Simplification is crucial to growth and competitiveness in the EU. However, dealing with 27 different national tax systems makes tax compliance difficult and costly for companies. This discourages cross-border investment in the EU, putting European businesses at a competitive disadvantage compared to companies elsewhere in the world.
That is why, on 12 September 2023, the Commission proposed a new, single set of rules to determine the tax base of groups of companies.
Business in Europe: Framework for Income Taxation (or BEFIT) will reduce tax compliance costs for large businesses, primarily those who operate in more than one Member State, and make it easier for national authorities to determine which taxes are rightly due.
The proposal, which is about simplification and builds on the OECD/G20 international tax agreement on a global minimum level of taxation and the Pillar Two EU Directive, will include:
Common rules to compute the tax base at entity level
All companies that are members of the same group will calculate their tax base in accordance with a common set of tax adjustments to their financial accounting statements.
Aggregation of the tax base at EU group level
The tax bases of all members of the group will be aggregated into one single tax base. This will entail cross-border loss relief, as losses will automatically be set off against profits across borders, as well as increased tax certainty in transfer pricing compliance.
Allocation of the aggregated tax base
By using a transitional allocation rule, each member of the BEFIT group will have a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years.
The new rules will be mandatory for groups operating in the EU with an annual combined revenue of at least €750 million, and where the ultimate parent entity holds, directly or indirectly, at least 75% of the ownership rights or of the rights giving entitlement to profit. For groups headquartered in third countries, their EU group members would need to have raised at least €50 million of annual combined revenues in at least two of the last four fiscal years or at least 5% of the total revenues of the group. This ensures that the requirements of the proposal are proportionate to its benefits.
In addition, the rules will be optional for smaller groups which may choose to opt in as long as they prepare consolidated financial statements. This optional scope could be of particular interest to SME groups that operate cross-border, as they may have less resources to dedicate to compliance with multiple national corporate tax systems.
For certain sectors, sector-specific characteristics are reflected in relevant parts of the proposal. This is, in particular, the case for international transport, shipping activities and extractive industries.
The transitional allocation rule will pave the way for a permanent allocation method that can be based on a formulary apportionment using substantive factors. In designing a permanent allocation method, the transitional solution will make it possible to take into account more recent County-by-Country Reporting (CbCR) data and information gathered from the first years of the application of BEFIT. It will also allow for a more thorough assessment of the impact that the implementation of the OECD/G20 Inclusive Framework Two-Pillar Approach is expected to have on national and BEFIT tax bases.
If appropriate, the Commission may propose a Directive whereby the aggregated tax base will be allocated based on a factor-based formula.
The profits and losses of related parties which are not members of the BEFIT group (e.g. because they are not in the EU) will not be aggregated in the group tax base. This means that their losses would not be relieved across borders and transfer pricing would still apply in the transactions between these entities and BEFIT group members. In these cases, the so-called ‘traffic light system' in BEFIT will simplify transfer pricing compliance.
A One-Stop-Shop will allow one group member to fill in the group's information returns with the tax administration of one Member State.
Tax audits and dispute settlement will remain at the level of each Member State. In some cases, audits may need to be carried out jointly under the existing legislative framework.
According to the OECD, large groups with a consolidated turnover of at least €750 million pay around €132 billion, or 1% of GDP, in taxes. The new, simpler rules of BEFIT could reduce businesses' current tax compliance costs up to 65%.