Tax initiatives of the EU Commission of 12.9.2023
For many years, Europe-wide harmonisation of tax systems was largely limited to turnover tax based on the VAT System Directive. This has changed with the OECD and G-20 initiative to combat aggressive tax avoidance and artificial profit shifting (BEPS). Many of the measures from the 15 BEPS reports have been implemented in EU directives, most recently in particular the plan for a global minimum taxation (Pillar Two) of 15% for multinational groups of companies with a consolidated annual turnover of at least €750 million. However, the EU Commission's intention to shape taxation does not seem to have ended there, as evidenced by three papers published in parallel on 12 September 2023.
BEFIT initiative
The proposal "Business in Europe: Framework for Income Taxation (BEFIT)" contains a new, uniform set of rules for calculating the tax base of groups operating in the EU with a total annual turnover of at least €750 million. The proposal builds on the EU directive on global minimum taxation and contains three core elements:
- Common rules for the calculation of the tax base at the entity level: Each member of a BEFIT group determines its provisional taxable result on the basis of its net accounting profit or loss, adjusted for certain additions and deductions. In the case of an EU resident ultimate parent entity, the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity is relevant.
- Aggregation of the group's tax base at EU level: The tax results of all members of the group are aggregated into a single tax base. This should lead to cross-border loss relief, as losses in one country are automatically offset against profits in another.
- Allocation of the aggregated tax base: For each member of the BEFIT group, a percentage share of the aggregated tax base is calculated that corresponds to the average of the taxable results of the three preceding tax years. This apportionment is planned as a transitional measure and is only to be applied for financial years between 1.7.2028 and 30.6.2035. Subsequently, the EU Commission is to develop a final allocation mechanism.
The regulations are scheduled to come into force on 1.7.2028 (BEFIT).
Draft directive on transfer pricing
Also as part of the BEFIT package, the European Commission has presented a proposal for a directive to harmonise transfer pricing rules within the EU. The starting point for the considerations are three identified problem areas in the area of transfer pricing:
- Profit shifting and consequently tax avoidance through false transfer pricing,
- Double taxation due to a different assessment by the states involved; and
- high compliance costs in both pricing and documentation.
The EU Commission wants to reduce the existing complexity and differences in location conditions that have arisen due to different adoption and application of the OECD Guidelines. To this end, the arm's length principle is to be firmly anchored in European law, essential transfer pricing rules harmonised, the role of the OECD guidelines clarified and binding rules developed on specific transfer pricing issues within the EU.
The proposed directive consists of three areas:
- Description of the arm's length principle,
- detailed transfer pricing rules and
- Develop a framework to further simplify the conduct of transfer pricing analyses.
It is intended that the adopted Directive will be transposed into national law by 31.12.2025 and will apply from 01.01.2026.
Draft Directive "Head Office Tax System
The EU Commission's draft directive entitled "Head Office Tax System (HOT)" provides for an option for small and medium-sized enterprises (SMEs) operating across borders in the EU exclusively through permanent establishments (not in the form of subsidiaries) to calculate the taxes to be paid exclusively on the basis of the tax regulations of the Member State in which the enterprise has its head office and also to file a tax return only in the Member State of the head office. The regulations are to be applied as of 1.1.2026.
Outlook
The EU Commission's proposals are ambitious - and at the same time not the first attempt to unify the direct tax system within the EU. However, while plans to implement a Common (Consolidated) Corporate Tax Base have not been politically feasible so far, the chances could now be better in the course of the Pillar Two implementation. For the companies concerned, the BEFIT initiative could offer advantages that should not be underestimated, such as cross-border loss offsetting, in addition to further administrative burdens. The proposals on transfer prices, which are to apply regardless of the size of the companies, also deserve attention. We will keep you informed about further developments here.