Corporate Tax News Issue 64 - November 2022

European Commission seeks input on BEFIT

On 13 October 2022, the European Commission (EC) launched a public consultation on an initiative to introduce a common set of rules for “Business in Europe: Framework for Income Taxation (BEFIT).” Through BEFIT, the EC wants to further harmonise the corporate income tax regimes of EU member states by introducing a common set of rules for EU companies to calculate their taxable base, including rules on the formulaic allocation of profits between EU member states. The proposal builds on—and will replace—the proposed Common Consolidated Corporate Tax Base directive of 2011 (amended in 2016) and the Pillar Two rules. The EC is expected to release a proposed BEFIT directive in the near future.

BEFIT is part of the EC’s strategy for Business Taxation for the 21st Century, published on 18 May 2021, which outlined broad corporate and direct tax policy measures for the EU (for prior coverage, see the article in the July 2021 issue of Corporate Tax News). The policy document announced several initiatives, including BEFIT, DEBRA and a new directive targeting the misuse of shell entities (for prior coverage, see the article in the May 2022 issue of Corporate Tax News).

The EC wants to create a common rulebook for groups of companies operating in the EU that would reduce barriers for cross-border investment. BEFIT should cut compliance costs for taxpayers and lessen the administrative burden for tax authorities. It aims to combat tax avoidance, and support job creation, growth and investment. Furthermore, BEFIT should provide a simpler and fairer way to allocate taxing rights between EU member states and ensure reliable and predictable corporate tax revenues for member states.

The EC is seeking input on a number of potential policy options:


Option 1: Groups with consolidated global revenues exceeding EUR 750 million

Under this option, the threshold for a group of companies to fall within the scope of BEFIT would be set at EUR 750 million in consolidated global revenues. The definition of a “group of companies” would be aligned with the definition used in the proposed EU Pillar Two directive. Both aspects would ensure close alignment of BEFIT’s scope with the scope of the directive.

Option 2: Broader scope

A broader scope would involve lowering the revenue threshold below EUR 750 million, making the legal framework more inclusive and reducing disparities. A broader scope would be of particular interest to small and medium-sized entities (SMEs) engaging in cross-border activities or those that envisage scaling up and starting cross-border operations soon. These SMEs could opt into BEFIT to benefit from common EU rules on the tax base and the allocation of profits.

The EC will further investigate whether limited sectoral carve-outs should apply, e.g., for the financial sector.

Tax base calculation

Option 1: Limited tax adjustments

The BEFIT initiative aims to create a simpler, effective, common corporate tax system in the EU. To determine the taxable base, a limited list of tax adjustments would be applied to the income reported in the financial statements of the group entities falling under BEFIT. The list of adjustments would be comprised of elements that are responsible for a significant part of the corporate tax base (around 90%). All companies in a group falling under BEFIT would be required to use financial statements as a starting point for the tax base calculation, prepared in accordance with the accounting standards authorised for use in the EU.

Option 2: Comprehensive set of tax rules

An alternative option would be to set up a comprehensive corporate tax system with detailed rules for all aspects of profit/tax determination, rather than building a system based on financial accounting as in option 1. If this option were chosen, member states would have to run two comprehensive sets of corporate tax rules in parallel, i.e., BEFIT and their national rules (this would not be the case under option 1 where BEFIT rules for tax determination would be simplified).

Formula for allocating taxable profits

Option 1: Formula without incorporating intangible assets

Under this option, the proposal would consider the three factors most commonly used for formulary apportionment of profits between tax jurisdictions, namely:

  1. Tangible assets (excluding financial assets unless in a sector-specific version);
  2. Labour (possibly equally shared between personnel and salaries); and
  3. Sales by destination.

The EC may look at other factors for the formula but these should reflect the income generation most accurately and be least prone to abuse.

Option 2: Formula incorporating intangible assets

The alternative option would be to include intangible assets as a factor in the formula, in addition to the three previously mentioned factors, to cater to the realities of modern economies. More specifically, intangible assets could be included by using a proxy value, which could consist of aspects such as research and development expenses and marketing and advertising costs.

Allocation of profit to related entities outside the group

Option 1: Simplified approach to transfer pricing

To provide more tax certainty to businesses, this option would envisage a simplified approach to the administration of transfer pricing rules based on macroeconomic industry benchmarks. The aim would not be to replace the arm’s length principle—in fact, businesses would still need to carry out the necessary transfer pricing analysis. The envisaged rules would only provide guidance on tax authorities’ risk approach to businesses’ transactions with related entities outside the consolidated group.

Option 2: Retain the current transfer pricing rules

The second option would be to keep the current approach to the application of the transfer pricing rules.


The aim of the public consultation is to collect views from stakeholders on: (1) the problem and the need to act; (2) the scope of the new system; (3) calculation of the common tax base; (4) consolidation of the tax bases of group members and allocation of the consolidated tax base to eligible member states; (5) allocation of profit in the context of transactions between members of the group and entities outside the group (in the EU and in non-EU countries); and (6) simplification of administration of the system.

The EC has extended the original comment deadline of 5 January 2023 to 23 January.

Frederik Boulogne

Mark Laeven