The Canadian surplus and FAT rules are not equipped to handle the proposed EU common consolidated corporate tax base

The European Commission draft EU directive package of October 2016 proposed the adoption of a common consolidated corporate tax base (“CCCTB”) under which EU-resident companies (and EU-located branches of third-country companies) would have one common set of rules for computing taxable income, companies within the same group would consolidate their individual results, and the group's consolidated taxable income would be allocated among the individual group members on the basis of a formula giving equal weight to sales, labour, and assets.

Where EU earnings of European subsidiaries of a Canco were active business earnings, determining earnings on the proposed apportionment basis could result in substantial discrepancies between the surplus balances for Canadian purposes of a particular subsidiary and its cash available for distribution. Even if it were more appropriate to determine the earnings as the pre-consolidated before-tax income computed in accordance with the CCCTB, taxes then determined in accordance with the CCCTB could still have the effect of shifting surplus inappropriately from one foreign affiliate to another.

If the European subsidiaries generated foreign accrual property income, the potentially major discrepancy between how FAPI and the local taxes was determined under Canadian principles and the CCCTB methodology, respectively, would often give rise to inability to obtain a deduction in computing FAPI under the foreign accrual tax rules.

Neal Armstrong. Summaries of Michael Black, "Cross-Border Consolidation and the Foreign Affiliate Rules," Canadian Tax Journal (2017) 65:1, 173-89 under Reg. 5907(1) – earnings – (a)(i), Reg. 5907(1) – taxable surplus, s. 95(1) – foreign accrual tax and Reg. 5907(1.3)(a).