On 12 September 2023, the European Commission introduced a long awaited and significant package of initiatives called "Business in Europe: Framework for Income Taxation" (BEFIT). This package aims to simplify and reduce tax compliance costs for large, cross-border businesses operating within the EU by replacing the current 27 domestic national corporate tax systems and ensuring an effective allocation of profits between EU countries.
Outlined within the BEFIT initiative:
- Scope: BEFIT will be mandatory for large groups preparing consolidated financial statements with an annual combined revenue of at least €750 million. A BEFIT group would be constituted by two or more EU companies or permanent establishments with an ultimate parent entity holding (directly or indirectly) at least 75 per cent of ownership rights or profit entitlements. Smaller groups may choose to opt in if they prepare consolidated financial statements, which could be of interest to small and midsize enterprises.
- Common tax rules: BEFIT aims to introduce a single set of rules to calculate the tax base of each company of the BEFIT group.
- Aggregated tax base: Under BEFIT, the tax bases of all companies within a group will be combined into a single tax base. This would notably allow companies to use tax losses on a cross border basis and reduce transfer pricing considerations between EU tax resident members of the BEFIT group.
- Allocation of the tax bases among the BEFIT group: For a transitional period, each member of the BEFIT group will have a percentage of the aggregated tax base calculated based on the average taxable results over the previous three fiscal years. The allocation key after the transition period is not yet known and is likely to be subject to heated negotiations.
- Reduced compliance costs: The goal of BEFIT is to significantly reduce tax compliance costs for businesses operating across EU member states. This is however questionable considering that BEFIT and domestic tax rules would not be fully harmonised (for example Pillar 2 rules are not fully aligned with the BEFIT rules).
- Transfer pricing: The package also includes proposals to harmonise transfer pricing rules within the EU. This harmonisation aims to increase tax certainty, reduce the risk of litigation and double taxation, and limit opportunities for aggressive tax planning.
If adopted by the Council (which would require unanimity), BEFIT is expected to come into force on 1 July 2028, while the transfer pricing proposal is set to take effect from 1 January 2026.
Overall, BEFIT could represent a significant step towards simplifying tax compliance for cross-border businesses within the EU, reducing costs, and promoting investment across member states however adding another layer of tax rules may increase complexity in an EU tax environment which is already largely similar.
The press release can be found here.
The BEFIT legal proposal can be accessed here.