Earlier this week, the European Commission formally proposed the Business in Europe Framework for Income Taxation (BEFIT).
The package aims to regulate cross-border taxation across the EU Member States and in doing so, make matters much simpler for both business and national taxation authorities. It is hoped that it will help spur cross-border investment and increase market competition within Member State economies. According to the Commission, the proposed combined measures may decrease tax compliance costs by up to 65% for businesses operating within the EU.
At a micro level, one of the most important changes proposed by the Commission is a move to allow national tax authorities to collect tax on the behalf of other EU member states. Through this measure, small and medium enterprises will be able to interact with tax authorities in their native language, thus minimising bureaucratic blockages and translation costs. Such a measure will prove impactful once in force.
The Commission proposal also includes a very significant climbdown on the taxation of multinational profits. Previously, the Commission intended to proportionately link the taxation of multinational corporations to the jurisdictions in which most value was created.
To the relief of FDI dependent Member States such as Ireland, this measure has since been shelved. In its place, multinational companies operating in the EU with annual revenues over €750 million will soon be required to compile their tax bills into an “aggregate tax base”. Under this EU framework, multinational companies will pay a percentage of the overall aggregated tax base, equating to the average of their taxable results over the previous three years. This process will continue to allow some flexibility regarding which national tax authorities are chosen to engage with.
An included sub-proposal will also ensure that Member States adopt a common approach to transfer pricing. This will limit opportunities for overly aggressive tax avoidance. At the same time, the measure aims to improve tax certainty for business and reduce the risk of litigation and double taxation.
This overall package strikes a good balance between Member States dependent on corporation tax revenues and those concerned with ensuring multinational companies pay their fair share. In this regard, the proposal aligns neatly with the previously announced OECD/G20 agreement on the global minimum level of taxation (an effective rate of 15%).
Once the legislative text is approved by the Council of the European Union, the transfer pricing component of the package will come into force on 1 January 2026. Thereafter, the wider BEFIT package will be effective as of 1 July 2028.