BEFIT – Business in Europe: Framework for Taxation

The BEFIT proposal introduces a single set of rules to determine the tax base for large businesses that operate out of more than one Member State. The new rules will be mandatory for groups with a combined global annual revenue of at least €750m and the ultimate parent holding at least 75% of ownership rights.

For groups headquartered outside the EU, their Union subgroup will only apply BEFIT rules where they achieve €50m combined revenues in at least 2 out of four previous fiscal years or 5% of the total group revenues.

The rules are discretionary for smaller groups.

BEFIT introduces:

• A common set of rules for calculating the tax base of a group meeting the thresholds.
• Allocation of the tax base, i.e. groups’ profits, to the relevant Member State.
• The re-allocated profits are taxed at the corporate income tax rate of that Member State (ME).
• Simplified approach to transfer pricing between BEFIT group member and associated enterprise outside BEFIT group, using a new traffic light system approach.

SME Relief Package and BEFIT

The proposed simplification for small and medium-size enterprises (SMEs) that have a presence in other Member States, through permanent establishments, allows them to compute the tax base of their permanent establishments (PEs) in other Member States in accordance with the tax rules of their head office company. The head office will file a single return and collect tax on behalf of the other Member States where the SMEs operate. The head office MS will then allocate the share of the collected tax to other tax authorities.

BEFIT now offers the opportunity for SMEs that are part of a group that file consolidated accounts, to opt into BEFIT rules. This compliments the SME Relief package, allowing smaller groups to choose the most beneficial option.

Transfer pricing

A proposal for a directive on Transfer pricing is also now part of the BEFIT Package in an effort to harmonise transfer pricing rules across the EU. Currently the status of OECD guidelines differs between Member States and whilst there is a common approach to basic principles, this is not fully aligned. The proposal contains anti-abuse rules and aims to increase tax certainty and reduce the risk of litigation and double taxation. The directive will reduce opportunities for aggressive tax planning using transfer pricing.