1. DG Taxation and Customs Union Slide: 1 European Commission - DG Taxation and Customs Union Advanced Program in Accounting & Auditing Regulation – Module 22 April 11 2006 IFRS as a possible starting point for a Common EU Tax Base Tom NEALE Principal Administrator Directorate General for Taxation and Customs Union

2. DG Taxation and Customs Union Slide: 2 European Commission - DG Taxation and Customs Union Introduction The Common Consolidated Corporate Tax Base (CCCTB) lBackground  Work to date IFRS/IAS lBackground lInteraction with CCCTB

3. DG Taxation and Customs Union Slide: 3 European Commission - DG Taxation and Customs Union CCCTB – What is it? lCommon – same tax base in each Member State (MS) lConsolidated – tax bases of all group companies combined, eliminating intra- group transactions, and then ‘shared out’ lCorporate – for companies lTax Base -concerns Base, not Rate

4. DG Taxation and Customs Union Slide: 4 European Commission - DG Taxation and Customs Union CCCTB - Background l lCompany Tax Communication & Company Tax Study (October 2001) mLack of loss relief an obstacle mCompliance Costs mTransfer Pricing complexities mTwin track strategy for removal of obstacles - Targeted, short term – eg Directive updates and - mComprehensive, longer term – CCCTB

5. DG Taxation and Customs Union Slide: 5 European Commission - DG Taxation and Customs Union CCCTB - Background 2003 – Public Consultation ‘The application of IAS in 2005 and the implications for the introduction of a consolidated tax base for companies’ EU-wide activities’2003 – Public Consultation ‘The application of IAS in 2005 and the implications for the introduction of a consolidated tax base for companies’ EU-wide activities’ 2003 – CCCTB confirmed in follow up Communication as preferred long term option2003 – CCCTB confirmed in follow up Communication as preferred long term option 2004 – ECOFIN (informal) : support for CCCTB Working Group2004 – ECOFIN (informal) : support for CCCTB Working Group Nov 2004 – CCCTB Working Group establishedNov 2004 – CCCTB Working Group established Oct 2005 – Lisbon Communication: Tax contribution to achieving Lisbon objectives – CCCTB proposal in 2008Oct 2005 – Lisbon Communication: Tax contribution to achieving Lisbon objectives – CCCTB proposal in 2008 April 2005 – Progress to date & next steps (COM(2006)157)April 2005 – Progress to date & next steps (COM(2006)157)

6. DG Taxation and Customs Union Slide: 6 European Commission - DG Taxation and Customs Union CCCTB Working Group (CCCTB WG) lTechnical working group m Commission chair m Participation of tax administration experts from all 25 MS m Initial mandate for three years m Tentative work programme agreed m Meetings +/- every three months m Several sub-groups chaired by Member States

7. DG Taxation and Customs Union Slide: 7 European Commission - DG Taxation and Customs Union Transparency

8. DG Taxation and Customs Union Slide: 8 European Commission - DG Taxation and Customs Union CCCTB WG Work Programme l lTentative Work programme mGeneral Tax Principles rGeneral economic and tax accounting principles mTraditional Structural Elements of the Tax Base r Depreciation, provisions/reserves, definition of income, etc. mAdditional Elements of a Common Consolidated Tax Base r Consolidation method r Allocation mechanism r Anti-avoidance rules mApplication of the Common Consolidated Tax Base

9. DG Taxation and Customs Union Slide: 9 European Commission - DG Taxation and Customs Union IAS/IFRS - Background l lIAS Regulation: compulsory for consolidated accounts of some 7,000 groups in EU l lLimited availability for individual companies across EU l lBut - Individual companies are the basic taxable entity

10. DG Taxation and Customs Union Slide: 10 European Commission - DG Taxation and Customs Union IAS/IFRS – Interaction with CCCTB l lConsultation confirmed that accounting consolidation (IAS 27) not appropriate for taxation l lCertain accounting principles differ from taxation eg Fair Value, materiality, and purpose of ‘IFRS’ accounts l lAccounting & Tax Dependancy

11. DG Taxation and Customs Union Slide: 11 European Commission - DG Taxation and Customs Union Use of IAS/IFRS l lTool for designing the tax base l lCommon definitions and understanding across the EU l lAccounting and Tax Dependancy – links must weaken with one common tax base, but up to 25 different sets of accounting standards in individual accounts

12. DG Taxation and Customs Union Slide: 12 European Commission - DG Taxation and Customs Union Examples (i) lTax Principles – The Framework lTax Depreciation – IAS 16 (Property, Plant and Equipment), IAS 38 (Intangible Assets), IAS (Leases) lReserves and Provisions – IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) lTaxable Income – IAS 18 (Revenue), IAS 11 (Construction Contracts) lForeign Income – Territorial Scope etc OECD Model Treaty and Guidelines

13. DG Taxation and Customs Union Slide: 13 European Commission - DG Taxation and Customs Union Examples (ii) lConsolidation – not IAS 27 (Consolidated Financial Statements and Accounting for investments in subsidiaries) lSharing mechanism – IAS 14 (Segment Reporting)? lFinancial Assets and Institutions – IAS 32 (Financial Instruments: Disclosure and Presentation), IAS 39 (Financial Instruments: Recognition and Measurement)

14. DG Taxation and Customs Union Slide: 14 European Commission - DG Taxation and Customs Union Conclusions lIFRS a possible starting point for a Common EU Tax Base? lYes – but as a tool to assist in the work, no formal links, mainly because IFRS changing constantly, outside Member State control, contain some inappropriate principles and not used by all companies across the EU anyway lhttp://europa.eu.int/comm/taxation_customs/tax ation/company_tax/common_tax_base/index_en. htm