Ambitious EU tax agenda includes new common corporate tax base proposal

By Doug Connolly, MNE Tax

The European Commission announced on May 18 a new plan to consolidate profits of multinational groups into a single tax base in the EU and to allocate those profits via a formula to EU member states to tax under national rates. The proposal, one of several proposals in a Commission communication on updating business tax rules, revises and replaces the Commission’s previous common consolidated corporate tax base (CCCTB) proposal.

The Commission has dubbed its new proposal for taxing multinationals in the EU “Business in Europe: Framework for Income Taxation” (BEFIT). For companies within its scope, BEFIT’s formulary apportionment would replace existing rules for allocating tax bases within the EU’s single market.

Other business tax measures set forth in the communication include proposals to require large multinationals to publish their effective tax rate, encourage the use of equity rather than debt financing, and address the use of shell companies.

Other business tax measures set forth in the communication include proposals to require large multinationals to publish their effective tax rate, encourage the use of equity rather than debt financing, and address the use of shell companies.

The Commission also concurrently adopted a recommendation for member states regarding the domestic treatment of losses, including allowing loss carrybacks.

The measures outlined in the Commission’s communication are intended to build on – and likely to harness the momentum behind – the OECD’s work on building international agreement on new global tax rules. This includes the OECD’s work under “Pillar One” on partially re-allocating taxing rights between countries and under “Pillar Two” on setting a global minimum effective tax rate for multinationals.

The communication states that, once international agreement is reached, the Commission will introduce EU directives to implement both Pillar One and Pillar Two.

The new proposals in the communication also supplement and run parallel to the Commission’s continuing work on a digital levy proposal. The communication states that the digital levy will be designed to be independent of an OECD agreement and “will coexist with the implementation of an OECD agreement on sharing a fraction of the taxable base of the largest multinational enterprises.”

BEFIT to replace CCCTB

BEFIT is not the Commission’s first effort to get member states on board for more harmonized corporate tax rules. It initially proposed the CCCTB to serve as such a measure in 2011 and has re-proposed the measure since then. In addition to a new name, the BEFIT proposal includes some tweaks from CCCTB, including revised rules for tax base calculation and for formulary apportionment.

The BEFIT proposal would build on the OECD discussions with respect to the formula for partial reallocation of profits under Pillar One and the rules for calculating the tax base for the purposes of applying Pillar Two. The changes in the new proposal would also seek to better reflect current economic realities, including “taking better account of digitalisation.”

Under BEFIT, the profits of multinational groups operating in the EU would be consolidated into a single tax base and allocated to member states using formulary apportionment. Countries could then tax their apportionment at their national corporate tax rate (potentially subject to any minimum rate agreed to under Pillar Two and implemented within the EU).

The communication does not specifically define how corporate revenues would be apportioned under the formula but states, “Key considerations will include how to give appropriate weight to sales by destination, to reflect the importance of the market where a multinational group does business, as well as how assets (including intangibles) and labour (personnel and salaries) should be reflected.”

The Commission states that while BEFIT would build on the work on allocating taxing rights under Pillar One, it would take that work even further such that it would replace, rather than simply run parallel to, existing rules for allocating tax base within the EU single market. “The use of a formula to allocate profits will remove the need for the application of complex transfer pricing rules within the EU for the companies within scope,” the communication states.

“The use of a formula to allocate profits will remove the need for the application of complex transfer pricing rules within the EU for the companies within scope,” the communication states.

The Commission contends BEFIT will reduce administrative burdens, cut compliance costs for businesses, reduce barriers to cross-border investment within the EU, and minimize opportunities for tax avoidance.

“Instead of having to comply with up to 27 different sets of corporate tax rules, a group will be able to determine its tax liability in each EU Member State according to one single set of rules,” the communication states. It adds that the proposal will even “pave the way … for the possibility of a single EU corporate tax return for a group.”

The Commission seeks to present a framework for BEFIT by 2023.

Other business tax reforms

The Commission plans to propose a requirement for certain large companies operating in the EU to publish their effective tax rates. The measure is intended to enhance transparency. The communication states that the proposal will use a methodology based on the one under discussion in the Pillar Two discussions. The Commission aims to make this legislative proposal by 2022.

The Commission also seeks to introduce new anti-tax avoidance measures to tackle abusive use of “shell companies” (i.e., entities with little substantive economic activity, sometimes used solely to avoid taxes). The proposal will include new monitoring and reporting requirements for shell companies to enhance tax authorities’ oversight of such entities. The Commission intends to table a legislative proposal on shell companies by Q4 2021.

Noting a bias for debt financing in the current corporate tax rules in the EU and finding such bias to encourage over-accumulation of debt, the Commission further plans to introduce changes to encourage companies to use equity rather than debt for financing. The Commission seeks to make this legislative proposal by Q1 2022.

In addition to these proposals, the Commission concurrently adopted a recommendation urging member states to allow carryback losses for businesses to at least the previous fiscal year. The Commission states this will allow businesses that struggled during the pandemic to claim their losses against taxes they paid before 2020. It believes this will especially benefit small and medium-sized entities.