Tag Archives: Controlled Foreign Corporations

The European Commission’s Proposals for a Common and Consolidated Corporate Tax Base

The BMG has now published its comments on the CCCTB  – the European Commission’s proposals for Common Corporate Tax Base, and for a Common Consolidated Corporate Tax Base.

The CCCTB adopts a sound approach to taxation of multinationals (MNEs), by treating them in accordance with their business reality as unitary firms. It aims to identify the tax base of the whole corporate group, disregarding internal transactions between the affiliates, and to apportion the taxable profit according to factors reflecting the firm’s real activity (sales, assets, employees) in each country. In our view, this is the most effective way to end both competition between states to offer tax incentives, and tax avoidance by MNEs shifting income between affiliates to minimise tax.

In our view, however, the aim should be to create a level playing field in relation to tax on corporate profits not only within the EU but worldwide. Unless this is done, EU member states will continue to compete with each other to offer tax preferences to MNEs from outside the EU. They will also continue to be vulnerable to tax competition from jurisdictions not covered by the CCCTB (including the UK, after Brexit). The CCCTB can and should be recast so that it attributes to the EU as a whole a portion of the worldwide profits of MNEs reflecting their actual activities within the EU, as well as allocating that profit among EU states, using the same criteria.

We also propose a ‘compensation mechanism’, in case another country (e.g. the US) adopts the alternative which has been proposed for a destination-based cash-flow tax with a ‘border adjustment’.

We also warn against the 2-stage approach proposed by the Commission, and criticise the proposed ‘super-deduction’ for R&D expenditures, and the so-called Allowance for Growth and Investment. As some business groups have also argued, it is better to define the tax base broadly, allowing scope for cuts in the rate (which are already taking place), than to build in selective and distorting special allowances.

16 May 2017

Controlled Foreign Corporations

The BMG has now submitted its comments on the proposals under Action 3 of the OECD-G20 BEPS Project, Strengthening CFC Rules.


Rules on controlled foreign corporations (CFCs) override the ‘separate entity’ principle by providing that, in defined circumstances, profits channelled to an affiliate of a Multinational Enterprise (MNE) in a low-tax country can be attributed to its parent and taxed by the home country of the MNE. In effect CFC rules give the primary right to tax business profits to the source country (where the activities take place), thus ensuring neutrality between domestic and foreign-owned firms, but a secondary right to the country of residence of the foreign owner, to ensure neutrality between home and overseas investments. CFC rules should act as a deterrent removing the incentive for MNEs to shift profits out of source countries. To achieve this however, they must be set at a high standard and coordinated. A weak standard which is left to states to implement would be counter-productive, as it would encourage source states to reduce their tax rates, and hence worsen the race to the bottom in corporate tax.

We therefore support adoption of full inclusion approach, under which the home country would tax all CFC income, with a credit for foreign taxes paid. An acceptable alternative would be a substance test based on the proportion of profit to employees, determined by payroll costs. It should apply if the effective tax rate in the CFC’s country of residence is below 95% of that of the home country, since a high threshold is essential both to remove pressures on source countries to reduce their tax rate, and to ensure competitive equality between MNEs from different home countries. We urge rejection of a ‘top-up tax’ as an inadequate alternative which would give unfair advantages to MNEs which continue to engage in BEPS behaviour.

Such strong CFC rules could give the BEPS project some chance of success, but weak rules would mean its failure. The inability to coordinate CFC rules until now has led to their weakening, due to economic globalization allowing MNEs to play states off against each other. Strong and coordinated international action is now needed in order to ensure that MNEs are taxed ‘where economic activities take place and value is created’. In our view the most effective response to BEPS would be to adopt a more explicitly unitary approach to MNEs, for example by systematizing and regularizing the profit split method with defined concrete allocation factors and weightings for all commonly used business models. Apportioning profits according to appropriate measures of real economic activity would leave states free to set their corporate tax rates, balancing encouragement of investment in real activities with optimizing tax revenues. The BEPS Project has preferred a different approach, including CFC rules, but it remains to be seen whether it can achieve agreement on the high standards necessary to make them effective.