2.1.Bringing taxation closer to where profits are generated and ensuring effective taxation of profits
A fully-fledged CCCTB would make a major difference in reinforcing the link between taxation and where profits are generated. While the new proposal is being prepared, work must continue in the framework of the proposal currently on the table of the Council on some international aspects of the common base which are linked to the BEPS project. For example, this would include adjusting the definition of "permanent establishment" so that companies cannot artificially avoid having a taxable presence in Member States in which they have economic activity 8 , and improving the Controlled Foreign Corporation rules 9 , which ensure that profits parked in low or no tax countries are effectively taxed. Consensus on these elements should be achieved in the Council within 12 months, and should be made legally binding before an agreement is reached on the revised CCCTB. This will ensure a coherent EU approach to implementing the new international standards arising from the OECD BEPS project, providing consistency for businesses and preventing a fragmented approach in the Single Market.
In addition, there are a number of other measures which can also be pursued to re-establish the link between taxation and economic activity, in order to ensure fairer taxation in the EU. The Commission will consider how to ensure effective taxation of profits, while taking into account the need for a competitive and growth-friendly corporate tax environment.
The Commission will explore concrete measures to ensure that these objectives are achieved, starting, for example, within the Code of Conduct for Business Taxation. The Commission recommends that the Code criteria be modified so that the Group can give high priority to ensuring effective taxation.
The Commission will also consider how to ensure that EU corporate tax legislation aimed at preventing double taxation does not inadvertently lead to double non-taxation. The ongoing recast of the Interest and Royalties Directive is the earliest opportunity for the Council to action. It should amend the legislation so that Member States are not required to give beneficial treatment to interest and royalty payments if there is no effective taxation elsewhere in the EU. Based on the outcome of this negotiation, and as a second step, the Commission could align the Parent Subsidiary Directive with the recast Interest and Royalties Directive.
The ultimate effect of any such measures should be to safeguard Member States' rights to tax revenues generated in the Single Market and reduce the capacity of certain companies to escape taxation altogether.
