The buoyant fiscal changes in Romania left almost unnoticed the European debates on profit taxation that are very important for both companies and the public budget.
Adopted in March 2018 by a resolution of the European Parliament, the Common Tax Base (CCTB) and the Common Consolidated Tax Base (CCCTB) are closer to the moment of the potential application.
Once entered into force, possibly as early as 2020, as the European Commission expects, this new tax regime will radically change the method of calculating taxes on profits in the EU and the allocation of the tax base between member states.
The common corporate tax base (CCTB) is a set of rules for calculating corporate tax and the Common Consolidated Corporate Tax Base (CCCTB) complements the CCTB with consolidation rules and rules for allocating the corporate tax base between member states.
In the first seven years after its entry into force, the common tax base will target groups of companies with revenues above EUR 750 million. After this time, all companies present in the EU will apply the same provisions for calculating corporate taxes.
Reasons for reform
The initiators of these projects, including the European Commission and some member states, argue that the unique rules will bring more clarity and predictability in calculating corporate taxes, will simplify reporting and increase national budget revenues.
Aligning the 27 national EU laws having different provisions would remove some of the administrative costs that are now a barrier to investment.
Another determining factor in this evolution is the digital economy that has transformed business models and requires a different approach from the tax perspective. For this reason, new concepts, such as the digital office, are introduced, or some existing terms are redefined, for example, the permanent establishment regarding the physical presence of a company in a jurisdiction.
Pros and cons of the new system. Need for a country-by-country evaluation
Proposed in 2011 as a single project, the common tax base was abandoned because of the lack of consensus among member states and was relaunched in 2016, split into two projects.
Opponents of this system challenge the adoption of the new common basis and invoke the subsidiarity principle (non-intervention of the EU on a subject that can be regulated in an efficient way by member states), but also some estimates indicating a loss of budgetary revenue in some states.
They also believe that the EU should not have different rules from the OECD international ones, namely from the project on the Basic Erosion and Shifting profit (BEPS). Some BEPS actions have been taken over in the EU directives, for example the Anti-Tax Avoidance Directive (ATAD).
Another argument is brought from an accounting perspective because the EU has no aligned accounting rules now. Applying a common basis under these conditions would generate substantial differences in the recognition and assessment of the main revenues and expenditure by companies.
On the other hand, promoters of this project believe it will bring more equity between member states in the allocation of corporate taxes, depending on the activity of companies in each state. At the same time, it would combat tax avoidance more effectively by eliminating the differences between national laws that can be used by companies to reduce tax obligations.
However, the European Commission has not issued yet an impact assessment to estimate country-to-country effects. From this point of view, probably every state, including Romania, will be in the position to make its own assessment so that to express an informed opinion in the final debates.
What do these rules mean for Romania?
Romania has not yet expressed its position on the adoption of the CCTB and the CCCTB. It is to be expected that Romanian authorities will issue in the following period a view as the adoption of this package is advancing, and Romania will take over the EU Presidency as of 1 January 2019 and in this position will also have prerogatives on the European fiscal agenda.
Regarding the implications for Romania, a first observation would be that in the first seven years after the new rules will come into force, there could be two parallel laws.
The common tax base will be mandatory for companies that are part of groups with incomes over EUR 750 million, while the rest of the companies will be subject to the same provisions of the Tax Code as now, or possibly adjusted.
For those who will apply the common tax base, a major consequence will be that tax incentives from the Tax Code will be eliminated, such as: the rules on tax depreciation, the facility for reinvested profit or R&D. The tax regime for micro-enterprises will also be uncertain in this context.
It should be noted that the limits on the deductibility of excessive borrowing costs and the period for loss reporting will become more restrictive than those set out in the ATAD Directive.
Romania has just transposed this directive with OUG 79/2017 and imposed a deductibility threshold that will most likely be amended again after the entry into force of the common base.
Other implications arise in terms of transfer pricing. Companies will no longer be required to prepare the transfer pricing file for transactions with group companies from the EU, which will lead to a lessening in tax administrative burdens.
In terms of public budget, the most important impact will be the introduction of the formula for allocating the tax base between companies from the EU member countries. The algorithm takes into account four factors: work (salary amount and number of employees), assets owned, sales in accordance with their intended use, and personal data collected and used.
After allocating the quota from the tax base, each state will apply the tax rate from its own legislation. In the context of losing the competitive tax advantages in the field of corporate taxation to other states, Romania’s only asset would be the tax level, now among the lowest in the EU.
As a conclusion, we are debating the most ambitious tax reform proposed by the EU in the field of corporate taxation and an important step towards a fiscal union. Given the major implications for companies and public budgets, it raises controversies, as it has both advantages and disadvantages which should be carefully weighed by each state, including Romania.
For this reason, an impact assessment of its implementation would be required before authorities take a firm stance. However, for the projects to come into force, the final vote must be unanimous, so it remains to be seen if, in the end, the consensus of all member states is met.
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Dan Badin is Tax & Legal Partner-in-Charge with Deloitte Romania
