EU Commission still wants to harmonise corporate tax law with CCCTB2.0

I remember speaking about the European Commission’s Common Consolidated Corporation Tax Base (CCCTB) at tax conferences over a decade ago. Back then, I referred to it as corporate tax’s UFO as it hovered there, sleepless, indefatigable at work upon the law it was writing. It was intent on every country having the same tax law for companies. Ireland constructively engaged with the initiative, but we weren’t a fan. It didn’t get traction and was withdrawn.

Clearly the European Commission has not heeded Disney’s dictum in “Frozen” and just “let it go”. On 12 September, the European Commission published its proposal for CCCTB 2.0, a directive introducing a common framework for corporate taxation in the EU with the “Proposal for a council directive on Business in Europe: Framework for Income Taxation (BEFIT)“. If adopted in its proposed form, the new rules would be implemented by 1 January 2028 and would apply as from 1 July 2028.

BEFIT has certain mandatory and optional application. Groups within the scope of the OECD Pillar Two initiative (groups with annual combined revenues of at least €750 million) have to be within BEFIT’s application, limited to those EU entities that meet a 75% ownership test (“the BEFIT group”). If the ultimate parent of the group is outside the EU, BEFIT would only apply if the revenues of the BEFIT group within the EU exceed 5% of the total group revenues or account for at least €50 million in combined revenue in two or more of the last four years. It’s optional for multinational or domestic groups that prepare consolidated financial statements but don’t meet the €750 million threshold.

Basically, this new BEFIT would mean one form of corporate tax law across Europe. My partner colleague James Smyth has written about the OECD Pillar 2 rules, often known as the 15% rate of tax, in these pages previously. These rules will form part of our tax law when this year’s Finance Bill is completed as we have to implement the related EU directive but BEFIT is something else.

Similar to the EU’s Pillar Two directive the starting point for determining the corporate tax base is the financial accounts of a BEFIT group member, prepared in accordance with an EU member’s accepted accounting standard or IFRS. Each BEFIT group member should determine its tax base individually. Then adjustments would have to be made to that base by including and excluding certain items. Some such adjustments would comprise certain borrowing costs in excess of the interest limitation rule of the EU Anti-Tax Avoidance Directive (I’ve previously written about that in these pages given the complexity it can bring to our law); certain dividends and capital gains or losses on significant share or ownership interests (we’re already thinking of bringing in a dividend exemption next year); certain rules regarding asset depreciation and so on.

The proposed directive also contains provisions to determine the treatment of group members joining or leaving the BEFIT group during the fiscal year. These relate both to the timing and the tax treatment of pre-existing long-term projects and pre-entry losses.

The individually determined tax bases of the BEFIT group members would be aggregated at the level of the filing entity (the EU ultimate parent company or an appointed EU BEFIT group member). A positive BEFIT tax base is to be allocated between each of the BEFIT group members. The previous CCCTB proposals used an allocation formula, referring to employees by location, sales by destination, and assets by location to determine which part of the tax base could be taxed by each member state. Given Ireland’s nature you could see why that could direct tax revenue away from Ireland. Under the current BEFIT proposal, a transitional period would apply for the first seven years, during which the BEFIT tax base would be allocated in accordance by reference to previous tax revenues.

The Commission is to prepare a study on the possible composition and weight of selected formula factors to apply after the transition period and report to the Council of the European Union by the end of 2031. If the Commission deems it appropriate, it would issue a proposal to amend the allocation formula in the current BEFIT directive.

BEFIT group members also may perform activities and transactions with associated enterprises outside the BEFIT group and so the BEFIT proposal includes transfer pricing rules, introducing a simplified approach to transfer pricing compliance. A separate proposed transfer pricing directive was also issued on 12 September 2023 - the same date as the BEFIT proposal. The BEFIT transfer pricing rules only relate to compliance, whereas the transfer pricing directive relates to the substantive rules and has a broader scope, potentially covering the entire range of transfer pricing topics.

The BEFIT rules would apply for a minimum of five years. The proposal for a BEFIT directive will be sent to the European Parliament and the European Council. The European Parliament can suggest amendments to the proposal, but the European Council is not bound by these suggestions. The Council of the European Union and its working parties would engage in technical work on the proposal to potentially achieve a political agreement on the text of the BEFIT proposal that would have been revised and amended by the member states within the Economic and Financial Affairs Council (ECOFIN) configuration of the Council of the European Union.

As the BEFIT directive relates to direct taxation, unanimity within the European Council is required since taxation remains an element of the sovereignty of the member states, i.e. each EU member state has the veto power and may block the proposal. I’ve mentioned the previous CCCTB experience earlier where the proposals stalled for many years in the absence of unanimous agreement and lack of political momentum. Each country has its own taxation needs and seeks to encourage certain areas of activity within its jurisdiction, one size does not always fit all. Various political and economic factors could influence the possible adoption of the BEFIT proposal, such as upcoming European elections, the fiscal revenue needs of individual member states, current risks and uncertainty influencing the EU economy as a whole, and the EU’s growth momentum.

The Commission believes however that an agreement on the BEFIT proposal could be achievable given that it builds on the achievements of the OECD BEPS work which was agreed by 138 countries and jurisdictions on 11 July 2023. Time will tell on that one.

Please note this article first featured in the Business Post on Sunday, 1 October 2023 and was re-published kindly with their permission on our website.