Considerations on COM(2023)532 - Business in Europe: Framework for Income Taxation (BEFIT) - Main contents
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| dossier | COM(2023)532 - Business in Europe: Framework for Income Taxation (BEFIT). |
|---|---|
| document | COM(2023)532 |
| date | September 12, 2023 |
(2) The existence of 27 different corporate income tax systems in the Union gives rise to complexity in tax compliance and leads to unfair competition for businesses. That has become more evident as globalisation and digitalisation of the economy have significantly altered the perception of land borders and business models. As governments have tried to adapt to that new reality, a fragmented response among Member States has led to further distortions in the internal market. The various legal frameworks inevitably lead to different tax administration practices across the Member States as well. This often entails long procedures characterised by unpredictability and inconsistency along with high compliance costs.
(3) Albeit different in their design, the fundamental features of corporate income tax systems are similar as they lay down rules aiming towards the same objective, i.e., to arrive at a taxable base for businesses. In this vein, it would be important for businesses which operate on the internal market that Member States introduce a common legal framework to harmonise the fundamental features of corporate income tax systems with a view to simplifying tax rules and ensuring a fair competition.
(4) On 9 June 2023, 139 jurisdictions, which are members of the OECD/G20 Inclusive Framework, had joined the October 2021 Statement on a “Two Pillar Solution to address the tax challenges arising from the digitalisation of the economy”24. With that Statement, Member States agreed (i) to a review exercise that calculates potential minimum tax liability of large multinational groups starting from financial accounting, as parts of Pillar 2 and (ii) to partially re-allocate taxable profits on the basis of a formulary apportionment as part of Pillar 1. The design of a common framework to address the tax challenges arising from digitalisation and globalisation should draw inspiration from the achievements of that exercise. As the implementation of Pillar 2 has unanimously been adopted by Member States via Council Directive (EU) 2022/252325, a common corporate tax framework in the Union should build upon concepts, such as the scope and computation of the tax base, which both businesses and Member States are already familiar with.
(5) The environment for doing business in the internal market should be made more attractive with the aim to stimulate growth and investment in the Union. For this purpose, the enactment of a common framework of corporate tax rules should be prioritised, in order to make it easier for businesses to comply with such rules when they operate across borders and also to encourage those who wish to further expand abroad to do so. A single set of corporate tax rules for international activity is expected to result in enhanced tax certainty and less tax disputes, as it would tackle distortions and decrease the number of cases of double and over-taxation. Furthermore, as tax revenue sustainability is key to Member States’ budgets, including to invest in infrastructure, research and development and to deliver public services, it would be critical to ensure for the future that the allocation of revenues is performed in accordance with a tool based on solid parameters that cannot be abused.
(6) It is indeed critical to create a system that achieves a degree of uniformity across the Union, at least amongst the taxpayers that it is chiefly addressed to. Accordingly, and considering the efforts that both tax administrations and businesses have made in order to implement the framework of a global minimum level of taxation, it would be important to capitalise on this achievement and design rules that remain as close as possible to the OECD/G20 Model Rules and Directive (EU) 2022/2523. On this basis, the common framework of rules should be mandatory for groups with a taxable presence in the Union provided that they have annual combined revenues of more than EUR 750 000 000 based on their consolidated financial statements. In this way, the scope would thus be targeted at businesses that are most likely to have cross-border activities and, thereby, can benefit from the simplification which a common legal framework would offer. The threshold would also provide alignment with Directive (EU) 2022/2523 for a consistent approach in the Union.
(7) Although the threshold would be determined on the basis of the combined revenues of the group on a global basis, the remit of the provisions should be limited to members of the group operating on the internal market as Union law only applies within the Union and does not bind non-Member States. Only the Union sub-set of such a group should therefore be captured. This would include companies which are resident for tax purposes in a Member State and their permanent establishments operating in a Member State as well as the permanent establishments in the Union of third country companies of the same group. Considering that the concept of a permanent establishment is dealt with within bilateral tax treaties and national law and although the definition features some common principles, there is still a degree of divergence worldwide. Consequently, it would be a pragmatic approach to rely on the existing double taxation treaties and national rules of the Member States, rather than attempt full harmonisation through secondary Union law.
(8) To ensure proportionality and the well-functioning of the common framework, group members, including companies resident in a Member State, their permanent establishments and permanent establishments in the Union which are members of a group headquartered outside the Union, with limited activity in the internal market should be excluded from the scope through a materiality threshold.
(9) The objective of simplifying the current rules underscores the envisaged initiative. Therefore, the rules on the computation of the tax base should be built by applying a limited series of tax adjustments to the financial statements of each group member. These limited adjustments would represent common adjustments that are necessary to convert the financial accounting statements into a tax base. Considering the need for alignment with Directive (EU) 2022/2523, the adjustments should resonate with that framework, which should also facilitate implementation for Member States and businesses that would already be familiar with the general principles.
(10) Given that, with the aim to bring simplification, the financial accounts will be used as a starting point for computing the tax base of each group member, it is necessary to draft tax rules in such a way that they stay as close as possible to financial accounting. In the cases where this is possible, the financial accounting treatment of an asset or liability would not change for the purpose of taxation and consequently, no adjustments would be required. Accordingly, it is also necessary that in line with the rationale of taxation, other elements of the tax base be treated for tax purposes in a different way compared to how they are qualified under financial accounting.
(11) Accordingly, it is essential to address specific sectors of activity, notably international shipping, that require certain sector-specific adjustments. For group members in this sector, the financial accounts would have to be adjusted, in order to exclude an amount (profit or loss) covered by a tonnage tax regime. Special tax regimes for international shipping, often referred to as ‘Tonnage tax regimes’ would normally allow for taxation on the basis of the tonnage (i.e., the carrying capacity) of ships operated by a group member rather than the actual profits or losses incurred by the group member through activities eligible for tonnage tax. An exclusion of such an amount would, therefore, build on the different acknowledged approaches for the computation of the tax base and would ensure a suitable consistency with the different policy objectives of the internal market.
(12) To achieve the key objective of creating a simplified corporate tax framework, the preliminary tax results for each group member should be aggregated into one single common tax base, in order to subsequently allocate this base to eligible group members. The tax adjustments to the financial statements would produce preliminary tax results for each group member. These results would then be aggregated, which would allow for cross-border loss relief between BEFIT group members, and subsequently, the aggregated tax base would be allocated to group members based on a transition allocation rule; this would pave the way towards a permanent mechanism. That permanent mechanism could be based on a formulary apportionment and would render the need for intra-BEFIT group transactions to be consistent with the arm’s length principle redundant. It would have the advantage of using more recent country-by-country reporting (‘CbCR’) data and the information gathered during the transition period. This will also allow for a more thorough assessment of the impact that the implementation of the two-pillar approach is expected to have on national tax bases and the BEFIT group tax bases. In this way, it would still become possible to materialise the key objective of tax neutrality in the internal market, which would reduce instances of double and over-taxation and enhance tax certainty with the aim of reducing the number of tax disputes.
(13) The aggregation of the tax results amongst group members would not be a suitable measure for certain sectors, such as extractive activities as well as international shipping, inland waterways transport and air transport. It would therefore be important to exclude those from the aggregation as their characteristics do not fit in such context. Any amount of the profit or loss of companies that operate in the field of international traffic which is not covered by a tonnage tax regime (and thus excluded from the preliminary tax results), would have to be kept out of the aggregation while it would be computed by applying the common corporate tax rules.
(14) To provide space for growth and investment, Member States would also be allowed to individually apply additional post-allocation adjustments (e.g. tax treatment of pension contributions) in areas not covered by the common framework. Member States would also be free to further adjust their allocated share without a ceiling in order to ensure that Member States can make their national policy choices in this area. Most importantly, Directive (EU) 2022/2523 would effectively set a ceiling which would effectively ensure that the effective tax rate is at least 15%.
(15) Some Member States operate corporate tax systems which are built on principles that differ from the most common approach, such as distribution-based tax systems. It is therefore of prime importance to put in place the necessary adjustments, in order to ensure a workable interaction with those systems. The solution could be sought in certain post-allocation adjustments. These would entail that the part which would be allocated to a group member under a distribution-based system has to be modified in proportion to the distributions made during the fiscal year. The essence of a distribution-based tax system would be fully retained, considering that the distribution marks a timing point for taxing the allocated part and accordingly determine how much of this would need to be taxed. In this regard, it should be envisaged to operate a carry-forward mechanism, to ensure that the allocated part which is not taxed in the current year would be taxable in the following years.
(16) As relations within a group represent only part of the commercial activity of a group of companies, the transactions between members of a group and associated enterprises outside the group constitute another essential aspect to look at. To address this external aspect and as the number of transfer pricing disputes has lately risen considerably, especially with respect to the pricing considerations for routine activities, it would be very useful to provide for a simplified approach to transfer pricing compliance which would decrease compliance costs for the businesses and improve the efficiency of tax administrations in the use of human capital. To this aim, it would be important to enact a common risk assessment framework for transfer pricing based on a commonly accepted benchmark analysis. This assessment would investigate the margins of Earnings Before Interest and Tax for entities operating independently within the internal market. The profit markers so obtained should then be published, to be used as a self-assessment risk tool, and enable groups operating in the internal market to know in advance the arm’s length returns (market based) that they are expected to achieve in transactions with associated enterprises. Each transaction within the scope of the system should be assessed as being of low, medium or high risk, depending on how this compares to the profit markers, which will be set through an implementing act and published on the website of the Commission.
(17) A common framework for corporate taxation would necessarily feature an administration system, which should ideally provide for a degree of tax certainty and simplification. To promote uniformity, the administration system would have to build on the importance of operating a centralised point of reference for dealing with a number of common issues, such as an Information Return for the entire group, and ensuring an adequate degree of coordination and collaboration amongst national tax administrations. At the same time, the administration system should fully respect national tax sovereignty as local tax returns, audits and dispute settlement would have to remain primarily at the level of the Member States.
(18) To ensure that the rules of the common framework are implemented and enforced correctly, Member States should lay down rules on penalties applicable to infringements of national provisions adopted pursuant to this Directive. Such penalties should be effective, proportionate and dissuasive.
(19) To optimise the benefits of having a common legal framework for computing the corporate tax base in the internal market, the application of the rules should be optional for groups, including SME groups, who earn annual combined revenues of less than EUR 750 000 000 as long as they prepare consolidated financial statements and have a taxable presence in the Union. By keeping the application of the rules open to groups of a smaller size, more groups with cross-border structures and activities may benefit from the simplification that the common framework offers.
(20) In order to supplement or amend, as the case may be, certain non-essential elements of this Directive, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission in respect of (i) amending Annexes I and II, as appropriate; and (ii) supplementing by laying down additional rules for insurance undertakings, in particular with regard to the new International Financial Reporting Standard (IFRS) 17 Insurance Contracts. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-Making26. In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States’ experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.
(21) In order to ensure uniform conditions for the implementation and functioning of the so-called ‘BEFIT teams’ set up in this Directive to bring together representatives of each relevant tax administration from the Member States where the group operates as well as to set profit margins for certain routine transactions between BEFIT group members and their associated enterprises outside the BEFIT group, implementing powers should be conferred on the Commission. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council27.
(22) Any processing of personal data carried out within the framework of this Directive should comply with Regulation (EU) 2016/679 of the European Parliament and of the Council28. Member States may process personal data under this Directive solely 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.
(23) The retention period of 10 years is justified in order to allow Member States to comply with most statute of limitations.
(24) To allow businesses to directly enjoy the benefits of the internal market without incurring an unnecessary additional administrative burden, information on the tax provisions set out in this Directive should be made accessible through the Single Digital Gateway (‘SDG’) in accordance with Regulation (EU) 2018/172429. The SDG provides a one-stop-shop for cross-border users for the online provision of information, procedures and assistance services relevant to the functioning of the internal market.
(25) Since the objective of this Directive cannot sufficiently be achieved by the Member States but can rather, by reason of the existing challenges which are caused by the interaction between 27 different corporate tax systems, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality as set out in that Article, this Directive does not go beyond what is necessary in order to achieve that objective.
(26) The European Data Protection Supervisor was consulted in accordance with Article 42(1) of Regulation (EU) 2018/1725 of the European Parliament and of the Council and delivered its informal opinion on 18 August 2023.