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According to the Commission, the initiative aims to introduce a single corporate tax rulebook for the EU, based on a common tax base and allocation of taxable profits to Member States based on a pre-defined formula. Once allocated, the taxable profits would be subject to the corporate income tax rates of the relevant Member States.
The initiative also aims to reduce tax compliance costs and create a coherent approach to business taxation throughout the EU.
The BEFIT proposal was first announced in 2021 as part of the Commission’s Communication on Business Taxation for the 21st Century to promote a robust, efficient and fair business tax framework within the EU. The Commission’s stated objective is to provide a new framework for income taxation for businesses in order to boost competitiveness of the single market, reduce compliance costs and support investment in the EU.
BEFIT will be informed by work on previous failed EU initiatives – the 2011 Common Consolidated Corporate Tax Base (“CCCTB”) and the two 2016 Common Corporate Tax Base (“CCTB”) and CCCTB proposals. Furthermore, to ensure cost efficiency, it is intended that BEFIT should be consistent with, and where possible build on, the principles that underline the two-pillar approach agreed by the Organisation for Economic Co-operation and Development (“OECD”).
Under the public consultation, the EU Commission sought feedback from stakeholders in relation to five key “building blocks” of BEFIT as set out below.
Alternatively, the Commission proposes a second option for a comprehensive corporate tax system with detailed rules for all aspects of taxable profit determination. However, this option would necessitate Member States administering two comprehensive sets of corporate tax rules in parallel (i.e. BEFIT and their national rules), and would likely not achieve the Commission’s objective to reduce the tax compliance burden for EU businesses.
The Commission’s indicative timetable for a legislative proposal on BEFIT is the third quarter of 2023. It is worth noting that any proposed directive would require unanimous approval in the European Council (i.e. approval by all 27 Member States).
The BEFIT proposal is similar to previous EU proposals which sought to introduce a common corporate tax base (i.e. the CCCTB / CCTB). These proposals have long been controversial and were resisted by a number of Member States.
While the Irish government has indicated that it will continue to engage actively on this issue, it was noted in the Tax Strategy Group Corporation Tax Paper, July 2022[1] that matters of direct taxation remain a Member State competence under the treaties, and tax harmonisation is contrary to that principle.
We would expect other Member States to hold similar views. The EU Commission may find it challenging to obtain unanimous approval for BEFIT from all 27 Member States. Furthermore, many Member States will likely see implementation of the Pillar Two minimum corporate tax directive as the priority for 2023.
Finally, in our view, it would seem premature to proceed with BEFIT given that there is global agreement in principle on the OECD’s Pillar One initiative, which also provides a formulary approach for profit allocation. It would seem logical at this stage to allow for the Pillar One and Pillar Two process to conclude before implementing a further set of complex rules, which clearly have some overlap.
At Grant Thornton, we have a team of specialist experts in this area that can provide insight into the ongoing developments at an EU level and how they may impact your business.
[1] TSG 22 - 03 Corporation Tax www.gov.ie
