The European Commission on Tuesday (12 September) put forward a proposal to reduce tax compliance costs for large companies operating in multiple member states through a common set of rules to calculate their tax base.

The proposed directive, named “Business in Europe: Framework for Income Taxation” (BEFIT), would apply to multinationals operating in more than one EU country and with a total annual turnover of €750 million or more, providing a single set of rules to calculate their tax base.

“[The aim is] to make it easier for businesses large and small to operate in the EU, reducing tax compliance costs and freeing up resources for them to invest and create jobs,” Commission for Economy Paolo Gentiloni said on Tuesday.

The proposal follows the directive to ensure a minimum effective tax rate for multinational companies – known as the Pillar Two directive – which was agreed in December 2022.

“[T]oday we take another key step towards simpler, clearer and more cost-effective tax systems in the EU,” Gentiloni said.

According to the Commission, the rules would impact around 4,000 EU companies and cut their tax compliance costs between 32% and 65%.

However, one EU official told reporters that the proposed rules would only simplify procedures for both businesses and tax authorities, without significantly changing the distribution of tax income among member states.

Tax rates will continue to be determined at the national level, while the subsidiaries of large corporations will be able to calculate their tax base according to a common set of rules and will each pay a share of the aggregated tax base calculated on the basis of its average share in the previous three fiscal years.

The aggregation of the tax base would also allow for cross-border loss relief, which, according to the Commission, should make the tax bill more predictable for corporations.

Moreover, the directive would introduce so-called BEFIT teams consisting of representatives of national tax authorities, which should help the coordination among tax authorities who seldom agree on how to apportion group profits among EU member states.

Smaller companies excluded from the scope of the proposal could voluntarily adhere to the rules.

Harmonising transfer pricing

The Commission also wants to harmonise rules on transfer pricing, the practice carried out by multinationals to transfer goods and services between their subsidiaries established in different member states.

As prices are set within the company, they do not always reflect the market price and can allow multinationals to shift their profits in order to reduce their tax burden.

According to the Commission, a common set of rules on transfer pricing will limit the fraudulent use of transfer pricing, while also increasing tax certainty and reducing cross-border disputes.

Next steps

According to the proposal, the new BEFIT rules would apply from 1 July 2028, while the transfer pricing rules would apply from 1 January 2026.

EU countries will need to agree unanimously on the new rules before they can enter into force, while the Parliament will only be able to present its opinion.

However, it is not yet clear whether the proposal will receive unanimous approval by member states, as similar proposals in the past, such as the 2011 Common Consolidated Corporate Tax Base (CCCTB), fell through.

Yet, Commissioner Gentiloni said he was “optimistic” for the new proposal.

“I’m a little bit optimistic that this proposal has much greater chances of success, because meanwhile we have achieved the agreement on pillar one and pillar two,” he said, adding that “the approach we have taken mirrors in many respects that of international agreements” and could therefore gather more consensus.

Reactions

The business association BusinessEurope cautiously welcomed the BEFIT and the Transfer Pricing directives, but its director general Markus J. Beyrer warned in a statement that “the new framework should remain adaptable to ongoing changes in the international corporate tax system.”

Advocates of tax justice are less happy.

“This long-overdue reform fails to make big multinationals in Europe finally pay their fair share of tax. It gives them a free pass to continue booking taxes where they only have empty offices and syphon off their profits to EU tax havens,” said Chiara Putaturo, from Oxfam EU.

According to the green member of the European Parliament Ernest Urtasun, “the biggest concern is the lack of ambition to fairly distribute profits within the EU via a formula, once again making the Commission take a cautious avenue because of the unanimity rule in taxation.”

“EU tax havens, in the proposed rules, will continue to profit from an unfair system,” he added.

[Edited by Nathalie Weatherald]

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