According to the European Commission, small and medium-sized enterprises (abbreviated SMEs) account for 99% (23 million entities) of all the companies in each European Union country and operate in a wide range of industry sectors. They provide more than 90 million jobs and contribute to a considerable proportion of created value-added (57%) and posting growth of 5.7% in 2015. Therefore, there is no doubt that SMEs play a key role in the EU economy.
However, the group of SMEs in the EU is very heterogeneous and differs significantly from large enterprises (abbreviated LEs). They differ not only in their size, but they also perform different activities, have different needs and require different resources. Currently, SMEs already face special rules in the area of accounting and financial reporting in comparison with LEs and also, they face specific problems and have specific needs in the area of practical international taxation issues.
Regarding the law and regulations, there are 28 different tax systems in the European Union, which may essentially disadvantage SMEs and may have distortive impacts on commercial decisions concerning the different business forms and different business activities.
The situation of SMEs in terms of transfer pricing
The European Commission also drew attention to the lack of knowledge and information, the lack of human and financial capital and the lack of public support are crucial barriers for doing international business from the perspective of SMEs. According to the European Commission, only 5% of SMEs are associated (having subsidiaries abroad) and only 1.2 million of SMEs are exporting, 83% of which are within the EU. This proves two important facts:
there are very low cross-border activities of SMEs in comparation with LEs;
there are insufficient use of external market demand for goods and services. This results in lower performance and lower economic growth of SMEs in the European Union.
A very important taxation issue that should be highlighted is transfer pricing. In the EU, transfer pricing compliance means adherence to the arm’s-length principle stipulated in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
These guidelines set treatments of transfer pricing issues with respect to multinational enterprises, which are generally LEs. In addition, the TP Guidelines are not making a direct distinction between the types or sizes of enterprises. In theory, all enterprises, regardless of their size, are subject to the same principles and recommendations.
Thus, all SMEs that carry out international business (but also domestic enterprises through affiliated enterprises in some countries, since the principle of arm’s length has also been introduced for domestic intragroup transactions) are confronted with transfer pricing issues (for instance, the transfer pricing in Romania includes also domestic transactions).
As regards SMEs, the application of transfer pricing rules is very complex. This is amplified by the fact that there is no common definition of SMEs for tax purposes in the EU nor the symmetry of dealing with this issue.
Given that SMEs are usually not able to provide all the necessary information on transfer pricing issues, using tax and accounting advice that increasingly leads to higher compliance costs than LEs, some simplified transfer pricing measures can be considered an appropriate solution.
CCCTB contribution to solving transfer pricing issues
A suitable solution for transfer pricing issues of SMEs is presented by the new corporate taxation system in the form of the Common Consolidated Corporate Tax Base (abbreviated CCTB), which was proposed by the European Commission during October 2016 to be a tool to prevent tax avoidance, tax fraud and profit shifting.
The introduction of this corporate taxation system is welcomed by opponents of the arm’s-length standard who perceive the standard negatively and consider it incompatible with today’s global economy.
With the current globalized economy, the many technological changes, the mobile and digital nature of business, and the more complex and complicated business models, it is absolutely incorrect to evaluate the results of associated enterprises based on the assumption that they were a group of unrelated enterprises transacting with one another at arm’s length and then using this assumption to determine where profits fall to be taxed.
Nowadays, some experts consider that the arm’s-length standard does not reflect economic reality and is not able to ensure the fairest and most reliable basis for the determination of where profits fall to be taxed and whether the third party would enter into the transaction (the basic premise of the arm’s-length principle).
To sustain that, they given evidences that income shifting between enterprises is taking place irrespective of the existence of the arm’s-length principle because transfer pricing is used as a tax planning tool to enable the distribution of the tax risks and profits resulting in the reduction of the overall corporate tax liability.
It is very interesting that due to the profit shifting and inefficiencies of the corporate taxation system, the annual loss in the EU is estimated to approximately 50–190 billion EUR. In this case it is obvious that the international tax rules are non-transparent, inefficient and unable to react on increasingly sophisticated tax planning structures.
The absolute change in the corporate taxation system, for example, in the form of CCCTB, could ensure a better reflection of economic reality of corporate entities, and through the consolidation of total taxable income and profits, it could help to eliminate the problem with transfer pricing issues, as all intragroup transactions will be eliminated from the total taxable income of the group.
The implementation of the CCCTB can bring advantages to both sides—the taxpayer and the tax administration. The disappearance of the differences between the nominal and effective tax rate and the harmonization of the rules for tax base construction should lead to the establishment of fair tax competition (i.e., the situation in which all market subjects have the same information about the effective tax rate).
Almost one-half of SMEs with foreign associated entities is facing this issue and because of this solution, offsetting the losses at the level of the parent company. Another advantage is the common rules for corporate tax base construction; SMEs would not face 28 different tax systems, which is connected with the high compliance costs of taxation. Finally, the most important advantage concerns the super-deduction for research and development for the intensive support of companies, notably SMEs and start-up companies.
In conclusion, all this advantages of the suggested tax systems along with the tax savings, can increase the business performance of small and medium-sized enterprises and the level of their internationalization in the EU.
In addition, it is the possibility that this might result in many economic benefits at least in the form of an increase in investment, employment, sustainable and innovative growth. In this context, our team can conclude that the CCCTB system is advantageous for SMEs, especially as a new form of corporate taxation, having the aim of eliminating the main distortions on the internal markets.