REPORT on Tax Treatment of Losses in Cross-Border Situations
30.11.2007 - (2007/2144(INI))
Committee on Economic and Monetary Affairs
Rapporteur: Piia-Noora Kauppi
MOTION FOR A EUROPEAN PARLIAMENT RESOLUTION
on Tax Treatment of Losses in Cross-Border Situations
The European Parliament,
– having regard to the Commission communication on Tax Treatment of Losses in Cross-Border Situations (COM(2006)0824),
– having regard to the Commission Communication on The Contribution of Taxation and Customs Policies to the Lisbon Strategy' (COM(2005)0532),
– having regard to the relevant case law of the Court of Justice of the European Communities, notably cases C-250/95, Futura Participations and Singer[1], C-141/99, AMID[2], C-397/98 (Metallgesellschaft), C-446/03, Marks & Spencer plc v. David Halsey (HM Inspector of Taxes) [3], and C-231/05, Oy AA[4],
– having regard to the Council Directive 94/45/EC of 22 September 1994 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees[5],
– having regard to its resolution of 13 December 2005 on taxation of undertakings in the European Union: a common consolidated corporate tax base[6],
– having regard to the Commission communication on Implementing the Community Programme for improved growth and employment and the enhanced competitiveness of EU business: Further Progress during 2006 and next steps towards a proposal on the Common Consolidated Corporate Tax Base (CCCTB) (COM(2007)0223),
– having regard to its resolution of 4 September 2007 on the Single Market Review: Tackling barriers and inefficiencies through better implementation and enforcement[7],
– having regard to Rule 45 of its Rules of Procedure,
– having regard to the report of the Committee on Economic and Monetary Affairs and the opinion of the Committee on Legal Affairs (A6-0481/2007),
A. whereas Member States' national tax systems need increasingly to take account of the globalisation of the economy and cope with the rules and functioning of the internal market, with a view to achieving the Lisbon Strategy objectives in terms of growth and competitiveness,
B. whereas the globalisation of the economy has increased tax competition in such a way as to result in the drastic decrease of average corporate tax rates in industrialised countries in the last 30 years,
C. whereas that decrease in tax rates has been intensified since the last enlargement of the European Union and whereas there is a clear trend in the Member States to put in place specific tax schemes by which to attract particularly mobile companies,
D. whereas the existence of 27 different tax systems in the European Union constitutes an impediment to the smooth functioning of the internal market, causes significant additional costs for cross-border trade and business in terms of administration and compliance, hinders corporate restructuring, and leads to cases of double taxation,
E. whereas fruitful tax competition, the transparency of rules, the removal of tax barriers hampering cross-border activities and the creation of a level playing field for EU undertakings operating in the internal market may lead to EU-wide economic gains by way of a dynamic corporate environment,
F. whereas an appropriate EU-level tax coordination which does not attempt to harmonise tax rates can contribute to the benefits of fruitful tax competition being even more widely shared between undertakings, their employees and consumers,
G. whereas achieving the objectives of the Lisbon Strategy necessitates the increasing coordination of Member States' fiscal policy,
H. whereas Member States have traditionally tried to coordinate their tax regimes through an extensive network of bilateral tax treaties that do not fully cover issues such as cross-border loss relief; whereas, within the European Union, the bilateral approach is less efficient and leads to less consistency than a multilateral and coordinated approach; whereas a common EU approach on a consolidated corporate tax base - such as the CCCTB proposal - is the most appropriate solution for the cross-border offsetting of losses and profits within the internal market and will lead to greater transparency, investment and competitiveness,
I. whereas Member States implement different rules on granting tax relief for losses incurred by branches, subsidiaries and entities of corporate groups thereby distorting business decisions and investment policies in the internal market with consequences in terms of their appropriate long-term industrial strategies and tax revenues,
J. whereas virtually all tax systems in the European Union tax profits and losses asymmetrically, in other words, profits are taxed for the year in which they are earned but the tax value of a loss is not refunded automatically to the company at the time when it is incurred; notes that the recent case law of the Court of Justice of the European Communities (the Court of Justice) does not analyse properly this time factor and its importance as regards increasing cross-border investments in the European Union,
K. whereas the implementation of a cross-border tax-relief regime on losses would be tantamount to waiving corporate tax revenues in certain Member States without certain legal assurances,
L. whereas losses by domestic branches will automatically be taken into account in the net result of the parent company, but the situation is less clear-cut for losses incurred by foreign branches, as well as domestic and foreign members of a group,
M. whereas the absence of cross-border loss relief constitutes a barrier to entering some markets, favouring establishment in large Member States where the size of the home market is sufficient to help absorb possible losses,
N. whereas the situation described puts small and medium-sized enterprises (SMEs) at a disadvantage because they are less able to carry out cross-border investments amid uncertainty over loss relief and frequently incur start-up losses,
1. Expresses its gravest concern over the negative impact that the different treatment of cross-border losses by Member States has on the functioning of the internal market;
2. Notes that any measure which impedes the freedom of establishment is contrary to Article 43 of the EC Treaty and thus its removal ought to be the focus of targeted action; recalls that differing company tax regimes create obstacles to entering different national markets and the proper functioning of the internal market, distort competition, and prevent the maintenance of a level playing field for undertakings at EU level and thus merit attention of this kind;
3. Takes the view that targeted action at EU level in respect of tax deductions of cross-border losses could be of greater benefit to the functioning of the internal market;
4. Signals its support for the Commission communication on Tax Treatment of Losses in Cross-Border Situations as an important step in addressing the situation and calls for adequate coordination among Member States as regards timing and solutions;
5. Stresses that any targeted measure to introduce cross-border loss relief should be defined and implemented on the basis of a multilateral, common approach and coordinated action by the Member States in order to guarantee the coherent development of the internal market; recalls that such targeted measures represent an intermediate solution pending the adoption of the CCCTB; considers that the CCCTB constitutes a comprehensive long-term solution for tax obstacles linked to the cross-border offsetting of losses and profits, as well as for transfer pricing and cross-border merger and acquisition and restructuring operations and will complete the achievements of an internal market with fair competition;
6. Points out that some Member States apply various methods for the elimination of double taxation, either by crediting taxes paid abroad (the credit method) or by exempting foreign income from the tax base (the exemption method); notes that only some of the Member States applying the exemption method do not provide for relief on losses incurred by foreign branches;
7. Draws attention to the fact that where losses incurred by permanent establishments may not be set off against profits of a head office, there is a difference in treatment in comparison with a purely domestic situation and that this constitutes an impediment to the freedom of establishment;
8. Considers that action in favour of groups of companies that do business in several Member States should be a priority, as it is precisely those groups that suffer from different treatment with regard to cross-border losses, compared to groups of companies that do business in one Member State only;
9. Takes the view that the distortions arising from the difference in national systems penalise SMEs in particular in comparison with their potential competitors and therefore asks the Commission to adopt specific measures in that area;
10. Recalls that few overall arrangements exist for loss relief between subsidiaries and parent companies (groups) across borders and that, therefore, within a group of companies, losses are not taken into account automatically in the same way as within a company;
11. Points out that the majority of Member States provide for domestic loss relief for groups, thereby treating them effectively as one entity, but that few do so as regards cross-border situations; recalls that the lack of cross-border group relief can distort investment decisions regarding both its location and legal form (branch or subsidiary);
12. Acknowledges that simply extending domestic regimes to cross-border situations is difficult as the tax bases are different;
13. Urges that the relevance of cross-border loss relief must be acknowledged although it should be pointed out that further in-depth elaboration is necessary as regards the cross-border loss relief scheme; suggests that it should be decided whether cross-border loss relief is limited to subsidiaries vis-à-vis the parent company or vice versa and that a thorough assessment should therefore be made of the budgetary effects of the scheme whereby the subsidiaries' profits are allowed to set off the parent company's losses;
14. Regards the judgment of the Court of Justice in the Marks & Spencer case as deferring to Member States' right to maintain their tax systems, especially as regards concerns of tax avoidance;
15. Notes that the judgment of the Court of Justice in the Oy AA case shows that the different national tax systems vary in their treatment for losses and thus it is unclear if the losses can be consolidated within a group in all cross-border situations even when the losses are final and thus result in a disproportionate situation as indicated by the Marks & Spencer case;
16. Believes that corporate groups present in several Member States should be treated as far as possible in the same way as groups present in a single Member State; stresses that in situations involving cross-border losses by foreign subsidiaries, double-taxation of the parent company must be avoided, fiscal competence must be fairly distributed between Member States, losses may not be offset twice and tax avoidance must be prevented;
17. Considers that it would be useful to launch a debate on the definition and characteristics of corporate groups in the European Union, taking into account the existence of common European institutions such as the 'European company' and the 'European cooperative society', without the intention, however, of limiting the scope of cross-border loss relief measures exclusively to such institutions;
18. Reiterates the importance of defining the concept of 'corporate group' in order to prevent firms from opportunistically distributing profits and losses among Member States; considers that, for the purpose of defining a corporate group, it might be useful to identify specific critical features within the undertaking such as foreseen in the Directive 94/45/EC on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees;
19. Welcomes the three alternatives proposed in the Commission communication on Tax Treatment of Losses in Cross-Border Situations; signals its support for targeted measures which would enable effective and immediate deduction of losses by foreign subsidiaries (annual, not just terminal, as in the Marks and Spencer case) which would be recaptured once the subsidiary returns to profit through a corresponding additional tax on the parent company;
20. Recommends, in order that these proposals can be implemented in such a way as to prevent tax evasion, considering whether it would be appropriate to establish an automatic information exchange system, similar to the VIES for VAT, so that the Member States can check the existence of negative tax bases declared by subsidiary companies in other Member States;
21. Nonetheless, urges the Commission to investigate further the possibilities of providing companies with a consolidated corporate tax base for their EU-wide activities;
22. Notes that a further thorough analysis is of great importance with respect to assessing the extent to which the proposed cross-border loss relief scheme could promote the cross-border activity of SMEs;
23. Points out that any targeted measure concerning the tax treatment of losses in cross-border situations put in place by individual Member States will not, alone, solve the problem of distortion of competition and high compliance costs for EU undertakings operating in the internal market, which derive from the maintenance of 27 different tax systems;
24. Underlines the need for Member States to proceed in a coordinated manner when introducing targeted measures for the relief of cross-border losses within one company or group; recalls the need for stronger coordination on tax matters between Member States and calls on the Commission to take on a proactive role;
25. Supports the Commission's efforts to establish a pan-European and uniform CCCTB; notes that the CCCTB will lead to greater transparency and efficiency by enabling companies to operate on the same rules abroad as at home, creating a level playing field and enhancing the competitiveness of EU undertakings, increasing cross-border trade and investment thus creating the conditions to reap the full benefits of the internal market as regards investment and growth, as well as significantly reducing administrative burdens and compliance costs and the possibility of tax evasion and fraud;
26. Recalls that the CCCTB involves common rules regarding the tax base and does not in any way affect Member States' freedom to continue to set their own tax rates;
27. Welcomes the Commission's intention to launch the CCCTB even in the framework of enhanced cooperation; points out, however, that this is a second-best solution as, in the absence of a comprehensive EU-wide system, the benefits of transparency and lower administrative costs may be partly mitigated;
28. Instructs its President to forward this resolution to the Council and the Commission.
EXPLANATORY STATEMENT
INTRODUCTION
This Commission Communication is presented within the framework of the Communication on “Coordinating Member States’ direct tax systems in the Internal Market” (COM(2006) 823 final) and constitutes an illustration of the Commission's twin-track strategy for removing tax obstacles in the internal market, which contemplates a long-term comprehensive solution (CCCTB) that is accompanied by short-term targeted measures based on cooperation and coordination of Member States tax policies, without involving any harmonisation.
In its Communication, the Commission explores options to target the specific problem that arises from the absence of cross-border relief of losses, drawing consequences from recent rulings from the European Court of Justice (ECJ), notably in the Marks & Spencer case.
THE ISSUE AND THE OPTIONS PROPOSED BY THE COMMISSION
All tax systems in the EU treat profits and losses asymmetrically: whereas profits are taxed on the year they are earned, losses cannot be refunded on the year the loss is incurred. Losses are thus set off against future profits. Whereas a company with several domestic operations will in principle and automatically be able to set off losses and be taxed on the net result, this will not be the case for companies having operations in several Member States. The Commission recalls that cross-border relief of losses within a group of companies is in principle not available, with a few exceptions.
This different treatment of cross-border losses has an impact on the functioning of the internal market; it favours domestic investments and cross-border investment in larger Member States; it favours large companies vis-à-vis SMEs. As a result, business and companies sustain higher prices.
As regards losses within a company, the Commission strongly encourages the Member States to review their tax systems in order to allow for losses to be automatically taken into account in the net result of the company in a similar way as this already happens in domestic situations.
As regards losses within a group of companies, the Commission encourages Member States to introduce and maintain domestic tax systems for loss relief within a group of companies that offer treatment equivalent to that provided for loss relief within a single company. The Communication discusses three alternative methods: (i) a definitive transfer of losses or profits, without recapture; (ii) a temporary loss transfer, that allows for that loss to be recaptured once the subsidiary returns to profit; and (iii) the current taxation of the subsidiary's results, whereby the tax paid by a subsidiary in its country of residence would be credited against the tax payable in the parent company's country in respect of income from the subsidiary.
THE RAPPORTEUR POSITION
The European Union, which has the largest competitive single market in the globe, must be made tax-competitive. By contrast to the other large single markets in the world (US, Japan, China), the EU Internal Market is characterized by a large number of tax-induced obstacles. Measures such as those proposed in the Communication work in the right direction towards a more tax-competitive environment for EU businesses.
The rapporteur thus welcomes the Commission's approach and supports the twin track strategy that identifies short-term, feasible measures that are based on cooperation between Member States. These measures are aimed at eliminating distortions and enhancing the attractiveness of the country in question as an investment location and thereby help to meet the objectives of the Lisbon Strategy.
Whereas direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law. Although many of the issues that arise in this context are dealt with by bilateral treaties between Member States, problems like cross-border loss compensation are not covered within the scope of the existing treaties, as the ECJ rulings show. Moreover, in this respect, the OCDE process and the bilateral treaties fail to take fully into account the EU dimension.
Groups present in several Member States should be treated as far as possible in the same way as groups in a single Member State.
Whereas the three alternatives proposed in the Communication are welcome, the rapporteur particularly supports any targeted measures which would enable effective and immediate deduction of losses by foreign subsidiaries (annual, not just terminal as in the Marks and Spencer case) which would be recaptured once the subsidiary returns to profit through a corresponding additional tax on the parent company. This option serves best the purpose of avoiding cash-flow disadvantages that hit in particular SME start-ups and affect cross-border investment in less large Member States.
However, the introduction of targeted measures such as the ones proposed in the Communication should not prevent the Commission from actively exploring ways towards creating an EU-wide system of consolidated profits where subsidiaries would be treated like branches.
The rapporteur calls on the Commission to make sure that, when submitting any specific proposal, the choice is made in favour of those that seek to find a proper balance between the interests of the internal market and the need to prevent abuse and erosion of Member States' tax bases. To this end, she encourages the Commission to continue its work towards a common consolidated corporate tax base.
OPINION of the Committee on Legal Affairs (20.11.2007)
for the Committee on Economic and Monetary Affairs
on the tax treatment of losses in cross-border situations
(2007/2144(INI))
Draftsman: Giuseppe Gargani
SUGGESTIONS
The Committee on Legal Affairs calls on the Committee on Economic and Monetary Affairs, as the committee responsible, to incorporate the following suggestions in its motion for a resolution:
1. Expresses its gravest concern over the negative impact that the different treatment of cross-border losses by Member States has on the functioning of the internal market;
2. Takes the view that targeted action at European level in respect of tax deductions of cross-border losses could be of greater benefit to the functioning of the internal market;
3. Considers that action in favour of groups of companies which do business in several Member States should be a priority, as it is precisely those groups that suffer from different treatment with regard to cross-border losses, compared to groups of companies which do business in only one Member State;
4. Takes the view, in particular, that the distortions arising from the differences between national systems penalise above all small and medium-sized companies in comparison with their potential competitors, and therefore asks the Commission to adopt specific measures in this area;
5. Proposes that, among the alternative measures it has proposed, the Commission give priority to temporary loss transfer (the so-called deduction/reintegration method) and that, to that end, it embark on an in-depth analysis of the possibilities afforded by that measure;
6. Calls on the Commission, nevertheless, also to explore other courses of action, especially with a view to introducing a common consolidated corporate tax base, which would help most of all to tackle the difficulties which arise in relation to cross-border losses.
RESULT OF FINAL VOTE IN COMMITTEE
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Date adopted |
20.11.2007 |
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Result of final vote |
+: –: 0: |
24 0 0 |
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Members present for the final vote |
Carlo Casini, Bert Doorn, Cristian Dumitrescu, Monica Frassoni, Lidia Joanna Geringer de Oedenberg, Neena Gill, Othmar Karas, Piia-Noora Kauppi, Klaus-Heiner Lehne, Katalin Lévai, Antonio López-Istúriz White, Hans-Peter Mayer, Manuel Medina Ortega, Aloyzas Sakalas, Diana Wallis, Tadeusz Zwiefka |
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Substitute(s) present for the final vote |
Mogens N.J. Camre, Charlotte Cederschiöld, Vicente Miguel Garcés Ramón, Luis de Grandes Pascual, Kurt Lechner, Eva Lichtenberger, Marie Panayotopoulos-Cassiotou, Gabriele Stauner |
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Substitute(s) under Rule 178(2) |
Toine Manders, Tomáš Zatloukal |
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RESULT OF FINAL VOTE IN COMMITTEE
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Date adopted |
21.11.2007 |
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Result of final vote |
+: –: 0: |
34 4 1 |
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Members present for the final vote |
Mariela Velichkova Baeva, Zsolt László Becsey, Pervenche Berès, Slavi Binev, Sharon Bowles, Udo Bullmann, Ieke van den Burg, Christian Ehler, Jill Evans, Elisa Ferreira, Donata Gottardi, Benoît Hamon, Gunnar Hökmark, Karsten Friedrich Hoppenstedt, Sophia in 't Veld, Piia-Noora Kauppi, Wolf Klinz, Kurt Joachim Lauk, Andrea Losco, Cristobal Montoro Romero, Joseph Muscat, John Purvis, Alexander Radwan, Bernhard Rapkay, Dariusz Rosati, Heide Rühle, Eoin Ryan, Antolín Sánchez Presedo, Manuel António dos Santos, Margarita Starkevičiūtė, Ivo Strejček,, Cornelis Visser, Sahra Wagenknecht |
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Substitute(s) present for the final vote |
Harald Ettl, Ján Hudacký, Werner Langen, Thomas Mann, Gianni Pittella, |
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Substitute(s) under Rule 178(2) |
Holger Krahmer, |
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