New EU proposals on harmonised tax rules

On 12 September 2023, the European Commission presented its proposals for common rules on determining the corporate tax base for certain EU-based entities, and common rules for determining the transfer pricing approach for certain EU-based entities.

The proposed Business in Europe: Framework for Income Taxation (BEFIT) Directive aims to standardise how corporate tax bases are determined for EU-based entities that are part of a group with global consolidated revenues above a certain threshold. Profits will be allocated to Member States and taxed at their respective rates.

Some of the key points of the BEFIT proposal include:

• Applies to EU-based entities, including their permanent establishments located in EU Member States, and permanent establishments of non-EU companies located in EU Member States, based on revenue thresholds.
• Calculation of the tax base involves financial accounts adjusted for taxable income, excluded income, non-deductible expenses, and specific rules for depreciation and other adjustments.
• Profits and losses from intra-BEFIT group transactions are excluded from the tax base.
• Allocation of the tax base occurs in the first seven fiscal years post-implementation, using a baseline allocation percentage.
• Local adjustments are necessary for each BEFIT group member to their allocated taxable base.
• Proposed implementation by 1 January 2028, with application from 1 July 2028.

The Transfer Pricing Directive (TP Directive) aims to align the EU with OECD principles, introducing uniform rules for determining transfer pricing methods with the aim to harmonise and reduce compliance costs for businesses.

Some of the key points of the TP Directive proposal include:

• Introduces a simplified approach to transfer pricing during the initial seven fiscal years post-implementation.
• Assumes transactions are priced at arm's length if they fall within a low-risk zone.
• A traffic light system assesses transactions with associated enterprises outside the BEFIT group as low, medium, or high risk.
• BEFIT group members have access to benchmarks as a self-assessment risk tool.
• Proposed implementation by 31 December 2025, with application from 1 January 2026.

The European Commission intends to initiate public consultation processes for the two proposals, allowing stakeholders to provide feedback.