The European Commission has published a proposed directive that contains a new framework for corporate taxation with a view to simplifying the tax rules and ensuring fairer tax distribution among the EU member states (for prior coverage, see the tax alert dated 15 September 2023). However, the Business in Europe Framework for Income Taxation (BEFIT) proposal released on 12 September 2023 and currently undergoing a public consultation also creates potential challenges for business groups operating in the EU.
BEFIT would be compulsory for large European groups that prepare consolidated financial statements and have annual combined revenue of at least EUR 750 million. Smaller groups that prepare consolidated financial statements could also opt to use BEFIT. For BEFIT to apply, the ultimate parent entity would have to hold, directly or indirectly, 75% or more of the ownership rights of its subsidiaries. BEFIT would also apply to groups that are not EU-headquartered where the combined EU revenue of the group either exceeds 5% of total group revenues based on the consolidated financial statements or EUR 50 million in at least two of the preceding four fiscal years.
In the first seven years that BEFIT is in effect, the expectation is that the tax base would be decided using a “baseline allocation percentage” based on the average taxable results of the previous three fiscal years. In essence, BEFIT would replace previous proposals for harmonizing corporate taxation in the EU, such as the common consolidated corporate tax base (CCCTB) and the common corporate tax base (CCTB), neither of which were ever approved by the European Council.
In addition to these substantive issues, adopting and complying with BEFIT would generate additional costs for groups. While a single rule set should in theory simplify tax systems for group companies, group company reporting systems still would have to be adapted to the new rules. Group companies would also have to ensure the consistency and comparability of the tax base, which may prove a difficult exercise, as accounting standards may vary among group members, affecting the calculation and aggregation of the tax base.
Even though a one-stop-shop mechanism for administering BEFIT is envisaged, each group member would still need to file local returns so that local tax authorities could ensure that adjustments to the BEFIT tax base were applied correctly. Groups would have to file local returns, as well as a BEFIT information return, similar to the GloBE information return required under the global minimum tax rules (i.e., Pillar Two of the OECD’s BEPS 2.0 project), placing an additional burden on taxpayers. It is therefore unclear whether BEFIT would effectively reduce the tax compliance and administrative burdens faced by groups.
After consultation and review by the European Parliament and the European Council, the BEFIT directive will need unanimous approval by the member states. The Commission expects to adopt the proposal by 2028, but first it should evaluate and address BEFIT’s remaining challenges to ensure its compatibility with Pillar Two and avoid repeating the mistakes made with the CCCTB.
An earlier version of this article was published in the October 2023 issue of AB.
Frederik Boulogne
Nathalie Bravo
Rutger Heinsius
BDO in Netherlands
BEFIT would be compulsory for large European groups that prepare consolidated financial statements and have annual combined revenue of at least EUR 750 million. Smaller groups that prepare consolidated financial statements could also opt to use BEFIT. For BEFIT to apply, the ultimate parent entity would have to hold, directly or indirectly, 75% or more of the ownership rights of its subsidiaries. BEFIT would also apply to groups that are not EU-headquartered where the combined EU revenue of the group either exceeds 5% of total group revenues based on the consolidated financial statements or EUR 50 million in at least two of the preceding four fiscal years.
Single tax base
The calculation of the BEFIT tax base would start with the determination of the preliminary tax results of each group member based on financial accounts prepared under accepted accounting standards in an EU member state or IFRS. Subsequently, these results would be subject to a number of adjustments, aggregated into a single tax base and allocated on the basis of a transitional rule (which has not yet been agreed).In the first seven years that BEFIT is in effect, the expectation is that the tax base would be decided using a “baseline allocation percentage” based on the average taxable results of the previous three fiscal years. In essence, BEFIT would replace previous proposals for harmonizing corporate taxation in the EU, such as the common consolidated corporate tax base (CCCTB) and the common corporate tax base (CCTB), neither of which were ever approved by the European Council.
Loss set-off
Since group members’ tax results are to be aggregated into a single tax base, cross-border loss set-off would be allowed and withholding taxes on interest and royalties would not be required within the group. While allowing cross-border loss set-off is commendable and consistent with the design of the BEFIT directive, it likely will face the same challenges that plagued the CCCTB, such as the lack of political consensus for its approval. BEFIT also would not replace the arm’s length principle and transfer pricing rules for multinational enterprises so groups would have to deal with a dual system and comply with both BEFIT and traditional transfer pricing rules.In addition to these substantive issues, adopting and complying with BEFIT would generate additional costs for groups. While a single rule set should in theory simplify tax systems for group companies, group company reporting systems still would have to be adapted to the new rules. Group companies would also have to ensure the consistency and comparability of the tax base, which may prove a difficult exercise, as accounting standards may vary among group members, affecting the calculation and aggregation of the tax base.
Even though a one-stop-shop mechanism for administering BEFIT is envisaged, each group member would still need to file local returns so that local tax authorities could ensure that adjustments to the BEFIT tax base were applied correctly. Groups would have to file local returns, as well as a BEFIT information return, similar to the GloBE information return required under the global minimum tax rules (i.e., Pillar Two of the OECD’s BEPS 2.0 project), placing an additional burden on taxpayers. It is therefore unclear whether BEFIT would effectively reduce the tax compliance and administrative burdens faced by groups.
Cost of complexity
As indicated above, BEFIT aims to simplify European corporate taxation by setting common rules for determining the corporate tax base of groups. However, this objective comes at the cost of introducing further system-level complexity and uncertainty, especially in relation to the interaction of BEFIT with Pillar Two. For instance, although the adjustments to be applied to the BEFIT tax base are intended to be much simpler than those required under Pillar Two, their introduction means that two sets of computations likely would be required. As a result, taxpayers would have to ensure consistency and compliance with both BEFIT and Pillar Two. In the end, BEFIT may not achieve its intended objectives of simplification and fairness but simply add another layer of tax compliance on top of existing tax systems within the EU.Comments
BEFIT is an ambitious European Commission proposal to harmonise corporate taxation in the EU. It aims to simplify tax rules, reduce compliance costs and ensure a fairer allocation of taxing rights among member states. However, it also creates challenges for business groups operating in the EU that may undermine the effectiveness and feasibility of the proposal.After consultation and review by the European Parliament and the European Council, the BEFIT directive will need unanimous approval by the member states. The Commission expects to adopt the proposal by 2028, but first it should evaluate and address BEFIT’s remaining challenges to ensure its compatibility with Pillar Two and avoid repeating the mistakes made with the CCCTB.
An earlier version of this article was published in the October 2023 issue of AB.
Frederik Boulogne
Nathalie Bravo
Rutger Heinsius
BDO in Netherlands