The formulary apportionment proposed under the Common Consolidated Corporate Tax Base[1] has as one of its goals to eliminate transfer pricing challenges. However, it also alters the methods that the taxpayers will use in their attempts to minimize their taxes while shifting profits. Transfer pricing allows companies to exploit their internal transactions. While this will no more be possible under the formulary apportionment, the profits will now be shifting through a process made at an earlier stage, i.e., during the time that each company’s economic decisions are taken.

What seems to the author to be the Achilles heel of the CCCTB is the potential manipulation of the factors according to which the tax base is attributed to the group members in the different Member States. This statement is based on the fact that companies can still structure the profits allocation according to their own interests, just by using other means. It is also regrettable that reading through the Proposal, it is easily noticeable that the CCCTB has not taken proper measures to protect itself. The author implies that the anti-abusive provisions of article 58 of the CCTB Proposal do not seem to place situations of abuse of the apportionment rules under their protective umbrella.[2],[3] According to the author, this is to be considered an impediment that the Proposal Directive sets per se to itself.

Diving a little deeper into the potential manipulation of factors chosen by the EU legislator, one can easily speculate the susceptible to manipulation character of the payroll sub-factor of labor against artificial structures.[4] Specifically, since the tax base is allocated to the Member State that makes the payments, the taxpayer only needs to establish this group member in a low-tax jurisdiction.[5] The EU has exerted to protect this variable from potential manipulation by inserting the duration and percentage requirements of article 33 to mitigate the ability of companies to move around workers and contracts to attain tax savings[6] and broadening the employees’ term disabling the firms’ ability to minimize the weight of this factor in high-tax countries by subcontracting.[7] Lastly, the wage concept has been widened as well, but it is still considered the most susceptible to manipulation.

It is crucial to mention the EU legislator’s choice regarding the elements included and excluded from the assets factor. In the last decades, the use of intangible assets has increased dramatically, and this growth is not of little consequence. These assets’ intangible nature assigns to them high mobility and allows companies to wave them around according to their tax interests. This mobility is of high significance since these assets are also famous for their high value, so their shift to low-tax jurisdictions is not of little interest. What is more, certain intangibles are considered hard-to-value, and this – as it is expected – renders the arm’s length principle’s application questionable in the absence of reliable comparables.[8] So, the exclusion of this type of asset allows for a reduction of harmful situations arising from the characteristics mentioned above since a possible shift would be of no tax interest.

However, the tangible assets are not manipulation-proof, which means that profit shifting issues continue to arise by exploiting this factor. Concretely, the assets’ location and valuation are the two features of the CCCTB system, which can be easily employed by the taxpayer in a profit shifting process.[9]

Throughout the years, it has been clear – or at least intensely advocated – that the sales factor[10] is less mobile and less susceptible to manipulation. The immobility of the factor lies in excluding dividends, interests, and royalties, which constitute easy to move passive income[11] and the company’s inability to control the place where the sales will take place.[12] At first, nobody can deny that a company’s decision in which markets will establish its presence is under its proper control. Nevertheless, after having been expanded in several jurisdictions, the place where its sales will occur, i.e., where its customers’ majority or minority will be, is out of its monitoring. The weight of this factor can be concentrated either in a high-tax or in a low-tax jurisdiction. Nonetheless, this cannot be assigned to beneficial profit-shifting structures that the company was aiming for.

This is positive news; indeed, however, taxpayer’s creativity nowadays seems to be of incomparable speed, ending up manipulating every single drop of each legal structure. Regardless of the lack of mobility, the sales factor is, unfortunately, susceptible to another kind of manipulation. The fact that sales are attributed to a company only when there is a nexus in the involved country creates a motivation for the company to eliminate such nexus from high-tax jurisdictions, and nowadays,the digital economy would also be happy to help it.[13] So, if one takes a look at the other side of the coin, it becomes apparent that a PE[14],[15] structure outside the EU suffices for all the abovementioned not to be considered more than a pretty fairytale.

All these situations seem to reduce the EU’s revenues, but to be considered abusive, they need to contain two significant characteristics: artificiality and intention to acquire a tax advantage that is not in accordance with the law. Labor, assets, and -for some- sales constitute production factors and value drivers. So, their actual transfer in a different jurisdiction cannot be considered de facto as abusive[16] just because it was also based on tax motives since it is widely accepted that the taxpayer has the freedom to structure its operations, optimizing his tax position and minimizing its tax burden.[17] When in the cases above, a transfer of real economic activities occurs, the structure is not deemed abusive, and there is no new aggressive tax planning opportunity born under the formulary apportionment of the CCCTB. In terms of EU revenue, these situations may not be ideal, but in any case, in the absence of artificiality and a not secundum legem intention, it cannot be considered that tax abuse emerges.[18]

[1] Clarifying the “hidden” terms behind the acronym CCCTB, what the European Union seeks to achieve is to provide member states with one single set of rules (Common) relating to the taxation of companies (Corporate), which will allow the cross border losses and profits of a group to offset (Consolidated) ending up to the formulation of the taxable amount of profits (Tax Base), see in this respect Questions and Answers on the CCCTB, MEMO/11/171, Brussels, 16 March 2011, available at [accessed 23.03.2021]

[2] Harris Peter, The CCCTB GAAR: A Toothless Tiger or a Russian Roulette? in Weber, D., Amsterdam Centre for Tax Law, & ACTL Conference, (2012), CCCTB: Selected Issues (Ser. Eucotax series on European taxation, vol. 35), Kluwer Law International, 273.

[3] While one should also have in mind that the safeguard clause’s effectiveness cannot be but of a restricted nature, since the totality of the tax authorities involved must agree upon its application, see art.29 CCCTB Proposal Directive 2016.

[4] Dąbroś, W., & Kudła, J. (2020). The voting of EU members for common consolidated corporate tax base and the tax benefits, Central European Economic Journal, Vol.7 Issue 54, p.59, available at [accessed 13.03.2021]

[5] Wilde Maarten, (2014), Tax Competition within the European Union – Is the CCCTB Directive a Solution?, Erasmus Law Review, Vol.7 Issue 1, 32

[6] Sánchez Sánchez Á., (2018), The Apportionment Formula under the European Proposal for a Common Consolidated Tax Base, European Taxation, Vol.58 No.6, 231

[7] Idem. 231-232

[8] The OECD endeavors to tackle the challenges stemming from this kind of intangible assets and even published guidance related to the Action 8 of the BEPS Project, proposing ex-post adjustments in cases where there is a deviation from the anticipated profits, see para.2 p.11 and para.16 p.13 of the OECD (2018), Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles – BEPS Actions 8-10, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris, [accessed 13.03.2021]

[9] Martini Jan Thomas, Niemann Rainer, Simons Dirk, (2012), Transfer Pricing or Formula Apportionment? Tax‐Induced Distortions of Multinationals’ Investment and Production Decisions, Contemporary Accounting Research, Vol.29 Issue 4, 1033

[10] The sales factor ends up being quite controversial , and this is mainly because on the one hand it is of low mobility, which is of high assistance in the fight against profit shifting, and on the other hand is not a production factor which -according to some- renders its inclusion in the formulary apportionment improper and in contrast with the international principle that profits should be taxed where value is created. According to the author, the hard-to-shift nature of this factor matters more than principles -even fundamental ones- resulting in inadequate control of one the most important internationally recognized tax problems of today’s society. Besides, according to the OECD, “[…] there is no agreement on what economic activities generate profits, which is critical to measuring BEPS. Some analysts argue that profits are generated where factors of production (labor and capital) are located, whereas other analysts argue that profits are generated where sales occur. Some other analysts argue that profits are generated based on a combination of labour, capital and sales.”, see OECD (2015) Measuring and monitoring BEPS, Action 11–2015 Final Report, OECD /G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, [accessed 15.03.2021]

[11] Also, according to the Commission this type of income generally does not form part of the core business. And when it does, there is an exception in art.37(2) pursuant to which “ […] interest, dividends, royalties […] shall not be included in the sales factor, unless they are revenues earned in the ordinary course of trade or business.” An example of the contentious exception is intellectual properties management companies whose regular revenue stems from royalties from licensing activities, see Chen Shu-Chien, (2017), Tax Avoidance in the Sales Factor: Comparison between the CCCTB and USA’s Formulary Apportionment Taxation, Indian Journal of Tax Law, Vol. III Issue II, available at SSRN: [accessed 15.03.2021]

[12] Since the CCCTB aims for a destination-based approach. It is also worth to notice if an origin-based or a value-added approach would have been selected, the challenges emanating from transfer pricing would insist since TP methods would be required in calculating the value added in its entity, see Martini et al. (2012), 1033

[13] Internet users are able to employ virtual private networks in order to conceal their IP address and their physical location. The immobility of the final customers does not appear to be present for business customers, though. A typical case is this of an intermediary company set up in a jurisdiction with a preferential regime to get access to lower-priced goods or services, which then sells to consumers in a country with a high level of taxation. As Martin Sallivan states, “There will always be an incentive to break the supply chain so that third-party sales occur in low-tax jurisdictions,” see Spencer, D. E. (2019), Formulary apportionment, Journal of International Taxation, Vol. 30 No.7, 34.

[14] See Sánchez Sánchez, (2018), 235.

[15] Article 5 of the CCTB Proposal Directive 2016 deal with artificial PE preventions.

[16] Besides, according to the OECD, the tax planning strategies of a legal character and a shift of real activities cannot be deemed unacceptable or aggressive, see OECD, Frequently Asked Questions, available at [accessed 20.03.2021].

[17] This is what is known as “tax planning,” see Dourado Ana Paula, Aggressive Tax Planning in EU Law and in the Light of BEPS: The EC Recommendation on Aggressive Tax Planning and BEPS Actions 2 and 6, Intertax, Vol.43, Issue 1, 43.

[18] Hellerstein Walter, Tax Planning under the CCCTB’s Formulary Apportionment Provisions: Th Good, the Bad and the Ugly, in Weber, D., Amsterdam Centre for Tax Law, & ACTL Conference, (2012), CCCTB: Selected Issues (Ser. Eucotax series on European taxation, vol. 35), Kluwer Law International, 233-234.