Business in Europe: Framework for Income Taxation (BEFIT)

On 18 May 2021, the European Commission adopted a new Communication on Business Taxation for the 21st century with the aim of promoting a robust, efficient and fair business tax system in the EU. You can read more about the Communication here. The Communication outlined five actions for corporate tax reform with the stated priorities of enabling fair and sustainable growth and ensuring effective taxation. One of these actions was a new Business in Europe: Framework for Income Taxation (known as BEFIT).

The Commission published a call for evidence for an impact assessment and launched a public consultation on proposed policy options for BEFIT on 13 October 2022. The Institute responded to the consultation in January 2023 outlining a number of significant concerns raised by members regarding the BEFIT proposal.

On 12 September 2023, the Commission adopted a package of initiatives intended to reduce the tax compliance costs for large, cross-border businesses in the EU. The package included a Proposal for a Council Directive on Business in Europe: Framework for Income Taxation (BEFIT) which provides for a new, single set of rules to determine the tax base of groups of companies. If adopted by the European Council, the BEFIT Directive would be implemented into the national law of Member States by 1 January 2028, with the rules applying from 1 July 2028. The Commission launched a public consultation on the proposed BEFIT Directive on 23 September. The Institute responded to the consultation in January 2024 outlining a number of significant concerns raised by members regarding the proposed Directive.

What is included in the BEFIT Proposal?

The BEFIT Proposal builds on the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) international agreement on a global minimum level of taxation i.e., Pillar Two of the Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and the EU Pillar Two Minimum Tax Directive adopted at the end of 2022.

BEFIT replaces the Commission’s Common Corporate Tax Base (CCTB) and Common Consolidated Corporate Tax Base (CCCTB) proposals, read more here. It includes the following:

Common rules to compute the tax base at entity level: All companies that are members of the same group would calculate their tax base in accordance with a common set of tax adjustments to their financial accounting statements.
Aggregation of the tax base at EU group level: The tax bases of all members of the group would be aggregated into one single tax base. This would entail cross-border loss relief.
Allocation of the aggregated tax base: By using a transitional allocation rule, each member of the BEFIT group would have a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years.

Who does BEFIT apply to?

The new rules would be mandatory for groups operating in the EU with an annual combined revenue of at least €750 million, and where the ultimate parent entity holds at least 75% of the ownership rights or of the rights giving entitlement to profit.

For groups headquartered in third countries, their EU group members would need to have raised at least €50 million of annual combined revenues in at least two of the last four fiscal years or at least 5% of the total revenues of the group.

The rules would be discretionary for smaller groups, which may choose to opt in as long as they prepare consolidated financial statements.

Sector-specific characteristics are reflected in certain parts of the proposal relating to international transport, shipping activities and extractive industries.

Tax base calculation and allocation under BEFIT

The tax base calculation would consist of a limited set of tax adjustments to the income as reported in the Financial Statements. Similar to Pillar Two, the starting point would be the accounting result from the Financial Statements which must be determined under one single accounting standard for the BEFIT group.

The Financial Statements of each BEFIT group member would need to be reconciled with the accounting standard of the ultimate parent entity (UPE), or if the group is headquartered outside of the EU, reconciled with the filing entity. The accounting standard must be accepted under EU law, which essentially means it must either be the national generally accepted accounting principles (GAAP) of one of the Member States or the international financing reporting standards (i.e. IFRS).

To allocate the aggregated tax base to those group members in which the BEFIT group maintains a taxable presence, firstly, the preliminary tax results of all members of the BEFIT group would be aggregated into a ‘single pool’ at EU group level, which would be considered the ‘BEFIT tax base’. The aggregated tax base would be allocated to each member of the BEFIT group based on a transition allocation rule, which would use each BEFIT group member’s percentage of an aggregated tax base calculated as the average of the taxable results in the previous three fiscal years.

The transitional allocation rule may pave the way for a permanent allocation method based on a formulary apportionment using substantive factors. In designing a permanent allocation method, the transitional solution would make it possible to take into account more recent County-by-Country Reporting (CbCR) data and information gathered from the first years of the application of BEFIT. It would also allow for a more thorough assessment of the expected impact of the implementation of the Two‐Pillar Solution on national and BEFIT tax bases. The Commission may propose a Directive to introduce a method for allocation of the BEFIT tax base using formulary apportionment based on factors.

Transactions with related parties outside of the BEFIT group

The proposal includes a simplified approach to transfer pricing compliance to apply to the allocation of profits between BEFIT group members and their associated enterprises outside of the BEFIT group.

The simplified approach would introduce a ‘traffic light system’ as a risk assessment tool for transactions between members of the aggregated BEFIT group and their associated enterprises outside of the BEFIT group. The traffic light system would apply to low-risk activities defined in Article 50: (i) distribution activities by low-risk distributors, and (ii) manufacturing activities by contract manufacturers. Transactions would fall within three risk zones i.e. low, medium, and high.

Administration of BEFIT

A One-Stop-Shop would allow one BEFIT-group member to file the group’s information returns with the tax administration of one Member State. Tax audits and dispute settlement would remain at the level of each Member State. In some cases, audits may need to be carried out jointly under the existing legislative framework.