In May 2021, the EU Commission published the Communication on Business Taxation for the 21st Century. This set out a long-term vision of what it considers to be a fair and sustainable tax system for companies operating cross-border within the single market.
The document highlights the patchwork of national corporate tax rules that create challenges for businesses looking to grow, expand and trade cross-border, and for tax authorities applying these rules. These challenges include double taxation, high compliance costs and tax leakage arising from opportunities for tax avoidance. The communication sets out a new framework designed to address these problems, referred to as the Business in Europe: Framework for Income Taxation (BEFIT).
BEFIT builds on earlier initiatives, such as the 2011 common consolidated corporate tax base (CCCTB) proposals. It aims to create a single corporate tax rulebook for the EU, based on a formulary apportionment of profits across the member states that individual businesses are operating in.
Since the CCCTB proposals were put forward, there have been further developments at the wider international level. For instance, the BEPS initiative, led by the OECD, that BEFIT must incorporate into its design. In particular, the pillar two ‘top up tax’ system will need to be factored into the project. Pillar two aims to ensure that large multinational businesses (MNEs) pay an effective 15% rate of corporate income tax in the countries they are operating in.
Bearing these developments in mind, the EU commission developed its proposals further and issued a call for evidence, open from 13 October 2022 to 26 January 2023, and received 48 responses. It is expected that a summary of responses and next steps will be published in the third quarter of 2023.
In the meantime, the European Parliament’s subcommittee on tax matters has heard evidence from experts and stakeholders on the proposal. Some interviewees expressed views that adherence by MNEs to BEFIT should not be mandatory. Other misgivings were expressed against further EU fiscal harmonisation. A recording of the session can be accessed here.
CFE Tax Advisors Europe, a Brussels-based association representing more than 200,000 European tax advisers of which ICAEW’s Tax Faculty is a member, has also issued an opinion statement on BEFIT. It recommends, among other points, that the following factors are taken into account by the Commission in developing the proposals further:
- As BEFIT would represent a fundamental shift in the EU corporate tax landscape, there may be benefit in allowing pillar two to bed in first so that companies and tax authorities have a chance to get used to those rules before applying BEFIT.
- MNEs operating both within and outside the single market will need to apply both the proportion-based system introduced by BEFIT and the existing arm’s length principle for determining the pricing of other intra-group transactions. This may create a two-tier system, leading to increased complexity and compliance costs for companies and tax authorities.
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