On October 23, 2001, the European Commission published a report entitled“Company taxation in the internal market.” It addresses problems regarding, for example, the limits to cross-border loss relief, the establishment of transfer prices, merger issues (taxation of capital gains on assets upon exit), and international restructuring operations.

To resolve these issues, the report proposes creating a consolidated tax base. This may be achieved by introducing either common base taxation (“CBT”) or home state taxation (“HST”). Under CBT, the Member States agree upon common rules for establishing profits, while under HST, national legislation is retained, with profits for European enterprises being established under the rules of the Member State where their head office or parent company is established. Both methods allocate an enterprise’s total profits across Member States, based on a formula that includes sales, wage and salary expenses, and the value of business assets, and is referred to as “formula apportionment.” The Member States may then apply their own tax rates to the profits apportioned to them.

Also on October 23, 2001, together with the report, the Commission announced itspolicy proposals in its communication entitled “Towards an internal market without tax obstacles - A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities.” Its key message was that the Commission would study ways in which a consolidated corporate tax base could be achieved.

In a non-paper to the Ecofin Council of September 10 and 11, 2004, the Commission set itself the goal of defining a common corporate tax base. It will attempt to involve all the Member States in achieving this goal. If this attempt fails, it proposes making further decisions by invoking the Treaty provisions on enhanced cooperation (Articles 43-45 of the EU Treaty), which only require the consent of eight Member States. The Ecofin Council approved the European Commission’s establishment of working groups that will study the technical details of the CBT document.