**4. Common consolidated corporate tax base: fundamental assumptions**

A document entitled "A Common Consolidated EU Corporate Tax Base<sup>7</sup> " published on 7 July 2004 includes the assumptions of the concept aimed at reducing the costs and barriers to business activity in the European Union. **On 16 March 2011**<sup>8</sup> , the European Commission submitted a proposal for the directive on a common consolidated corporate tax base (CCCTB). According to the proposal, the main goal of the concept is to eliminate at least some major tax problems impeding economic growth on the EU single market. Due to the lack of uniform corporate tax regulations, interdependence of domestic tax systems often results in double taxation. Hence, enterprises have to deal with heavy administrative burdens and high costs associated with conforming to tax regulations. Such a state of affairs discourages companies from making investments in the EU and consequently hinders the achievement of priorities included in *Europe 2020*—a strategy for smart, sustainable and inclusive growth.9

<sup>7</sup> *A common consolidated EU corporate tax base*, Commission Non-Paper to Informal Ecofin Council, 10 and 11 September 2004 (http://ec.europe.eu/taxation\_customs)

<sup>8</sup> *Proposal for a council directive on a common consolidated corporate tax base* of 16 March 2011*{SEC(2011) 315}{SEC(2011) 316}* 9 The strategy is aimed at smart, sustainable and inclusive growth. The *Europe 2020* strategy has defined the following three interrelated priorities:

Smart growth: development of the economy based on knowledge and innovation

Sustainable growth: supporting the economy based on a more efficient use of resources, more environmentally friendly and more competitive

Inclusive growth: supporting the economy characterized by a high employment rate, providing social and territorial cohesion

Cf. Communication from the Commission of Europe 2020: A strategy for smart, sustainable and inclusive growth (COM(2010) 2020 Brussels 3.3.2010)

Common consolidated corporate tax base is a major initiative designed to eliminate obstacles to the creation of a single market.10 It is considered11 an initiative stimulating growth that should be undertaken in the first place in order to facilitate economic development and create new jobs. CCCTB concept would guarantee the coherence of domestic tax systems but no harmonization of tax rates.

While analyzing deductible costs for income tax and the CCCTB concept, it is important to note how businesses perceive the burden of costs that are not deductible for tax purposes. **Table 2** shows the importance of the costs that are not considered deductibles for Polish companies. The data contained in **Table 2** shows that for Polish company costs that are not considered deductibles in income tax do not have much significance. The least important include fines and penalties, enforcement costs, interest expenses, commissions and foreign exchange differences on loans. In contrast, the cost of interest on loans granted by shareholders has greater

It is important to note the wording states that revenue, expenses and all other deductible items shall be recognized in the tax year in which they were achieved or incurred. It follows that the tax costs are deducted in the tax year in which they are incurred. Incurring a deductible cost occurs when the following conditions are met: firstly, the obligation to make payments; secondly, the ability to determine the amount of liability with reasonable accuracy; and thirdly, in the case of trading goods, transfer of significant risks and rewards of ownership of goods to the taxpayer, while in the case of services, receiving the services by the taxpayer. It should be stressed that the

2004 includes the assumptions of the concept aimed at reducing the costs and barriers to

mitted a proposal for the directive on a common consolidated corporate tax base (CCCTB). According to the proposal, the main goal of the concept is to eliminate at least some major tax problems impeding economic growth on the EU single market. Due to the lack of uniform corporate tax regulations, interdependence of domestic tax systems often results in double taxation. Hence, enterprises have to deal with heavy administrative burdens and high costs associated with conforming to tax regulations. Such a state of affairs discourages companies from making investments in the EU and consequently hinders the achievement of priorities

*A common consolidated EU corporate tax base*, Commission Non-Paper to Informal Ecofin Council, 10 and 11 September

*Proposal for a council directive on a common consolidated corporate tax base* of 16 March 2011*{SEC(2011) 315}{SEC(2011) 316}*

The strategy is aimed at smart, sustainable and inclusive growth. The *Europe 2020* strategy has defined the following

Sustainable growth: supporting the economy based on a more efficient use of resources, more environmentally friendly

Inclusive growth: supporting the economy characterized by a high employment rate, providing social and territorial

Cf. Communication from the Commission of Europe 2020: A strategy for smart, sustainable and inclusive growth

included in *Europe 2020*—a strategy for smart, sustainable and inclusive growth.9

" published on 7 July

, the European Commission sub-

proposed solution is possible to implement in the Polish law on corporate income tax.

**4. Common consolidated corporate tax base: fundamental** 

A document entitled "A Common Consolidated EU Corporate Tax Base<sup>7</sup>

business activity in the European Union. **On 16 March 2011**<sup>8</sup>

Smart growth: development of the economy based on knowledge and innovation

importance for tax-payers.

14 Taxes and Taxation Trends

**assumptions**

7

8

9

cohesion

2004 (http://ec.europe.eu/taxation\_customs)

three interrelated priorities:

(COM(2010) 2020 Brussels 3.3.2010)

and more competitive

According to the proposal for the directive, tax rates ought to be subject to fair competition. Different rates enable particular countries to maintain a certain level of tax competition on internal market. Furthermore, fair competition based on tax rates provides a greater transparency and allows the member states to take into account the competitiveness of their markets and budgetary requirements while determining tax rates [6].

Supporting research and development is one of the fundamental objectives included in the directive under discussion. As part of common consolidated corporate tax base, all costs associated with R&D are tax-deductible expenses. For enterprises that would decide to adopt the system, such an approach will be an incentive to further investment in research and development. In case of economic losses which are subject to cross-border compensation, consolidation within the framework of CCCTB will contribute significantly to reducing the tax base. Nevertheless, the implementation of CCCTB will expand the average EU tax base mainly due to the option taken as far as the depreciation of assets is concerned.

The introduction of CCCTB would reduce or even eliminate barriers to conducting cross-border activity in the European Union. This is of profound importance for enterprises regardless of their size. In the case of small- and medium-sized companies, costs involved in adjusting the activity to regulations imposed in particular countries are a major barrier. Compared to the turnover of such firms, these costs are an important item. As for large enterprises, the possibility of cross-border settlement of tax losses is the main advantage of the new solution.

A system will be chosen voluntarily. Since not all enterprises conduct their activity abroad, CCCTB will not require companies which do not intend to expand their business outside their homelands to cover costs associated with adopting a new tax system. Only methods for determining tax base will be subject to harmonization. It will not be the case with financial statements. Therefore, the member states will still apply domestic principles of financial accounting, and CCCTB will impose autonomous regulations on calculating corporate tax base. These regulations will not exert any effect on producing annual and consolidated financial reports. As for CCCTB, certain enterprises would have to follow uniform tax rules (applicable in the entire European Union) and would deal with single tax administration (one-stop shop). Having decided to apply common consolidated corporate tax base, the company is no longer subject to domestic corporate tax system as far as all the issues regulated by joint regulations are concerned. Enterprises conducting activity in more than one state will benefit from the possibility of cross-border loss relief and lower the costs involved in conforming to

<sup>10</sup>Communication from the Commission Towards a Single Market Act: For a highly competitive social market economy—50 proposals for improving our work, business and exchanges with one another (COM(2010) 608 Brussels 27.10.2010)

<sup>11</sup>Communication from the Commission Annual Growth Survey: advancing the EU's comprehensive response to the crisis (COM(2011) 11 Brussels 12.01.2010).

corporate tax regulations. The possibility of direct consolidation of profits and losses for the purpose of calculating the EU tax base is a major step towards reducing overtaxation in a cross-border context. At the same time, it is a step towards improving the existing conditions, namely, in the scope of tax neutrality of domestic and cross-border activity. This will lead to a more effective fulfilment of internal market potential.<sup>12</sup>

in the context of corporate finance theory. As far as research on capital structure and its impact on goodwill are concerned, major breakthrough was achieved by Franco Modigliani and Merton H. Miller. In 1958 they published an article entitled *The Cost of Capital, Corporation Finance and the Theory of Investment* [7]. Publications has been started discussion that is held up to the present day. The discussion centres on the consequences of the capital structure imposed by the company for its finance and goodwill [8]. According to the theory developed by Modigliani and Miller, in the world without taxes, both the goodwill and weighted average costs of capital

Base of Corporate Income Tax and the EU Concept http://dx.doi.org/10.5772/intechopen.72530 17

In 1963 Modigliani and Miller published an article which was a correction to the capital structure irrelevance proposition. It was then that they addressed the problem hitherto explored by corporate finance. **Major difficulty lays in defining the role of tax in shaping the financial policy to be pursued by the company** [9]. The authors under discussion presented a different view on the effect that the capital structure had on the goodwill. Having in mind corporate income tax, they were inclined to believe that under such circumstances the level of foreign funding to the enterprise was optimum and therefore the capital structure was optimum. Taking into account the tax differentiation (**tax asymmetry**) was a key to the analysis. The asymmetry is between income generated by shareholders and creditors at the company level [10]. Costs associated with interest on foreign capital reduce income tax base, unlike retained dividends and profits [11]. Hence, the utilization of outside capital involves interest tax shield. If interest is subtracted from corporate tax base, the goodwill of business entity which utilizes debt financing exceeds the goodwill of the company which does not utilize foreign capital (by

Introducing the tax system allowing to reduce the tax base by expenses such as interest on debt, Modigliani and Miller proved that less expensive foreign capital (due to interest tax shield) increased the goodwill. At the same time, they were the first to stress the importance of tax for financial policy pursued by the company and aimed at increasing its goodwill.

The theory formulated by Modigliani and Miller in 1963 highlighted **the role of tax in corporate finance**. They proved that it was possible to shape the capital structure and goodwill through tax policy. It is worth emphasizing that this aspect to tax has not yet been noticed by employees responsible for tax management in enterprises. Nowadays, tax is often treated as a fiscal burden and not a flow that may be managed in order to exert an influence on the goodwill. **With reference to the concept of CCCTB, the aforementioned theory states reasons for introducing one corporate tax system in the entire European Union so that all entities have** 

As for factors determining the capital structure in a given company, attention was also paid to the role of the other, namely, non-debt tax shields, resulting from depreciation and investment allowances, that may lessen the effect of interest of tax shield. Non-debt tax shields enabled to modify the research conducted by Miller by adding the concepts framed by DeAngelo and Masulis. They highlighted the role of investment tax shield in determining optimum tax structure. Furthermore, they proved that the goodwill of company with high non-debt tax shield may be the same as the goodwill of entity with high debt and thereby high interest tax shield. The higher the depreciation tax shield, the lower the interest shield.

**equal opportunities for developing their goodwill through tax policy**.

(WACC) do not depend on capital structure.

the compound value of tax shield).

The main advantage of implementing CCCTB for enterprises is the reduction of costs associated with observing tax regulations. Data published by the European Commission indicates that the introduction of the aforementioned concept may lower such costs by circa 7%. Actual reduction of the costs under discussion may have a major impact on enterprises' potential and willingness to expand their business and enter foreign markets (especially the companies that have operated only on regional markets so far).13

The directive under consideration provides a complete set of corporate tax regulations. It specifies which entities may select tax system, method of determining tax base, relief scope and methods. Furthermore, it introduces regulations on combating fraud, proposes a method for the apportionment of consolidated base and specifies how CCCTB system is to be administered by the member states in line with "one-stop shop" principle.

Optional implementation of CCCTB entails that it will be the 28th tax system adopted by the 27 member states. In other words, certain enterprises or individual taxpayers will choose fiscal regime referred to in the directive or follow their domestic tax systems. Therefore, the proposal is a major step towards the harmonization of corporate income tax which, by improving the internal competitiveness of the EU, is to restrict harmful internal competition.

In the context of following the principles of income tax, and particularly the principle of tax system coherence and transparency, it should be emphasized that the directive under discussion provides a complete regulation on CCCTB. Directive on CCCTB and related issues should be implemented only when all the aspects to determining the tax base and its apportionment are known and so are the mechanisms that underlie the functioning of administration in such the new system. Needless to say, the system has to be comprehensive and coherent.
