As such, it would inevitably require increased financial contributions from the Member States to the Union, thus putting additional pressure on the national budgetary systems already weakened by the economic recession.
At the same time, the EUR3 billion savings from which the international businesses are expected to benefit from are highly questionable. What is certain is the need to invest substantial financial resources in training company personnel, adjusting software products and generally restructuring the process of bookkeeping and accounting in order to comply with the new rules.
Another concern is that the country of the EU top holding (where the group tax return will be submitted) will be the leading tax jurisdiction. This could present serious procedural and language problems for the tax authorities. The taxpayers reasonably fear that their right to tax appeal will be substantially affected by having only one, usually unknown to them, legal system to defend their rights.
Among other predictable drawbacks is the difficulty in preparing simultaneously "national" and "CCCTB" tax returns. As they would both need to be based on assumptions regarding the apportionment of the company's profit between the countries concerned, the final distribution may differ significantly from the preliminary estimate thus rendering the expectations for increased transparency and/or reduction in compliance costs (as promised by the Commission) unreasonable.
We have to admit that there will be certain benefits for international business of having CCCTB such as full deductibility of costs related to research and development, off-setting economic losses on a cross-border basis, and avoiding complicated transfer pricing requirements in different jurisdictions.
For Cyprus however, the proposed Directive is undeniably less generous than the national tax legislation. Starting from the formula for apportioning taxable profits, the definition of "assets" provided by the Commission takes into consideration only "tangible fixed assets" (immovable property, machinery etc.), but excludes intangible assets such as IP rights, patents and licenses. This omission will hit hard on certain economic sectors driving their profits mainly from intangibles (ie the IT industry, and entertainment sector). Geographically, the negative effect will be particularly strong on Cyprus which has positioned itself among the top tax-planning jurisdictions for IP-property related structures.
Although the incoming dividends both under CCCTB and under Cypriot national law are exempt from CIT, the taxation of capital gains will be substantially less advantageous under the former. As a result, Cyprus resident companies which opt to apply CCCTB will no longer be able to profit from the exemption of capital gains derived from the disposal of shares in companies within the group but only in subsidiaries outside the group.
Moreover, the income of Cyprus resident companies from their permanent establishments located abroad is generally exempt from taxation. If the Commission's proposal is implemented, the incentive will cover only incomes of permanent establishments located outside the EU.
Last, but not least, Cyprus prides itself with its network of over 40 DTTs which the introduction of the CCCTB will render redundant, thus leaving the resident companies with no option to enjoy the treaty tax benefits.
Although the CCCTB does not formally touch upon the right of the Member States to determine their national tax rates, by eroding the tax base, it covertly undermines the whole point of having a variety of tax rates as an instrument to attract foreign investment. The proposed Directive is the first, and possibly decisive, step towards unification of all rules and regulations related to corporate taxation.
The "new initiative" will inevitably diminish the attractiveness of smaller countries such as Cyprus and Bulgaria for international business. It is not difficult to predict some of the direct consequences: less foreign investment, decline in the GDP, and rising levels of unemployment. That is why, when voting in the Council, the Members States should carefully weigh up the obscure benefits this Proposal promises to bring against the detrimental direct impact it will inevitably have.
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