Consolidation under the CCCTB

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Consolidation under the CCCTB

A study on the possible impact of the introduction of the CCCTB

on multinational companies and Member States of the

European Union with a particular focus on consolidation.

Wessel Witmer

Winter semester 2016/2017

Mr. M.J. Boer

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Personal Information

Name Wessel Witmer

Degree Bsc.

Student number 2176912

E-mail wessel_w92@live.nl

Phone number(s) +4915781328327 / +31653671544 Study program Economics of Taxation

Faculty Economics and Business Supervisor mr. M.J. Boer

Second supervisor prof. dr. I.J.J. Burgers

Abstract

In 2011, the European Commission released a proposal for the Common

Consolidated Corporate Tax Base followed by a second one in 2016. Consolidation of corporate results is one of the main aspects of these proposals. Multinational companies can offset their losses cross-border under the proposed regime. This thesis shows that under most circumstances the CCCTB is profitable for

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Terminology

BEPS - Base Erosion and Profit Shifting

CCTB - Common Corporate Tax Base

CCCTB - Common Consolidated Corporate Tax Base

ECA - Enhanced Cooperation Agreement

ECJ - European Court of Justice

EU - European Union

FDI - Foreign Direct Investment

GDP - Gross Domestic Product

MNG - Multinational Group

OECD - Organisation for Economic Co-operation and Development

R&D - Research & Development

SA - Separate Accounting

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Chapter 1: Introduction

Background

In nowadays economy, Europe’s biggest challenge is to sustain growth and

investment in the Single Market.1 Therefore, the EU has introduced an Action Plan in 2015.2 The Action Plan contains multiple objectives in order to build a fair and

transparent tax environment. To achieve these objectives, there are five key areas in which the EU will work. Many of these areas are based on the Action Plan of the OECD (BEPS), but the first area is one of Europe’s own ideas. The European Commission describes it as the Common Consolidated Corporate Tax Base (CCCTB): a holistic solution to profit shifting.

The CCCTB is proposed to improve fair and efficient taxation in the EU. In 2011, the first proposal for the CCCTB was launched.3 The aim of the European Commission was to overcome some major fiscal problems, such as administrative burdens and high compliance costs due to the absence of common corporate tax rules. In the current situation, every nation within the EU has its own set of rules. Double taxation and double non-taxation is overcome by bilateral tax treaties. The status quo does not match with the priorities set in Europe 20204 which are:

 smart growth - by developing an economy based on knowledge and innovation

 sustainable growth - by promoting a more resource efficient, greener and more competitive economy

 inclusive growth – by fostering a high employment economy delivering economic, social and territorial cohesion

The CCCTB should be able to accomplish developments which support the mentioned priorities.

The proposal from 2011 included an optional CCCTB for companies. Member States disagreed with this proposal, because it was too ambitious to implement in one step. In 2013, the OECD published a global Action Plan on Base Erosion and Profit

1_{A single market where there is a free movement of goods, services and human resources.} 2

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- 7 - Shifting5. This incentivised the European Commission to implement more anti-abuse measures in a renewed proposal for the CCCTB. In June 2015, the European

Commission commented on some questions regarding a renewed proposal for the CCCTB6. After four years of technical discussion, they agreed with the Member States that the first plan was too ambitious. The main changes in the new proposal are a mandatory CCCTB at least for multinationals and a step-by-step approach which means that first a CCTB will be implemented. Mandatory consolidation

corresponds with the Action Plan introduced by the OECD. Consolidation is the most difficult aspect with regard to negotiations. A temporary system for cross-border loss-relief will prevail when the common tax base is applied in the EU. This system offers some of the same benefits as full consolidation, but is not as radical as mandatory consolidation.

In October 2016, the European Commission released a new proposal7 for the CCCTB. The European Commission announced three new features of the re-launched CCCTB compared to the prior proposal8:

 The CCCTB will be mandatory for companies with global consolidated revenues more than EUR 750 million;

 Research and Development costs will qualify for a very large deduction and

 Debt overhang will be contested by offering equivalent benefits for debt or equity financing.

The characteristics of these features will be discussed in chapter 2. In this thesis, the focus will generally be on the consolidation of profits and losses under the new regime. Consolidation and formulary apportionment are the most important drivers of the behaviour of both companies and governments. These drivers will be elaborated in chapters 3 and 4. Other important features, such as compliance and anti-abuse measures, will be mentioned, but not elaborated.

To clarify the direction of this thesis, it is necessary to answer a main question. Hence, the main question is:

5_{OECD (2013), Action Plan on Base Erosion and Profit Shifting, p. 13.} 6

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- 8 - ‘’To what extent is consolidating the corporate income tax base by the

Common Consolidated Corporate Tax Base within the European Union profitable for multinationals and Member States?’’

Framework

In order to answer the stated main question, various topics have to be discussed. In this section these topics will be introduced. Each chapter of the thesis has its own subquestion. The combined answers of the subquestions will compose the answer to the main question.

In chapter 2, the CCCTB and the ideas behind it will be explained. To provide insight in the first and the second proposal, some historical information is needed. Therefore, several key events in the history of the EU and its predecessors will precede. The first and the second proposal will then be described by emphasising their main features. Several figures criticised the CCCTB. In order to give an integral view on the CCCTB, it is necessary to discuss this in this chapter. Consequently, the subquestion is as follows:

‘’What are the key elements of the CCCTB?’’

In chapter 3, empirical models will show the difference between consolidating corporate results and the current situation. As mentioned before, the EU is planning on a temporary system for cross-border loss-offset which will be analysed by a simple model. Afterwards, a more complicated model will analyse the difference between the current system of separate accounting and the CCCTB for a

multinational group. These models will be compared and evaluated. Hence, the subquestion is:

´´What are the financial consequences for multinationals when introducing cross-border loss-offset and consolidation under the CCCTB?’’

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- 9 - quite important to make a distinction between them and give an all-encompassing view on the impact of the CCCTB on national governments. The subquestion here is:

‘’What are the effects of introducing the CCCTB on the tax revenues of Member States?’’

In the conclusion the answers to the subquestions will be the foundation to answer the main question. Afterwards there will be a discussion regarding possible further research on the topic.

Research method

Considering the limited time available to do research combined with the difficulty to find specialists who could comment on the CCCTB, this thesis will only consist of desk research. Literature review teaches us that there is widespread information about the CCCTB. First of all, the EU has published many documents on the CCCTB. The first and second proposal for the CCCTB, as well as directives and plans which cohere with the CCCTB, are used to explain the features of the CCCTB: Memo´s and press releases mostly published by the European Commission support the

explanation of the CCCTB. Several researchers focussed on various types of cross-border loss relief. For the purpose of this thesis, the most comprehensible model will facilitate the comparison between cross-border loss relief, consolidation and separate accounting. Other models and researches on cross-border loss relief will support the model by adding different information to the topic. Furthermore, critique from

researchers and people who work in the field of international taxation will be used to support or avert the CCCTB. In order to investigate the impact on tax revenues in Member States, analyses by researchers with different kinds of simulations will give a broad and comprehensive view on the topic. Assessing public consultations held by the European Commission will not be part of the thesis. This is time-consuming and subjective. The thesis needs a scientific vision on the CCCTB. Therefore, the usage of public opinions is marginalised.

Limitations

The CCCTB is a European project. Therefore, national regimes and their

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- 10 - between the systems. Enterprises that only operate on a national level will therefore not be discussed. In explaining the CCCTB, the releases issued by the EU will be leading. Many aspects of the CCCTB include juridical complexities which lead to various questions. As this thesis focusses on the economic behaviour of

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Chapter 2: The Common Consolidated Corporate Tax Base

2.1 Introduction

The European Commission launched a proposal to unify the corporate tax base in the EU in October 2016.9 The proposal was a reaction towards a concept directive from 201110 which was rejected by the Member States. The CCCTB, as mentioned before, is part of an Action Plan issued by the European Commission. The Action Plan is called 'A Fair and Efficient Corporate Tax System in the European Union'.11 It is designed to deal with corporate tax challenges and abusive tax planning.

Reduction of compliance costs and the removal of administrative burdens are the essence of the CCCTB. To accomplish that, the European Commission offers a unified set of rules which should apply to all Member States of the EU. The corporate tax rates will not be harmonised under the current proposal. By consolidating profits, transfer-pricing issues which arise nowadays will be mitigated as the proposed

CCCTB ignores intra-group transactions. OECD guidelines on transfer-pricing will not be relevant anymore within the EU.12

In order to explicate the CCCTB, insight in the history of the European Internal Market is necessary. Thereafter, the key elements of the CCCTB can be explained. In order to objectivise the topic, critique from leading figures on the CCCTB will compensate the positive view of the European Commission. As stated before, the subquestion in this chapter is:

’What are the key elements of the CCCTB?’

In the following subchapters, this question will be elaborated. 2.2 Developments in corporate income taxation in Europe

The original EEC Treaty had some major objectives; one of these was a common market. A free flow of goods and services was of vital importance. Harmonisation of indirect taxes formed part of removing obstacles that hindered the free flow.

Harmonisation was completed in 1977 when the sixth VAT directive was enforced.13

9_{European Commission, COM(2016) 683.} 10_{European Commission, COM(2011) 121/4.} 11

European Commission, COM(2015) 302.

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- 12 - Harmonisation of direct taxes was more problematic. In 1962, the Neumark Report initiated a centralised system to compute total taxable income within a single Member State followed by ´an allocation of the bases of assessment among the different interested States´ in order to relieve double taxation. Contradicting the purpose of a common market, the idea was rejected because it would require ´a very broad alignment of national legislations and a very developed degree of collaboration between the tax authorities of the Member States´ and it would be ´far too different from traditional methods followed in the field of double taxation´.14 In 1975, the European Commission issued a proposal on the harmonisation of corporate tax systems that concerned double taxation relief and withholding tax for cross-border dividend payments. Moreover, a single tax rate was introduced. This proposal lacked support. Proposals from 1980 until 1990 were also withdrawn by the Member

States.15

In 1990, the European Commission communicated that the aim of direct tax

measures should be on completing the internal market and respect the principle of subsidiarity.16 Therefore, the Ruding Report from 1992 focussed on minimum standards for a corporate tax base rather than comprehensive harmonisation of tax systems. This reflected the shift from the common market to the internal or single market established by the Single European Act in 1993. Positive integration, where laws were adjusted to create more harmony and negative integration, where

discriminatory or restrictive practises by the Member States were prohibited, was the new approach to unify the market. However, the Ruding Report recommendations were also not accepted by the Member States.17

The new approach was not successful in the field of harmonising tax systems, but the adoption of the Parent Subsidiary Directive, the Merger Directive and the Arbitrage Convention in 1990 was an important step in cohering the Single Market. In 1991, a proposed directive on cross-border interest and royalty payment resulted from the successful adoption of the directives and convention in 1990. In 1997, the European Commission proposed the ‘Monti tax package’ which consisted of a code of conduct for corporate taxation, a savings directive and an intra-group interest and royalties

14_{The EEC reports on tax harmonisation, IBFD, 1963, p 142.} 15

KPMG (2012), The KPMG Guide to CCCTB, p. 7. 16_{European Commission, SEC(1990) 90.}

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- 13 - directive. This was the result of the re-evaluated approach of the Council of Europe towards direct taxation in the light of the Single Market. Tackling harmful tax

competition was in the light of attention here.18

The ´Lisbon Strategy´ launched in 2000, was the European Council´s incentive to make the EU the world´s most competitive and dynamic economy. The European Commission responded by an in-depth study into corporate taxation within the EU, together with a communication to the European Council.19 Various tax obstacles were identified and analysed in order to complete the Internal Market which consisted of several distinctive national tax systems. Problems such as the limited applicability of tax directives, the absence of cross-border relief, and the application of separate accounting under the arms’ length transfer pricing approach were considered. The transfer pricing approach was considered to be the reason of high compliance costs and double taxation. The European Commission incentivised several solutions, one of these was that ´Companies with cross-border and international activities within the EU should in the future be allowed to compute the income of the group according to one set of rules and establish consolidated accounts for tax purposes (thus

eliminating the potential tax effects of purely internal transactions within the group)’.20 This approach was only a partial solution; the underlying problem of the different national tax systems was not addressed.21

Besides the Common Consolidated Corporate Tax Base, another potential solution to the corporate tax policy problem arose: Home State Taxation (HST). This incentive was particularly beneficial for small- and mid-cap enterprises. Here, SMEs were allowed to apply the corporate tax rules from their domicile in all Member States where they were operating. Every Member State would still be able to apply its own corporate tax rate on the share of profit derived in that Member State. This share would be calculated by a formula based on added value per country.22

In order to design the most suitable solution to the underlying problem, public consultations and conferences occurred. One of the most catching public

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- 14 - as a reference for the common tax base. The CCCTB qualified as the favourite

possible solution. Therefore, in 2004 the European Commission collaborated with a working group and six sub-groups to establish the foundation of the CCCTB. This resulted in a significant number of working papers regarding building a new system and developing policy. Academics and business deputies advised and commented on the work by the European Commission and the working groups. This process lasted until 2011.23

2.3 CCCTB

2.3.1 Concept-directive of the CCCTB

On the 15th of March 2011, the European Commission published the first draft on the CCCTB.24 Attached to this draft was an impact assessment that explains the

comparison between certain policy choices.25 All options were evaluated against the status quo (so by doing nothing). The options were the adoption of:

 An optional Common Corporate Tax Base (CCTB),

 A compulsory CCTB,

 An optional Common Consolidated Corporate Tax Base (CCCTB) or

 A compulsory CCCTB

The difference between CCTB and CCCTB is that under a CCTB separate

accounting will still prevail, whereas the CCCTB includes an apportionment formula valid for all Member States. The options were evaluated against compliance costs, double taxation and the absence of cross-border loss relief. Under the CCCTB, it was possible to remove all the three mentioned obstacles. Businesses would be able to make solid economic choices and it would improve the overall efficiency in the EU. Especially in the light of compliance cost savings, the CCCTB was preferable over the CCTB. Macroeconomic analysis showed that an optional CCCTB was the most preferable option to implement.

The European Commission decided to present a directive over ‘soft law’ instruments due to the need of uniform rules across the EU and the satisfaction of the

23_{KPMG (2012), The KPMG Guide to CCCTB, p. 8.} 24

European Commission, COM(2011) 121/4.

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- 15 - proportionality requirement. Using a directive for a common tax system, multinational companies could overcome major legal complexities, huge costs arising from transfer prising issues and the inability to offset losses in other Member States. SMEs could be deterred from expanding over their national border without such a directive.26 Another objective of the European Commission was to stay competitive in the global market. Powerful nations like the United States, China and Japan have a uniform tax system whereas the Internal Market in the EU has different systems. For these countries, and other countries that trade with Member States, it is more complex to deal with such a variety of tax systems. One uniform tax system across the EU would even be profitable for third-country trading partners, and therefore strengthening the competitiveness of the Member States.

After the publishment of the proposal, it was sent to the European Council for

technical discussion. As shown in the following section, this process took a couple of years before a renewed proposal was introduced.

2.3.2 Re-launch of the CCCTB proposal

On the 25th of October 2016, the European Commission re-launched the proposal for the CCCTB.27 Various discussions in the European Council since 2011 have

revealed that the first proposal was too ambitious. It was very unlikely that the proposal would be adopted without a staged approach towards consolidation. In 2015, the Action Plan by the European Commission advised a step-by-step approach when implementing the CCCTB.28 First, agreement upon a common set of rules on the common tax base has to be reached. Afterwards, consolidation will be the topic of discussion. The European Commission will therefore adopt a proposal for a CCTB and a proposal for a CCCTB. These two proposals will replace the proposal from 2011.

Complementary to the CCCTB-proposal, the European Commission presented a new impact assessment.29 New issues with an influence on corporate taxation in Europe have risen since 2011, reinforcing the need for a new approach. Multinationals tend to use aggressive tax planning structures which undermine the fairness of the Single

26_{European Commission, IP/11/319.} 27

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- 16 - Market, moreover frustrate corporate and private tax payers who honestly contributed to the recovery of public finances after the global economic and financial crisis.30 The crisis also revealed the lacking resilience of businesses that use tax-incentivised capital structures, ultimately putting the economy at risk. Corporate tax systems should secure neutrality regarding debt or equity financing decisions by companies. Furthermore, the European economy lacks growth and investment compared to other large economies. Especially the investment in R&D activities remains diminutive. In order to stay competitive and innovative, European businesses need to be

encouraged to invest. Structuring a corporate tax system that incentivises innovative investment and minimises negative effects of investment could play an important role in the encouragement.

2.3.2.1 Decomposing CCCTB

Decomposing the abbreviation gives a better view on what the CCCTB means:31

 Common: a set of rules that is applicable to all Member States of the EU

 Consolidated: profits and losses of parent- and subsidiary companies are summed as if it was a single economic entity

 Corporate: only entities that qualify as a corporation under specific laws32 will be taxed, so human beings will be excluded

 Tax Base: the profit of an enterprise is the object of taxation. The tax base is defined as revenue minus qualifying expenses and exempted elements. One of the most important features of the CCCTB is that only the tax base is

harmonised. The tariff remains unharmonised, so Member States can freely choose their corporate tax rate.

2.3.2.2 Benefits of the CCCTB

Adoption of the CCCTB will lead to a significant reduction in administrative burdens, compliance costs and tax obstacles for businesses in the EU. Businesses with cross-border activities in the EU can calculate their taxable income under a single system which should be more efficient than calculating taxable income under multiple

30

For instance the widespread debate on the tax aversion by a prominent American Coffee Company. 31_{Van Eijsden (2011), p.6.}

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- 17 - systems. These businesses will be able to file their tax return through a ‘One Stop Shop’. This means that they will have to deal with only one tax administration, like domestic companies would have to do. Losses incurred in one Member State could be offset against profits in another which is potentially very important for small-caps and start-ups. Due to the implementation in EU law, the CCCTB will be a stable and transparent system enforcing companies greater legal certainty and removing double taxation. The CCCTB will lead to a time saving of approximately 8% in annual

compliance activities and 67% in constructing a subsidiary. Therefore, it will be easier (especially for SMEs) to go abroad.33

One of the new issues in the field of taxation is the combat against tax avoidance. Making the CCCTB mandatory for the largest groups operating in the EU, it will help in the combat.34 By prevailing over national tax systems, the CCCTB will eliminate current loopholes and mismatches between these domestic systems, which prevents tax avoidance by companies. Recently, the OECD worked on transfer pricing

guidelines because companies used transfer prices to shift profits within their groups. In the context of the CCCTB, complex transfer pricing guidelines will be superfluous due to the introduction of consolidation. Moreover, the common base creates

transparency regarding the effective tax rate of each Member State. This is the result from removing preferential and vague tax regimes that currently exist within domestic laws. Furthermore, the CCCTB contains anti-abuse measures to defend the Single Market against base erosion and profit shifting to third countries.35

The CCCTB will improve the investment climate in the EU. The predicted raise in investment is 3,4% and growth will rise with 1,2%. Companies will benefit from the more predictable rules and the reduction in compliance costs. Therefore, the EU will be more attractive for foreign investors. The new proposal for the CCCTB

incentivises R&D-investment as well, which is necessary for further growth. The currently existing debt-bias in corporate taxation will be eliminated, which leads to a stronger financial stability in the EU. The stability will slightly be increased by the

33

European Commission, MEMO(2016) 3488 p. 2.

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- 18 - transition of revenues from tax avoidance. Under the CCCTB, these revenues will flow into the treasury of the Member States instead of the multinationals’ wallets.36

2.3.2.3 New features of the re-launched CCCTB

As mentioned earlier, the re-launched CCCTB will consist of two proposals. This will make it possible to implement the CCCTB in two stages. First, Member States will be able to agree on the common base. In a later stadium, they can work on the complex aspects of consolidation. This should make the negotiation process more feasible and manageable. Discussions could be more constructive and agreement could be reached quicker, without the reduction of ambition. Regardless of the existence of two proposals, the re-launched CCCTB has a couple of improved features in relation to its predecessor from 2011.

Firstly, for the largest companies the CCCTB will be mandatory. In the proposal, a large company is defined as a group with global consolidated revenues of €750 million or more. In the proposal from 2011, there was an optional CCCTB which easily could lead to aggressive tax planning by large companies. By making the CCCTB mandatory for these companies, its potential as an anti-abuse tool is

maximised. Companies that fall below the threshold could opt for the CCCTB as well in order to give them the same benefits if they want to. The mandatory aspect will create more certainty for businesses when it comes to anti-abuse measures. This results in a more predictable business environment in the EU.37

Secondly, the CCCTB will support Research and Development. Research and innovation are the key drivers of growth. By introducing a new R&D-incentive, companies in the EU are encouraged to invest in research and innovation. Companies will be given a super-deduction for their R&D-costs under the new regime. Investment in R&D leads to a 100% deduction of the investment plus an additional amount, depending on the amount spent on R&D. For the first €20 million, there will be an additional deduction of 50% of R&D costs. If the investment is over €20 million, the part that is over this amount will qualify for a deduction of 25% of this amount.38 To support small-caps that decide to opt-in to the CCCTB, even a bigger

36

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- 19 - deduction is granted. Under certain conditions, start-ups will be offered up to 200% deduction of their R&D costs.

Thirdly, the CCCTB will remove the incentive for debt-accumulation. Currently there is a debt-bias in corporate taxation. Most European tax systems allow a debt interest deduction, but not a deduction for costs of equity. This bias incentivises debt-overhang, which results in financial instability of companies and undermines the overall economy. Therefore, the CCCTB introduces an ‘Allowance for Growth and Investment’ (AGI), which will give companies equivalent benefits for using debt or equity financing. The AGI will allow a tax deduction for companies that choose equity financing over debt financing. The change in equity will be multiplied by a fixed rate which is composed of the risk-free rate plus a risk premium. This fixed rate should be multiplied with the investment resulting in the amount of deduction. Deductions are allowed for ten years. Because of the floating risk-free rate, the AGI will change each year.39 By introducing the AGI, companies are offered more diverse sources of funding, which was a plan of the European Commission for a Capital Markets Union.40

2.3.2.4 Formulary Apportionment

After consolidation of a company´s tax base, a distribution rule should apply. Each Member State where the company has activities has the right to levy a part of the consolidated tax base. The proportion of the base that a Member State can tax, will be determined using assets, labour and sales as three equally weighed factors. The apportionment formula has the following form:

41 The three factors are determined as follows:

 Assets: This factor is an average value of all fixed tangible assets owned, rented or leased by a group member as the numerator and all fixed tangible

39

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- 20 - assets owned, rented or leased by the group as denominator.42 Intangible and financial assets are excluded from the formula due to their mobile nature and evasion risks43

 Labour: The labour factor consists, as to one half, of the total amount of the payroll of a group member as the numerator and the total amount of the payroll of the group as the denominator. The other half consists of the number of employees of a group member as the numerator and the number of

employees of the group as the denominator. Where an individual employee is included in the labour factor of a group member, the payroll relating to that employee is allocated to the labour factor of the same group member.44

 Sales: The sales factor consists of the total sales, including sales from a permanent establishment, of a group member as the nominator and the total sales of the group as denominator.45

The existence of different industries with each its own characteristics makes it necessary to adjust the apportionment formula. Rules that need to be defined in the future will enable the adjustment for every sector according to their needs.46

2.4 Critique on the CCCTB

The introduction of the first proposal caused rumour within Member States´ governments. Many aspects, like the optional character and the lack of R&D-incentives, led to the rejection of the proposal. Implementation needs unanimity by the Member States. The new proposal solved the critical points from the first

proposal. Still, the second proposal will not be irreproachable. National governments as well as tax specialists commented on the recent developments.

2.4.1 Critical notes by tax specialists

As the new proposal for the CCCTB is very recent, research on this proposal is scarce. But the presentation of the Action Plan in 2015 by the European Commission

42_{Art. 34 of the Directive.}

43_{European Commission, COM(2016) 683 p. 10.} 44

Art. 32 of the Directive. 45_{Art. 37 of the Directive.}

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- 21 - resulted in an analysis published in the International Transfer Pricing Journal.47 Here, they discussed the announced re-launch of the CCCTB. The authors embrace the initiative of the European Commission to increase transparency and the reduction of compliance costs and complexity, but are still critical on some elements of the CCCTB.

The European Commission claims that the CCCTB is a magical solution to the profit shifting problem via transfer pricing. However, companies are still able to manipulate parameters like payroll costs used to allocate profits. The CCCTB needs to improve by cooperating with the OECD BEPS initiative. In addition, the authors question the fairness of the allocation of profits. The parameters do not comprise for example intangible assets, which could lead to a distortion of profit allocation.

As the tax rates will not be harmonised, tax competition in Europe may still remain. Companies could still consider the parameters for the profit allocation when making investment decisions. For example, payroll costs can be influenced by reducing headcount and assets in countries with high tax rates and move these to low-tax countries or even to third countries.

In calculating the apportionment formula, the European Commission stated that differences in sectors should be included. Creating deviating regimes may cause tax competition. More important is the fact that this may lead to unlawful state aid, because in certain Member States some sectors prevail over others. This bottleneck can raise much discussion between the involved parties.

2.4.2 Viewpoints of Member States

The Action Plan by the European Commission caused some critical reactions by governments of Member States. For example, the Dutch national government reacted by a letter from the Secretary of State.48 The proposal from 2011 was rejected on the grounds that the disadvantages of the CCCTB were bigger than the advantages. The plans from 2015 are substantially different from the plans from 2011. Therefore, it has become more likely that the Dutch national government will join the discussion with a positive view. Nevertheless, there are some struggles with the renewed plans. A mandatory CCCTB for large companies and an optional

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- 22 - CCCTB for smaller companies leads to two corporate tax systems in the country. This could cause operational problems for the Dutch tax administration. The switch from a national to a common base is a very radical operation. Therefore, it is

uncertain if it has positive economic effects on all Member States. Changes in the common base could only be reached by unanimity, which reduces effectiveness in changing legislation. Member States will not be able to change the base in order to attract foreign business or remove loopholes. This is contradictory to the sovereignty of Member States. Therefore, the Dutch are sceptical towards the CCCTB.

The Irish government used a new economic modelling system to calculate the impact of the introduction of the CCCTB in their country.49 Irish economic output would fall by 1,5% and the flow of investment into Ireland would fall by 5%. This would result in a drop of 5,5% of Irish corporate tax revenues. Therefore, the Irish national

government is opposed to the CCCTB. They claim that countries like France, who pushed the CCCTB, will most likely profit the most from a new regime.

Recent political developments within the union do not support the CCCTB either. The so called ‘Brexit’ leads to the fact that the United Kingdom most likely will not

implement the CCCTB. More broadly, criticism against the European Union

increased in the past years. The rise of populism and growing Euroscepticism make it much more difficult for the European Union to implement proposals like the CCCTB. 2.5 Conclusion

This chapter started with the following question: ’What are the key elements of the CCCTB?’

To answer this question, some background information was needed. As one of the EEC Treaty’s main objectives was to provide a common market, a free flow of goods and services was necessary. Harmonisation of taxes was important in this area. Harmonisation of indirect taxes did not cause that much problems as harmonisation of direct taxes. The European Commission undertook multiple attempts to harmonise the corporate tax base in the EU. Until 2000, this did not lead to much success. After the launch of the Lisbon Strategy, they started an in-depth study on corporate

taxation in Europe. Problems like the inability to offset losses cross-border and high

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- 23 - compliance costs for multinationals were identified. In order to address these

problems, they came up with a couple of solutions. One of these was the CCCTB. The European Commission started a process to elaborate this solution, which was finished in 2011.

The first proposal for the CCCTB was introduced in 2011. The attached impact assessment clarified that an optional CCCTB was the best option. After some years of technical discussion and new economic insights, a renewed proposal was

necessary. In 2016, the European Commission proposed a staged approach for the CCCTB. First, the CCTB should be implemented. Afterwards, discussion about consolidation would be possible. Therefore, the European Commission issued two proposals.

The new CCCTB-proposal will reduce compliance costs and administrative burdens due to the ‘One Stop Shop’ where businesses can file their taxable income to only one tax administration. By making the CCCTB mandatory for large companies, it will also combat tax avoidance. Consolidation will help in this battle too, because abuse in transfer pricing will almost be eliminated. Furthermore, the new proposal facilitates R&D-investment and eliminates the debt-bias in investment. Forecasts show that this leads to more investment in and a bigger growth of the European economy.

Critical remarks were placed by tax specialists and national governments. Tax

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Chapter 3: Cross-border loss offset and Consolidation

3.1 Introduction

The European Commission re-launched the proposal for the CCCTB on the 25th of October 2016. Different from the first proposal, they introduced a staged approach when implementing the CCCTB. First, the CCTB should be implemented. Afterwards, discussion on consolidation should start. Therefore, companies who would like to use the full benefits of the CCCTB would be deceived. In order to facilitate some of the benefits of the CCCTB, the European Commission proposed a temporary system of cross-border loss offset.50 This is especially important for start-ups and businesses who want to expand in the Single Market, because many times they incur losses at the beginning. In order to alleviate this problem, they can offset their foreign losses in the home state. When the foreign subsidiary becomes profitable again, the Member State of the parent will recapture the taxes that it relieved during the loss phase. In this way, Member States will not lose in the long run from an unprofitable subsidiary in another Member State.

In this chapter, cross-border loss offset and consolidation under the CCCTB will be compared to the status quo. In order to measure the impact of cross-border loss offset, the introducing part of a model by Gérard and Weiner (2003) will be used. The main question of their paper was: ‘’Cross-border loss offset and formulary

apportionment: How do they affect multijurisdictional firm investment spending and interjurisdictional tax competition?’’ Measuring the effects of consolidation will be done by a model of Ortmann and Sureth (2014). This model is based on the first proposal for a CCCTB, but changes in the new proposal will not have an impact on the validity of this model. Their main question was: ‘’Can the CCCTB alleviate tax discrimination against loss-making European national groups?’’ The subquestion of this chapter is:

’What are the financial consequences for multinationals when introducing cross-border loss-offset and consolidation under the CCCTB?’’

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- 25 - 3.2 Cross-border loss offset

If implemented, it will not be the first time that cross-border loss offset is possible in the EU. In the Marks & Spencer-case51, the ECJ ruled that under certain conditions, cross-border loss relief should be possible. Marks & Spencer is a British-based enterprise that had loss-making subsidiaries in other Member States. The British tax system has a facility for group relief. This was only possible for domestic companies. The ECJ ruled that this was contrary to the freedom of establishment. The obstacle is justified when balance between taxing rights in different Member States could not be secured, when there is a possibility of double-deduction of losses, and when there is a possibility of tax avoidance. If these conditions are not met, and there is no

possibility of loss relief in another Member State, the state of the parent should facilitate loss relief for the foreign subsidiary.52

Before consolidation is confirmed, the temporary system of cross-border loss offset will prevail. Gérard and Weiner53 introduced a model to show the effects of the introduction of cross-border loss offset.

3.2.1 Gérard & Weiner (2003), cross-border loss offset

After the European Commission proposed a new method to tax multinational companies in the EU, Gérard and Weiner investigated the impact of cross-border loss offset and formulary apportionment of a consolidated tax base on investment and transfer pricing behaviour of multinationals, and the impact on government behaviour when engaged in tax competition. This thesis only includes the impact of cross-border loss offset on multinationals. Gérard and Weiner made a distinction between corporate tax systems with a separate-entity approach and a consolidated tax base with formulary apportionment. In this paragraph, only the separate-entity approach by Gérard and Weiner is included. The consolidated tax base with formulary apportionment was reconsidered in more recent papers when the first proposal for the CCCTB was already present.

In their model, a multijurisdictional firm consisting of a parent and two

subsidiaries/branches is assumed. The difference between subsidiaries and branches has no economic substance in this model. The parent is located in

51

C-466/03 (Marks & Spencer II). 52_{Burgers et al. (2013), p. 632-633.}

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- 26 - jurisdiction r, the affiliates in i and j. The parent has invested one unit of money in production tools in both affiliates. A fraction α is invested in country i and a fraction (1-α) is invested in country j. Both affiliates produce and sell one unit of goods

together. i produces fraction α and j produces fraction (1-α). Furthermore, they define p as the price per unit and assume that dividends are the only stream of funding from the affiliates to the parent.54

For both entities i and j they sell their outputs (α) with probability ω, and obtain a profit of pα (p(1-α) for j). In case of failure, they incur a loss of or with probability 1-ω with p≥ ≥pα (or p≥ ≥p(1-α)). The restrictions on the losses allow the firm to match excess losses - pα>0 or - p(1-α)>0 against the tax base in the other jurisdiction while keeping the tax base positive in that jurisdiction. The value of the project can take four different expressions. The possible outcomes for jurisdiction i and j are:

 good-good probability ω^2: _{= p}

 good-bad probability ω(1-ω): ₌_pα-

 bad-good probability (1-ω)ω: _{= p(1-α)-}

 bad-bad probability (1-ω)^2: _{= - (} ₎

The expected value of the firm (before tax) is then:

This value is assumed to be positive, otherwise the firm would not invest. This expression lacks α so they are indifferent (in absence of tax) of locating in either jurisdiction.55

3.2.2 Introducing taxation

Tax can be levied on the level of the active entities or at the level of the parent. The authors first considered taxation on the level of the active entities. The tax base creates room for depreciation allowances, so one unit of investment in country i creates a flow of tax shield . The corporate tax rate is . For country j the same signs apply. The expected tax liability for the whole firm is:

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- 27 -

The expected after-tax firm value without loss offset is:

This value depends on the distribution of investment a between the active entities. When the distribution of investment between the two entities is irrelevant, there is capital export neutrality. To reach this, the tax base and the rate should be

harmonized, so and .

In case of taxing at the level of the parent, the tax system is by definition capital export neutral when the tax base and rate are attached to the parent’s location. In this case, the expected tax liability becomes:

The value depends on the location of the parent here. With this form of taxation, the location of the parent is independent of the distribution of investment. In the sequel, tax shields do not play a role anymore.56

3.2.3 Introducing cross-border loss offset

Cross-border loss offset is introduced by setting a dummy variable k. When it is (fully) permitted, k equals one. If not permitted, k equals zero. The expected firm value with loss offsetting becomes (under taxation at activity level):

Assuming no change in tax rates and liabilities, this equation implies:

To establish capital export neutrality, the tax base and rate should be harmonised. Taxation on the level of the parent yields the following expected firm value:

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- 28 - Here, capital export neutrality holds by definition. To create capital import neutrality, tax bases and rates should be harmonised. Concluding, Gérard and Weiner make the following proposition:

‘’Under the assumption that changing the rules regarding cross border loss offset does not alter the tax rates, expected tax liabilities are not larger when losses can be offset across borders. Then the expected firm value is not smaller. As a consequence, cross-border loss offset makes the multijurisdictional firm better.’’ Cross-border loss offset can make the firm better off than vertical carry forward in the same jurisdiction if

where the carry forward occurs in the year after. r is the discount rate, is assumed to be positive.57

3.3 Consolidation under the CCCTB

As mentioned earlier, the CCCTB will provide consolidation for multinationals operating in the EU. The impact of consolidating results is studied by several researchers, but many papers are published before the first draft of the CCCTB. Nevertheless, Ortmann and Sureth studied the impact of the CCCTB after the first draft was published.58 This paper will be used to analyse the impact of the CCCTB.

Before analysing the impact of consolidation under the CCCTB by using their study, some preliminary remarks should be taken into consideration. Germany and France matched their loss-offset conditions. This means that the back and carry-forward provisions are almost equal. Losses can be carried carry-forward up to 1 million euros of net income. Remaining loss carry-forwards can only be offset up to 60% in Germany and 50% in France of net income above 1 million euros.59 Furthermore, cross-border dividend payments between France and Germany are tax-exempt, except for a 5% lump sum of gross dividends distributed from France to Germany. In both countries, businesses are subject to local taxes and a surcharge which will be taken into account in the model.60

3.3.1 Ortmann & Sureth, CCCTB

Ortmann and Sureth studied the conditions under which SA or the CCCTB is preferable for a multinational, particularly focussed on loss offsets. In their model,

57_{Gérard; Weiner, Cross-Border Loss Offset and Formulary Apportionment (2003), p. 9-11.} 58

Ortmann; Sureth, Journal of Business Economics (2016), no. 86, p. 441-475. 59_{The so-called ‘’minimum taxation-rule’’.}

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- 29 - Ortmann and Sureth use a parent company based in Germany with a fully owned subsidiary in France. These companies are unlevered and invested in a domestic project that generates cash flows and causes depreciation of assets. This is the only business activity. France distributes all profits to Germany in the form of dividend at the end of each year. These dividends are either used as investment in the capital market or to redeem a loan. In the light of tax planning, the authors assume that the multinational does not seek a more tax-efficient solution under the CCCTB system and it does not use profit shifting through transfer pricing under separate accounting. Furthermore, compliance costs and shareholder taxation are neglected, because these should not alter the investment decisions. Thus, the distinctions between the two loss-offset mechanisms could be manifested. Depreciation is identical in both countries (the straight-line system). For both countries, the corporate tax rates stay the same under the CCCTB. The group will legally qualify for the CCCTB by

assumption. Pre-tax debit and credit interest rates are identical in both countries (otherwise this could cause arbitrage) and the after-tax net cash flow is the criterion for identifying tax effects.61

3.3.1.1 Separate accounting

The main goal of most businesses is to maximise after-tax net cash flows, so this is assumed here too. The group’s net cash flow in a period ( _{) is determined by} adding the gross cash flows of both companies ( and _{). The pre-tax} interest income from the financial investment is added too (

_and

the tax payments are subtracted ( _and _{). In total:}

If the subsidiary has a positive net cash flow, it distributes dividends to the parent company. A dividend payment is limited to net cash flow minus depreciation. This means that the amount of depreciation ( _{) is retained in the French subsidiary.} This amount is assumed to be reinvested in the capital market. When there is a loss in the subsidiary, the subsidiary takes a loan from the parent. Although the

companies are fully equity-financed, it is assumed that the liquids are all invested in projects or assets and thus not available for loss-compensation. Because there is a positive pre-tax present value of earnings, losses are only temporary, and so there is

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- 30 - no insolvency risk. The subsidiary is assumed to redeem 10% of the principal amount ( ) next period. It has to pay interest to the parent at the market rate. If the

principal amount is redeemed, this payment is deducted from the dividend. If the parent lacks funds, the parent borrows from the capital market. Finally, when there is excess cash flow, so after redemption of the principal amount and deduction of deprecation, this amount is distributed to the parent. Excess cash flows of the parent are invested in the German capital market. As a result, the total dividend distribution in a period is:

Tax payments per company result from multiplying the tax rate ( ) by the tax base ( . The tax base is determined by the adjusted gross income , the loss-offset ( ) and the loss carry-back .

The adjusted gross income in both countries is determined similarly, except for the 5% lump sum on gross dividends which rises the German income:

Loss-offset for both companies is the same, except for the 0.5 in France and 0.6 in Germany of the amount above 1 million euros of net income that can be used to offset losses:

The loss carry-forward at the end of period t, can be used in period t + 1. The following equation can be used for both countries:

Loss carry-backs are allowed up to 1 million euros in both countries, so:

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- 31 - The parent receives profits from the subsidiary as dividends and compensates losses otherwise. Therefore, the financial investment _{is equal to the total net cash}

flow _{in Germany, and the financial investment} _{in France equals zero.}

This is not the case when profits in France exceed the amount of depreciation. If so, the financial investment _{equals depreciation} _{, and in Germany} 62

3.3.1.2 CCCTB

The net cash flow under the CCCTB-regime is the equivalent of the net cash flow under separate accounting:

Taxation under the CCCTB is determined by applying the domestic tax rates against the share of the tax base of the whole group. So a share of β of the group base is allocated to the German parent, and a share of (1-β) is allocated to the French subsidiary. This results in a total tax payment of:

The tax base ( ) consists of the adjusted gross income ( ) when this is positive, minus loss-offset ( ) if applicable at the group level. If the sum of both adjusted gross incomes is negative, the tax base will be zero.

The adjusted gross income equals:

The amount that can be offset is restricted by the lesser of either the adjusted gross income or the loss carry-forward accumulated in previous periods:

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- 32 - Loss carry-forwards ( ) are equal under CCCTB and SA, except for the fact that loss carry-backs are not considered63:

Under the system of the CCCTB, the same accounting principle with respect to

dividend payments to the parent applies as under the system of SA. So dividends are only distributed when the profits of the subsidiary are higher than the amount of depreciation. This means that when the profits are higher than depreciation, the German financial investment ( _{is equal to} _{and the French} one ( _equals _{. If these profits are not higher than the depreciation, then} _and _{equals zero.}64

3.3.2 Analysis using after-tax future values

To analyse the differences between the systems, Ortmann and Sureth use the after-tax future value of the investment of the group by summing the compounded net cash flows in a two-period model. Because all endogenous variables are components of net cash flows, together with depreciation and exogenous variables, net cash flows institute the differences between CCCTB and SA. To analyse tax effects, pre-tax cash flows vary in increments of €200.000 between -€3 million and €3 million in the first period for both entities. To analyse loss-offset distinctions, both entities are required to have at least one year with losses. Using a growth factor (which is always negative)65 that should be multiplied by the cash flow from the first period, they make sure that each entity has a positive and a negative cash flow in the total of two

periods. The authors set the depreciation for both companies at €30.000, so the projects are valuable after taxes. The effective tax rates are 30,95% for Germany and 38,93% for France as computed by the Centre for European Economic Research.66 Pre-tax debit and credit interest rates are assumed to be 2%. Furthermore, they assume that loss carry-forwards at the end of the second period could be offset against future projects’ profits. The two-period model clarifies the decisive

characteristics of both tax systems and singles out loss induced implications. Main

63

Loss carry-forwards are allowed without limitations whereas loss carry-backs are disallowed (article 43 CCCTB 2011).

64_{Ortmann; Sureth, Journal of Business Economics (2016), no. 86, p. 451-452.} 65_{This formula is}

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- 33 - differences in loss-utilisation between the two systems arise in the first two periods, because loss carry-back is possible under SA but not under the CCCTB. Estimating loss utilisation in periods after the time span is difficult. To keep it as simple as possible, the authors estimate the tax effects of loss carry-forwards using empirical evidence. Overall tax-benefit from loss-offset under the CCCTB is, according to the authors, proven to be higher under the CCCTB. Under the system of SA, the loss carry-forwards that may be utilised can be valued on _{of their face value.}67 Under the CCCTB, loss carry-forwards are valued to be _{of the face} value. 45% is chosen because there is cross-border loss-offset and non-existence of minimum and dividend taxation under the CCCTB which are advantageous over SA. After-tax future values of the concern depend, under both taxation systems, on ‘’earnings’’. Earnings are defined as ‘’cash flows CF less depreciation D’’ of the parent and the subsidiary. Taxation of these earnings results in the after-tax future values. These after-tax future values are the sign whether the CCCTB is more profitable than SA. Ortmann and Sureth plot earnings in increments of €200.000 for both companies in a graph. However, the second period of cash flows is not plotted because these are endogenously determined by the growth factor. Disparities in future values are mainly driven by utilisation of losses under both systems. So if there are more losses utilised in the corresponding time span, then there are higher after-tax future values.68

3.3.2.1 Future values under the CCCTB

Assuming that the same amount of money is invested in projects in both countries, the apportionment factors assets and labour are equally allocated to both countries. Thus, 50% of the factors are attributed to each entity in both periods. Dividends creating financial assets in Germany do not alter this, because financial assets are excluded from the determination of apportionment. The sales factor follows the path of the respective pre-tax cash flows. If a pre-tax cash flow is negative, sales are attributed for 100% to the other entity, assuming there are no sales in the

67

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- 34 - making entity.69 To illustrate the variation in German and French earnings, Ortmann and Sureth plotted the following graph:

Area 1 represents the combinations of German and French earnings that result in a zero or negative CCCTB. However, this results in the highest future values, as all losses can be utilised in the second period. Area 1 represents a full loss-offset scenario where the loss carry-forwards of the first period can be utilised to offset a large proportion of profits in the second period (due to the growth factor). The tax burden in the second period will therefore decrease largely. The highest future value in area 1 will be around €175.000. Area 2 represents the combinations of earnings that result in a positive CCCTB in the first period. Here, the future values decrease with the increasing earnings. This is the result of losses that may not be utilised in the time span that is considered here. Profits of the first period are taxed, whereas the losses of the second period are assumed to be offset against future profits for

_{only. When taking the maximum value of earnings, €3 million, the} lowest future value of -€985.679 occurs. The authors conclude that increasing first period’s group earnings leads to a relative bigger gap between payable taxes in the

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- 35 - first period and the present value of tax refunds in the second period. These refunds result from loss carry-forwards.70

3.3.2.2 Future values under separate accounting

Applying the two-period model to SA is much more difficult than under the CCCTB. The tax burden of the group depends on more factors, and the treatment of losses is more complex. This is the graph regarding earnings and future values under SA:

In area A, the earnings of both entities range between -€1,2 million and €1 million in the first period. Here, all losses may be utilised if there applies no minimum taxation and there are no loss carry-back restrictions for both companies. Future values slightly differ in this area, where the highest value is €173.789. If the earnings of one or both entities in the first period exceed €1 million, the earlier mentioned loss carry-forward restriction applies in the second period. Future values will decrease more if these limits will be exceeded in increasing amounts. This is caused by the inability to offset a bigger share of losses. In the case that one entity may not entirely utilise its losses but the other may do, future values range between area B (loss carry-back

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- 36 - restriction in Germany), D (loss carry-back restriction in France), F (minimum taxation in Germany) or H (minimum taxation in France). If both companies may not be able to utilise their entire losses, the future value lies in area C (both entities face loss carry-back restrictions), E (minimum taxation in Germany and loss carry-back restrictions in France), G (both entities face minimum taxation) or I (loss carry-back restrictions in Germany and minimum taxation in France). If both entities have first period future values of the maximum of €3 million, the lowest future value of -€696.755 appears due to the loss carry-back restriction of the largest share of losses.71

3.3.2.3 Relative favourability of the tax systems

Based on the future values estimated in the previous graphs, Ortmann and Sureth plot a new graph. It shows which of the two tax systems is advantageous for which combinations of earnings:

Most of the combinations lead to a favourable CCCTB. In total, 622 of 961

combinations reveal that the CCCTB is preferable. SA is only advantageous if both entities’ earnings are positive in the first period or if one of the entities has slightly negative earnings and the other positive earnings. Four different tax effects were identified that are crucial for the relative favourability of one of the tax systems. The

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- 37 - relative size of these effects determineswhich tax system is overall the most

preferable. These tax effects are:

 Loss utilisation effect – relates to the share of overall losses of the group that can be offset against profits. Loss carry-forwards that exist after the second period are also important when determining the attractiveness of each system.

 Dividend taxation effect – in the French-German setting, this is always a disadvantage for SA. This is because 5% of the dividends are non-deductible expenses in Germany. Under the CCCTB, this rule will not apply.

 Interest taxation effect – the subsidiary takes a loan from the parent, so under SA the interest payments are deducted in France and taxed in

Germany. The effective tax rate in Germany is lower, so this is an advantage (in this case) of SA as intragroup loans under CCCTB are ignored.

 Tax base allocation effect – under the CCCB, the allocation of assets and labour is more or less equal. As the taxes in France are higher, profits should be taxed mostly in Germany. However, as every entity faces a loss and a profit period, the tax system that is advantageous in one period becomes disadvantageous in the other period. So the allocation effects in this time span are probably counterbalanced.

These effects are used to evaluate the graph. Considering the combinations in area a (including the diagonal line), the CCCTB is always negative or zero. Utilisation of losses could be achieved for all combinations under the CCCTB. Due to loss carry-back restrictions and minimum taxation, this could only be achieved for a few combinations under SA. When loss offset is possible under both systems, the dividend taxation effect causes a preference for the CCCTB. The interest taxation effect causes a preference for SA. However, the dividend taxation effect is in this case bigger than the interest taxation effect. Therefore, the interest taxation effect will be vanished.

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- 38 - effects do not appear at all as the French company does not lack any liquidity in the first period.

Considering area c1 and c2, where one company incurs negative earnings and the other positive ones, favourability depends on the specific combinations of earnings of both entities. Under SA, an entity may carry back losses of the second period and it must carry-forwards losses of the first period. Under the CCCTB, these losses are offset cross-border in each period. In both areas, the CCCTB is positive in the first period and negative in the second period. In the first period, all losses of an entity are offset against the profits of the other. In the second period, these losses exceed the profits of the other entity. SA may be favourable when advantages from carrying back losses are greater than from cross-border loss-offset under the CCCTB. In area c2, the interest taxation and the allocation effect cause bigger SA-advantageous area than in c1. Interest is deducted in France and taxed in Germany, where the tax rate is lower. Due to restrictions on loss carry-backs under SA, the system’s attractiveness declines relatively when earnings increase. SA only remains attractive if the benefits from cross-border loss-offset are low. This is the case when profits and losses under the CCCTB are very unbalanced.

Concluding, cross-border loss-offset and unlimited loss carry-forward without minimum taxation makes the CCCTB favourable in most cases. SA only becomes profitable if profits and losses relate in such a way that loss carry-back may be utilised. From the four identified effects, the loss utilisation effect has the biggest effect on the favourability of one of the systems. The other three effects have only marginal influence on the favourability.72

3.3.2.4 Generalisation of the results

As Germany and France are the biggest economies in the EU, this model is in many cases applicable. However, there are 28 countries in the EU nowadays. All countries have different loss-offset provisions. To capture these differences in national laws, Ortmann and Sureth use loss-offset coefficients. This model should be representative for all Member States. In the following table, the different loss-offset provisions per country are summarised (data from IBFD 2015):

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- 39 - All Member States allow loss carry-forwards as shown in the table, but not every Member State has loss carry-back provisions.73 In order to distinguish, they use parameters η (share of AGI of each entity against which previous periods’ loss carry-forwards can be offset) and π (share of against which current losses can be offset). Use of the equations from paragraph 3.3.1.1 results in:

_,

To Member States without back provisions, but with no limitations on carry-forwards applies η=1 and π=0. Here, SA and CCCTB provisions are the same, except for cross-border loss-offset under the CCCTB. Under these circumstances,

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- 40 - the CCCTB is always preferable over SA. If the 5% non-deductibility for dividends is disregarded, the following figure emerges:74

Favourability of SA has declined here to about one-eighthof the combinations. Only combinations that lead to more losses allocated to France (because of higher taxes) than Germany result in a preference for SA. For Member States that have carry-forward time-restrictions, a figure similar to this one appears because first-period losses can be utilised in the second period.

When applying unlimited carry-forwards and 1-year carry-backs (η=1, π=1), SA becomes relatively more advantageous:

Consolidation under the CCCTB