In response to the CCCTB proposals, which were released by the European Commission in updated form on October 25, Grant Thornton partner Peter Vale said the consolidation aspect of the common tax base would likely result in a "major reallocation" of taxable profit from Ireland, and an erosion of the effectiveness of Ireland's competitive 12.5% corporate tax rate.

‘The CCCTB is essentially a two-part exercise,' Vale observed.

'The "common" piece seeks to ensure that all EU states calculate their taxable profits in a similar manner. The second part is "consolidation", which means that the profits of the enterprise are then allocated across relevant EU member states using a prescribed formula.

‘Of most concern to Ireland is the [consolidation] piece of the proposals, as the formula places emphasis on employee numbers, sales, and assets,’ he said. ‘This will likely see a relatively small amount of the enterprise's profits allocated to a small economy such as Ireland, thus significantly eroding the benefit of our low tax rate.’

Last year, a report by Chartered Accountants Ireland attempted to quantify the potential damage to Ireland's corporate tax base posed by the CCCTB proposals. It found that around one sixth, or €700m (£636m), of Ireland's annual corporation tax revenues come from the manufacture of pharmaceuticals. But as only 1% of the sales of pharmaceuticals in the EU takes place in Ireland, if the tax base for pharmaceuticals was based on the location of sales, Ireland could potentially see a 90% reduction in the tax base.

‘Under a CCCTB-style apportionment based on capital, sales, and labour, Ireland's share of the tax base from pharmaceuticals could be around 80% lower than it is now. The potential loss of annual corporation tax revenue for Ireland under these scenarios is between €575m and €650m,’ CAI said.

Although the prospects of the CCCTB reaching implementation stage are ‘remote’, given that it must be approved by every member state, Vale said it would be better if the EU were to put the proposals on hold until the OECD's base erosion and profit shifting (BEPS) project is at a more advanced stage.

‘The general view in Ireland is that many of the issues that CCCTB seeks to address are being dealt with through the BEPS process and at a minimum CCCTB should be set aside until the outcome of BEPS is clearer,’ he said.

‘This is not a path favoured by the Commission at present.’

This article first appeared in Tax-News – Global Tax News, a Wolters Kluwer publication. Find out more here