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BEFIT: New rules to reduce tax costs for cross-border businesses up to 65%

Sep 12, 2023 , , , , , ,

Brussels, 12 September 2023

Today, the European Commission adopted a key package of initiatives to reduce tax compliance costs for large, cross-border businesses in the European Union.

Today’s proposal, called “Business in Europe: Framework for Income Taxation” (BEFIT), will make life easier for both businesses and tax authorities by introducing a new, single set of rules to determine the tax base of groups of companies. This will reduce compliance costs for large businesses who operate in more than one Member State and make it easier for national tax authorities to determine which taxes are rightly due. The new, simpler rules could reduce tax compliance costs for businesses operating in the EU by up to 65%.

BEFIT will mean that:

  • Companies that are members of the same group will calculate their tax base in accordance with a common set of rules.
  • The tax bases of all members of the group will be aggregated into one single tax base.
  • 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.

Dealing with 27 different national tax systems, each with its specific rules, makes it costly for companies when it comes to tax compliance. This discourages cross-border investment in the EU, putting European businesses at a competitive disadvantage compared to companies elsewhere in the world.

In more detail

The proposal builds on the OECD/G20 international tax agreement on a global minimum level of taxation, and the Pillar Two Directive adopted at the end of 2022. It replaces the Commission’s CCTB (common corporate tax base) and CCCTB (common consolidated corporate tax base) proposals, which are withdrawn1. 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 at least 75% of the ownership rights or of the rights giving entitlement to profit.

The rules will be discretionary for smaller groups, which may choose to opt in as long as they prepare consolidated financial statements. This might be of particular interest to SMEs.

Transfer pricing

Today’s package also includes a proposal aiming at harmonising transfer pricing rules within the EU and ensuring a common approach to transfer pricing.

The proposal will increase tax certainty and mitigate the risk of litigation and double taxation. The Directive will also further reduce the opportunities for companies to use transfer pricing for aggressive tax planning purposes.

Next steps

Once adopted by the Council, the proposals should come into force on 1 July 2028 (for BEFIT) and as of 1 January 2026 (for the transfer pricing proposal).

For more information

Questions and Answers on BEFIT and transfer pricing

BEFIT legal proposal

Transfer Pricing

BEFIT Factsheet

Quotes

Today, the Commission is taking another step towards simplifying the EU’s tax laws and making them fairer for companies active in more than one Member State. SMEs will be able to use one set of rules for filing their tax returns, instead of dealing with 27 different national regimes. This will save them in compliance costs and stimulate more cross-border investment and competitiveness. In corporate taxation, today’s proposals build on work done by the OECD/G20 to establish a common set of rules to determine the tax base of companies and to address problems related to transfer pricing – such as profit shifting, tax avoidance and double taxation – so as to improve tax certainty while reducing opportunities for aggressive tax planning.

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People – 12/09/2023

Today’s proposals aim to make it easier for businesses large and small to operate in the EU, reducing tax compliance costs and freeing up resources for them to invest and create jobs. Our proposals will also facilitate tax authorities’ efforts to ensure that companies pay what is rightly due. After the adoption of the EU Directive ensuring a minimum effective tax rate for large multinational groups, today we take another key step towards simpler, clearer and more cost-effective tax systems in the EU.

Paolo Gentiloni, Commissioner for Economy – 12/09/2023

1 COM(2016) 685 final and COM(2016) 683 final

 

Source – EU Commission

Q&A: BEFIT and transfer pricing

Brussels, 12 September 2023

Why was BEFIT needed?

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.

What is the Commission proposing?

The Commission is proposing 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:

1. 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.

2. 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.

3. 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.

Which companies does this apply to?

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.

What will the transitional allocation rule lead to?

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.

What about companies that are part of a group, but do not operate in the EU?

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.

How will the BEFIT rules  be administered in practice?

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.

How much will BEFIT save businesses in tax compliance costs?

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%.

How does the BEFIT proposal relate to the HOT proposal (Establishing a Head Office Tax System for SMEs)?

The BEFIT proposal is primarily aimed at large groups operating across the EU. The HOT proposal simplifies rules for SMEs during their early stages of expansion. If SMEs successfully expand and grow, they may outgrow the scope of the HOT rules, but then they will be able to opt into BEFIT. In this way, the two proposals are complementary. Smaller businesses will be able to choose the best option for their own needs throughout their lifecycle.

TRANSFER PRICING
What is transfer pricing?

Transfer pricing is a mechanism to determine the pricing of transactions between companies that are part of the same group. A significant volume of global trade consists of international transfers of goods and services, capital and intangibles, such as intellectual property, within a multinational group. These are called intra-group transactions. According to the current international standards -the OECD’s  arm’s length principle – transactions between related entities of a multinational group must be priced on the same basis as transactions between third parties under comparable circumstances. This arm’s length principle is further elaborated in the OECD’s Transfer Pricing Guidelines.

In order to apply the arm’s length principle, it is necessary to identify the commercial or financial relations between the associated enterprises and to compare the conditions and economically relevant circumstances of transactions between associated enterprises, called controlled transactions, with those of comparable transactions between independent enterprises, which are called comparable uncontrolled transactions.

What are the problems related to current transfer pricing practices?

At European Union level, transfer pricing rules are currently not harmonised through legislative acts. While all Member States have in place domestic legislation that provides for some degree of a common approach by following the arm’s length principle, even if its application is not identical across Member States, the definition of associated enterprises and the notion of control, which are pre-conditions to applying transfer pricing, differ between Member States. Certain Member States apply a threshold of 25% while others apply a threshold of 50% shareholding when it comes to determining whether the control criterion is met.

The complexity of the transfer pricing rules also causes a number of other problems, such as:

  • Profit shifting and tax avoidance, as transfer prices can be easily manipulated to shift profit and be used in the context of aggressive tax planning schemes.
  • Litigation and double-taxation, as transfer pricing is more subjective than other areas of taxation and, for this reason, is sensitive to disputes, with tax administrations not always sharing a common interpretation.
  • High compliance costs, resulting from businesses having to determine what prices could be regarded as arm’s length, conducting studies, as well as compiling, maintaining and updating the related documentation.
What is the Commission proposing?

The Commission’s proposal aims at harmonising transfer pricing rules within the EU and ensuring a common approach to transfer pricing problems. It incorporates the arm’s length principle and key transfer pricing rules into EU law, clarifies the role and status of the OECD Transfer Pricing Guidelines and creates the possibility to establish common binding rules on specific aspects of the rules within the Union.

The proposal will increase tax certainty and mitigate the risk of litigation and double taxation. Moreover, it will also reduce the opportunities for companies to use transfer pricing for aggressive tax planning purposes.

When will the new rules start being applied?

Member States should implement the transfer pricing rules by 1 January 2026.

For more information

Press release

BEFIT legal proposal

Transfer Pricing

BEFIT Factsheet

Source – EU Commission

Remarks by EU Commissioner Gentiloni on the SME Relief initiatives and BEFIT

Brussels, 12 September 2023

Good afternoon.

As Thierry mentioned, the SME relief package is about making it easier for SMEs – the backbone of the European economy – to really reap the full benefits of our single market. And taxation is one important piece of the puzzle.

SMEs operating cross-border pay corporate income taxes in all Member States where they have permanent establishments, according to different national rules. This results in high tax compliance costs, which disproportionately affect smaller firms: SMEs spend some 2.5% of their turnover just to comply with their tax obligations. That’s around 3.5 times higher than larger firms.

Yearly compliance costs for corporate income tax amount to almost EUR 55 billion in the EU, of which 90% is incurred by very small businesses, with less than ten employees. These costs can discourage smaller firms from investing in other Member States.

That is why today we are proposing that SMEs with permanent establishments in other Member States will be able to interact with just one tax administration – that of their Head Office.

For those SMEs that choose to opt into this “Head Office Taxation” system, their taxes will be determined based only on the rules of the Member State where their Head Office is based.

They would need to file just one tax return with the tax administration of their Head Office, which would then share it with the Member States where the SME has permanent establishments.

The lower tax compliance costs will be reduced by around a third, freeing up resources for investment and job creation. And this will encourage smaller firms to expand into other Member States.

So for SMEs, this proposal means one single tax return, one single set of rules, one tax administration. It will make the single market real for them – now also in the field of taxation.

Of course, it is not just SMEs that have to deal with 27 different national tax systems. Large multinationals face the same issues. This takes me to the second legislative proposal we adopted today: the Business in Europe Framework for Income Taxation.

‘BEFIT’ is a new single set of rules to determine the tax base of large groups. The new rules will be mandatory for the approximately 4,000 multinational enterprises that have an annual revenue of at least EUR 750 million operating in the EU. This is also the threshold of the global agreement on minimum taxation, the so-called Pillar 2.

So, how will BEFIT work?

Companies that are members of the same group will calculate their tax base according to a common set of rules.

The tax bases of all members of the group will be aggregated into one single tax base.

Each member of the multinational group will have a share of the aggregated tax base based on the average of the taxable results in the previous three fiscal years.

Let me underline that tax rates will remain nationally determined, in line with the principles of subsidiarity and proportionality.

For the companies falling within its scope, BEFIT will cut tax compliance costs but is also designed to ensure tax certainty and there have been previous attempts in the past, but I am optimistic that this proposal has much greater chances of success. Why?

Because in the meantime we have reached the historic OECD/G20 international agreement on a global minimum level of taxation and adopted the related Pillar Two EU Directive last year. We have a global pull factor towards this harmonisation of rules in defining the tax base. Let me recall that the EU has been among the first jurisdictions in the world to implement this international agreement.

The approach we have taken with BEFIT – supported by the European Parliament – mirrors in many respects that of the international agreement. In fact, BEFIT will make it easier for Member States’ tax administrations to ensure a more uniform and effective implementation of the Pillar Two Directive, something that all Member States have unanimously agreed to.

Finally, the third proposal we have adopted today is about harmonising transfer pricing rules in the EU. These are rules that govern the setting of prices of property or services between associated enterprises. Because transfer pricing affects the tax base both in the country of the buyer and that of the seller, this has long been a tool used – and frequently abused – by multinationals to reduce their tax liability.

This is why the OECD has set out rules specifying that cross-border transactions between related entities must be priced on the same basis as transactions between third parties. This is what is known as the “Arm’s Length Principle”.

All Member States have implemented the relevant OECD principles into their domestic legislation. However, there are still significant differences in how they are applied – for example, when it comes to the notion of “control”, which is normally the pre-condition to apply transfer pricing. In some Member States this is applied where there is a substantial shareholder above 25%; in some others, there needs to be a substantial holder with over 50%.

This and other inconsistencies between national rules cause a number of problems, such as profit shifting and tax avoidance and litigation.

For instance, in 2021 there were some 2,300 ongoing procedures between Member States to settle disputes on questions of transfer pricing. On average, it takes almost three years to settle these procedures, with costs that can reach up to EUR 1 million per procedure. This is clearly an unnecessary drain on the resources not just of companies but also of national tax administrations.

To sum up, today we are putting forward three separate proposals, but their goals are the same:

to make it easier and more cost-effective for businesses to operate in the EU, which will support investment and job creation;

and to make it easier for tax authorities to more effectively ensure that companies pay what is rightly due – which is good news for tax fairness, public finances and social justice.

Thank you.

Source – EU Commission

 

BusinessEurope reacts to proposed EU Framework for Income Taxation

Commenting on the package of tax proposals announced by the European Commission today (the BEFIT and Transfer Pricing Directives), BusinessEurope Director General Markus J. Beyrer said: “The new framework can potentially support investment and growth across the single market, but should remain adaptable to ongoing changes in the international corporate tax system.”

“We welcome the Commission’s efforts to improve the existing tax framework for businesses operating in the EU. By deepening the single market and encouraging business expansion across different Member States, the proposals have the potential to support investment and growth. Nevertheless, it is important that any implementation of the BEFIT system is adaptable to significant, ongoing changes in the international corporate tax system.

“The two directives proposed today must be implemented in a harmonised manner, support further simplification of the administration of tax returns, and minimise transfer pricing disputes both between Member States and with third countries.

“We are ready to work with policymakers to ensure that both companies and citizens can fully reap the potential benefits of simplification and reduced compliance costs.”

Source: Businesseurope (via email)

 

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