The Tax Treatment of Losses under the CCCTB Directive (part 2)
Losses post CCCTB
The proposed CCCTB directive provides that any losses incurred by the taxpayer while benefiting from the CCCTB regime which would not have yet been utilised ‘shall be carried forward in accordance with national corporate tax law.’1 This article applies in the case of a single taxpayer who would have opted for the CCCTB regime and now is opting out of the regime. This article mirrors article 48 dealing with losses pre-CCCTB. Thus, once the taxpayer opts out of the system national rules will start to apply again. The unlimited carry forward provision under the CCCTB regime will no longer apply. By this provision the taxpayer is safeguarded from losing any benefit provided by national legalisation. The fact that the taxpayer opted for the CCCTB regime will have no impact on the way the unutilised losses would be treated in national law once the taxpayer opts out of the CCCTB regime.
There may however be an impact to this provision in the national scenario. Not all Member States have the same rules when it comes to carry forward of losses. When a Member State applies unlimited carry forward of losses then this provision merely means bringing losses in the national system which would have been brought forward any way whether the taxpayer had opted to apply the CCCTB or not. On the other hand if a Member State has a 3-year carry forward limitation in the local scenario, will this 3-year carry forward2 start to apply at the point when the taxpayer exits the CCCTB regime or at the point when the losses were incurred? The point of when the carry forward period starts to apply has implications on the utilisation of losses. Article 53 of the proposed CCCTB directive seems to imply that the national corporate tax law provisions will start to apply at the point when the tax payer leaves the system.
If we consider the situation of two taxpayers Company X and Company Y both resident in Member State C which adopts a 3-year carry forward of losses. In year 1 Company X opted to benefit from the CCCTB regime while Company Y did not (assuming that the CCCTB is optional). Both companies had the following results over a 6 year period:
|Year 1||(800) Loss|
|Year 2||(200) Loss|
|Year 3||(300) Loss|
|Year 4||(100) Loss|
|Year 5||(200) Loss|
|Year 6||1,000 Profit|
Company X did not have the possibility to utilise its losses during the period it benefited from the CCCTB and in year 6 opted out of the regime. According to article 53 of the proposed CCCTB directive in year 6 Company X is entitled to carry forward the losses it was not able to set off against taxable profits. Therefore, in year 6 the following is the position of Company X in Member State C:
|Profit for the year||1,000|
Company X pays no corporate tax in year 6 and has €600 of loss to carry forward according with national corporate tax law, which in this example is for a 3 year period. On the other hand Company Y never opted to form part of the CCCTB regime. The following is the position of Company Y in year 6 in Member State C:
|Profit for the year||1,000|
Given that losses can only be carried forward for a 3 year period, Company Y lost its right to utilise the losses it had incurred in years 1 and 2 which resulted in the company having a taxable income of €400 in year 6.
The fact that Company X has opted for the CCCTB and then opted out, allows the company to carry forward losses which it would not have otherwise been able to carry forward under the national corporate tax law. If Company X and Company Y are competitors in the same market, Company X is being put at an advantage with regards to Company Y as it is paying less tax. From the perspective of Member State C, this State is giving relief for losses (in the case of Company X) it would not have otherwise provided relief for. This situation only arises if the CCCTB regime is optional for companies. In this circumstance CCCTB has the effect of prolonging the life of the losses in the Member State. Given the lack of harmonisation of direct tax rules and also of loss carry forward rules in the Member States these distortions are to a certain extent inevitable. There are thus various scenarios that could arise when combining the CCCTB with national legalisation. The above example illustrates a scenario where distortion can easily arise. Also, Member States might not be willing to accept that the national legalisation starts to apply at the point of exist of the company from the CCCTB regime, since if the company would not have opted for the CCCTB regime those losses would have been expired. Perhaps further clarification regarding the way article 53 would be applied in practice would shed more light on whether there is a possibility of a distortion in the internal market and the extent of such a possible distortion.
Article 65 deals with the termination of the whole CCCTB group and states that “any unrelieved losses of the group shall be allocated to each group member in accordance with Articles 86 to 102, on the basis of the apportionment factors applicable to the tax year of termination.” Therefore losses will be allocated to the individual group Members in accordance with the allocation formula. Since losses are in fact held at the level of the group and not allocated to the individual taxpayers, these will be shared in accordance with the apportionment formula at the time of the termination of the group. If the apportionment formula has changed during the life time of the CCCTB group some taxpayers may in fact get a lower portion of losses than they would have otherwise got if the losses had been attributed to the individual tax payers. This scenario will also have an impact on the interests of minority shareholders. Whilst pre-consolidation losses are ring-fenced, losses earned by the individual company during the CCCTB regime are attributed to the whole group. Upon the termination of the group the individual company will get its portion of profits/losses back according to the allocation formula which might differ significantly with what would have been the case has the individual company not opted for the CCCTB regime.
There is also inconsistency between the termination of a whole CCCTB group and when one Member actually leaves the group. In the latter case no losses are apportioned to the taxpayer leaving the group.3 Thus, this taxpayer is completely forfeiting his right to any losses. This creates an imbalance in the CCCTB regime. Article 66 provides for three possibilities of utilisation of losses after the CCCTB group is terminated:
taxpayer remains in the system – becomes a single taxpayer under the CCCTB regime and the allocated share of loss will be used according to CCCTB rules;
taxpayer joins another group; the losses are only allowed to be set off against its apportioned share. Therefore there is no import of losses from the old group to the new group;
if the taxpayer leaves the system, losses will be taken into account according to national rules.
Essentially losses are ring fenced and can only be utilised by the taxpayer against its own share of profits.When one taxpayer leaves the CCCTB group, the directive provides that as a general rule no losses are apportioned to that individual taxpayer. Therefore, if the individual taxpayer had generated losses when it formed part of the CCCTB group these losses would remain at the level of the group. In this situation the minority shareholders are losing out on the potential tax benefits that would arise from the future utilisation of the losses by the individual taxpayer. Upon liquidation a company would automatically leave the CCCTB group. As per the general rule under the directive no losses would be attributed to the liquidated company. This is in line with CJEU case law as regards terminal losses, i.e. losses are being taken into account by other group members. Thus, the losses are not lost but utilised against profits from other group Members.
The proposed CCCTB directive contains a number of articles dealing with losses in the different stages of the CCCTB. Even though the CCCTB regime adopts a system of consolidation whereby profits and losses are aggregated there are strict provisions ring fencing losses upon entry into the system. Also, the regime aims at keeping losses at the level of the group while attributing immediately profits to the individual taxpayers. From an administrative point of view if the EU Commission wishes to encourage taxpayers to opt into the system the Commission should consider offering more guidance to the application of some of its provisions with regards to losses. There are no provisions in the proposed CCCTB directive that cater for the interests of minority shareholders. Minority interest shareholders can have up 25% of the equity share capital of any of the individual tax payers in the CCCTB group. Tax losses can add up to a significant amount and minority interest shareholders have no protection under the CCCTB regime. Some domestic regimes such as the UK and France have provisions in their domestic legislation to provide compensation to the company surrendering the losses in order to compensate the minority interest shareholders. The CCCTB makes no reference to minority interest shareholders. It is the author’s opinion that consideration should be given to the interests of minority interest shareholders in the CCCTB proposed directive.
The CCCTB proposal would benefit from provisions, which would compensate minority shareholders for their deemed losses of future tax benefits. Even though pre-consolidation losses are ring fenced if a particular company’s share of profits is more as a result of adopting the CCCTB regime than the pre-consolidated losses are used quicker implying less distributable profits. If Company X would have pre-consolidation losses of €2,000 and non-CCCTB profits of €1,000 while its share of CCCTB profits (if it opts for the regime) is €1,500, then it is using €500 more of pre-consolidation losses when adopting the CCCTB regime. In this case Company X is giving €500 losses to other members of the CCCTB group permanently. Minority shareholders of Company X have lost their share of future tax benefits arising from these losses. Is it not justified to request compensation for this loss? Similarly during the CCCTB regime the sharing ratio would determine how losses arising in a one or more members of the group is utilised by the members of the whole group. Minority interest shareholders of the loss making member/members would be forfeiting part of their losses for the benefit of other members of the group.
Compensation should be on-going during the period of the CCCTB regime and be carried out internal between the members of the group. The compensation should have no impact on the share of CCCTB profits taxed by the Member States and should also not give rise to further tax obligations. In the following example Companies X, Y & Z are resident in Member States A, B & C and have opted to form a CCCTB group. The results for the Companies in year 1 are as follows:
|Individual €||Sharing Ratio||CCCTB €|
Assuming a corporation tax rate in all Member States of 30%, the following would be the tax obligations (both with or without the CCCTB regime).
|Individual €||CCCTB €|
Company X & Y should be compensated by Company Z for the extra tax paid. The compensation would not affect the overall tax at group level or the portion of tax of Member States. It will only be an internal adjustment between group members to safeguard the interests of minority shareholders. Compensation does however add a level of complexity to the CCCTB regime given also the different tax rates in the EU. Compensation should be carried out at the lowest tax rate. If Company X and Company Y had a tax rate of less than 30% then compensation should be carried out at the lower tax rate. On the other hand if Company X and Company Y had a tax rate of more than 30% then the compensation should be carried out at the 30% tax rate.
Compensation should also be carried out once an individual member decides to leave the group. In this case the particular company would not be allocated any share of losses and should be compensated for the losses it left at the level of the group. Upon the dissolution of the whole group a calculation of appropriate share of losses should be carried out and internal compensation given.Even when adopting a compensation system there will always be distortions due to the different tax rates in the EU. The compensation system however, provides a fairer approach in relation to minority interest shareholders. Whether a compensation system is adopted or not further consideration should be given to minority interest shareholders in the CCCTB proposed directive.
This article has been published in Intertax Volume 41, issue 11 pages 581-587, 2013 Kluwer Law International BV, The Netherlands.
The author wishes to thank Profs. Pasquale Pistone and Mr. Lluís Fargas for their valuable comments to this article.
The views expressed in this article are the author’s views and do not necessarily reflect the views of Deloitte Malta.