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Commerce committee wants EU to ditch corporate tax reform

By Stelios Orphanides

The parliamentary committee for energy, commerce, industry and tourism said that it objects to the European Commission proposals for a corporate tax reform in the European Union.

The parliamentary committee which prepared an opinion on two proposed directives, tabled by the EU Commission in October last year, to introduce a common corporate tax base (CCTB) and a common consolidated corporate tax base (CCCTB), after it consulted stakeholders, including the executive branch earlier this year, asks “EU institutions to take into account” Cyprus’s concerns related to the “specificities” of member states.

“The necessity and legal basis of the proposed regulations have not been sufficiently supported,” the committee said in a document seen by the Cyprus Business Mail.

The proposed directives aim at countering aggressive tax planning by multinational companies and provide that they will pay taxes in the jurisdictions they generate their profit, address base erosion and profit shifting which facilitate tax avoidance and encourage companies to finance their operations with equity instead of borrowing. It also encourages innovation via tax incentives for research and development.

The proposals could eliminate the comparative advantages of Cyprus’s business services sector comprised of accounting and audit firms as well as law companies which rely on a clientele seeking to benefit from the Cypriot corporate tax rate of 12.5 per cent as well as the double taxation avoidance treaties Cyprus signed with 60 other jurisdictions. Cyprus’s wealth defence industry is estimated to account for roughly 15 per cent of economic output.

The introduction of CCTB will limit the “autonomy and sovereignty of member states” with respect to tax policy affecting both tax revenue and economic and social policy, as well as their competitiveness, the committee said. In addition, it is up to a member state to decide on the fairness of a tax system, including the balance between equity and loans.

“The CCTB proposal may negatively affect foreign investment, employment and the gross domestic product of certain member states,” the committee continued. The reference to advantages with respect to investment, employment and economic output in the EU as a whole included in an impact assessment of the EU Commission has neither factored in nor evaluated how each member state will be affected by the CCCTB, it continued.

“An additional tax system complicates and increases operation costs for tax authorities of each member state, given that corporate groups not falling under CCTB (and CCCTB, should it be implemented) will continue to be subjected to national tax rules of determining the tax base,” the committee said. The parliamentary committee also disputed the EU Commission’s finding that the proposed rules would reduce compliance cost for companies and added that neither measures taken by individual member states nor through cooperation can help multinationals reduce administrative cost.

The proposed rules may also “alter the balance achieved via bilateral double taxation avoidance treaties signed either with member states or with third countries, as at the time of the signing the provisions of a probable CCTB had not been taken into account,” the committee said. “The EU failed to sufficiently support its CCTB proposal with respect with its compliance to the principles of proportionality and subsidiarity”.

“According to the principle of subsidiarity, the Union has to take action only if and to the extent that the aimed targets are impossible for member states to meet sufficiently,” the commerce committee argued.

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