Explanatory Memorandum to COM(2023)532 - Business in Europe: Framework for Income Taxation (BEFIT) - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2023)532 - Business in Europe: Framework for Income Taxation (BEFIT). |
|---|---|
| source | COM(2023)532 |
| date | 12-09-2023 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The BEFIT proposal was announced in the Communication on Business Taxation for the 21st Century in May 20211. The proposal is also included in the Commission Work Programme 20232 and it is also relevant from an own resource perspective, as set out in the 2021 Communication on the next generation of own resources for the Union budget3.
The idea to develop a common corporate tax framework in support of the internal market has always been part of the Union’s history and first appeared in policy documents of the European Economic Community as early as the 1960s. However, as we celebrate 30 years of the internal market, there are still no common rules to calculate the taxable income of businesses operating in the Union. Therefore, businesses have to comply with (up to) 27 different national tax systems, making it difficult and costly for companies to do business across the Union. The complexity of, and discrepancies in, the interaction of the different tax systems create an uneven playing field and increases tax uncertainty and tax compliance costs for businesses operating in more than one Member State. This has an adverse effect on the functioning of the internal market as it discourages cross-border investments and puts Union businesses at a competitive disadvantage compared to businesses operating in markets of a comparable size elsewhere in the world.
In addition, the arm’s length principle in transfer pricing which is used to value transactions between associated enterprises does not only result in higher costs and long disputes but also relies on the availability of comparable transactions, which makes it less accurate especially for transactions related to intangible assets (patents, trademarks, goodwill etc.), as these are unique in nature. This makes the tax base of Member States less stable, and businesses risk arbitrary valuation of an important part of their activities.
To address the identified issues, valuable insights gained from many years of negotiations and related analyses of taxation files can now be used in the design of BEFIT. In particular, the 20114 and 20165 proposals for a common consolidated corporate tax base triggered a thorough exchange of views and Member States converged considerably in their technical approaches during those negotiations. This proposal replaces the Commission’s Common Corporate Tax Base and Common Consolidated Corporate Tax Base proposals, which are withdrawn. BEFIT will reflect the insights gained and the changes in modern economy characterised by increasing globalisation and digitalisation.
The context for Union tax policy has changed significantly in the recent years. Key concepts of corporate tax initiatives and follow up discussions have been taken up in other and broader contexts than before. In 2020, the Council, Parliament and the Commission agreed that a common corporate tax base could be the basis for a new own resource that the Commission will propose6. In 2021, as part of the OECD/G20 Inclusive Framework statement on a Two-Pillar Solution7, over 135 countries agreed to calculate the effective tax rate of a large multinational group starting from the consolidated financial statements of the group (Pillar 2) and to use formulary apportionment to partially re-allocate taxable profits (Pillar 1). The agreement on Pillar 2 was endorsed by Member States which unanimously adopted the Directive on ensuring a global minimum level of taxation for multinational enterprise groups and domestic groups in the Union (Pillar 2 Directive) in December 20218. Hence, Union policies can build on, not only own experiences, but also these developments in the field of corporate taxation taking place at international level.
Technological progress and enhanced administrative capacity of tax authorities in the Member States have also made the prospect for implementing and managing a Union-wide tax framework a more efficient and feasible proposition. Furthermore, in the wake of the COVID-19 crisis and in the context of economic uncertainty caused by the Russian war of aggression against Ukraine, reliable rules and stable public revenues are more important than ever. Nonetheless, the tax bases of Member States shift as a result of megatrends, such as globalisation, digitalisation, climate change, environmental degradation, an ageing population, and a transforming labour market. In particular, globalisation and digitalisation have paved the way for profit shifting through tax planning practises which previously have been addressed by the Union and Member States by adopting anti-tax evasion and avoidance measures. These measures have been successful in addressing specific issues, but also added complexity to the tax systems that businesses have to navigate. It has therefore become more pressing for the Union tax policy to ensure that Member State tax bases are robust, sustainable, and protected against abuse while reducing complexity in the internal market.
This proposal seeks a way forward that reconciliates all aspects by introducing a common framework for corporate income taxation in the Union. The common framework will simplify the tax environment in the internal market as it will replace the current 27 different ways for determining the taxable base for groups of companies which have annual combined revenues exceeding EUR 750 million. Consequently, the common framework will create a level playing field, enhance legal certainty, reduce compliance costs, encourage businesses to operate cross-border and stimulate investments and growth in the Union.
Together with this proposal, the Commission adopted a separate proposal on transfer pricing which is covered by the same impact assessment report.
• Consistency with existing policy provisions in the policy area
This Directive is in line with and complements a number of recent proposals made by the Commission, which were also announced in the Communication on Business Taxation for the 21st century. Notably, the “DEBRA” proposal which aims to promote growth and innovation by addressing the debt-equity bias in corporate taxation through an allowance system9, and the “UNSHELL” proposal which aims to tackle the misuse of shell entities for tax purposes, through new anti-tax avoidance measures10.
This initiative is also fully consistent with existing Union policies in the field of direct taxation. The Parent-Subsidiary Directive,11 the Interest and Royalties Directive12 and the Merger Directive13 had the objective of tackling double taxation of companies. BEFIT further builds on this policy and aims to provide a more comprehensive solution. In addition, the Directive on Administrative Cooperation (DAC)14 ensures cooperation and exchange of different types of information between the tax administrations of the Member States. In particular, since 2017, the DAC4 revision15 requires the ultimate parent entities of MNE groups to file country-by-country reports containing information on revenue, profits, taxes, employees and tangible assets, and their constituent entities. This information is shared between Member States. The administration system of BEFIT will benefit from this existing cooperation and make it more efficient.
This proposal is also compatible with the Anti-Tax Avoidance Directive (ATAD)16 that was adopted in 2016 to address tax avoidance practices. BEFIT does not contradict these rules. Businesses in scope of BEFIT may even benefit from more tax certainty in this regard. Their tax situation will be more transparent and clearer, compared to having to structure their operations in accordance with multiple national legal frameworks while also making sure that they respect the main purpose of each framework and avoid mismatches. The only provision where the BEFIT proposal needs to ensure consistency is the interest limitation rule (Article 4 of the ATAD). For this purpose, the proposal includes a specific provision to accommodate this measure within the dimension of a cross-border group and not as a rule that will apply company-by-company (Article 13).
The proposal is also consistent with the implementation of the OECD/G20 Inclusive Framework Two-Pillar Solution. As an extension to the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project in 2015, and in particular the BEPS Action 1 Report on addressing the tax challenges of the digital economy, the OECD/G20 Inclusive Framework was set up to address tax challenges arising from digitalisation. The approach focused on two different, but related workstreams and in 2021, jurisdictions worldwide reached a historic agreement on a two-pillar solution. Pillar 1 encompasses a partial re-allocation of taxings rights to market jurisdictions (Amount A) and a simplification of the arm’s length principle for certain activities (Amount B). Pillar 2 consists of the Global anti-Base Erosion (GloBE) rules, which are two interlocking domestic rules ensuring a minimum effective taxation of 15%, and the Subject to Tax Rule (STTR), which is a treaty-based rule allowing a minimum rate of 9% on certain payments. On 15 December 2022, the Union adopted the Pillar 2 Directive, with a view to implementing the GloBE rules in a uniform manner in the Union. The further work of the OECD/G20 Inclusive Framework to address the remaining elements of the Two‐Pillar Solution was agreed by 138 countries and jurisdictions on 11 July 202317. The proposal builds on the achievements of the two Pillars, in order to provide businesses in the Union with simplicity and certainty in a comprehensive manner.
• Consistency with other Union policies
Commission President Ursula von der Leyen announced in her 2022 State of the European Union address that the Commission will put forward an SME “Relief Package”. The SME Relief Package should deliver much-needed support to secure cash flow, to simplify, and to invest and grow. This should make it easier for SMEs to do business in the internal market. In this regard, a related proposal for a Directive for SMEs with limited taxable presence abroad (only through permanent establishments in (an)other Member State(s)) is expected to complement the array of the Commission’s initiatives for simplification in corporate taxation. This will ensure that SME groups are also encouraged to expand across borders and that high tax compliance costs do not hinder SMEs from fully taking advantage of the opportunities in the internal market.
BEFIT and the SME Relief Package are complementary. Both initiatives are aimed at enhancing simplification for businesses. In the field of taxation, the SME Relief Package aims to offer simplification for SMEs with limited presence abroad whilst BEFIT focuses on large corporate groups which already have extensive cross-border activity. However, BEFIT offers optional rules for SMEs which are part of a group that files consolidated financial statements. The optional scope will enable them to choose the simplest and most cost-efficient option based on their individual needs.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
This proposal falls within the ambit of Article 115 of the Treaty on the Functioning of the European Union (TFEU). The rules of the proposal aim to approximate the laws, regulations or administrative practices of the Member States as directly affect the establishment or functioning of the internal market. It shall therefore be adopted under a special legislative procedure in accordance with this article and in the form of a Directive. The competence of the Union in this area is shared with the Member States.
• Subsidiarity (for non-exclusive competence)
Businesses in the Union increasingly operate across borders in the internal market, but the current tax framework in the Union consists of 27 different corporate tax systems. This multiplicity of rules results in fragmentation and presents a serious impediment to business activity in the internal market. Indeed, cross-border businesses face high tax compliance costs in the internal market, as they must comply with various legal frameworks. Moreover, the disparities between Member States create mismatches that can lead to double non-taxation and unintended tax benefits.
These problems are common to all Member States and cannot be effectively addressed by national actions. As they are the result of having different tax systems in the first place, national uncoordinated action would produce insufficient effects. Similarly, while better cooperation may also be beneficial, this approach has mainly been bilateral and is limited, especially for groups that operate in more than two Member States.
In this context, only a Union-wide initiative providing for a common set of rules can be effective. The complexity and its consequences would be significantly reduced if a single Union-wide set of corporate tax rules were in place for groups of companies. Mismatches can also only be eliminated, rather than corrected, when the problem is addressed by common rules.
If action is taken at Union level, it will have clear added value. For instance, the aggregation of group members’ tax bases in a single pool, coupled with a straightforward method for allocating profits within the group, would set out a method for determining the tax liabilities of groups of companies in a more objective and less costly way. However, Member States cannot effectively use this method individually, because the risk of double taxation and disputes would remain, if the method for profit allocation is not uniform for the whole group and the allocable tax base of the group is not computed in accordance with a single set of rules.
Common substantive rules can also be administered by a common framework, which would have definitive advantages for businesses and tax administrations in the Union. Instead of filing in each Member State, a one-stop-shop could allow groups of companies to comply with requirements through one single entity. For tax administrations, which currently assess the tax liabilities of the same cross-border businesses separately but each only with their own resources, it would be possible to collectively use those resources in a more effective and targeted manner. In addition, cross-border issues may require agreement between different Member States and often result in lengthy disputes or procedures. A common administrative framework would thus also allow businesses in the Union to obtain a degree of early certainty on certain items.
This initiative is therefore in line with the principle of subsidiarity laid down in Article 5(3) TFEU, considering that the objectives cannot be sufficiently achieved by the Member States, and a common approach for all Member States would have the highest chances of achieving the intended objectives.
• Proportionality
The envisaged measures do not go beyond what is necessary to achieve their objectives and are therefore compliant with the principles of proportionality. The proposal does not prescribe full harmonisation of corporate tax systems but only sets out common rules to determine the taxable income of (large) groups of companies in the Union. This is required to be able to attain the objectives of the initiative and the rules are carefully limited to what is strictly necessary.
Tax rate and enforcement policies will fully remain with Member States. The scope of the proposed measures only concerns the tax base. More specifically, the proposal will only introduce rules where this is necessary to allow businesses in the Union to calculate their tax base across the Union based on a single set of rules. This means that the new BEFIT tax base will be primarily based on existing financial accounting rules, which are already accepted under Union law, i.e. either the national generally accepted accounting principles (GAAP) of the Member States, or the International Financial Reporting Standards (IFRS). The proposal does not harmonise tax base rules generally, but only where this is necessary and it allows for additional adjustments after allocating the BEFIT tax base, in consideration for national policy needs.
To ensure that the initiative does not go beyond what is needed, the rules will also be optional for most businesses, who may continue to apply the existing rules of Member States. The mandatory scope is limited to the Union sub-set of the large groups that are also within scope of the Pillar 2 Directive, unless a large group is headquartered outside the Union but has limited activity in the internal market (materiality threshold). This targeted approach is taken in order to ensure consistency and coherence in the Union and because the common rules under this Directive would benefit, in particular, these businesses. They are thus most likely to have a strong cross-border presence and the new rules are aligned as closely as possible with the Two-Pillar Approach.
Applying BEFIT rules in a uniform manner to these groups would ensure coherence with the Pillar 2 Directive. It will allow to leverage interactions and keep the costs of implementation at a minimum. Both the BEFIT tax base and the Pillar 2 minimum effective tax rate would be dealt with at the same level, i.e. the Union group level. Processes can also be aligned; for instance, they both rely on financial accounting statements as a starting point and companies must apply the Union-wide tax adjustments for both. Hence, this is a proportionate step forward to simplify our tax rules and enhance tax certainty in the Union.
Introducing a new tax framework for businesses in the Union would imply some initial adaptation costs and administrative burdens. However, these costs are estimated to be outweighed by compliance cost savings as well as simplified administrative procedures and in the long run, the improved allocation of resources by businesses and tax administrations.
Consequently, this initiative is also in line with the principle of proportionality laid down in Article 5(3) TFEU, as its content and form does not exceed what is necessary and commensurate with the intended objectives.
• Choice of the instrument
The proposal is for a Directive, which is the only permissible legal instrument under the legal basis (Article 115 TFEU).
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
The stakeholder consultation strategy for this initiative consisted of both public and targeted consultations. For the public consultation, a call for evidence18 and an online survey were published on 13 October 2022, followed by a consultation period of 12 weeks that ran until 26 January 2023. This aimed to collect the views of stakeholders on the key principles that define the features of a common corporate tax base in the Union. Overall, the consultation received 123 contributions, consisting of 46 feedback contributions and 77 responses to the public consultation survey, of which 29 included written submissions that were either attached to feedback or sent by email. Fifty four out of the 123 contributions were submitted by businesses associations that represent general business interests, tax advisers, lawyers, or specific business sectors, such as insurance. Respondents also included citizens and both larger and smaller businesses, as well as academic and research institutions, non-governmental organisations, and trade unions. No input was received from national authorities.
All contributions received were considered in the impact assessment. A synopsis report can be found in annex to the impact assessment report, and the Commission published the stakeholder input and a factual summary report on the consultation page. The latter provides a detailed overview of the profiles of the respondents and the input received.
Targeted consultations and bilateral meetings with relevant stakeholders (corporate taxpayers likely falling under BEFIT, academics, Member States) have also taken place. A compilation of the interview reports from targeted consultations can be found in annex to the impact assessment report. Member States were also informed through meetings of the Commission Working Party IV (direct taxation) and the Council High-Level Working Party (HLWP).
Out of all these exchanges and input received from various stakeholders, it can be concluded that, while views differ, there is a broad consensus on the problems arising from the differences between national tax systems and on the need for action in the Union to tackle the fragmented and inefficient situation.
Views on the main features for a new system were more divided. However, the proposal includes the options that were most favoured by respondents to the public consultation, such as a hybrid scope, calculating the tax base by making as few as possible adjustments to financial accounts, allowing cross-border loss relief, and a simplification for filing obligations. In respect of transactions with associated enterprises outside the BEFIT group, transfer pricing rules will continue to apply, but the proposal puts forward benchmarks for a simplified risk assessment framework. The latter was favoured by most respondents.
• Collection and use of expertise
The Commission has relied on the expertise of its Joint Research Centre, which used the CORTAX model to study the possible impacts of the initiative. The CORTAX model is a general equilibrium model designed to evaluate the effects of corporate tax reforms in 27 Member States, using detailed data from various sources.
The Commission did not rely on external expertise in preparing this proposal.
• Impact assessment
An impact assessment was carried out to prepare this initiative, as well as the proposal for a Directive on Transfer Pricing. The draft impact assessment report was submitted to the Commission’s Regulatory Scrutiny Board (RSB) on 26 April and a meeting was held on 24 May 2023. The RSB delivered a positive opinion19 with reservations on 26 May 2023, suggesting areas for further improvement. Main areas for improvement were: to draw a clearer link to previous proposals and ongoing international tax developments, a more detailed description of the compliance cost estimates, a better explanation of the costs and benefits and a clearer description of the monitoring arrangements.
A revised impact assessment report addressing these reservations was prepared. For example, the lessons learned from previous corporate tax initiatives have been clarified and the links with the OECD Two-Pillar Approach have been added. The estimates of compliance costs have also been amplified to the extent possible based on available data.
It was found necessary that the initiatives assessed in the report that received the positive opinion with reservation from the Regulatory Scrutiny Board will be presented as separate proposals. For this reason, the said impact assessment report only assesses the impact of the proposals for a Council Directive on BEFIT and for a Council Directive on Transfer Pricing.
The impact assessment report to this proposal represents faithfully the analysis on BEFIT and Transfer Pricing contained in the scrutinised draft impact assessment and integrates the recommendations of the Regulatory Scrutiny Board in that regard.
The report assesses the impact on the basis of several policy options. For the scope of BEFIT, the options cover mandatory, optional, and hybrid, i.e., mandatory for some groups while it remains optional for others. For the computation of the tax base, the options cover limited adjustments to the financial statements and a comprehensive set of tax rules. For the allocation of the tax base, the options cover a formula without intangible assets, a formula including intangible assets and a transition allocation method. For transactions with related parties outside the BEFIT group, the options cover keeping the status quo and introducing a ‘traffic light system’ as a risk assessment tool. For the administration, the options cover an advanced one-stop-shop, a limited one-stop-shop and a hybrid one-stop-shop.
To assess these options, the report examines three ‘Versions’ of BEFIT, i.e. three combinations of the various options. As the assessment of transfer pricing options will be contained in a separate proposal, it will not be summarised for the purposes of this Directive.
Version 1 – BEFIT “Comprehensive”:
| Scope | Tax Base Computation | Tax Base Allocation | Transfer Pricing Risk Assessment | Administration |
| Mandatory for all groups | Comprehensive set of rules | Formula including intangible assets | Traffic light system | Advanced one-stop-shop |
This version would propose rules that are mandatory to all taxpayers, and it would involve the highest degree of harmonisation as well as immediate application. This combination of options would ensure the broadest scope possible and, as a result, the most extensive simplification for businesses in the Union and Member State tax authorities, considering that it would replace current national rules on group taxation in the Union.
Version 2 – BEFIT “Light”:
| Scope | Tax Base Computation | Tax Base Allocation | Transfer Pricing Risk Assessment | Administration |
| Optional for all groups | Limited tax adjustments | Transitional allocation rule | Keep the current rules | Limited one-stop-shop |
This version would propose rules that are mostly optional, with the least degree of harmonisation and planned for gradual application. This combination of options would bring along some changes to the status quo, but these would be narrower in scope, less comprehensive, and with provision for gradual application.
Version 3 – BEFIT “Composite”:
| Scope | Tax Base Computation | Tax Base Allocation | Transfer Pricing Risk Assessment | Administration |
| Hybrid | Limited tax adjustments | Transitional allocation rule | Traffic light system | Hybrid one-stop-shop |
This is a third ‘in-between version’ which is a compilation of elements of mandatory harmonisation and gradual application. BEFIT “Composite” provides for a hybrid approach regarding its application and scope. It would ensure common and mandatory rules targeted at large groups that are most likely to have cross-border structures and activities and could be expected to therefore benefit the most from the simplification that BEFIT offers.
The impact assessment concludes that Version 3 is the preferred policy package. It not only proves effective in achieving the specific objectives of the initiative but, in addition, demonstrates efficiency, as its limited mandatory scope is delineated to include solely those groups who can mostly benefit from the common rules and can afford the transition, and optional for those groups below the threshold.
The impact assessment includes a cost-benefit analysis of the initiative, which is expected to be positive. Among the benefits for businesses in the Union under this option, the simplifications that the initiative would introduce have the potential to reduce current tax compliance costs per firm and are expected to stimulate investment and growth and contribute to ensuring more sustainable tax revenues for Member States.
The costs of the proposal cannot be determined with any precision because the BEFIT proposal does not have a precedent and there is no dedicated data that can be used reliably for concrete estimates. Nonetheless, the report indicates that the following costs are expected for the implementation of the common rules under this proposal: ongoing operational costs of an administrative nature, short-term (possibly, one-off) adjustment costs, related to updating IT systems, and the training of company staff and tax administrations to adjust to the new system. These estimates can be found in Annex 3 to the impact assessment report.
• Regulatory fitness and simplification
The proposal is aimed at reducing regulatory burdens for both taxpayers and tax administrations. Tax compliance costs are a burden for businesses and their reduction will be a major advantage in the implementation of the initiative. The estimated reduction in compliance costs features in the impact assessment report.
To meet the objectives of simplifying tax rules, stimulating growth and investment, while also ensuring fair and sustainable tax revenues, in a proportionate manner, the preferred option of the initiative is a hybrid scope for cross-border businesses in the Union. Businesses in the Union, other than the Union sub-set of the largest groups, which are also in scope of the Pillar 2 Directive, are exempted from the mandatory scope of the initiative. For the largest groups, the BEFIT rules will be mandatory, in order to ensure consistency and coherence. Other groups below the threshold, including SME groups, will have the option to apply the BEFIT rules, depending on the structure of their business. This voluntary scope should ensure that the proposal effectively reduces regulatory burdens. Businesses are likely to opt in when they can benefit from the simplification that the rules offer. If this is not the case, they can continue to apply the existing rules. In this way, the scope of the proposal ensures that compliance costs for SMEs are kept low. Finally, as the proposal is primarily aimed to address the needs of cross-border businesses which have taxable presence in more than one Member States, many micro-enterprises will effectively be out of scope.
Tax administrations should also benefit from the expected decrease in transfer pricing issues, as the necessity of thorough assessments of consistency with the arm’s length principle will be reduced for intra-group transactions under BEFIT rules. After the transition period, the need for pricing such intra-group transactions in consistency with the arm’s length principle might even be made redundant for tax purposes. There should also be a reduced number of disputes to the extent that the establishment of BEFIT teams allow tax administrations to agree on a degree of early certainty and resolve arising problems in a more efficient manner through consultation and coordination.
• Fundamental rights
It is not expected that there would be a considerable effect on fundamental rights and the proposed measures are compatible with the rights, freedoms and principles in the Charter of fundamental rights of the European Union.20 By levelling the playing field, removing cross-border barriers, and providing more tax certainty, the proposal will also contribute to preventing any discrimination or unjustified restrictions on the freedoms related to conducting a business.
Data protection rights covered by the Charter and the General Data Protection Regulation (GDPR)21 are safeguarded. Personal data, e.g., information about ownership interests in a BEFIT group, might be processed by tax administrations but only for the purpose of applying Chapter IV as well as for the purpose of examining and reaching consensus on the content of the BEFIT information return and processing and assessing individual tax returns under Chapter V. Personal data may be transmitted only between tax administrations which are involved in the administration of a particular BEFIT group. The amount of personal data to be transmitted will be limited to what is necessary to ensure compliance and detect tax fraud, evasion, or avoidance in line with the GDPR requirements. Personal data will be retained only as long as necessary for this purpose but in any case, no longer than 10 years.
• Other impacts
There are no other significant impacts. The proposal concerns groups of companies in all sectors which are subject to corporate income tax in a Member State. The proposal does not, as such, affect the present way of doing business and is not expected to have a direct impact on the objectives of the European Green Deal or European environmental legislation. Indirectly, it may be considered that the resources freed from tax compliance costs could be used by companies to invest in more environmentally sustainable production methods if the companies wish to do so.
The proposal upholds the ‘digital by default’ principles and contributes to achieving the European way for a digital society and economy.
The relevant Sustainable Development Goals partially addressed by the proposal are number 8 (Decent work and economic growth) and 9 (Industry, innovation and infrastructure) as presented in Annex 3 of the impact assessment.
4. BUDGETARY IMPLICATIONS
The initiative will have budgetary implications for the Commission linked to the BEFIT collaborative tool. Tax administrations will need to coordinate closely and to use communication tools for BEFIT teams under this initiative. To facilitate the operation and communication of BEFIT teams, the Commission will adopt the necessary practical arrangements, including measures to standardise the communication of the information between the members of BEFIT teams through making use of a BEFIT collaborative tool. The Commission will be responsible for the development of this tool (one-off cost), as well as the hosting, content management, encryption, and its annual maintenance. The costs for such BEFIT collaborative tool are estimated at around EUR 300 000 one-off (for the first year) and around EUR 600 000 on a yearly basis for running the BEFIT collaborative tool. These costs will be financed from within the foreseen envelope for the Fiscalis programme. Details can be found in the legislative financial statement to this proposal.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
For the purpose of monitoring and evaluating the implementation of the Directive, it will initially be necessary to give Member States time and all necessary assistance, in order to properly implement the European Union rules. The Commission will evaluate the application of the Directive five years after its entry into force and report to Council on its operation. Member States should communicate to the Commission the text of the provisions of national law which they will adopt in the field covered by this Directive and should also provide any relevant information they have that the Commission may require for evaluation purposes.
In addition to an evaluation, the effectiveness and efficiency of the initiative will be regularly and continuously monitored using the following pre-defined indicators: implementation and initial BEFIT running costs; number of groups of companies in the mandatory scope of the proposal, as well as the number of companies that voluntarily opted in; evolution of the compliance costs; and the number of double taxation disputes. This is set out in more detail in the impact assessment report accompanying this proposal.
• Detailed explanation of the specific provisions of the proposal
The proposal establishes a common set of rules to determine the tax base of companies that are part of a group which prepare consolidated financial statements and which are subject to corporate income taxation in a Member State.
A hybrid scope for mandatory and optional application
Under the general provisions of Chapter I, the proposal defines a hybrid scope for the application of the rules under this Directive. The mandatory scope comprises the same groups as Pillar 2 (i.e., groups with annual combined revenues of at least EUR 750 million) but is limited to the Union sub-set of entities that meet the 75% ownership threshold (Articles 5-6). For groups headquartered in third countries, their Union sub-set will need to additionally raise at least EUR 50 million annual combined revenues in at least two of the four fiscal years immediately preceding the fiscal year in which the group started to apply this Directive and this will have to account for at least 5% of the total revenues of the group (Article 2, paragraph 4). This materiality threshold further ensures that the requirements of the proposal are proportionate to its benefits.
The choice to align the mandatory scope with Pillar 2 was made with the knowledge that these taxpayers already implement several relevant features as part of the Pillar 2 Directive, for example with regard to the computation of the taxable result. It thus strikes a balance between achieving necessary changes in a consistent manner on one hand, and keeping the system simple, on the other hand.
Other, smaller groups can opt in if they so wish, provided they prepare consolidated financial statements. This voluntary scope could be of particular interest to smaller groups that operate cross-border, as they have less resources to dedicate to compliance with multiple national corporate tax systems.
When a group applies or chooses to apply the rules of this Directive, the framework will apply to the whole ‘BEFIT group’, i.e., the sub-set of all Union tax resident companies and Union-located permanent establishments of the group that meet the ownership threshold of 75%, called the ‘BEFIT group members’. The scope is contained within these entities.
The proposal does not exclude any sectors from its scope. Sector-specific characteristics are reflected in relevant parts of the proposal. This is in particular the case for international transport and extractive activities. For example, shipping income is often subject to special tax regimes which are tailored to the realities in this sector. The proposal acknowledges this and carves out shipping income covered by a tonnage tax regime from the BEFIT tax base.
Calculation of the preliminary tax result of each BEFIT group member using a simplified method
Chapter II includes the rules for the determination of the preliminary tax result of each BEFIT group member. This is done by applying the adjustments of Section 2 and 3 and the rules of Section 4 on timing and quantification issues to the net income or loss as stated in the financial accounts.
Like in Pillar 2, the starting point is the accounting result from the financial accounts, which must be determined under one single accounting standard for the BEFIT group. To this aim, the financial accounts of each BEFIT group member must be reconciled with the accounting standard of the ultimate parent entity, or if the group is headquartered outside of the Union, the one of the filing entity. The accounting standard must be accepted under European Union law, which essentially means it must either be the national generally accepted accounting principles (GAAP) of one of the Member States or the international financing reporting standards (IFRS), as set out in Article 7.
In the interest of simplification, adjustments are kept to the minimum necessary, rather than putting together a detailed corporate tax framework. Therefore, BEFIT includes fewer tax adjustments than Pillar 2 which has a different purpose, namely to calculate the appropriate qualifying income for the level of tax due.
The BEFIT adjustments are listed under Section 2. The following items are included, i.e. added back in case they were deducted or not already recorded in the financial accounting statements: financial assets held for trading (Article 11), borrowing costs that are paid to parties outside the BEFIT group in excess of the interest limitation rule of the ATAD (Article 13), fair value adjustments and capital gains received by life insurance undertakings in the context of unit-linked/index-linked contracts (Article 14), fines, penalties and illegal payments such as bribes (Article 16), and corporate taxes that were already paid or top-up taxes in application of Pillar 2 (Article 17).
The following items are excluded, i.e. subtracted from the financial net income or loss if they were in the financial accounts: dividends and capital gains or losses on shares or ownership interests, in the case of significant ownership and unless they are held for trading or by a life insurance undertaking (Articles 8-11 and Article 14), the profit or losses from permanent establishments (Article 12), shipping income subject to a national tonnage tax regime (Article 15), rollover relief for gains on assets that are replaced (Article 18), acquisition, construction and improvement costs of depreciable assets, because these costs will already be part of the depreciation base, as well as subsidies directly linked to this, because subsidies should neither be in the depreciation nor tax base (Article 19), unrealised gains or losses from currency exchange fluctuations on fixed assets (Article 20). The rule in Article 21 also excludes any amount relating to the post-allocation adjustments listed in Article 48 (explained below). Consequently, these items are not part of the preliminary tax result, which prevents a risk that they are accounted for twice.
In addition, Section 3 consists of a common set of tax depreciation rules. This is an important adjustment for tax purposes, but the proposal remains closer to financial accounting than national tax depreciation rules. Fixed tangible assets valued below EUR 5 000 will be immediately expensed. Other assets are always depreciated on a straight-line basis, i.e. distributed equally over the duration of the asset. In principle, the duration will correspond to the useful life in the financial accounts. For immovable property, including industrial buildings, the duration is, however, set at 28 years as a general rule. For fixed intangible assets, this will correspond to the period of legal protection, e.g. intellectual property rights, or if that is not the case, 5 years. Goodwill is also depreciated if it is acquired, and accordingly, present in the financial accounts.
Under Section 4, the proposal addresses timing and quantification issues which are needed for tax purposes in order to avoid abuses. Differences between the cost of stocks and work-in-progress should for instance be measured consistently using the first-in-first-out method or the weighted average cost method (Article 29). Provisions are excluded if they are not legally required or cannot be reliably estimated (Article 30). Bad debts can only be deducted if all reasonable steps to obtain payment from the debtor have been exhausted or if the amount that will be lost can be reliably estimated, never if the debtor is an associated enterprise (Article 31). Revenues and costs from long-term contracts only count for the year when they were accrued or incurred (Article 32). The treatment hedging instruments must follow the tax treatment of the hedged item (Article 33).
Finally, under Section 5, the proposal also includes rules that are necessary for entities entering or leaving the BEFIT group. For example, losses that were incurred before the new member entered the BEFIT group, should not be included at the expense of the tax base of other Member States where the BEFIT group has members. These losses should be set off against the allocated share, so after aggregation and allocation (Article 38 in conjunction with 48, paragraph 1, point (a)). The rules also deal with business reorganisations, to clarify for instance that the Merger Directive takes precedence (Article 40). There is also an anti-abuse rule to ensure that capital gains on assets are included in the preliminary tax result when the assets are moved within the group, without tax implications, to a group member which is then sold out of the group. This would normally benefit from a tax exemption for share disposals but should not be allowed, unless it can be justified from a commercial perspective (Article 41).
Aggregation of the preliminary tax results into a single tax base and allocation of this aggregated tax base to eligible BEFIT group members
Chapter III contains the rules for the aggregation and allocation of the tax base. First, the preliminary tax results of all members of the BEFIT group are aggregated into a single “pool” at Union group level, which will be the ‘BEFIT tax base’. This is described in Articles 42-44 and features several important advantages:
- Cross-border loss relief: it will allow groups to set off losses across borders. Today, this is only rarely possible, which can result in over-taxation of the profits of the group and disincentivise businesses from operating across borders in the internal market, and;
- Facilitation of transfer pricing compliance: during the transition period, the outcome of intra-BEFIT group transactions will be a determining factor to how the (aggregated) BEFIT tax base will be allocated to the BEFIT group members. Given this importance of the pricing of intra-BEFIT group transactions for tax purposes, the requirement for their consistency with the arm’s length principle will be retained but at the same time, BEFIT group members will benefit from increased tax certainty (a comfort zone) if, as a result of their intra-BEFIT group transactions, their expenses or income remain within a limit of less than 10% increase compared to the average of the previous three fiscal years. This system allows a degree of certainty and paves the way for a possible elimination of the need for pricing the intra-BEFIT group transactions in consistency with the arm’s length principle should a factor-based formula be agreed as a permanent way for allocating the BEFIT tax base.
- There will also be no withholding taxes on transactions such as interest and royalty payments within the BEFIT group, as long as the beneficial owner of the payment is a BEFIT group member. Within the BEFIT group, there is in principle no need to tax these transactions individually as they will be included in the aggregated BEFIT tax base but it is also critical to ensure that such payments are not used to shift profits out of the group at low tax. This is why national competent authorities will retain the right to review whether their recipient is a beneficial owner.
There are however two exceptions to the aggregation. Income and losses from extractive activities are separated from the BEFIT tax base, because they are always allocated to their jurisdiction of origin. The rationale, in line with the OECD/G20 Inclusive Framework Two-Pillar Approach, is that the taxation of these activities should be based on the origin, i.e. the place of extraction (Article 46). Revenues and expenses from shipping which is not covered by a tonnage tax regime or from air transport are also not allocated. In line with the approach in Article 8 of the OECD model tax convention, such activities are taxed only in the State where the company operating the ships or aircrafts is located (Article 47).
Next, the aggregated tax base will be allocated to the members of each BEFIT group based on a transition allocation rule, which uses each BEFIT group member’s percentage of an aggregated tax base calculated as the average of the taxable results in the previous three fiscal years. This may pave the way for a permanent allocation method that could be based on a formulary apportionment. A proposal that lays down a transitional solution will have the advantage of using more recent County-by-Country Reporting (CbCR) data and the information gathered from the first years of the application of BEFIT in the design of a permanent allocation method. 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 the BEFIT tax bases.
The proposal also accommodates distribution-based tax systems and to this effect, provides for the necessary adjustment, which will allow their companies to participate in a BEFIT group. In this case, the taxation of corporate income is not on a yearly basis, but upon distribution of the profits. Accordingly, the allocated part of the aggregated tax base would be carried forward each year in proportion to the income that has not been distributed that year (Article 49).
Finally, upon allocation, each BEFIT group member will have a part. On this part, the group member will have to apply additional adjustments in its tax assessment (Article 48, paragraph 1). These mostly include technical corrections that are necessary for the coherence of the system. For example, several items should not be included in the preliminary tax result, in order to avoid that they are shared among all Member States, but these items should still be accounted for (e.g. pre-BEFIT losses). Other amounts, such as gifts, donations and pension provisions are very dependent on national law requirements and are therefore most appropriate on the allocated part.
Importantly, in order to ensure Member States’ full competence over their tax rate policies, Member States will be free to further apply any deductions, tax incentives, or base increases to their allocated parts, without restrictions (Article 48, paragraph 2). The only requirement that Member States will need to respect in this regard, are the rules of the Pillar 2 Directive for a global minimum effective level of taxation.
‘Traffic light system’ to facilitate transfer pricing compliance with associated enterprises outside the BEFIT group
With regard to transactions with associated enterprises outside the BEFIT group, i.e. entities of the group that are not in the Union or that do not meet the 75% ownership threshold, Chapter IV aims to facilitate compliance by providing a risk assessment tool (‘traffic light system’) with benchmarks.
This feature of BEFIT focuses on simplifying compliance with transfer pricing and does not interfere with the substantive rules that determine whether a certain transaction has been priced at arm’s length. In addition, its material scope is confined to low-risk activities, which normally do not involve extensive discretion in their pricing, as they do not give rise to high residual profits. This is a clear distinction from the Directive on transfer pricing, which relates to the substantive rules and has a broader scope, potentially covering the entire array of transfer pricing topics, and features a separate function. The Directive on transfer pricing thus endorses the OECD transfer pricing guidelines and constitutes a steppingstone for Member States to agree common approaches to specific transfer pricing themes, in particular those in which administrative practice has so far been disparate across the EU.
The traffic light system will apply to low-risk activities defined in Article 50: (i) distribution activities by low-risk distributors, and (ii) manufacturing activities by contract manufacturers. To qualify, the distributor or manufacturer must use a reliable, one-sided method based on the OECD Transfer Pricing Guidelines, and in any case, they cannot qualify if they hold the intellectual property rights or some of the risks related to the products. This is because intangible assets and risks often lack comparable transactions.
For these activities, the proposal suggests using ‘Public Benchmarks’ which will be profit markers set at Union level with the help of an expert group (Article 53). Operationally, if the profit performance of a low-risk distributor or contract manufacturer is low compared to the average ranges in this benchmark, its transactions will be assessed as ‘high-risk’ and vice versa. In this way, the transactions can fall within three risk zones (low/medium/high). Member State tax administrations would be expected to focus their efforts to the high-risk zones (Article 51). It is accordingly referred to as a ‘traffic light system’.
As such, the tool will allow Member States to use their resources more efficiently and it will offer businesses a higher level of predictability regarding the acceptability of their transfer prices on the condition that they comply with pre-set margins.
Administration of the system: a ‘One-Stop-Shop’ and a ‘BEFIT team’
The administration of the system is outlined in Chapter V. Common substantive rules also require a common administrative framework. This will allow additional simplification of the current systems and should gradually free up resources for administrations and businesses.
A one-stop-shop will allow businesses to deal with one single authority in the Union for filing obligations, whenever feasible. The ‘filing entity’, which is in principle the ultimate parent entity, will file one information return for the whole BEFIT group (the ‘BEFIT Information Return’) with only its own tax administration (the ‘filing authority’), which will share this with the other Member States where the group operates (Article 57). Each BEFIT group member will also file an individual tax return to their local tax administration to be able to apply domestically set adjustments to their allocated part (Article 62). Taken together with the BEFIT Information Return, this will allow each tax administration to assess its BEFIT group members’ tax liabilities as efficiently as possible (Article 64).
For each BEFIT group, there will also be a so-called ‘BEFIT Team’ which will bring together representatives of each relevant tax administration from the Member States where the group operates (Article 60). Instead of each Member State separately dedicating human resources to assess the tax liabilities of the same cross-border group, the members of each BEFIT Team will be sharing information, coordinating, providing a degree of early certainty on specific topics and resolving issues through an online collaborative tool (Article 61).
Audits will remain at Member State level and it will be possible for Member States to request joint audits and create an obligation on the other side to accept it. Following the outcome of an audit, the BEFIT team will also facilitate rectifications (Article 65).
The proposal also ensures that appeals against the content of the BEFIT information return may be brought to an administrative body in the Member State of the ‘filing authority’. Likewise, appeals against the individual tax assessments may be brought to an administrative body of the Member State in which the BEFIT group member is resident for tax purposes. When such appeal affects the BEFIT tax base, the necessary amendments can be made across the group through a coordinated process established by the ‘BEFIT Teams’ (Articles 66-70).