Last week, the European Commission published the long-awaited proposals on the new corporate income taxation framework for Europe. The package contains two proposals for directives on BEFIT (Business in Europe: Framework for Income Taxation), and for the first time ever, a proposal for an EU directive on transfer-pricing. BEFIT aims to replace and thus repeal the 2011 and 2016 Commission proposals for a common consolidated corporate tax base (CCCTB), and replace the current 27 national corporate tax systems for MNE groups with combined revenue exceeding EUR 750 million. The approval of these proposals requires unanimity, given the shared competence in corporate taxation between the Union and its Member states.
The BEFIT Proposal
BEFIT establishes a common set of rules to determine the tax base of companies that are part of a group which prepares consolidated financial statements and which are subject to corporate income taxation in an EU Member State. The proposal does not contain sector-specific exclusions from its scope.
The directive proposes a hybrid scope for mandatory and optional application of the rules:
- Mandatory scope: Comprises the Pillar 2 companies (i.e., groups with annual combined revenues of at least EUR 750 million) but is limited to the EU sub-set of entities that meet the 75% ownership threshold. For groups headquartered in third countries, their EU 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.
- Voluntary scope: Smaller companies can voluntarily opt-in, if they prepare consolidated financial statements. When a group applies or chooses to apply the rules under this Directive, the framework will apply to the whole ‘BEFIT group’, i.e., the sub-set of all EU tax resident companies and EU-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.
Calculation of the preliminary tax result of each BEFIT group member
As in Pillar 2, the starting point is the financial accounts of the EU entities of the group. These financial accounts must follow the accounting standard of the UPE or, if the group is headquartered outside of the EU, those of the filing entity. The accounting standard must be accepted under EU law, which means either national generally accepted accounting principles (GAAP) of one of the Member States or the international financing reporting standards (IFRS). For simplification purposes, adjustments are kept to the minimum necessary, rather than putting together a detailed corporate tax framework. BEFIT thus comprises fewer tax adjustments compared to Pillar 2. Items which are included, i.e. added back in case they were deducted or not already recorded in the financial accounting statements, comprise: profit distributions; financial assets held for trading; borrowing costs that are paid to parties outside the BEFIT group in excess of the interest limitation rule of the ATAD; fair value adjustments and capital gains received by life insurance undertakings in the context of unit-linked/index-linked contracts; fines, penalties and illegal payments; and, corporate taxes that were already paid or top-up taxes in application of Pillar 2. The proposal contains a number of excluded items of income, which are subtracted from the financial net income or loss if they were in the financial accounts.
In respect of the rules on aggregation and allocation of the tax base, the preliminary tax results of all members of the BEFIT group will be aggregated into a single “pool” at Union group level, which will be the ‘BEFIT tax base’, with the following advantages: cross-border loss relief, allowing the BEFIT groups to set off losses across borders; 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; as well certain transfer-pricing simplifications. To ensure Member states’ competence in tax rate policies, the proposal aims to allow Member states to introduce further deductions, tax incentives, or base increases, to the extent these comply with the EU Directive on Minimum Tax/Pillar 2.
The transactions between a BEFIT group and associated entities outside the BEFIT group will continue to be governed by existing transfer-pricing rules, i.e. the arm’s length principle. The proposal provides a risk assessment tool (‘traffic light system’) with benchmarks: this aspect of transfer-pricing concerns simplification of the formal compliance with the transfer-pricing rules (i.e. low risk activities that do not result in high residual profit), but not the substantive aspects of arm’s length profit allocation.
Regarding the administration of the rules, “one-stop-shop” will allow the ultimate parent entity to file one tax return for the whole BEFIT group (the ‘BEFIT Information Return’) with one own tax administration (the ‘filing authority’), which will share this with other Member States where the group operates.
The Transfer-Pricing Directive Proposal
The proposal for an EU Directive on transfer pricing covers the substantive rules, transposing the OECD Transfer Pricing Guidelines into the EU legal order. This aspect constitutes a significant milestone for the EU, as it would formalise the use of soft-law instruments agreed at OECD level as a matter of compliance with secondary EU law. Significantly, the proposal relies on the so-called EU Commitology procedures, under which the Commission is empowered by Member states to cater for any subsequent changes of the OECD rules and thus adopt an “ambulatory approach” to the application and interpretation of the OECD-derived transfer-pricing rules.
The Directive will seek to address the complexity of the transfer pricing rules and their different implementation in the national law of Member States, which according to the European Commission has led to significant profit shifting and tax avoidance, i.e. transfer prices which are manipulated to shift profit and be used in the context of aggressive tax planning schemes. On the other hand, simplified transfer-pricing rules can lead to less tax disputes, litigations and double-taxation, in particular in the context of bilateral and multilateral APAs and the ensuing adjustments.
Specifically, the Directive defines the Arm’s Length Principle (ALP), as an international standard that prescribes that associated companies must transact with each other as if they were independent third parties: the transactions between two associated enterprises should reflect the outcome that would have been achieved if the parties were not related i.e. if the parties were independent of each other and the outcome (price or margins) was determined by (open) market forces.
The divergent interpretation on the definition and the scope of the Arm’s Length Principle in the enforcement of EU law in tax rulings cases has been a subject of lengthy litigations between the European Commission, Member states and MNEs (Apple, Starbucks, Fiat, Amazon etc), notably with the Fiat case and the anticipated Apple judgment.
CFE Professional Affairs Conference: “Tax Adviser 2030: Evolution or Revolution for Tax Practice, Policy and Administration?”
Last places are available for CFE’s 16th European Conference on Tax Advisers’ Professional Affairs Conference in Helsinki on 21 September, where we will discuss what is next for tax policy, the role of tax advisers, fairness in taxation in the aftermath of BEPS, and take stock of the EU/OECD anti-avoidance initiatives with the more prominent role of the UN in tax policy, as well as the constrains on the EU Commission to investigate tax planning practices with the ‘manifest error’ doctrine established by the ECJ in the Fiat case.
The conference will feature a keynote speech from Prof. Dr. Vesna Tomljenović, Judge at the General Court of the European Union (GC)/ Judge-rapporteur for the Apple case, as well as other prominent speakers from the EU, tax practice, governments, tax institutes and academia.
Register here for the conference, organised by CFE Tax Advisers Europe and the Finland’s Association of Tax Consultants. The conference will be held in Helsinki, Finland, on Thursday 21 September 2023 from 10:00am to 16:00pm, on the topic of “Evolution or Revolution for Tax Practice, Policy and Administration”. Two conference panels of speakers will examine the evolution of fiscal systems, tax practice and tax administration, prompted by both policy developments at EU and international level, as well as tax avoidance, enforcement of EU law in relation to taxation and impact on the tax profession.
Further information concerning the conference and registration is available here.
CFE Opinion Statement on the EU Commission FASTER Withholding Tax Proposal
CFE Tax Advisers Europe has published an Opinion Statement concerning the EU Commission’s withholding tax proposal to introduce legislation on a new EU system for the avoidance of double taxation and prevention of tax abuse: Faster and Safer Relief of Excess Withholding Taxes.
In June 2022, CFE Tax Advisers Europe submitted representations to the European Commission’s consultation concerning its public consultation on the planned proposal. As CFE set out in its initial representations, CFE is supportive of the initiative to introduce an EU-wide system for relief at source of withholding tax on dividend, interest, royalty payments and service fees, and for exchange of information and cooperation between tax authorities under the system.
We are not seeking in this Statement to repeat all those points which we continue to endorse from our previous statement. However, we believe there is merit in making some observations concerning issues identified with the current legislative proposal.
Firstly, CFE believes that a tax residence certificate should be issued in a harmonized format within the EU, both in the local language and in English. Furthermore, it should certify the residence of the taxpayer under the applicable domestic law and not for the purposes of particular tax treaties.
Secondly, CFE is of the view that the scope of the currently proposed directive is much too restricted, given the extremely limited application to only publicly traded bonds and shares which is much narrower than was originally envisaged at the time of the EU Commission’s consultation process in 2022. CFE is disappointed that the proposed directive is limited in scope and does not address further issues which allow for relief of double taxation not addressed by the mechanism. CFE is of the view that relief at source via a digital certificate mechanism should be applicable to all types of dividend, interest and royalty payments and to service fees.
Thirdly, while obviously recognizing that Member States should effectively fight tax fraud and abuse, CFE believes that the right that they have in this respect should be exercised “after-the-facts” and not before. For that reason, CFE Tax Advisers Europe is of the view that a taxpayer should not have to provide information on the purposes of the certificate (this refers to Article 4(2)(g) of the Proposal) and that the financial intermediary should not be required to verify that information including undertaking a “risk assessment that takes into account the credit risk and fraud risk” as is notably provided by Article 10(1)(b) of the Proposal. More generally, the role of financial intermediaries should be revisited as set forth in section 4 of our Statement.
Finally, CFE observes that the currently proposed directive will not enter into force until January 2027, which is a relatively long transition period as compared with other direct tax proposals, for what would seemingly be a less complicated implementation.
We invite you to read our Opinion Statement and remain available for any queries you may have.
OECD Secretary-General Tax Report to G20 Leaders
The OECD has published its Secretary-General Tax Report presented to the G20 leaders at the G20 Summit which took place in New Delhi in India last week from 9 – 10 September 2023.
With respect of international taxation, G20 leaders welcomed the progress on Pillar 1 and 2 at OECD level, calling for coordinated efforts towards capacity building to implement the two-pillar package effectively and, in particular, a plan for additional support and technical assistance for developing countries, as set out in the G20 New Delhi Leaders’ Declaration.
Platform for Collaboration on Tax Publishes Report on Carbon Pricing Metrics
The Platform for Collaboration on Tax, a joint initiative of the IMF, OECD, UN and World Bank Group have released a report on carbon metrics.
The Platform states of the report: “Carbon pricing has emerged as the policy strategy to monetize the cost of the emission of carbon dioxide and other greenhouse gases, such as the damage caused by climate change. In the last decade, international organizations have developed diverse metrics on carbon pricing. The PCT’s new report, “Carbon Pricing Metrics: Analyzing Existing Tools and Databases of Platform for Collaboration on Tax (PCT) Partners,” showcases this rich array of approaches of the PCT Partners (the IMF, OECD, UN and the World Bank Group) and provides a comparison of various metrics, including other carbon pricing metrics. The study shows that the existing metrics of the PCT Partners complement each other and give a comprehensive picture of the carbon pricing landscape. According to the report, the PCT Partners concur on a crucial message: Energy prices are poorly aligned with climate, environmental and health costs. Carbon pricing signals to date are insufficient.”
An event will be held to present the report in due course with expert speakers, who will discuss the key takeaways from the report.
The selection of the remitted material has been prepared by:
Aleksandar Ivanovski & Brodie McIntosh