9.10.2023

The European Commission proposes changes to transfer pricing and the taxation of large international groups within the EU

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In September 2023, the European Commission published its proposed directive on Business in Europe: Framework for Income Taxation (BEFIT) aimed at cross-border groups. The proposed directive includes a common set of rules to determine the tax base of companies belonging to the same group within the EU, with the purpose of aggregating the tax bases into one single tax base. Once the aggregated tax base has been determined, each group company will be assigned a percentage of the aggregated tax base. This percentage will be based on the average of the taxable results in the previous three fiscal years.

In the same connection, the Commission issued a separate proposal for harmonising transfer pricing rules within the EU. This proposal aims at enhancing tax certainty and, consequently, reducing tax litigation and double-taxation. Moreover, it also aims at reducing aggressive tax planning schemes.

The proposed directive would concern large groups that are subject to EU regulations

The BEFIT Directive will be mandatory only for groups operating in the EU with a combined revenue of at least EUR 750 million over a certain period, and where the ultimate parent entity hold at least 75% of the ownership rights or of the rights giving entitlement to profit. Another precondition is that the group companies prepare consolidated financial statements. Groups with a lower revenue operating in the EU may also choose to opt in as long as they prepare consolidated financial statements.

The proposed regulation may initially lead to additional work

The proposed directive is another step towards a common EU corporate taxation system and the plan for a common allocation method in which the results, determined under common rules, would be allocated for taxation in the group companies’ home countries using a formulary apportionment.  The proposed regulation aims to further develop the EU’s internal market and reduce the procedural costs caused by applying multiple taxation frameworks. It is also expected to encourage cross-border investments within the EU. While the Commission predicts that the regulation could result in significant savings in procedural costs, the implementation and application of the new regulation will likely lead to additional work for groups, at least in the initial stage. The situation is further complicated by the fact that the proposed directive only concerns companies that fall under EU regulation. In other words, it does not apply to cases in which a company’s tax residence is in a non-EU state.

The contents of the directive are not yet set in stone

The BEFIT Directive is proposed to enter into force on 1 July 2028. If the transfer pricing proposal proceeds as planned, it would enter into force on 1 January 2026 already. However, the directives must first pass through the hands of the European Parliament and of the Council. The proposed regulation and the allocation of revenue concern the taxing rights of Member States, which have traditionally been difficult questions on the EU level. It is therefore highly uncertain that the European Parliament and the Council would adopt the proposed regulations, at least exactly as proposed. Nevertheless, it is necessary to renew the international corporate taxation system, and we are bound to see some changes sooner or later.

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