On May 18, 2021, the EU Commission issued the Communication on Business Taxation for the 21st Century (“the Communication”), presenting its short-term and long-term vision to establish a robust, efficient, and fair business tax framework in the EU.
One of the proposals outlined in the Communication was the Commission’s plan to introduce a new framework for business taxation in the EU aiming to create a single corporate tax rulebook for the EU, streamline administrative processes and eliminate tax barriers for businesses operating within the single market.
847 days later, on 12 September 2023, the EU Commission adopted this proposal which includes 3 initiatives aimed at simplifying tax rules for small and large businesses within the EU.
The 3 initiatives are:
The BEFIT Directive tackles the considerable tax challenges faced by multinational enterprises (“MNEs”) when conducting business across various Member States, each with its own distinct domestic tax framework. To address this, the Directive is laying out a single set of rules to determine the tax base of all companies within the EU. Once the tax base is determined, the taxable profits would then be allocated to each Member State based on a formulary approach.
The concept of a common tax base for companies in the EU is not a new one. In 2011 and 2016, the Common Consolidated Corporate Tax Base (CCCTB) and the Common Consolidated Tax Base (CCTB) were proposed, to improve simplicity and efficiency through a consolidated tax base across Member States. Both proposed Directives were never agreed upon and hence not introduced. While the notion of a common tax base is still present, unlike previous efforts, the BEFIT Directive addresses the current challenges being faced through the digitalisation and globalisation of the economy.
Furthermore, the Commission, notes that through the recent changes in the international tax landscape, particularly with the introduction of BEPS 2.0, the notions of a common tax base and formulary apportionment of taxable profits have been welcomed and supported by all Members States within the OECD/G20 Inclusive Framework on BEPS. The Commission hopes that the BEFIT Directive gets unanimous approval from Member States as did the implementation of Pillar II, which encompasses the same principles.
Having said this, the consensus of position papers and opinion statements issued by several organisations and service providers around the globe, highlight and question whether the timing for such Directive is right. With the introduction of the Pillar II Rules, the EU should give sufficient time for such Rules to be operational in order for businesses and policy makers to assess the effectiveness and the need for the BEFIT Directive. Furthermore, there is a lot of scepticism on whether the BEFIT Directive is really about simplification highlighting that the material divergencies from the OECD’s Pillar II Framework puts more complexities to MNEs, with groups having to prepare different tax calculations for Pillar II and BEFIT and thus MNEs operating within the EU will be at a disadvantage when compared to MNEs operating outside the EU.
SMEs are the backbone of Europe’s economy with more than 24 million active enterprises within the EU. This Directive seeks to facilitate and reduce the burden for SMEs transacting in the single market.
Under this Directive, SMEs, as defined by Directive 2013/34/EU, operating exclusively through the use of Permanent Establishments, may opt to calculate their taxable results for all their operations using the tax rules of the Head Office jurisdiction. Once the tax base is calculated, the tax liability is to be computed by applying the domestic tax rates of each respective Member State.
Furthermore, the Directive seeks to facilitate the tax burden for in-scope SMEs by adopting a one stop shop approach and enabling the ‘filing entity’ to submit a single tax return and pay the respective tax dues to the ‘filing authority’. By also amending Council Directive 2011/16/EU on administrative cooperation in the field of taxation, the filing authority will then be required to transfer the resulting tax revenues to each Member State where the SME maintains a Permanent Establishment.
Currently, at the European Union level, there is no unified legislation governing transfer pricing rules. Whilst all Member States have enacted domestic laws that adhere to the arm’s length principle, there are variations in its application across different countries. Fundamental concepts such as the definitions of associated enterprises and the concept of control vary among Member States with some countries using a 25% ownership threshold, while others using a 50%. In Malta, we use a 75% threshold, offering a far more lenient approach.
As such, the Directive seeks to address these variations by requiring Member States to adopt a single set of Transfer Pricing Rules, which rules are based on the OECD Transfer Pricing Guidelines. Furthermore, the directive seeks to introduce provisions concerning transfer pricing adjustments such as corresponding and compensating adjustments.
The BEFIT Directive is set to come into effect from 1st January 2028 while the Head Office Directive and the Transfer Pricing Directive are set to take effect from 1st January 2026 and 1st January 2025 respectively. Having said that, all three proposals must be approved unanimously by all Member States, a process which could span several years, without any certainty that such proposals will see the light of day. Therefore, for now all we can do is hold on tight and monitor the progress on these Directives as they unfold.
Markita Falzon
Tax Leader
