COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the documents Proposal for a Council Directive on Business in Europe: Framework for Income Taxation (BEFIT) and Proposal for a Council Directive on Transfer Pricing

EN EN
EUROPEAN
COMMISSION
Strasbourg, 12.9.2023
SWD(2023) 308 final
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the documents
Proposal for a Council Directive
on Business in Europe: Framework for Income Taxation (BEFIT)
and
Proposal for a Council Directive on Transfer Pricing
{COM(2023) 532 final} - {SWD(2023) 309 final}
Offentligt
KOM (2023) 0532 - SWD-dokument
Europaudvalget 2023
Table of contents
1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT............................................................... 6
1.1. Business in Europe: Framework for Income Taxation (BEFIT).......................6
1.2. Framework for transfer pricing .........................................................................9
1.3. Introducing the initiative ...................................................................................9
2. PROBLEM DEFINITION ...................................................................................................................10
2.1. What are the problems?...................................................................................10
2.2. What are the problem drivers? ........................................................................12
2.3. What are the consequences of the problem? ...................................................13
2.3.1. High tax compliance costs...........................................................................13
2.3.2. Distortions in the market that influence business decisions........................14
2.3.3. Tax uncertainty and increase in disputes.....................................................15
2.3.4. Businesses are discouraged from expanding cross-border..........................19
2.4. How will the problem evolve? ........................................................................19
3. WHY SHOULD THE EU ACT? .........................................................................................................20
3.1. Legal basis.......................................................................................................20
3.2. Subsidiarity: Necessity of EU action...............................................................20
3.3. Subsidiarity: Added value of EU action..........................................................21
4. OBJECTIVES: WHAT IS TO BE ACHIEVED? ................................................................................22
4.1. General objectives ...........................................................................................23
4.2. Specific objectives...........................................................................................24
5. WHAT ARE THE AVAILABLE POLICY OPTIONS? .....................................................................25
5.1. What is the baseline from which options are assessed? ..................................26
5.2. Description of the policy options ....................................................................26
5.2.1. BEFIT..........................................................................................................26
5.2.2. Common approach to transfer pricing.........................................................35
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ............................................................36
6.1. Three Versions of the initiatives to be assessed ..............................................36
6.2. Scope: How many company groups could be affected?..................................39
6.3. Impact of the three Versions............................................................................40
7. HOW DO THE OPTIONS COMPARE?.............................................................................................50
7.1. Comprehensive Version ..................................................................................51
7.2. Light Version...................................................................................................52
7.3. Composite Version..........................................................................................54
7.4. Overall comparison and Coherence with other EU policies ...........................56
8. PREFERRED OPTION .......................................................................................................................58
8.1. BEFIT..............................................................................................................58
3
8.2. Common approach to transfer pricing.............................................................60
8.3. REFIT (simplification and improved efficiency)............................................61
8.4. Application of the ‘one in, one out’ approach.................................................61
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?...................................62
9.1. Monitoring.......................................................................................................62
9.2. Evaluation........................................................................................................65
ANNEX 1: PROCEDURAL INFORMATION.............................................................................................66
ANNEX 2: STAKEHOLDER CONSULTATION (SYNOPSIS REPORT).................................................72
ANNEX 2A: TARGETED CONSULTATIONS – COMPILATION OF INTERVIEW REPORTS............82
ANNEX 3: WHO IS AFFECTED AND HOW? .........................................................................................104
ANNEX 4: ANALYTICAL METHODS ....................................................................................................109
ANNEX 5: COMPETITIVENESS CHECK AND SME TEST ..................................................................117
ANNEX 6: THE OECD TWO PILLAR APPROACH ...............................................................................119
ANNEX 7: TRANSFER PRICING.............................................................................................................122
ANNEX 8: TERRITORIAL IMPACT ASSESSMENT – NECESSITY CHECK......................................136
4
Glossary
Term or acronym Meaning or definition
ATAD Anti-Tax Avoidance Directive
BEPS OECD/G20 Base Erosion and Profit Shifting Project
CbCR Country-by-Country Reporting
CCCTB Common Consolidated Corporate Tax Base
CIT Corporate Income Tax
CJEU Court of Justice of the European Union
Consolidated financial accounting
statements
These are financial statements of a group company in which the
financial information of the parent company and its subsidiaries are
presented as those of a single economic entity.
Deduction Deduction denotes, in an income tax context, an item which is
subtracted (deducted) in arriving at, and which therefore reduces,
taxable income.1
GAAP Generally Accepted Accounting Principles
GDP Gross Domestic Product
GloBE Rules Global Anti Base Erosion Rules
IFRS International Financial Reporting Standards
Intangible assets An intangible asset is an asset that is not physical in nature. Examples
include patents, copyright, goodwill, trademarks, and software.
Inventory Inventory or stock refers to goods that a business holds for the goal of
resale, production or utilisation
MAP Mutual Agreement Procedures
MNE Multinational enterprise
OECD Organisation for Economic Co-operation and Development
Profit distributions A pay out of cash or property from a corporation to a shareholder.
Provisions Provisions refer to any funds set aside from company profits to help
budget for liabilities or obligations
SME Small and Medium-Sized Enterprise
Tax adjustments Taxpayers can subtract certain expenses, payments, contributions, fees,
etc. from their total income
Tax depreciation A tax deduction that allows the taxpayer to recover the cost or other
1
https://www.oecd.org/ctp/glossaryoftaxterms.htm
5
basis of certain property over the time you use the property.
Tax treaty An agreement between two (or more) countries for the avoidance of
double taxation. A tax treaty may be titled a Convention, Treaty or
Agreement.2
Transfer pricing Transfer pricing refers to the terms and conditions surrounding
transactions within a multi-national company. This is explained in
Annex 7.
Unilateral downward adjustments In cross-border transactions, a downward adjustment is considered
“unilateral” when it is applied by one tax authority, whether or not there
has been a corresponding upward adjustment has been applied by the
State where the other party to the transaction is subject to tax.
2
https://www.oecd.org/ctp/glossaryoftaxterms.htm
6
1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT
As President Von der Leyen in her 2022 State of the Union Address said, “We need an enabling
business environment (…) as our future competitiveness depends on it”. It was announced in the
Communication on Business Taxation for the 21st Century in May 20213
that the European
Commission, drawing inspiration from the achievements in the context of the OECD/G20 Inclusive
Framework Two-Pillar proposals, will table a legislative proposal for a common corporate tax
framework for groups of companies in 2023. This is also included in the Commission Work
Programme 20234
, and it could be relevant from an own resource perspective, as set out in the 2021
Communication on the next generation of own resources for the EU Budget5
.
To address the current challenges related to corporate taxation in the internal market, particularly
with regard to corporate groups, this impact assessment covers a proposal known as ‘Business in
Europe: Framework for Income Taxation’, or ‘BEFIT’, and a complementary proposal to introduce
a common framework for transfer pricing Therefore, the impact assessment will look at:
a) laying down of a common set of rules for computing the tax base of primarily large groups
of companies in the EU (BEFIT) and,
b) integrating key transfer pricing principles, covering all transactions between associated
enterprises, into EU law, to put forward certain common approaches for Member States.
1.1. Business in Europe: Framework for Income Taxation (BEFIT)
BEFIT is not a new tax, but a harmonised framework to determine EU businesses’ taxable income
in the Member States where they are established. The rationale for this new initiative is
threefold.
Firstly, the idea to develop a harmonised corporate tax framework in support of the internal
market has consistently been part of the EU policy history and first appeared in policy documents
of the European Economic Community as early as the 1960s.
As we celebrate 30 years of the internal market, there are still no common rules for
calculating the taxable income of EU businesses, but 27 different national systems, making it
difficult and costly for companies to operate and grow and fully benefit from the internal
market. Complexity increases tax uncertainty and tax compliance costs as soon as businesses start
operating in more than one Member State. This unnecessarily discourages cross-border investment
in the internal market. It also puts EU businesses at a competitive disadvantage, especially when
compared to businesses operating in markets of a comparable size elsewhere in the world. The
discrepancies in the interaction of 27 corporate tax systems create an uneven playing field which
can cause distortions in the market and influence business decisions in investment and the financing
of projects. It also leads to loopholes and complexities that open opportunities for aggressive tax
planning or result in double or over-taxation. Simpler tax rules could help stimulate investment and
3
COM(2021) 251 final.
4
https://commission.europa.eu/strategy-documents/commission-work-programme/commission-work-programme-
2023_en
5
COM(2021) 566 final.
7
growth in the EU by reducing cross-border obstacles and freeing resources currently used for tax
compliance towards economic activity. In an increasingly globalised and digitalised economy and
an ever-closer integrated internal market, this remains of paramount importance.
Secondly, valuable insights gained from many years of Council negotiations and related
analysis of taxation files can now be used to design BEFIT. Long negotiations on files like the
first Parent-Subsidiary Directive (proposed in 19696
and adopted in 19907
), the Interest & Royalties
Directive (first proposed in the early 1990s8
and adopted in 20039
), and on the 201110
and 201611
CCCTB proposals, triggered valuable detailed technical analysis and a thorough exchange of
views. This contributed to enhancing EU expertise in the field and about half of the measures of the
ATAD12
sprang from these discussions. The discussions of the 2011 and 2016 proposals
concentrated on several items of the tax design that determine around 90% of the tax base.
It should be noted, though, that Member States also converged considerably in their approaches
during those negotiations. For example, the use of financial accounting statements to calculate the
taxable base, as envisaged by BEFIT, reflects this work by Member States. The same approach can
be found in the Pillar 2 Directive, which the Member States unanimously adopted in 2022 and
which follows the agreement reached internationally on the Two-Pillar Solution of the OECD/G20
Inclusive Framework13
. Pillar 2 sets a minimum effective corporate tax rate and to determine this,
the tax base is calculated starting from the consolidated financial statements of the group. The
BEFIT proposal takes inspiration from this breakthrough, building on concepts with which both
companies and Member States are already familiar to deliver further simplification for businesses
in the EU14
.
In addition, key concepts of the previous corporate tax initiatives have in the meantime been taken
up in other EU and international contexts. In 2020, the Council, the Parliament and the Commission
agreed that a common corporate tax base could be the basis for an additional new own resource that
the Commission will propose.15
In 2021, the Member States agreed to use formulary apportionment
6
COM/1969/6/FINAL, OJ C 39, 22.3.1969, p. 7–9.
7
Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent
companies and subsidiaries of different Member States.
8
SEC(90) 601 final; COM/90/571FINAL, OJ C 53, 28.2.1991, p. 26–29.
9
Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty
payments made between associated companies of different Member States.
10
COM(2011) 121/4 final.
11
COM(2016) 685 final; COM(2016) 683 final.
12
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly
affect the functioning of the internal market.
13
https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-
digitalisation-of-the-economy-october-2021.pdf -138 member jurisdictions (including all Member States that are part of
the OECD/G20 Inclusive Framework) have agreed to the Statement on a Two-Pillar Solution to Address the Tax
Challenges Arising from the Digitalisation of the Economy.
14
For a more detailed explanation on the two Pillars and their relations with BEFIT, see Annex 6.
15
Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European
Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well
as on new own resources, including a roadmap towards the introduction of new own resources.
8
for re-allocating taxable profits as part of Pillar 1 of the agreed statement on the Two-Pillar
Solution of the OECD/G20 Inclusive Framework16,17
.
Thirdly, the context for EU tax policy has changed significantly. Technological progress and
enhanced administrative capacity of Member State tax authorities have made the prospect of
implementing and managing an EU-wide tax framework a more efficient and feasible proposition.
Furthermore, in the wake of the COVID-19 crisis and in the context of economic uncertainty
caused by the Russian war of aggression against Ukraine, reliable and sustainable public revenues
are more important than ever. Other megatrends such as globalisation, digitalisation, climate
change, environmental degradation, an ageing population, and a transforming labour market also
require Member States to reflect on their tax mix and their priorities. For instance, while
globalisation and digitalisation can contribute to economic growth and help reduce tax compliance
costs, they may create new tax planning opportunities to manipulate and erode the tax base. In
response, the EU and Member States have progressively adopted a variety of anti-tax evasion and
avoidance measures. While these have been successful in addressing specific issues, they have
added layers of complexity to Member States tax systems that businesses have to navigate.
In view of the above, it has become more pressing for EU tax policy to ensure that Member
State tax bases are robust, sustainable and protected against abuse while reducing complexity
in the internal market. Accordingly, the Commission intends to propose a new, comprehensive,
more straightforward, and effective reform that will provide the Member States with a corporate tax
framework that is fit for this purpose. The proposal will integrate the lessons learned from previous
initiatives and reflect the changed context and tax policy landscape. More specifically, it will build
on the following elements of the design of the two Pillars. The BEFIT rules for the computation of
the tax base can: (i) draw inspiration from the way that the Pillar 2 Directive computes a tax base
for the purpose of verifying whether corporate tax was due at the minimum effective rate; and (ii)
build on the agreed approach of Pillar 1 for the allocation of taxable profits. These significant shifts
in the structure of international tax rules in recent years make the key building blocks of BEFIT
necessary to implement18
.
Since the Commission announcement in May 2021, the initiative has generally received support
from civil society. The European Parliament supported the rationale of the Commission’s proposal
on BEFIT when calling for the adoption of new legislative proposals in 2022-202319
. BEFIT
follows up on requests made by many stakeholders in the field of taxation at the Conference on the
Future of Europe. Finally, the Council of the European Union and the European Parliament agreed
16
Pillar 1 is the reallocation of taxing rights to market jurisdictions based on a formula. The OECD is currently
finalising the technical work to develop a Multilateral Convention to give effect to Pillar 1 rules. The Commission is
committed to present a legislative proposal to implement Pillar 1 within the EU once the OECD work are concluded.
For a more detailed explanation of the OECD Two Pillar Approach and its interactions with BEFIT, see Annex 6.
17
Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy –
8 October 2021, OECD/G20 Base Erosion and Profit Shifting Project.
18
For a more detailed explanation of the OECD Two Pillar Approach, please see Annex 6.
19
European Parliament resolution of 10 March 2022 with recommendations to the Commission on fair and simple
taxation supporting the recovery strategy (EP follow-up to the July Commission’s Action Plan and its 25 initiatives in
the area of VAT, business and individual taxation) (2020/2254(INL))
9
as part of the 2020 Interinstitutional Agreement20
that the Commission will present a proposal for
new own resources linked to a common corporate tax base, which could build on BEFIT.
1.2. Framework for transfer pricing
Most Member States are also members of the Organisation for Economic Cooperation and
Development (OECD) and are therefore committed to follow the OECD principles and
recommendations. Article 9 (Associated Enterprises) of the OECD Model Tax Convention on
Income and on Capital sets out the conditions for primary adjustments and for corresponding
adjustments where economic double taxation arises. Although article 9 endorses the application of
the arm’s length principle it does not set out detailed transfer pricing rules.
Over time the OECD has developed the so-called OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations (OECD TP guidelines) which provide guidance
on the meaning and application of the arm’s length principle, primarily for OECD member
countries to use in resolving transfer pricing disputes under tax treaties. Out of the 27 Member
States, 23 are member of the OECD members (Malta, Cyprus, Bulgaria and Romania are not
members of the OECD) and therefore, politically committed to follow the OECD TP guidelines to
interpret the arm’s length principle. However, despite the political commitment, the status and role
of the OECD TP guidelines currently differs from Member State to Member State. In addition, at
the level of the Union the transfer pricing rules are currently not harmonised through
legislative acts. The domestic legislation in all Member States provides for some degree of a
common approach on the basic principles by following the arm’s length principle, but the specific
rules and applications are not identical across Member States. This causes profit-shifting and tax
avoidance opportunities, litigation and double taxation, as well as high tax compliance costs.
1.3. Introducing the initiative
The initiative is twofold and provides a holistic, coordinated and simplified framework to
determine businesses’ taxable income across the EU. More specifically, the proposals involve a
common set of rules for the corporate income tax base of companies within large groups. This is a
new framework that replaces the current 27 different ways for determining the taxable base in the
national corporate tax systems for the groups of companies that fall within its scope. It will consist
of common rules for computing the tax base of each group member and subsequently, aggregating
and allocating the corporate tax base of the group across the EU. The transfer pricing aspects of this
initiative are meant to endorse the arm’s length principle and the OECD transfer pricing guidelines
in EU legislation and also lay a steppingstone for Member States to agree to common approaches to
transfer pricing21
in the future. The aim is to ensure consistency in the way Member States treat
20
Interinstitutional Agreement of 16 December 2020 between the European Parliament, the Council of the European
Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound
financial management, as well as on new own resources, including a roadmap towards the introduction of new own
resources, EUR-Lex - 32020Q1222(01) - EN - EUR-Lex (europa.eu).
21
Transfer pricing refers to the terms and conditions surrounding transactions within a multi-national company. It
requires corporate taxpayers to determine the price at which transactions between associated enterprises must be set, in
order to reflect the value of a comparable transaction between unrelated parties. In this way, the income should be
allocated in a manner that is reasonable in the market. Currently, each Member State has its own transfer pricing rules
and practices. This is explained in more detail in Annex 7.
10
transactions between associated enterprises and, thereby, prevent profit shifting, increase tax
transparency, and reduce tax compliance and litigation costs for companies.
While the approach is clear, the specific design for the common framework on BEFIT and transfer
pricing is associated with various policy options. This report assesses the impact of the policy
options by reference to three combinations of the options under each of the two aspects and
concludes on the preferred Version (preferred package of options).
2. PROBLEM DEFINITION
This section defines and analyses the problems and their drivers and assesses the evolution of these
problems in the absence of EU policy intervention. The ‘Problem tree’ in Figure 1 presents the
context, the drivers, the problem and the direct and indirect consequences that the initiative will be
designed to address.
2.1. What are the problems?
The current systems of corporate income taxation in the EU give rise to high complexity and an
uneven playing field for businesses. It was confirmed by stakeholders in the public consultation and
the Call for evidence that this translates into businesses facing high compliance costs, barriers to
cross-border operations, high risks of double or over-taxation leading to tax uncertainty and
frequent, time-consuming legal disputes. The stakeholder consultations are summarised in the
synopsis report in Annex 2. For instance, a large business association explained that while the
international community cooperated on combatting tax fraud and evasion and EU directives aim to
coordinate and strengthen tax rules, the implementation has not been consistent and coordinated
among Member States which has led to misaligned tax bases in the EU, increased administrative
burdens and significant tax compliance costs for businesses. A large firm also pointed out that tax
disputes related to intra-EU transfer pricing and withholding tax elimination have increased.
These tax barriers for businesses impede the proper functioning of the internal market and hamper
the prospect for achieving its potential in terms of efficiency gains. As a result, the competitiveness
of the internal market is undermined. The problem that the initiative aims to address is therefore
complexity and an uneven playing field and its inherent consequences as detailed below.
11
Figure 1 – Problem Tree
Tax complexity is an inherent feature of 27 jurisdictions, each designing their own rules according
to national or regional circumstances and preferences. As governments try to adapt to new
economic realities (e.g., globalisation and digitalisation) and to the emergence of new business
models, the fragmented response among Member States has led compliance with more than one tax
system in the internal market to become more complex. In addition, the unpredictability and
inconsistency of tax administration practices across 27 Member States, as well as the limited
effectiveness of dispute prevention and resolution mechanisms, contribute to tax complexity.
Recent research, including the Tax Complexity Index, indicates that tax complexity has increased
significantly in the past years.22
In addition to the multitude of design rules of each system as
described below, the increase can be in part explained by the introduction at global level of
measures to tackle tax fraud and evasion and aggressive tax planning. Transfer pricing regulations,
in particular, appear to drive much of the complexity which relates to documentation requirements
and the ambiguity and interpretation of these regulations. Moreover, the complexity of corporate
tax systems is further associated with the multitude of legal provisions on anti-abuse rules,
investment incentives and corporate reorganisations. Recent policy responses to both the COVID-
19 crisis and to the economic uncertainty caused by the Russian war of aggression against Ukraine
may add to the complexity.
A related problem is the uneven playing field. Beyond corporate tax rates and incentives,
corporate tax systems in the EU have divergent features, for instance in the field of tax depreciation
or tax-deductible items, and businesses operating across the EU may face stricter or more flexible
tax interpretations depending on the Member State. Each of these systems lays down disparate
administrative requirements for compliance and will interact differently with other tax systems, for
instance, by way of a multitude of bilateral tax treaties. It follows that the resulting tax liability
22
See for example, Hoppe, Schanz, Sturm, Sureth-Sloane (2021): The Tax Complexity Index – A Survey-Based
Country Measure on Tax Code and Framework Complexity, European Accounting Review, DOI:
10.1080/09638180.2020.1852095.
12
computations and the required resources to comply with tax obligations tend to vary from one
Member State to another. These differences lead to an uneven playing field for businesses across
the EU.
2.2. What are the problem drivers?
Different national tax systems and many bilateral tax treaties
Corporate income taxation in the EU is characterised by 27 different corporate income tax systems
and 27 distinct tax administrations. Each of these systems computes the national corporate tax base
of businesses that are established in the respective Member State. A business that operates in all 27
Member States must therefore have the capacity to cope within 27 systems of corporate tax laws
before it can file its 27 different tax returns. In addition, requirements and procedures for filing
corporate income tax returns vary across Member States.
All systems have one common aim, i.e., to define the rules to arrive at the taxable results (profit or
loss) for each taxpayer. Gross income (revenues) is generally taken as the starting point, on which
tax laws allow certain expenses to be deducted. Among these deductible expenses, tax depreciation
and amortisation of fixed assets generally have the largest impact. Additionally, there are
adjustments for items of the base which are relevant for longer than a year, such as long-term
contracts or provisions for future risks, and measures to take account of inflows and outflows of
passive income, e.g., dividends, interest, royalties and rentals. While the aim is the same, the
application of these items (e.g., rates, caps) can vary substantially across Member States. By way of
example, as shown in the Annual Report on Taxation 202323
, statutory tax rates vary among
Member States from 10% to 31.5%. The model based effective tax rates which consider, amongst
other things, tax support schemes put forward by governments vary from 9% to 29%. The same
Report shows how various tax incentives vary across countries. Depreciation rates can vary
significantly across countries by type of asset: e.g., just for fixed tangible assets it ranges from 2
years to 10 years and some countries use the so-called useful life with minima and sometimes
maxima, while others use accelerated methods.
For cross-border businesses, which have income and expenses in multiple countries, each country
also has to apply a method to determine which part of the income they will tax, and whether they
allow foreign expenses to be deducted. The common method at national level for allocating the
income of cross-border businesses is transfer pricing.24
Each country currently sets a method
nationally,25
which means the same income may be taxable multiple times (or may not be taxed at
all).26
Foreign expenses, on the contrary, are rarely deductible. Cross-border loss relief is largely
absent from national tax systems.
23
See here https://taxation-customs.ec.europa.eu/taxation-1/economic-analysis-taxation/annual-report-
taxation_enAnnual Report on Taxation (europa.eu) for a detailed analysis of tax systems across Member States
24
Transfer pricing is explained in Annex 7.
25
With the exception of common requirements that stem from CJEU case law, in the case of transfer pricing.
26
This is regardless of the method chosen. Double taxation and double non-taxation are possible when countries have
different transfer pricing practices, when one country uses transfer pricing and another uses a different allocation
method, as well as when countries use different formulae.
13
Mismatches in the interaction between different national tax systems can result in double or over-
taxation, or tax evasion and avoidance opportunities. Countries have also adopted a range of
measures to address these issues, such as bilateral treaties, exchange of information, anti-abuse
measures, and dispute prevention and resolution provisions. These are therefore also common
features in national tax systems, but as researchers indicated in the public consultation, a
fundamental concern remains regarding cross-border inconsistencies compared to the consistency
of tax regimes for purely domestic situations.
In sum, although each of the national systems may feature similar elements for calculating the tax
base, the legal qualification and practical application can differ widely. National rules have had
different trajectories, have been subject to frequent changes to address variable political objectives,
and although bilateral tax treaties and anti-abuse measures are often comparable and based on
model rules, they have resulted in a multitude of rules that differs for each country. Hence,
businesses that operate in a cross-border environment involving numerous Member State
jurisdictions do not only have to comply with a complex combination of national legislation, but
they have to deal with a bilateral international approach to allocating income through tax treaties.
This illustrates only part of the source of complexity that companies must deal with.
For some companies, the need to navigate such complexity may constitute a significant barrier to
do business. Almost two thirds of the public consultation survey respondents agree or strongly
agree that the current situation with 27 different national corporate tax systems gives rise to
challenges in the internal market. The next sections look at the problem and its consequences in
more detail.
2.3. What are the consequences of the problem?
There are several negative direct and indirect consequences arising from tax complexity and an
uneven playing field.
2.3.1. High tax compliance costs
The variety of features that permeate national tax systems, the discrepancies in the application and
interpretation of such features, as well as differences in general administrative procedures across
Member States have an impact on the tax compliance burden. A taxpayer has to bear an overall
burden from the tax system, which consists of i) the actual amount of tax due, plus ii) the costs
incurred to comply with the applicable tax regulations (e.g., costs associated with legal and
accounting advice and time to file tax returns which multiply with the number of countries where
the company has its activity). From the economic perspective of a taxpayer, administrative costs
related to tax compliance can be regarded as an efficiency loss. This is because administrative tax
compliance costs reduce the profits of businesses and increase the costs for tax administrations
without leading to higher tax revenues. Complex tax compliance also creates broader economic
costs and inefficiencies that do not immediately materialise as expenses: legal uncertainty and non-
transparent systems can be significant obstacles to investment and thus hinder economic growth.
Compliance costs can, therefore, be considered as an inherent waste of resources and a ‘deadweight
loss’ which is undesirable for the entire society.
Even if one looks only at the directly related expenses, tax compliance costs for businesses are
found to be high. A comprehensive survey-based study presenting an extensive analysis of the
administrative costs to comply with tax obligations (tax compliance costs) has been carried out on
14
behalf the European Commission (2022).27
This study estimates the administrative burden28
of tax
compliance for small and large businesses in Member States and the United Kingdom and finds that
‘differences in the broader public administration of the countries do have an impact on the burden
of compliance’. In general, businesses incur an annual cost in meeting their tax compliance
obligations that amounts to 1.9% of their turnover. Businesses in these 28 countries spend an
estimated annual amount of around EUR 204 billion to comply with their tax obligations (tax
compliance costs for all types of taxes). Furthermore, tax compliance costs have not declined over
time. Total corporate tax compliance costs increased significantly (i.e., 114%) from 2014 to 2019.
Tax compliance costs are positively correlated with cross-border activities. This is because in such
a context, two or more different sets of national tax rules would have to be applied in addition to
possible common European and international norms. To demonstrate, a multivariate regression
analysis was carried out on the above-mentioned survey’s firm-level data. This is outlined in Annex
4. It shows that, everything else being equal29
, firms crossing borders will have significantly higher
CIT related compliance costs. However, the effect of going international on compliance costs
strongly interacts with the availability of a ‘simplified tax regime’ (as explained in Annex 4). Those
are tax rules which are less complicated and easier to comply with, relative to regular CIT tax rules.
Cross-border operating firms could reduce their CIT related compliance costs significantly only if
they are subject to a simplified tax scheme. In this case, their compliance costs are one third below
the cost of those firms which are not subject to simplified schemes, all other firm characteristics
being the same. Simplified tax rules therefore offer a significant premium for firms operating in
more than one jurisdiction. This argues for a comprehensive EU-wide corporate tax reform, making
some tax rules common to groups of firms and making it more straightforward and less costly for
firms to comply with these rules.
2.3.2. Distortions in the market that influence business decisions
The 2019 Flash Eurobarometer 507 “Businesses’ attitudes towards corruption in the EU”30
looked
at how respondents agree with the statement “The complexity of administrative procedures is a
problem when doing business”. For the majority of Member States (17/27) more than 50% of their
businesses agree with this statement, for several (12) it is more than 60% and in 4 Member States
more than 75% of businesses agree with this statement. To the extent that tax compliance costs are
associated with administrative procedures and with calculating and filing tax returns, these figures
could be a proxy for how businesses feel about tax compliance costs and in the way they influence
businesses decisions.
Indeed, as businesses grow larger and expand their operations, they need to make investment
decisions, including on where to continue their expansion. In an increasingly integrated economy,
such decisions can be numerous. The statistics of Country-by-Country Reporting (CbCR), for
27
European Commission, Tax Compliance costs for SMEs: An update and complement” Final Report by VVA and
KPMG, Luxembourg: Publications Office of the European Union, 2022.
28
The administrative costs consist of two different cost components: the business-as-usual costs and administrative
burdens. While the business-as-usual costs correspond to the costs resulting from collecting and processing information
that would even be done in the absence of any legislation, administrative burdens stem from the part of the process
which is done solely because of a legal obligation.
29
The analysis controls for different firm sizes and differences firms’ country- and sector-related specificities.
30
See Businesses' attitudes towards corruption in the EU - Publications Office of the EU (europa.eu)
15
example, reveal that in 2018 a total of 29,500 MNE groups worldwide reported operations affecting
174,800 entities in the EU. Thus, if one counts only the entities involved in CbCR, there is an
average of at least six EU entities per group, so that MNEs would on average have to comply with
six different sets of corporate income tax rules.
These businesses, if and when they invest, have to undergo costly and time-consuming
administrative procedures with the tax authority of each jurisdiction where they have a taxable
presence. As said, the overall tax liability of groups usually has to be established in accordance
with a complex mix of national tax rules which, depending on the international presence of the
group, can engage more than one national system. This does not only require businesses to consider
different tax rates and incentives, but also up to 27 different tax bases in the EU, with sometimes an
unclear compilation of exemptions and tax expenditures. In addition, the tax treatment of a business
can, independently from tax rates, vary significantly depending on the combination of Member
States in which it is active, and a study has found that compliance costs in countries with higher
compliance costs can be up to 3 times higher than in countries with the lowest costs31
. This
complexity increases with the number of Member States where businesses are active, which can be
many for large groups.
Consequently, the design of each national tax system can influence the decision to invest and where
and how much to invest, and in turn, it affects the level playing field in an integrated market. Put
simply, some businesses may be inclined to invest in a particular Member State based mainly on
the applicable corporate tax system, rather than on non-tax but important economic factors (e.g.,
skills, infrastructure, etc.), which can result in economic inefficiencies.
These differences could be associated with the observed uneven distribution of net inward and
outwards FDI stock as a share of GDP across the EU (Annual Report on Taxation, 2023). As
explained there in more detail, in some countries the FDI stock can be a lot higher compared to
their GDP. While much may be explained by economic reasons, part may be explained by tax
complexity and differences in tax treatment.
In sum, while in many other areas, there is significant progress in EU law to ensure that businesses
can operate in the internal market under common standards, the proliferation of different corporate
tax systems can still lead to distortions in investment decisions by businesses. By contrast, if there
was a single set of corporate tax rules in the internal market for the computation of the tax base,
such distortions could be significantly mitigated or avoided altogether.
2.3.3. Tax uncertainty and increase in disputes
Another consequence of complexity is tax uncertainty and the risk of double taxation and/or over-
taxation, which results in tax disputes. This section first describes how double and over-taxation
remain a problem. Next, it looks at legal rulings and the number of disputes to demonstrate that this
remains a significant challenge to companies with associated costs.
31
See FISC subcommettee SME tax compliance costs - IPOL_STU(2023)642353_EN.pdf
16
2.3.3.1. Double taxation
Double taxation can occur in the context of cross-border business restructurings and payments for
which the state of destination does not fully relieve the tax paid in the state of origin. The absence
of clear obligations, in particular when it comes to withholding taxes and taxes on capital gains,
may also give rise to different interpretations resulting in double taxation.
Another area with an inherent risk of double taxation is transfer pricing. According to the current
international standard, i.e., the arm’s length principle, cross-border transactions between entities of
the same group must be taxed on the same basis as comparable transactions between independent
enterprises under comparable conditions. While double non-taxation in this area, an equally
undesired outcome, is primarily dealt with through rules against aggressive tax planning, double
taxation could occur if one Member State unilaterally adjusted the price set by a company on a
cross-border intra-group transaction upwards, without the other Member State making an
appropriate corresponding adjustment downwards. Feedback from the public consultation also
included that the complexities of transfer pricing may even result in higher taxes for businesses
than estimated. This also leads to tax disputes.32
In the impact assessment to the Directive on tax
dispute resolution mechanisms,33
the total amount of tax involved in disputes pending at the end of
2014 was estimated at EUR 8 billion in the area of transfer pricing, whereas the total amount of all
cases was EUR 10.5 billion. This corresponded to 3% of the total corporate income tax levied in the
EU, which can give an idea of the magnitude of this issue. Recent studies also confirm that legal
costs and the unilateral application of transfer pricing rules negatively impact investment and
distort capital allocation.34
Regarding the overall prevalence of double taxation, 94% of corporate taxpayers that participated
in a public consultation by the European Commission indicated that they had encountered a double
taxation dispute.35
This showed that, despite the existence of EU law instruments that aim to
address double taxation36
and bilateral tax treaties37
, the risk of double taxation is a significant
problem for many businesses with cross-border activity. While bilateral tax treaties can resolve
some of the double taxation occurrences, the heterogeneity among these treaties and differences in
32
For numbers, see: https://taxation-customs.ec.europa.eu/taxation-1/statistics-apas-and-maps-eu_en
33
SWD(2016) 343 final.
34
E.g., R. De Mooij and L. Liu (2018), ‘At a cost: the real effects of transfer pricing regulations’; S. L. Teles, N.
Riedel, K. Strohmaier (2022) ‘On the Real Consequences of Anti-Profit Shifting Laws: Transfer Price Documentation
Rules and Multinational Firm Investment’.
35
European Commission (2011). Summary Report of the Responses Received to the Commission's Consultation on
Double Taxation Conventions and the Internal Market See section "Main Conclusions" - Annex A.
36
The legal instruments applicable in this area are: COUNCIL DIRECTIVE 2011/96/EU of 30 November 2011 on the
common system of taxation applicable in the case of parent companies and subsidiaries of different Member States
(recast); COUNCIL DIRECTIVE 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest
and royalty payments made between associated companies of different Member States; COUNCIL DIRECTIVE
2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions,
transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the
registered office of an SE or SCE between Member States (codified Version).
37
A tax treaty, also called double tax agreement (DTA) is an agreement between two countries to avoid or mitigate
double taxation. Such treaties may cover a range of taxes; however, the most common ones are in relation to income
and capital taxes, including in respect of companies. Tax treaties tend to reduce taxes of one treaty country for residents
of the other treaty country to reduce double taxation of the same income. Many tax treaties were already in place when
the public consultation was conducted in 2010.
17
their interpretation and application could also give rise to double taxation. In addition, although
almost all Member States concluded bilateral tax treaties with each other, some gaps and
mismatches remain. Some Member States have terminated their bilateral tax treaties. Treaty
networks have been usefully updated with the OECD/G20 Base Erosion and Profit Shifting Project
(BEPS) Action 6 and the Multilateral Convention for Implementing Tax Treaty Related Measures
to Prevent Base Erosion and Profit Shifting, but this has also increased complexity and thereby
uncertainty.
2.3.3.2. Risk of over-taxation
The limited availability of loss relief38
, including cross-border loss relief between Member States,
leads to taxation of business profits which may not always reflect the overall result of the group’s
activities. The non-availability of cross-border loss relief can therefore result in over-taxation.
Cross-border relief is currently mainly available in specific and very limited circumstances
involving “final” losses within the meaning of CJEU case law39
.
In most cases where a business operates in two or more Member States, it is prevented from
utilising losses incurred in another Member State. It follows that a business may turn out to be more
highly taxed, compared to if that business had set up the same operations in one Member State
only, even if there can be legitimate business reasons for doing so. For instance, because of location
and available workforce, it could be better for a business to import and manufacture goods in one
Member State but distribute it in another Member State. The contracts and transfer prices between
the two group members can be stable, while maybe the cost of importing the goods increases
significantly at some point. In this situation, the profits from the selling the final products may
perhaps not be set off against the losses from importing the materials. In the same vein, it can thus
be concluded that such limitations can distort investment decisions and the effective organisation of
groups operating in the internal market (cf. section 2.3.3).
2.3.3.3. Increase in tax disputes
The risk of double taxation and over-taxation for businesses operating cross-border leads to a lack
of tax certainty due to possible tax disputes between tax administrations of different Member
States in cases where they take different views in relation to the treatment of a specific transaction
within their corporate tax system. To increase their tax certainty, some businesses seek to obtain
tax rulings from a tax authority in respect of the treatment of certain transactions, including cross-
border arrangements. However, if the tax ruling is unilateral, other Member States concerned may
still challenge the agreed treatment of such transactions. Therefore, even when a unilateral tax
ruling is obtained, there is a real risk of tax disputes and possible double or over-taxation.
The importance of tax disputes is attested by the instruments that have been put in place, and are
frequently used, to try to resolve them. For example, the EU Arbitration Convention40
established
38
Loss relief is a mechanism where a taxable loss suffered by a group company can be surrendered to another company
of the same group, in order to offset/reduce taxable profits of the latter company.
39
Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes) (Case C-446/03), 13 December 2005 [2005]
I-10837.
40
Convention of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of
associated enterprises (OJ L 225, 20.8.1990, p. 10).
18
since the 1990s is a non-binding procedure to resolve transfer pricing disputes between Member
States. As shown in Figure 2, the number of Mutual Agreement Procedures (MAP) between
Member States under the Arbitration Convention is still increasing, which evidences that double
taxation within transfer pricing is still a relevant issue.41
Figure 2 – Mutual Agreement Procedures (MAPs) under the Arbitration Convention
Additionally, the Directive on tax dispute resolution mechanisms42
is a more recent hard-law
instrument which can be used on the taxpayer’s initiative. It provides legal certainty that certain
disputes will be resolved within a given timeframe and covers, amongst others, transfer pricing
disputes. Although dispute resolution mechanisms significantly facilitate the resolution of disputes,
they do not prevent such disputes from occurring and often require a long timeframe before the
parties reach an agreement. The root of the problem is therefore linked to the fact that a dispute
arises in the first place.
For example, in 2021, there were some 2,300 ongoing MAPs43
to settle disputes on questions of
transfer pricing. According to the OECD, on average, these procedures take almost three years, and
only half of them close with a full agreement.44
Today, disputes associated with transfer pricing
tend to be extremely lengthy (they may extend for over a decade), time-consuming and costly.
Costs include those for staff of legal departments in companies, but also costly external legal
advice. In 2017, the 2,400 firms captured by the above-mentioned survey had, on average, costs for
outsourcing of compliance activities of more than EUR 4,000 per firm. For litigations in particular,
the costs are a multiple of that amount. For example, German tax advisors could charge EUR 150
per hour.45
A 40-hour week of work would then cost EUR 6,000, potentially resulting in a total cost
per procedure of almost EUR 1 million if one assumes a duration of three years. Even this is a
41
European Commission, Statistics on APAs and MAPs in the EU (europa.eu). The UK is excluded. See also: Mutual
Agreement Procedure Statistics 2021 per jurisdiction - Inventory - OECD.
42
Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union.
43
Included in the numbers shown in Figure 2.
44
OECD, Multiannual Agreement Procedure Statistics.
45
The fees for charges for tax advisors are regulated in many countries. In Germany, for example, the schedule of fees
for tax advisors (Vergütungsverordnung) envisages a fee of up to EUR 75 per half an hour. Each week of work (40
hours) would then cost EUR 6.000.
0
500
1000
1500
2000
2500
3000
2016 2017 2018 2019 2020 2021
Total number of Mutual Agreement Procedures (MAPs)
Opening inventory on 1 January + cases initiated during that year
19
lower-bound estimate as hourly fees for lawyers are usually much higher. Moreover, costs of
litigation also include the teams in national tax administrations handling these cases.
2.3.4. Businesses are discouraged from expanding cross-border
One specific distortion that is of particular importance in the context of the internal market is the
fact that complexity, and as a consequence a high tax compliance burden and tax uncertainty
leading to potential litigation, hampers cross-border expansion altogether. In other words,
complexity acts as a barrier for the expansion of businesses across borders in the internal market.
Especially smaller groups may be affected by this when they wish to further develop their business,
but also larger firms may for instance decide to concentrate their investment in a few jurisdictions
to avoid dealing with many administrative or regulatory rules, including tax rules, while
economically, it could be more interesting to spread operations. As a result, there may be less cross-
border activity in the internal market and less direct competition between businesses. This in turn
may impact negatively on innovation, investment, employment and growth in the EU. It would also
hinder EU competitiveness vis-à-vis other global trading partners.
2.4. How will the problem evolve?
If no action is taken at the level of the EU to bring more simplification in the tax rules notably those
regarding the calculation of the tax base for the taxpayers with extensive cross-border activity, the
situation just described will persist, i.e., large tax compliance costs and high uncertainty and
litigation costs, which are a deadweight loss and which can discourage expansion within the
internal market and potentially inward foreign investment. Businesses report legal certainty and
reduced complexity as important matters for economic decisions and wish to look at the internal
market as one set of rules for compliance. While in some other areas, there is significant progress to
simplify/converge in the definition of rules/standards, in what regards direct taxation complexity
remains very significant as just described.
Moreover, the above discussed issues will not be prevented by existing EU policies. The Parent-
Subsidiary Directive was adopted in the early 1990s, to eliminate double taxation of profits
distributed by a company resident in one Member State to a parent company resident in another
Member State. The Interest and Royalty Directive serves the same purpose. More recently, in 2017,
rules on hybrids have been added to the Anti-Tax Avoidance Directive (ATAD) to deal with
mismatches leading to double non-taxation where there is a different legal qualification of the same
transaction between two Member States. However, these pieces of legislation do not cover the full
range of issues, as transfer pricing compliance remains burdensome and expensive. This can be
witnessed by the continued proliferation of transfer pricing expert advice in the legal and consulting
profession. Disputes also remain prevalent and lengthy. In addition, within a group, some
companies may be profitable and others loss-making in a certain tax year. In the current context,
losses incurred in one Member State cannot be used against the profits of another company within
the same group. This problem will continue to result in a risk of over-taxation.
Finally, it is important to mention that the status quo would be inconsistent with recent
developments in the field of corporate taxation taking place at the international level, such as the
OECD/G20 Inclusive Framework Two-Pillar Approach. The most recent example is the Pillar 2
Directive, as explained above and in Annex 6. Without EU intervention, large groups would have
to go through uniform calculations worldwide to compute at which level they pay corporate tax but
20
within the internal market, they would still need to comply with multiple different rules for
computing their tax liability in the first place.
3. WHY SHOULD THE EU ACT?
3.1. Legal basis
The legal basis for this initiative is Article 115 of the Treaty on the Functioning of the EU (TFEU).
This provision allows for the approximation of laws of the Member States, which directly affect the
establishment or functioning of the internal market. The initiative assessed here falls in the field of
direct taxation and possess an aspect of primarily cross-border activity.
The rules of this initiative will provide a single corporate tax rulebook for the calculation of the tax
base which will mainly be addressed to large groups of companies with taxable presence in the EU.
As such, it will simplify tax rules for businesses in the internal market and is expected to stimulate
investment and growth and contribute to ensuring more sustainable tax revenues for Member
States. In addition, the framework for transfer pricing focuses on the practice of adjusting the price
of transactions between associated enterprises and this refers to inherently cross-border operations.
The initiative therefore proposes changes to the status quo that can have a decisive and direct
impact on improving the functioning of the internal market, by aiming to eradicate distortions. It
simplifies existing rules as well as addresses complexity and its consequences, including tax
compliance costs and tax uncertainty.
3.2. Subsidiarity: Necessity of EU action
In accordance with the subsidiarity principle laid down in Article 5(3) TFEU, action at EU level
should be taken only when the aims envisaged cannot be achieved sufficiently by Member States
acting alone and in addition, by reason of the scale or effects of the proposed action, can be better
achieved by the EU.
Today’s business models increasingly involve economic groups that operate globally, including
across more than one Member State within the EU. In their conduct, groups have to adhere to
different corporate tax systems in the 27 Member States. This is because the current framework of
uncoordinated action, planned and implemented by each Member State individually, results in
persisting fragmentation and complexity. This creates a serious impediment to business activity in
the internal market.
Indeed, different country-specific rules imply high compliance costs for businesses active in cross-
border operations within the internal market, as they must comply with various legal frameworks.
This creates barriers; such a large administrative burden and tax uncertainty that discourage cross-
border commercial activity. In addition, complexity associated with dealing with multiple tax
administrations can give rise to lengthy and costly legal disputes and result in double or over-
taxation, which again discourage cross-border investment. This situation is exacerbated by the fact
that Member States’ practices of applying the internationally agreed transfer pricing standards tend
to vary (see Table in Annex 7). Such complexity and its consequences would be significantly
reduced if businesses could benefit from a single EU-wide set of corporate tax rules, and this were
coupled with closer coordination in applying the existing transfer pricing standards.
21
An EU-wide common set of rules would significantly limit the room for mismatches and, as such,
address this problem in a comprehensive manner. The existence of 27 disparate corporate tax
systems designed and managed at the national level inevitably overburdens compliant taxpayers
and results in divergent tax treatments due to mismatches or unintended, different interactions
between tax systems. This can limit sustainable growth across the EU because it can impede
competitive economic activity and investment, including cross-border, and in turn limit tax
revenues to be used for public expenditure. An EU-wide common set of rules would significantly
limit the room for mismatches and, as such, address this problem in a comprehensive manner.
These problems are common to all Member States and cannot be effectively addressed by disparate
national action. In fact, as they result from the very fragmentation and diversity of tax systems,
national uncoordinated measures that would be put in place might have undesirable implications by
adding further complication and forcing businesses to incur extra costs. In this context, an EU-wide
initiative providing for a common set of rules would be effective in addressing such problems.
Similarly, while better cooperation between tax administrations may be beneficial to address some
of the problems, this approach is mainly bilateral and can therefore be effective only to a limited
extent. While double or over-taxation can indeed be prevented by double taxation conventions
between Member States, such frameworks are corrective in that they intervene on the assumption
that it would otherwise occur, and when it does occur, dispute resolution processes are lengthy and
costly, as explained above. The approach is also of limited effectiveness when it comes to groups
that operate in more than two Member States. Therefore, an EU-wide initiative is needed to be able
to tackle the origin of double or over-taxation, or other forms of tax uncertainty, in the EU. An EU
system can have technical features, such as the aggregation of the tax bases of the EU members of a
group, that will eliminate the risk of double taxation and disputes. Moreover, an EU-wide platform
such as the BEFIT Teams (explained below), which gathers tax inspectors from all concerned
Member States, is also necessary to be able to provide early certainty instead of lengthy procedures.
The initiative assessed here aims to simplify the currently complex rules for corporate taxation in
the internal market that result from the co-existence and interaction of 27 national and disparate
corporate tax systems. Adopting a common approach would be the most effective way to correct
the current distortions in the functioning of the internal market and achieve the desired outcome.
Since the problem is primarily of a cross-border nature, it can only be tackled by laying down
legislation at the EU level. This initiative is therefore in line with the subsidiarity principle,
considering that individual uncoordinated action by the Member States would only add to the
current fragmentation of the legal framework for corporate taxation and fail to achieve the intended
results. A common approach for all Member States would have the highest chances of achieving
the intended objectives.
3.3. Subsidiarity: Added value of EU action
Action at the EU level would bring significant benefits to both businesses and tax administrations.
Most key features of the initiative, such as a simplified calculation of the tax base and the allocation
of aggregated profit to the eligible group members as well as a coordinated approach to transfer
pricing, have a cross-border underpinning and could only be addressed, with an added value, within
the context of a single set of rules. Common substantive corporate tax rules are also a prerequisite
for administrative simplifications, such as a ‘one-stop-shop’ for groups of companies operating in
the EU.
22
As explained above and in Annex 7, the allocation of profits among jurisdictions under the current
systems is based on transfer pricing and specifically, the arm’s length principle, the application of
which is transaction-based and inherently subject to interpretation. This initiative would require that
the allocable profit be computed in accordance with common rules, by either applying a limited
number of adjustments to the financial statements of companies or by introducing a fully
harmonised EU tax base, as set out in Chapter 5. Both these options would be expected to introduce
the necessary unification across the EU and in this way, they would not only simplify the
determination of the tax base for businesses, but also successfully tackle mismatches between 27
disparate national systems.
Moreover, a possible future formulaic approach to allocate profit within large corporate groups,
which could eventually be designed at a later stage, could be based on factors that reflect a
company’s value and add objectivity to the exercise of sharing the base among group members. By
limiting the margin for interpretation, a well-designed allocation rule would significantly reduce the
number of disputes that currently arise in the application of transfer pricing rules. This would
however only have added value if defined at EU level. If Member States use different factors or
weightings, the risk of double taxation and disputes would remain.
Businesses and tax administrations would also derive a clear benefit from more clarity and certainty
on transfer pricing rules. Consequently, enhanced tax certainty for transfer pricing for BEFIT
groups as well as, more generally, a common approach whereby the OECD arm’s length principle
would be integrated in law and Member States would ensure a more consistent application of the
OECD Guidelines, will bring added value at EU level.
In addition, for businesses active across the EU more broadly, the opportunity to comply with their
fiscal obligations by referring to only one system of substantive corporate tax rules would bring
gains in terms of administrative simplification. Such a system would be administered, to the extent
possible, through a one-stop-shop, which would significantly reduce compliance costs for
businesses. Dealing with the tax authorities of several Member States through a streamlined
procedure would further minimise the number of disputes and ensure a consistent application of the
rules. These two advantages, taken together, would have additional positive effects on the
compliance of businesses, which cannot be achieved without EU intervention.
By decreasing compliance costs and tax obstacles, this initiative would in turn foster foreign and
domestic investment as well as capital mobility in the EU for large groups, as businesses operating
in different Member States should be able fully maximise the freedom of establishment and the free
movement of capital without being hindered by tax regulatory obstacles.
Considering the scale and effects of the envisaged initiative, the objectives to attenuate the negative
effects resulting from the current interaction of 27 disparate national tax systems and divergent
transfer pricing practices and to create more favourable conditions for cross-border investment in
the internal market would be better achieved at Union level.
4. OBJECTIVES: WHAT IS TO BE ACHIEVED?
This section outlines the general and specific objectives that the initiative pursues to ensure a stable
and consistent functioning of the internal market. The ‘Intervention Logic’ in Figure 3 presents
these objectives jointly with the problem drivers and problems that the initiative aims to address.
23
Figure 3: General and Specific Objectives
4.1. General objectives
A primary objective of the initiative is to simplify tax rules for businesses in the EU. This should
increase businesses’ resilience by reducing compliance costs. The proposal will introduce a
common framework with rules that are easier to comply with and that result in less cross-border tax
disputes. Simpler rules would enhance tax certainty and facilitate the activities of companies that
wish to operate in several Member States.
The proposal further aims to stimulate growth and investment in the EU by reducing the number
of corporate tax systems that businesses must comply with in the internal market. It will make the
environment for doing business more attractive46
. By reducing the disparities between the existing
corporate tax systems in the internal market, the proposal will also provide for a common approach
to taxing profit that does not distort businesses’ investment and financing decisions.
At the same time, this initiative aims to ensure fair and sustainable tax revenues for Member
States. Taxation plays a fundamental role in raising resources for governments. Tax revenues
provide governments with the means to invest in infrastructure and R&D and to deliver public
services. This should be done in an effective and efficient manner being accountable to citizens and
responding to their needs. As mentioned above, especially after the COVID-19 and the current
46
As explained in Annex 3, the objectives of the initiative also relate to the Sustainable Development Goals (SDGs).
Notably, the general objective to stimulate growth and investment should translate into a positive impact on SDGs no. 8
and 9.
24
energy crisis, there was a growth in general government expenditures and accordingly, an increased
need for tax revenues.47
This is made more important in view of the megatrends described before
and to respond to the political priorities of the Commission including to fund the digital and net-
zero transition.
4.2. Specific objectives
The specific objectives of the initiative contribute to achieving the general objectives. The specific
objectives link directly to the problem and its consequences, as identified in Chapter 2.
The initiative aims to reduce compliance costs for EU businesses. Compliance costs can act as a
barrier to growth. Therefore, it is important that these barriers be alleviated. Considering that EU
businesses would be made subject to, or given the possibility of applying, a simplified set of tax
rules, compared to the current environment, it should take less resources for businesses to comply.
The envisaged common approach to transfer pricing can also have a significant impact on lowering
the businesses’ budget for tax compliance, as the formalities for compliance and the number of
disputes is expected to be reduced.
Secondly, the initiative will contribute to reducing distortions that influence business decisions
and mitigate fragmentation in the internal market. Several aspects of the initiative could help
achieve this objective.
This initiative would provide a level playing field for groups of companies within its scope by
establishing a uniform set of corporate tax rules for the members of the group operating in the
internal market. In-scope businesses would thus benefit from a tax environment where tax
competition would be kept within the limits of fairness and not be polluted with harmful features
that would solely aim to attract investments based on tax motives. Therefore, when businesses had
to take decisions about which Member State to invest in, or expand their operations to, they would
face a more uniform corporate tax system, which would ensure that investment decisions are free
from certain distortions. In addition, this objective would be reinforced by the gradual development
of common and consistent approaches among Member States’ tax authorities to the interpretation
and application of transfer pricing norms. This would improve the business environment in the EU
and contribute towards a level playing field for businesses in the internal market.
The initiative will aim to encourage cross-border expansion. This specific objective can mostly
be achieved by providing simplification of the tax framework and establishing common rules. In
this way, the businesses, particularly national groups or groups of a smaller size, would not face a
cliff effect, i.e., a sudden increase in the compliance and other burdens when expanding their
operations cross-border. In parallel, the initiative also aims to encourage larger groups to achieve
further cross-border expansion. As EU businesses come in all sizes and shapes, it is important that
the encouragement for cross border expansion is available to all such businesses.
47
Eurostat, Evolution of total general government expenditure, EU, 1995-2020, % of GDP.png, available at
https://ec.europa.eu/eurostat/statistics-
explained/index.php?title=File:Evolution_of_total_general_government_expenditure,_EU,_1995-
2020,_%25_of_GDP.png.
25
Thirdly, the initiative also aims to reduce the risk of double and over-taxation and tax disputes.
Issues for transfer pricing, an area with an inherent risk of double taxation, will be addressed, first,
through a simplification of compliance with arm’s length for transactions between a group member
and a (non-group) associated enterprise and, second, through common EU approaches to the
application of certain discretionary transfer pricing concepts. This bifocal approach would thus
ensure a greater focus on alleviating the risk of double taxation to a greater extent. Secondly, cross-
border loss relief through the aggregation of tax bases among the companies in a group would
eradicate the risk of over-taxation in this context. Third, the initiative intends to reduce tax disputes
for businesses operating cross-border, through establishing an effective administration mechanism
that would require engagement by national tax administrations.
Finally, the initiative aims to increase tax certainty and fairness for business. A clear outcome
from both the targeted and public consultations was the businesses’ desire for tax, and more
broadly, legal certainty. Tax certainty has always been a high priority for businesses, often
highlighted as a more important concern than the tax rate. This has become an even more important
issue due to the vast number of ambitious reforms in international corporate taxation in recent
years.
5. WHAT ARE THE AVAILABLE POLICY OPTIONS?
As explained above, the initiative to address current challenges in the field of corporate taxation
involves a corporate tax system intended to apply to all sectors of economic activity without any
envisaged exceptions based on the industry. As the initiative would replace the existing national
corporate tax frameworks for the companies in its scope, they would be all-inclusive, i.e., no
exemptions would apply to specific sectors of activity/industries (e.g., no exemptions for banks).
There may however feature sector-specific rules (e.g., a carve-out for certain shipping income), in
order to more accurately reflect the specific characteristics of certain industries and ensure that
there are no distortions in the system. Its scope would mostly be delineated by choices about the
size of groups, rather than the sector of activity. This is because the system would focus on
primarily tackling challenges linked to cross-border businesses, which tend to be different for larger
and smaller enterprises.
This initiative is twofold and covers options for:
A. BEFIT which is comprised of the following building blocks to arrive at a common set of
rules for the corporate tax base of large groups: (i) scope, (ii) tax base calculation, i.e., to
determine the preliminary tax result of each BEFIT group member, which would be
aggregated at the BEFIT group level, (iii) allocation of the aggregated tax base to the
eligible group members, (iv) transactions between BEFIT group members, on the one hand,
and associated enterprises outside the BEFIT group, on the other hand, and (v) the
administration of the system. These five building blocks are all essential to any corporate
tax system, therefore the analysis in this Chapter assumes that all five building blocks are
necessary, and none can be dropped. In this light, the options assessed involve alternatives
under each building block.
B. A common approach to transfer pricing which considers the options of (i) including the
OECD arm’s length principle and transfer pricing guidelines in EU law; or (ii) in addition to
(i) also regulate the prospect for ongoing coordination towards a common EU approach to
certain transfer pricing practices. This is aimed to apply to transactions between associated
26
enterprises, i.e., entities that have some degree of association but are not within the same tax
group.
Figure 4: Overview: Initiative, Building Blocks and Options
5.1. What is the baseline from which options are assessed?
The baseline policy option is to keep the existing policy framework. This means that the EU
continues with 27 different corporate tax systems and no simplification at EU level is offered to
businesses. Businesses operating in all 27 Member States would continue to calculate their tax
liability based on national corporate tax bases as there would be no common rulebook. Maintaining
the existing policy framework also means that the profit allocation within multinationals would
continue to be performed by reference to existing transfer pricing rules, with all the complexities
and uncertainties that this entails, as outlined in Chapter 2, and without any EU-wide coordination
in the application of the guidelines that interpret the arm’s length principle.
5.2. Description of the policy options
5.2.1. BEFIT - a common set of rules for the corporate income tax base of companies
within large groups
5.2.1.1. Scope
BEFIT rules will apply to the EU members of groups of companies that prepare consolidated
financial accounting statements. These are companies which are resident for tax purposes in the EU
(“EU tax resident companies”) and also EU-located permanent establishments of companies
resident outside the EU (“EU-located permanent establishments”).
27
In simple terms, a group of companies is a collection of a parent company and its subsidiaries
whereby the parent owns a controlling interest in, and exercises a function of control over, the
subsidiaries. In the case of groups that have a dimension beyond the EU, BEFIT will only apply to
the EU members of such a group.
Three options are considered: (i) mandatory for all, (ii) optional for all, and (iii) a hybrid option:
mandatory above a certain revenue amount, and optional below that.
Option 1: Mandatory for all EU members of groups that prepare consolidated financial
accounting statements
Under this option, all EU tax resident companies and the EU-located permanent establishments
which are members of a group that prepares consolidated financial accounting statements fall
within the scope of the BEFIT rules, regardless of the level of annual combined revenues of such
group. Member States would continue to establish corporate tax rates at national level, but all the
EU tax resident companies and EU-located permanent establishments of in-scope groups would
calculate their tax base in accordance with the common (BEFIT) rules.
Option 2: Optional for all EU members of groups that prepare consolidated financial
accounting statements
Under this option, all EU tax resident companies and the EU-located permanent establishments
which are members of a group that prepares consolidated financial accounting statements could opt
to apply the BEFIT rules, regardless of the level of the annual combined revenues of such group.
To avoid ‘cherry-picking’ practices, this option would require that, in the event of opting in, all EU
tax resident companies and EU-located permanent establishments of the group would be included
in the option and for a set minimum period of time. Member States would continue to set corporate
tax rates at national level, but all members of the opting-in groups would calculate their tax base in
accordance with the common (BEFIT) rules.
Option 3: Hybrid - mandatory for all EU members of a group with annual combined
revenues exceeding a certain amount and optional for all EU members of a group with
revenues below this threshold
Under this option, the BEFIT rules would be mandatory, and replace the national corporate income
tax system, for all EU tax resident companies and EU-located permanent establishments which are
members of groups of companies with annual combined revenues beyond a certain threshold.
Considering that BEFIT will build on the Pillar 2 Directive and should capitalise on the degree of
harmonisation achieved in that context, it would be reasonable to align this threshold with that of
the Directive, i.e., annual combined revenues exceeding EUR 750 million. All other groups, which
prepare consolidated financial statements but record annual combined revenues below the agreed
threshold, would have a right to opt in and apply the common rules. In such case, all EU tax
resident companies and EU-located permanent establishments of the opting-in group would be
subject to the BEFIT rules for a set minimum period of time.
28
5.2.1.2. Tax base calculation
Two options will be considered for this building block: (i) a limited set of tax adjustments to
income as this is reported in the financial accounting statements, and (ii) a comprehensive and
complete set of tax rules.
Option 1: Limited tax adjustments
The aim of BEFIT is to set up a simple, yet effective, common corporate tax system in the EU. To
comply with this objective, the tax base of each BEFIT group member would be determined by
applying limited common tax adjustments to its income. In the public consultation, a majority of
the respondents was in favour of such an approach.
To ensure that the entire BEFIT group uses the same financial accounting standard as starting point
in this exercise, the tax adjustments should be made to the ‘reconciled’ financial accounting
statements of each group member, i.e., the financial statements (of each group member) adjusted to
align with the standard followed for the consolidated financial statements of the group. The list of
such adjustments (e.g., tax depreciation, treatment of profit distributions, deductibility of business
expenses, long-term contracts, bad debt, provisions, taxes paid) would consist of certain items that
represent a significant part of the current corporate tax base of a BEFIT group member (around
90%).
This is a fundamental difference between BEFIT and the approach that was followed in past
initiatives of the Commission, notably the 2011 and 2016 CCCTB proposals. As introduced above,
BEFIT builds on the rules for the determination of the tax base under the recently adopted Pillar 2
Directive, which use financial accounting statements as a starting point and subject the annual
financial accounting result to a number of tax adjustments.
As the final step in the determination of the tax base, the preliminary tax results (i.e., the tax-
adjusted financial accounting results) of all individual BEFIT group members would be added
together to establish an aggregated BEFIT tax base. As a result, intra-group transactions, i.e.,
transactions between BEFIT group members, would be neutralised to avoid double deductions or
double taxation, except for transactions relating to certain income from shipping activities for
instance, which will not be included in the BEFIT tax base due to its specific treatment.48
Whether the aggregated BEFIT tax base is positive or negative, the profit or loss would still be
allocated to the eligible group members. The part that would be allocated to each group member in
each Member State through the allocation rule would be subject to a limited number of adjustments
based on a list of items which would not be covered by the common rules (e.g., incentives for
research and development, deductions of pension provisions, tax credits relating to transactions
with third countries, etc.). As certain items of the tax base (e.g., pensions) have a strong national
thrust and previous experience has demonstrated that Member States are not willing to share the tax
48
This income is often covered by specific tax regimes, which have to be compatible with state aid rules and the tax
liabilities would be calculated on the basis of the tonnage (i.e., the carrying capacity) of ships and not the actual profits
or losses incurred. An exclusion of such an amount would, therefore, build on an acknowledged approach that is
tailored to the realities in the shipping sector and widespread across countries.
29
base on these, it would be important to allow adjustments at national level for a limited number of
items.
Option 2: Comprehensive set of tax rules
An alternative option for the tax base determination would be to compile a comprehensive
corporate tax system with detailed tax rules, covering all aspects that determine the tax base of each
individual BEFIT group member and the aggregation of these tax bases into a single base. This
approach would resonate with the 2011 and 2016 exercises that led to the respective CCCTB
proposals.
Instead of starting from the financial accounts, this option would involve putting together a fully
self-standing statute of corporate tax rules, to lay down a common legal framework, which would
primarily cover the calculation of the tax base of each individual BEFIT group member: that is,
taxable revenues, tax exempt income, tax deductible expenses and non-deductible items, rules on
timing (e.g., accrual of revenues, incurrence of deductible expenses), items with a tax relevance of
longer than a year (e.g., long-term contracts, bad debt, provisions), depreciation, the treatment of
tax losses, and a framework for transitioning into and outside of the system.
The aggregation of the individually computed tax bases of each BEFIT group member into a single
aggregated base for tax purposes and the allocation of such aggregated base to the eligible group
members would apply in the same way, as explained under option 1.
5.2.1.3. Allocation of the aggregated tax base
The third building block focuses on how to allocate the aggregated base to those group members in
which the BEFIT group maintains a taxable presence. The basic principle to follow when deciding
on the composition of a formulary apportionment is to choose factors that reflect the source of
income generation. While most respondents in the public consultation were in favour of using a
formula, there was no collective view on how it should be designed. For this reason, different
options could be envisaged, including a transitional allocation rule which could possibly pave the
way towards a formulary apportionment for the future.
Option 1: Formula without incorporating intangible assets
A first option would be to operate a formula with the three most commonly used factors: labour
(which can include payroll and/or the number of employees), tangible assets (excluding financial
assets except for specific sectors), and sales by destination.
This option is elaborated further below. These factors were also used in the 2011 and 2016
proposals for the CCCTB and reflect both the state of origin/production (tangible assets, payroll,
number of employees) and the state of demand (sales by destination). Inventory and intangible
assets would be excluded. The weighting of factors is also an important consideration. For all
options under this building block, equal weighting would apply. This means that for this option,
labour, assets and sales are treated as equally reflecting the source of income generation.
30
Option 2: Formula incorporating intangible assets
Under this option and with the aim of catering for the realities of modern economies, the proposal
would consider ways to include intangible assets49
as a factor in the formula, in addition to the three
previously mentioned factors. The aim would be to better reflect income generation.
This approach received support in the public consultation particularly from businesses, business
advisors, and business associations, and its absence under the previous proposals has been a source
of criticism. The respondents in the public consultation who were opposed to this approach seemed
to be concerned mainly by risks of tax planning. To achieve its aim and to avoid abuse, the
proposal could consider different sourcing approaches and weighting of the factors. For these sub-
options, equal weighting would apply. This means that for this option, labour, tangible assets, sales,
and intangible assets are treated as equally reflecting the source of income generation.
Sub-option 2.1: Location where intangible assets are booked in financial accounts
The first sub-option would use legal ownership and (book) value as recorded in the financial
statements to determine the location of intangible assets.
Sub-option 2.2: Location where research and development expenses, staff training
expenses and costs for marketing and advertising are incurred
The second sub-option would use research and development expenses, staff training expenses, and
costs for marketing and advertising as a proxy value for intangible assets (i.e., where intangible
value is created). The proposal would consider the Member State of location of the BEFIT group
member that ultimately incurred these expenses during the preceding five years, to determine where
the intangible assets are deemed to be located. As payroll costs would be an important share of
these research and development (R&D) expenses under this sub-option, the proposal would reduce
the payroll component of the labour factor by an amount equal to the R&D costs in the intangible
assets factor. In this way, there would be no double-counting of the researchers’ salaries, i.e., under
both the intangible assets and labour factors.
Such a solution draws inspiration from the principles set out in the OECD modified nexus
approach. Under this sub-option, part of the tax base would be allocated to the Member State of
location of the BEFIT group member that initiated and requested the eligible R&D activities and
ultimately incurred such costs. It will have no impact whether such activities are outsourced or
performed within or outside that Member State. This would also ensure overall tax symmetry
whereby it would be ensured that the BEFIT group member which incurred or deducted eligible
expenses for tax purposes is subsequently allocated the tax base50.
49
In simple terms an intangible asset is an asset without physical (or tangible) form. Examples include intellectual
property such as patents and copyright.
50
Under the BEPS Action 5 Report - to address base erosion and profit shifting allowing for low or no taxation without
substance of income from certain intangible assets, the OECD and G20 countries developed the modified nexus
approach. The principles set out intend to ensure that, in order for a significant proportion of IP income to qualify for
benefits, a significant proportion of the actual R&D activities must have been undertaken by the qualifying taxpayer
itself. Thus, a taxpayer may benefit from an IP regime, e.g. for royalty income and/or capital gains, only if and to the
extent that it has incurred R&D costs related to that IP asset.
31
Option 3: Transition rule for allocating the aggregated tax base
A third option would be a transition allocation rule with transitional features that would last for a
number of years. During this transition period, it would be possible to evaluate the effect of the
implementation of Pillars 1 and 2 on national and the BEFIT tax bases with more accuracy,
supported by more and improved CbCR data.
Such a method would allocate the aggregated tax base to the BEFIT group members based on a
transition rule, which would look at each group member’s percentage in an aggregated tax base that
will most possibly represent the three-year average of the tax results of the group over previous
fiscal years. Such an approach could pave the way towards a permanent allocation mechanism
which might be based on a formulary apportionment.
During the transition phase, the allocation of the BEFIT tax base would thus depend on the
individual tax results of the BEFIT group members. Therefore, it is important that intra-group
transactions remain consistent with the arm’s length principle during the transition. However,
enhanced tax certainty can already provide both businesses and administrations with additional
clarity and simplification. In line with international developments and continued experience in the
EU in the area of transfer pricing, the initiative can propose risk assessment criteria to provide
businesses with more predictability and to assist the efforts of tax administrations. With formulary
apportionment, the requirement for consistency with the arm’s length principle could be eliminated
within the BEFIT group after the transition phase, which will bring further simplification.
5.2.1.4. Transactions with related parties outside the BEFIT
group
As the remit of EU law is generally confined to the internal market, the intra-group allocation of
taxable profits would only concern BEFIT group members and not associated enterprises that are
located in third countries or in the EU but outside the BEFIT group (due to not fulfilling the
ownership requirements). It therefore follows that other rules would need to apply for the allocation
of profit between BEFIT-group members and their associated enterprises outside the BEFIT group.
Option 1: Keep the current transfer pricing practices
Under this option, the current transfer pricing practices would continue to apply to transactions with
associated enterprises outside the BEFIT group, and as such these transactions should continue to
be determined at ‘arm’s length’.
As explained in Annex 7, transfer pricing is a methodology for determining the pricing for tax
purposes of transactions between related parties. This methodology has been developed because the
price of transactions between associated enterprises can be abused, to shift profits from high- to
low-tax jurisdictions by artificially increasing or decreasing such price. Pursuant to the current
international standards, such transactions must be taxed on the same basis as transactions between
third parties under comparable circumstances (so called ‘arm’s length’ principle). The ‘arm’s
length’ principle underlies the profit allocation rules that can be found in Article 9 of the OECD
Model Double Tax Convention51. Furthermore, the OECD Transfer Pricing Guidelines52
provide
51
https://www.oecd.org/ctp/model-tax-convention-on-income-and-on-capital-full-Version-9a5b369e-en.htm
32
guidance on the application of the arm’s length principle, which is applied and recognised by all
Member States53
.
Option 2: Simplified approach to transfer pricing risk assessment
As described in Chapter 2 and Annex 7, the interpretation and application of the ‘arm’s length’
principle can vary between tax administrations and taxpayers. This could result in legal uncertainty,
increased compliance costs and double taxation for businesses.
While respondents in the public consultation had a clear preference for maintaining the current
transfer pricing rules, the majority was open to a more streamlined approach to risk assessment.
This option envisages, in addition to the current transfer pricing principles, a simplified approach to
transfer pricing risks to increase tax certainty. The intention would be to introduce a so-called
‘traffic light system’ as a risk assessment tool for transactions between members of the
(aggregated) BEFIT group, on the one hand, and their associated enterprises outside the BEFIT
group, on the other. Transactions would be assessed as being of low, medium or high risk
depending on how these transactions compare to a series of pre-set benchmarks agreed at EU level
and published by tax authorities. It is important to clarify that the ‘traffic light system’ would not
replace or change the ‘arm’s length’ principle. Instead, it would allow businesses to know in
advance the ‘arm’s length’ returns (market based) that they would be expected to achieve in
transactions with associated enterprises, provided certain conditions are preliminarily met.
5.2.1.5.Administration system
One of the key goals of BEFIT is to reduce compliance and administrative costs for taxpayers and
Member States, which was welcomed by stakeholders in the public consultation. Accordingly, the
administration system would be based on the so-called ‘one-stop-shop’ (OSS) principle. On this
basis, procedures would be centralised and performed, to the extent possible, by the Filing Entity
of the BEFIT group and the Filing Authority. The Filing Entity would be the EU Ultimate Parent
Entity or any other designated BEFIT group member. The tax administration of the Member State
where the Filing Entity is resident would be called the Filing Authority.
The policy choice under this building block is between an Advanced, a Limited and a Hybrid OSS.
This distinction is relevant across the various aspects of the administration of the system, starting
from annual filing and covering audits and the resolution of disputes.
An indispensable feature of the administration of the system would be the “BEFIT Teams” and this
would be part of this building block, regardless of the choice of options. Its chief role would be to
coordinate procedures which can be dealt with centrally amongst the individual national tax
authorities.
Option 1: Advanced One-Stop-Shop
The BEFIT group would be in contact exclusively with the Filing Authority:
52
OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, (OECD Publishing,
January 2022).
53
For a more detailed explanation on transfer pricing, see Annex 7.
33
(i) The BEFIT Information Return54
would have to be filed by the Filing Entity with the Filing
Authority. Then, the Filing Authority would share the information of the BEFIT Information
Return with the tax authorities of the Member States where the other BEFIT group members
are tax resident (or, in case of permanent establishments (PEs), located).
(ii) The Filing Entity would file all the individual tax returns55
of the BEFIT group entities with
the Filing Authority. In addition, the Filing Entity would need to settle all corporate income tax
liabilities for the BEFIT group through its single contact with the Filing Authority and the latter
would distribute the tax revenues to all eligible national authorities.
(iii) Following a tax audit56 or a procedure for dispute resolution57, the revised tax assessments
would be notified by the Filing Authority to the Filing Entity for all BEFIT group members.
This is because the outcome of an audit or dispute resolution could lead not only to a revised
tax assessment for every (or most) individual BEFIT group member(s) but also, as a knock-on
effect, to a need for revising the aggregated tax base and allocated parts.
Option 2: Limited One-Stop-Shop
It would be for the local BEFIT group members to carry out most of the required administrative
formalities:
(i) The information included in the BEFIT Information Return would be shared by each BEFIT
group member with their local tax authorities. To obtain certainty as soon as possible on a
number of aspects of the BEFIT Information Return, a coordination mechanism would be
developed within the BEFIT Teams.
(ii) The individual tax returns would be filed by each BEFIT group member with its local tax
authority. This means that there would be no engagement of the Filing Entity and Filing
Authority. Each BEFIT group member would be responsible for their own individual tax
return. Furthermore, BEFIT group members would have the possibility to opt for filing one
individual tax return per jurisdiction (a so-called ‘Jurisdictional One-Stop-Shop’) for all the
54
The BEFIT Information Return will provide information on key Elements of the BEFIT group, such as the
identification of its members, the group structure, the scope, the aggregated tax base of the BEFIT group and the
allocated parts.
55
The individual tax returns will record the final tax liability of each BEFIT group member after limited additional
adjustments to the apportioned share in accordance with the national law of the Member State where the BEFIT group
member is tax resident (or in the case of PEs, located). It is envisaged to include a ceiling/cap to the permissible
adjustments, for instance, in the form of a percentage of the apportioned share.
56
To verify the filed individual tax returns, the local tax authorities of the Member State where a BEFIT group Member
is located would be entitled to initiate and carry out tax audits. In addition, the Filing Authority and other local tax
authorities would have the possibility to request such an audit, through the consultation process within the BEFIT
Teams. Under none of the options for a one-stop-shop, is it envisaged to make changes to the national procedural rules
that apply in Member States for audits.
57
When a BEFIT group member does not agree with a revised tax assessment (which can be a result of a tax audit), the
member will hold a right to challenge this assessment. Disputes in relation to revised tax assessments would primarily
be settled locally, which means that a BEFIT group member would have the right to challenge the assessment in the
Member State where it is tax resident (or in the case of PEs, located). In this context, it is envisaged that when it comes
to challenging the revised tax assessment, a BEFIT group member would be entitled to the legal means offered by its
Member State.
34
BEFIT group members in that jurisdiction. Tax revenues would be collected directly by the
local tax authorities.
(iii) Following a tax audit or a procedure for dispute resolution, the revised tax assessments would
be notified by the local tax authorities to each local BEFIT group member directly. In this
context, the BEFIT Teams would have a coordinating function, to ensure that all impacted
jurisdictions adjust the tax liability to reflect the relevant revised adjustment.
Option 3: Hybrid One-Stop-Shop
The hybrid OSS combines features from Options 1 and 2, with the aim to create an efficient
administrative framework which can borrow as many features as possible from the Advanced OSS
and fall back to the Limited OSS where national sovereignty in tax matters requires that action be
taken locally.
More specifically, in the context of a hybrid OSS, the BEFIT Information Return would be dealt
with centrally via the Filing Authority whereas the individual tax returns would be filed by each
BEFIT group member with its local tax authority. The local tax authorities would also remain
responsible for the BEFIT group members’ settling of tax liabilities, as well as audits and dispute
settlement in conformity with national tax sovereignty. When, however, the tax base of an
individual company is updated following an audit or dispute settlement and this adjustment affects
the taxable share of other companies within same BEFIT group, the BEFIT Teams would have a
coordinating function in case of disagreement among tax authorities.
This hybrid OSS acknowledges the benefits of advanced coordination but is also designed to allow
room for national-specific solutions in fields where national tax sovereignty is traditionally a
sensitive issue.
BEFIT Teams
Regardless of which option is preferred, once the BEFIT Information Return is filed and it becomes
known which entities are included in the BEFIT group, the Filing Authority would form together
with the other relevant local tax authorities a BEFIT Team for the respective BEFIT group. There
will be a Team for each BEFIT group. The chair of the BEFIT Team would be the representative of
the Filing Authority. The purpose of this Team would be threefold:
(i) To coordinate processing the BEFIT Information Return, having the aim to reach agreement on
a number of elements and within a certain period of time;
(ii) To coordinate the process of carrying out iterations of the allocation of the aggregated tax base
where individual tax assessments are revised (for example, after an audit or juridical procedure
in a Member State);
(iii) To provide a consultation instrument on all other stages of the procedure, including
disagreements on revised assessments after audits and/or disputes.
The BEFIT Team is relevant to all options for the OSS.
35
5.2.2. Common approach to transfer pricing
The initiative on transfer pricing complements BEFIT in providing simplification in the area of
transfer pricing, but is a separate topic from transfer pricing risk assessment within BEFIT. BEFIT
would include a simplified approach to transfer pricing risk assessment of certain transactions of
the BEFIT group. As such, this risk assessment tool would be limited to the specifics of BEFIT and
would not touch upon the broader issue of divergent interpretations in the application of the arm’s
length principle and OECD Transfer Pricing Guidelines. The initiative for a common approach
to transfer pricing, on the other hand, directly involves the interpretation which delineates the
content of the arm’s length principle. This is discussed separately here.
Out of the 27 Member States, 23 are OECD members and therefore, politically committed to follow
the OECD Guidelines to interpreting the arm’s length principle. However, in addition to some
Member States not being OECD members, the status and role of the OECD Guidelines currently
differ from Member State to Member State.58
Option 1: Inclusion of the OECD arm’s length principle and Transfer Pricing Guidelines in
EU Law
This option is about harmonising transfer pricing norms within the EU in the form of principles-
based legislation. The arm’s length principle would be integrated into EU law. In addition, the law
would clarify the status and role of the OECD Transfer Pricing Guidelines and refer to the latest
edition thereof for the interpretation of the arm’s length principle. By effect, the Guidelines would
be turned into a binding tool, but this would exclusively concern the (latest) edition which would be
incorporated in EU law; not any revisions thereof. The aim would be to ensure that Member States
follow the same principle and have a common approach to applying transfer pricing.
Option 2: Inclusion of the OECD arm’s length principle and Transfer Pricing Guidelines in
EU law and ongoing coordination towards a common EU approach
This option builds on Option 1. It would however not only aim to ensure that Member States apply
the same principle but go a step further into implementing a mechanism which would ensure a
coordination of views and interpretations of the OECD Guidelines among Member States.
As under Option 1, the arm’s length principle would be incorporated in EU law and the legislation
would clarify the role and status of the OECD Guidelines, but under this Option, these would also
be complemented with a mechanism for coordinating their interpretation and application at EU
level on an ongoing basis. The mechanism would consist in setting up an EU expert group or
committee to discuss, and agree on, specific topics that pertain to the interpretation of the arm’s
length principle, as these may arise from the OECD Transfer Pricing Guidelines. The aim would be
to ensure a coordinated approach to practical problems that emerge from transfer pricing practices
58
For example, some Member States (Spain, Italy, Germany) makes direct reference to the OECD guidelines in their
national provisions recognising the OECD guidelines as a source of interpretation not only for Article 9 of the tax
treaties but also for domestic legislation as long as the guidelines do not conflict with specific domestic regulations.
Other Member States (France, the Netherlands, Croatia) has not explicitly implemented the OECD guidelines into their
internal legislation although they report to follow the guidelines in practice. Another group (Estonia, Hungary) reports
that the OECD guidelines are not recognised as legally binding but that their administrative regulations are based on the
same principles contained in the OECD Transfer Pricing Guidelines.
36
in the EU. This option would also be complemented with a specific anti-tax avoidance framework,
for instance, to ensure that unilateral downward adjustments do not result in double non-taxation.
Discarded options
Three options should be discarded from the outset and will not be assessed:
(i) To develop an EU arm’s length principle with subsequent EU-origin guidance. The arm’s
length principle is a global standard commonly accepted and applied worldwide. The EU
cannot substantially depart from such standard since this would create frictions and
inconsistencies, in particular in its relations with third countries.
(ii) To incorporate the arm’s length principle only – without reference to the OECD Transfer
Pricing Guidelines. This option would fall short of the policy objectives of this initiative, as the
arm’s length principle is not sufficient without the Guidelines for ensuring a common approach.
(iii) To follow the UN developed definition of the arm’s length principle and Guidance. The UN has
developed a practical manual which is intended to be used as interpretation tool of the arm’s
length principle in Article 9 of the United Nations Model Convention. The UN manual is meant
to specifically address the challenges that many developing countries face in dealing effectively
with transfer pricing issues. Most of the Member States are OECD members and are not
represented at the UN fora. It thus makes more sense to refer to the OECD Guidelines.
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?
6.1. Three Versions of the initiatives to be assessed
As set out in Chapter 4, the initiative aims to introduce a common framework of corporate tax rules
that will replace the current national corporate tax systems for the businesses in scope. It will aim to
bring simplification for taxpayers and encourage growth and investment in the internal market,
while levelling the playing field in which businesses operate. This Chapter explores the impact of
the policy options. As not every single option, and combinations thereof, can be assessed
individually, the identified options under the initiative were compiled in the form of packages,
referred to as ‘Versions’. These reflect the two extreme ends of a range and a middle-ground option:
(1) the highest degree of harmonisation (‘Comprehensive’), which is about laying down uniform
corporate tax rules, to enter into effect immediately, and setting up a centralised administrative
mechanism to operate such rules; (2) the lightest approach (‘Light’), where harmonisation is
limited and most of the features of the system remain optional. Under the “Light” version, Member
States are given discretion to deviate within limits; and (3) the middle-ground (‘Composite’),
which integrates elements of the first two versions of options with the aim to achieve an adequate
degree of uniformity, which implies that not all tax-technical and administrative features would be
harmonised. The three Versions are presented in Table 2 and discussed in more detail below.
Table 2: Three Versions
37
Comprehensive Version – Rules are mandatory to all with the highest degree of
harmonisation and immediate application. Such combination of options would ensure the
broadest scope possible and, as a result, the most extensive simplification for tax administrations as,
as it would replace current national rules on group taxation in the EU to a great extent.
BEFIT would translate into a comprehensive corporate tax system leading to a fully harmonised
computation of the tax base, de facto replacing 27 disparate national tax systems for computing the
tax base with a common one. The allocation formula would include intangible assets to best reflect
today’s economic reality. The Comprehensive Version would introduce a new ‘traffic light system’
as a risk assessment tool for transactions between a BEFIT group member and an associated
enterprise outside the BEFIT group without departing from the internationally established arm’s
length principle. All administrative matters would be settled by one single entity of the group
(Filing Entity) and one tax authority (Filing Authority). The entity would file all returns, i.e., the
BEFIT Information Return of the group and all the separate tax returns of the BEFIT group
members.
Transfer pricing norms would be harmonised in the form of principles-based legislation, which
would include the arm’s length principle and clarify the status and role of the OECD Transfer
Pricing Guidelines. In addition, the rules would go a step further into implementing a mechanism
which would ensure ongoing Member State coordination of views and interpretations of the OECD
Guidelines, especially in light of any revisions and the needs of the internal market. The
Comprehensive Version would entail setting up an EU expert group or committee to run the
process.
38
Light Version – Rules are optional, with the least degree of harmonisation including a review
mechanism. This version would bring along some changes to the status quo, but they would be
narrower in scope, less comprehensive and with a provision for reviewing the allocation method. It
would be optional for all groups, and thus provide a flexible framework, enabling groups to choose
depending on their corporate structures and activities.
BEFIT would allow for a dual system whereby eligible groups in the EU will have the right to
choose between BEFIT and their national tax system. For those joining BEFIT, it defines a starting
point to compute the tax base; that is, the financial accounting statements. It would then subject the
content of these accounts to limited common tax adjustments, to arrive at the tax results of the
BEFIT group members, before being aggregated into the single BEFIT tax base. In addition, the
allocation rule would be based on prior years’ tax results and would be subject to review with a
view to possibly proposing an allocation method based on formulary apportionment. The system
would maintain the existing rules and risk assessment practices in the field of transfer pricing with
regard to transactions between a BEFIT group member and its associated enterprises outside the
BEFIT group. The Light Version proposes an overall coordinated approach to the administrative
matters, while ensuring that tax audits and control remain locally administered by the Member
States.
Transfer pricing norms would be harmonised in the form of principles-based legislation, which
would include the arm’s length principle and clarify the status and role of the OECD Transfer
Pricing Guidelines.
Composite Version – A composite package with features of mandatory harmonisation
including a review mechanism.
BEFIT would ensure common and mandatory rules targeted at the EU sub-set of large groups that
are also in scope of the Pillar 2 Directive. These groups would be most likely to have extended
cross-border structures and activities and be already familiar with certain features, in particular
those which feature in Pillar 2. These groups could therefore be expected to benefit the most from
the simplification that BEFIT offers. For computing the tax base, they would start from the
financial accounting statements used for preparing their consolidated accounts and subject the
reported income to a limited number of tax adjustments. The system would also include a transition
rule to allocate the aggregated tax base based on the average of the tax results of the group over
previous fiscal years, as well as a review clause aimed to assess the effects of the allocation method
and address possible changes in the corporate tax environment after Pillars 1 and 2 have entered
into force. The Composite Version would also propose the introduction of a new ‘traffic light
system’ as a risk assessment tool for transactions between a BEFIT group member and its
associated enterprises outside the BEFIT group. This would not depart from the arm’s length
principle. There would be a hybrid one-stop-shop in the administration, meaning that a part of the
issues would be settled by the single Filing Entity of the group (Filing Authority), while all BEFIT
group members would file separate returns with their local tax authorities.
Transfer pricing norms would be harmonised in the form of principles-based legislation, which
would include the arm’s length principle and clarify the status and role of the OECD Transfer
Pricing Guidelines. In addition, the Composite Version would go a step further into implementing a
mechanism which would ensure ongoing Member State coordination in interpretating and applying
the OECD Guidelines, especially in the light of any revisions and the needs of the internal market.
39
The Composite Version would also entail setting up an EU expert group or committee to run the
process.
6.2. Scope: How many company groups could be affected?
The number of companies falling under this proposal depends on the Version to be chosen, and in
turn, on the choices made by companies when the system is optional.
Under the Composite Version, an estimation of the number of today’s MNEs that would be in
scope of BEFIT is based, inter alia, on aggregate CbCR data for MNEs with a consolidated yearly
revenue exceeding EUR 750 million.59
For the most recently published reporting year (2018),
CbCR data suggests that 4,082 MNEs in the EU fall into this category60
and would thus be subject
to BEFIT rules for large enterprises. They would also fall within the scope of the Directive on
transfer pricing, which aims to integrate the arm’s length principle in EU law and seek a common
approach to the interpretation and application of the OECD Transfer Pricing Guidelines. The
number of smaller MNEs below that threshold can only be approximated (see Annex 4 for more
details). Based on the ECB’s EuroGroups Register (EGR), there are some 209,000 groups in that
category. Around 7.5% of them are estimated to prepare consolidated financial accounts (around
16,000 groups). Figure 5 below shows the estimated number of groups that have annual combined
revenues up to EUR 750 million and prepare consolidated financial accounting statements. The
number strongly declines as the size of groups increases. These groups would have the right to opt
in into BEFIT and benefit from the new EU coordinated approach to transfer pricing. The
population of these groups could be expected to grow as new rules will incentivise so-far domestic
companies to invest cross-border.
Under the Comprehensive Version, all groups would be covered by BEFIT. The Light Version
would be likely to involve a different mix of groups and potentially a smaller number of groups
overall as it is optional.
Figure 5: MNE’s with consolidated revenue < EUR 750 million, in scope of BEFIT (estimate)
TAXUD calculations based on EuroGroups data
59
Country-By-Country Reports are typically filed by large MNEs (consolidated turnover at least EUR 750m) to the tax
administration of the country where the ultimate parent entity is located. They contain information about a number of
variables such as revenues, Profit/Loss Before Tax, taxes paid, sales, production etc. at firm level, showing how these
variables are distributed across headquarters and subsidiaries in the different countries.
60
There is no more recent data available, the OECD is in the process of obtaining such information for 2019 and 2020.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
< 50 50 to
<100
100 to
<150
150 to
<200
200 to
<250
250 to
<300
300 to
<350
350 to
<400
400 to
<450
450 to
<500
500 to
<550
550 to
<600
600 to
<650
650 to
<700
700 to
<750
Cumulated
percentage
of
MNEs
filing
consolidated
statements
Number
of
MNEs
filing
consolidated
statements
Size class of MNEs, consolidated revenue in million EUR
Number of MNE filing consolidated financial statements Cumulative percentage (rhs)
40
6.3. Impact of the three Versions
Quantifying the effects of the three Versions is difficult, given major data gaps and high uncertainty
as there is no precedent of a corporate tax reform similar to this. In addition, there are interactions
between the common rules for the tax base of large groups (BEFIT) and the common approaches to
transfer pricing which cannot be quantified. For example, applying a common and simplified set of
rules would impact on how the new common approach to transfer pricing would work in practice.
The analysis below provides an estimation of the possible costs and benefits of implementation. For
the benefits, the analysis looks at both the direct pecuniary savings for compliance costs of
businesses and the broader macro-economic impact thereof. For each, the analysis will try to give
an upper and a lower bound estimation, based on the three Versions of the initiative, as outlined
above.
Table 3: Classification of Versions analysed
The mandatory scope of the Comprehensive Version includes all groups regardless of the size of
their annual combined revenues. It has hence a ‘wide’ scope of application. The Composite is
mandatory only for the largest groups and allows smaller groups to opt in.
Section 6.3.1 looks at how BEFIT could impact on the direct CIT compliance costs of companies.
Section 6.3.2 considers the savings associated with transfer pricing specifically. Section 6.3.2 looks
at the broader impact of establishing a group-wide tax base and the possibility of firms to offset
losses against profit across borders. Section 6.3.4 sets out a comprehensive estimation of the costs
of implementation for businesses and tax administrations, to the extent possible. Section 6.3.5
considers environmental or social impacts that the initiative may have, and section 6.3.6 any
additional impacts such as on fundamental rights and competitiveness.
6.3.1. The impact on direct CIT compliance costs
Using firm-level micro data of the survey-study on companies’ tax compliance costs and combining
it with EuroGroups data presented in Figure 5 above and the CbCR data, allows us to estimate the
potential savings regarding CIT-related compliance costs. Note that, as Table 4 below suggests,
SMEs and in particular SMEs with no cross-border operations face the bulk of tax compliance
costs, but there is clear scope to reduce tax compliance costs borne by large and small enterprises
with cross-border presence and that would qualify to opt-into BEFIT.
"Comprehensive" "Light" "Composite"
Very big groups (cons. turnover > EUR 750m) Mandatory Optional Mandatory
Smaller groups Mandatory Optional Optional
41
Table 4: Number of firms, absolute and average CIT compliance costs (CC), cross-tabulated by
firm size and cross-border activity, 2019
Source: Commission services, based on data from VVA/KMPG (2022).
Simplification via a common tax base and clearer transfer pricing rules have the potential to reduce
large businesses’ tax compliance costs. This is estimated as follows. We first conduct a regression
analysis (see Annex 4 for more detail) which reveals that there is the potential for cross-border
operating firms to reduce compliance costs by -32% if they are subject to some ‘simplified tax
system’. This figure holds if one controls for firm characteristics such as size (measured in terms of
the number of employees and turnover). Without controlling for size, the potential relative
advantage of simplified tax regimes is double that number: -65%. This finding implies that per
group, the potential of reducing compliance costs tends to be higher if groups are bigger.
Table 4 above provides us the per company tax compliance cost for SMEs and larger enterprises
with cross-border activities: EUR 3,308 for SMEs and EUR 8,266 for larger enterprises. If we use
the numbers of Figure 5, we see that there are 5,373 MNEs with a turnover of less than EUR 50
million which can be seen as SME groups, 9,657 MNEs with a turnover in between EUR 50 million
and EUR 750 million and 4,082 MNEs with a turnover of EUR 750 million. A total of 19,112
MNEs.
If only the very large MNEs with a turnover of EUR 750 million are in BEFIT and we consider a
32% cost reduction using the proxy obtained via the regression analysis, then the savings in tax
compliance costs are EUR 11 million (on the original tax compliance costs of almost
EUR 34 million), which would be a lower-bound estimate in the case, considering the above. If we
then consider a 65% reduction in costs, this represents about EUR 22 million.
If all other large MNE groups of companies bigger than SMEs opt in, then savings would amount
to almost EUR 37 million, that is, 32% of today’s EUR 80 million tax compliance costs for these
MNEs, i.e., EUR 26 million per year plus the EUR 11 million for the EUR 750 million MNEs. If
we consider a 65% potential this would mean EUR 74 million. If we were to consider that also
SMEs with cross-border presence, i.e., the MNEs in Figure 5 with a turnover of less than EUR 50
million, then the savings for this group would be 32% of today’s EUR 18 million (the 65% is only
considered for larger companies), that is, almost EUR 6 million in savings. In sum, if all groups
with a cross-border presence took part, i.e., in the “Comprehensive” Version of BEFIT and in
“Composite” Version of BEFIT, then the direct tax compliance cost savings as a result of
simplification would be respectively EUR 42 million (32%) as a lower-bound estimate and EUR 80
million (65%) as an upper-bound estimate.
no yes Total
CIT CC (bn EUR) 46.9 5.9 52.8
.. per enterprise 3,223 3,308 3,232
Number of enterprises 14,566,027 1,784,673 16,350,700
CIT CC (bn EUR) 0.8 0.3 1.0
CIT CC per enterprise 9,929 8,266 9,436
Number of enterprises 77,939 32,824 110,763
CIT compl. Costs (bn EUR) 47.7 6.2 53.9
.. per enterprise 3,259 3,398 3,274
Number of enterprises 14,643,966 1,817,497 16,461,463
Total
SME
Larger
Enterpr.
Operating cross-country?
42
While these numbers may not sound very large overall, for each of the companies and groups they
may still be significant or non-negligible. These savings could then be spent on production
activities with a positive impact on growth. Note, too, that the results are derived from the
combination of three datasets and therefore may need to be interpreted with caution. Hence, results
here could be underestimating the true tax compliance costs of larger companies since the per
company costs are derived from a study-survey whose main focus is SMEs. These savings could
then be spent on production activities with a positive impact on growth.
6.3.2. Savings associated with harmonising transfer pricing rules and enhancing tax
certainty for firms and tax authorities
The compliance with transfer pricing rules imposes high costs for both subsidiaries and parent
entities. This is because it requires complex supporting documentation and high expenses on
external advice and/or personnel time. Moreover, uncertainty about the outcome of tax inspections
on transfer prices is quite high. As for tax authorities, the most complex task today is checking
fairness and compliance of transfer prices with the arm’s length principle. This exercise requires a
deep knowledge of both the underlying rules and of the specific transactions between related
parties. Disproportionate sanctions and tedious tax disputes list among the consequences of transfer
pricing. Hence, both companies and tax administrations can expect additional savings from the
proposal on transfer pricing, due to the implementation of simpler/clearer transfer pricing rules and
because, for the groups applying BEFIT, the risk of transactions would be assessed based on
criteria that provide more predictability. This would reduce significantly:
• direct expenses on tax compliance activities related to transfer pricing;
• uncertainty about the tax inspections on transfer prices;
• the efforts (including staff time) of tax authorities to define whether a transfer price
agreement is compliant or not;
• the number of tax disputes over transfer prices;
In other words, for both groups and tax administrations, we expect a net reduction of the full-time
equivalent employees that would be allocated the respective tasks. Correspondingly, there can be a
significant reduction of legal costs. Chapter 2 already provided an indication of the magnitude of
litigation and legal costs. These are reported to be in the thousands to millions of euro a year per
firm. It is expected that the benefits, in terms of cost savings associated with less litigation and legal
costs, would be higher in the case of the Comprehensive and Composite Versions, than in the Light
Version, as regular guidance will also be provided.
6.3.3. The impact of introducing common EU rules to calculate the tax base of group
entities and aggregate these into a single EU-level tax base
BEFIT will introduce a common group-wide corporate income tax base covering related entities
located in the EU. This has consequences for firms to the extent they are today not able to offset
certain subsidiaries’ losses against other subsidiaries’ profits. BEFIT will also introduce a common
set of rules the calculate the corporate tax base of each group member, and most importantly:
common rules for the tax depreciation of capital. This section looks at the impact of these major
structural changes.
43
6.3.3.1. Cross-border loss offsetting as a result of an aggregated BEFIT tax base
A common (group-wide) CIT base automatically brings the advantage of cross-border loss relief:
groups can offset losses made by certain subsidiaries against profits made by other subsidiaries. As
a result, the groups’ CIT base declines, which results in lower CIT tax payments for companies.
Based on Orbis, a firm-level database, this section attempts to estimate the impact of this offsetting
of losses against profits of the same year. The intention is to interpret the resulting losses in the
EU’s CIT revenue as a careful estimate for subsidiaries of very big MNEs.
It is upper-bound to the extent that, as a result of cross-border loss offsetting, there would be fewer
loss carry forward, as more losses will be offset in the year they are made by the group. The
analysis does not fully take this into account and the difference in losses carried forward to future
years cannot be adequately modelled.
The analysis looks at subsidiaries of MNEs with a turnover of at least EUR 750 million per year.
These are the groups for whom BEFIT will be mandatory in both the Composite and the
Comprehensive version. The Orbis-sample for the year 2021 covers some 4.000 MNEs worldwide
with a turnover of more than EUR 750 million. Of those MNEs, there are unconsolidated accounts
of almost 100.000 subsidiaries in the EU, for some 80.000 of whom there is information about
profits/losses before tax. Offsetting losses against profits in 2021 would have reduced the EU’s CIT
base by around EUR 31 billion, equivalent to 0.2% of the EU’s GDP, or to 1.7% of the EU’s total
CIT tax base. From the companies’ point of view, this would mean lower CIT payments.
Based on this information, the European Commission’s Joint Research Centre has used its Cortax
general equilibrium model to estimate the macro-economic impact that would fit this CIT relief for
firms. As firms pay less CIT, this would lower their cost of capital, inducing them to invest more.
As CIT payments decline by 1.7%, investment shifts up by 0.2%, pushing up EU GDP by 0.1% in
the long term.
6.3.3.2. Common BEFIT depreciation rules
BEFIT would bring a harmonisation of depreciation rules in the EU. In a first scenario, a simple set
of depreciation rules is considered. It assumes that the depreciation for all buildings are set at 28.5
years (equivalent to straight depreciation of 3.5% p.a.) and at 5 years for all other assets (20%). The
Joint Research Centre’s Cortax model is used to simulate the impact of these common depreciation
rules.
In terms of generosity, these rules would roughly reflect the current average over Member States’
rules. Therefore, with these new rules in place, total CIT revenue in the EU would change only
slightly (decline by 0.7%), pushing the capital stock up by 0.1% and GDP by some +0.04%.
To demonstrate the impact of alternative depreciation rates, a second scenario foresees longer
straight-line depreciation of commercial buildings over 40 years (i.e., only 2.5% per year), while
industrial buildings would be depreciated over 25 years. Other than buildings, fixed tangible assets
would in this case be depreciated over 7 years (14%), and intangible assets over 5 years (20%). Due
to longer deprecation of commercial buildings and other tangible assets, these rules seem somewhat
stricter than is reflected by the average of existing national rules in the EU.
44
As a result, a second simulation with Cortax finds that the new rules tend to increase the EU’s CIT
base, and thereby CIT revenue by some 6%. The decline in depreciation allowances would thus
produce a surplus in a government’s budget in the short term, but also an increase in the cost of
capital for firms. The latter would reduce somewhat the incentive for firms to invest. This would
possibly lead to a decline in the capital stock, with eventual negative consequences in terms of
GDP.
6.3.3.3. Overview of the structural effects of BEFIT
The table summarizes the last two sections’ simulation results.
CIT tax
revenue
Total tax
revenue
Capital GDP
Cross-border loss relief (simulated for MNEs >750m) -1.7% -0.02% +0.2% +0.1%
Common depreciation (simulated for all MNEs)
----- Scenario 1 -0.7% -0.02% +0.1% +0.04%
----- Scenario 2 +6% +0.05% -0.7% -0.3%
Better legal certainty due to common rules not quantifiable
The effects of changing depreciation rules described in the previous section were calculated with
Cortax assuming that depreciation was introduced for all MNEs, while the proposal would only
mandatorily apply to a sub-set of MNEs above a turnover threshold of EUR 750 million (smaller
businesses would be able to opt in on a voluntarily basis). This is the reason why they cannot be
directly compared with the effects stemming from the cross-border loss relief. The latter was
explicitly calculated for MNEs with a turnover of at least EUR 750 million.
There are an estimated about 4.000 MNEs beyond that turnover threshold and some 14.000 MNEs
below as shown in Figure 5 above. That is, MNEs with turnover of EUR 750 million or more make
roughly one fifth of all MNEs potentially in scope of BEFIT. All else being equal, the positive
GDP-effect of the cross-border loss relief would therefore have been stronger had all MNEs been
included in the analysis (which did not happen because smaller MNEs are less well represented in
Orbis).
Moreover, there are positive second-round effects due to better tax transparency and legal certainty
as firms in scope would face only one common set of CIT rules. The resulting productivity-increase
is not included in the above analysis and is expected to lead to a positive aggregate effect of BEFIT
on GDP in the long run. Altogether, the BEFIT package is therefore likely to increase GDP.
6.3.4. The impact of formulary apportionment as a method to allocate the BEFIT tax
base
As for the allocation of the BEFIT tax base (section 5.2.1.3), options 1 and 2 foresee the
introduction of an apportionment formula. The allocation formula would, after establishing an EU-
wide CIT base of MNEs, apportion that aggregated tax base following a number of factors. These
are in option 1 as follows: labour (which can include payroll and/or the number of employees),
tangible assets, and sales by destination. Option 2 also includes intangible assets as a factor in the
formula. Based on the OECD’s statistics of Country-By-Country Reporting (CbCR, see Annex 4
for explanation), the EU as a whole would gain additional CIT revenue in the short term which may
45
be in the order of magnitude of some 0.1% of GDP, assuming that only MNEs with a turnover of at
least EUR 750 million are included. This holds true both when including (option 2) or not including
(option 1) intangible assets in the formula.
The impact may nevertheless affect Member States differently. This means that in the shorter term,
some Member States may have significant benefits, while for other Member States there may not
be a direct gain. It is difficult to estimate the effects accurately, given uncertainties and limited data
availability. Therefore, option 3 considers an allocation of the BEFIT tax base that ensures stability
during a transition. During this transition, it will be possible to estimate the impact of the new tax
base and potential effects of introducing formulary apportionment with more accuracy.
6.3.5. Costs for companies and tax administrations
Costs cannot be estimated with any precision because the new initiative does not have a precedent
that we can refer to. Moreover, there is no dedicated data that one can reliably use to produce very
concrete estimates. It is also noteworthy that under the public consultation and dedicated
stakeholder consultations (including MNEs and tax administrations) estimations of such costs were
not provided, not even at a qualitative level. This is primarily because a business has to know the
technical details of a new system to simulate its cost. In addition, the cost is expected to differ
substantially depending on the business model. For instance, an in-scope group which is centrally
organised should be expected to have less costs than a retail group that maintains a large number of
subsidiaries. Below, we attempt to describe some of the possible costs, noting that these are likely
to be relatively very small when compared to the potentially large cost savings derived from
simplification.
Concerning tax administrations, a holistic picture is hard to obtain. There are fundamental
differences in capacity and expertise between Member States’ authorities, and the workload will
depend on the amount of Filing Entities (i.e., ultimate parent entities, or if there is no ultimate
parent entity, the designated filing entity) that are present in each respective Member State. For this
purpose, the administrations would need to dedicate resources so that the BEFIT Information
Returns can be filed by their resident Filing Entities. The administrations have to transmit these
BEFIT Information Returns to the other administrations where the BEFIT group has its taxable
presence and chair a BEFIT Team including those administrations. Smaller Member States, with
less resources in their public sector, would be unlikely to accommodate a large number of MNEs
headquartered in their territory. So, the fact that these Member States may be short of resources is
unlikely to create a concern in practice, assuming that these Member States would accommodate a
small number (if any) of Ultimate Parent Entities (UPE).
Regarding the BEFIT Teams, while there will have to be a Team for each BEFIT group, this is not
expected to result in substantial additional costs (other than setting up a simple communication and
consultation tool) but rather in a re-allocation of existing resources. This is because a BEFIT Team
brings together tax inspectors from the Member States where the group operates. Instead of each
Member State separately dedicating human resources to assess the tax liabilities of the same cross-
border groups, these available resources will now be used collectively in a more effective and
targeted manner. Each inspector would be responsible for the group entities in their own
jurisdiction. In addition, Member States already need to dedicate resources to cross-border issues
that require agreement between different Member States, and to lengthy disputes or procedures.
Finding consensus on some of these issues within the BEFIT Team and based on common
standards would also be a more efficient re-allocation of existing resources.
46
When considering the Composite and Light Versions in implementing the common rules for
computing the tax base (BEFIT), which would be, respectively, either primarily directed at large
groups with annual combined revenues exceeding EUR 750 million or entirely optional, the
following costs are expected to be incurred:
1. Recurrent costs of adjustment and administrative nature, which include personnel time:
a) for tax administrations, dealing with the BEFIT Teams: costs associated with exchanging
information on the content of the Information Return and checking compliance with the risk
assessment mechanism of the ‘traffic light system’;
b) for the Filing Entity for the group, which aggregates all the preliminary tax results: costs
associated with filling in the Information Return and submitting it to the tax authorities;
c) for tax administrations: additional costs associated with coordinating action among
different tax authorities in case of tax inspections;
2. One-off adjustment costs for groups and tax administrations associated with updating IT
systems to calculate the tax base or other administrative systems to run any related exchanges of
information;
3. One-off adjustment costs for the training of company staff and tax administrations to adjust to
the new system.
Some of these costs may not actually be additional costs. Companies and notably the Parent Entity,
which may also be the Filing Entity, already prepare consolidated financial statements. The groups
of companies which fall within the scope of BEFIT already prepare consolidated financial
statements in accordance with the requirements of their national accounting standard. The financial
accounting statements which are used as a starting point for computing the tax base are therefore
already available and would not require taxpayers to undertake additional compliance actions.
Furthermore, the infrastructure for carrying out exchanges of information is already in place as
Member States engage in exchanges of information, including automatic exchanges, in a variety of
fields under the Directive on Administrative Cooperation61
. This said, companies will still need to
invest in IT software updates and new programmes, to facilitate the computation of the tax base in
accordance with the new rules. Yet, the cost will be substantially lower, as compared to what this
would amount to if it also included an installation of hardware. There will also be a possibility of
receiving EU financial support.
When it comes to tax administrations, one should consider that in several Member States’ tax
administrations, there is currently personnel dealing with corporate income tax files that involve
groups within the mandatory scope of BEFIT. This staff would need to be trained, which should be
seen as a one-off cost for tax administrations, and change job description, in order to shift into
working on BEFIT groups. As explained above, these officials would most possibly also participate
in the BEFIT Team of their assigned groups.
61
Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and
repealing Directive 77/799/EEC, OJ L 64, 11.3.2011, p. 1–12.
47
Regarding training, the costs are expected to be limited as the simplification of the rules also
translates in fewer staff needed to undergo such functions at company group level and in national
tax administrations. It should accordingly be noted that for the latter, EU funding could be available
to support national administrations. This is also possible in the case of item 1.c) above.
When considering the Composite and Light Versions in connection with transfer pricing, there
will not be any additional costs for large groups or national administrations, as there are currently
large numbers of staff dealing with transfer pricing in each Member State. The change will
therefore mostly consist of a limited re-assignment of tasks/ job descriptions and as said, a possible
and likely reduction of full-time equivalent staff allocated to these tasks.
Under the Comprehensive Version, some additional, short-term adjustment and perhaps non-
negligeable administrative costs could be generated for smaller groups who would face mandatory
rules for the computation of their tax base (BEFIT). Indeed, for smaller groups, there could be a
need to learn and adapt to the new rules for the calculation of the tax base. The costs would mostly
be those listed above for BEFIT. Under the Composite Version, the companies under BEFIT would
be likely to already undergo similar tasks and costs. However, the Comprehensive Version could
possibly have the effect that many, especially small, groups would have to face a large adjustment
and start some of the tasks anew. Accordingly, for tax administrations, the fact that a larger number
of groups would fall in scope could require some additional oversight costs.
Hence, when comparing the benefits shown in previous sections with the possible costs discussed
here, one could claim that benefits would be expected to make up for the costs notably when it
comes to the Composite Version. This could generate significant savings associated with the
reduction in tax compliance costs and with important expected macroeconomic effects from the
investment (which brings higher GDP and higher tax revenue). It would be the outcome of freed
resources and additional cross-border activity (which increases productivity and eventually leads to
an increase in EU GDP) at expected low cost. Under the Light Version, as it is optional, the
benefits would be much lower, although at similar low costs. The Comprehensive Version would
give rise to benefits on the high end, but some administrative costs would also be higher. In this
context, one would expect that the Composite Version be the most cost-effective. Chapter 7
accommodates a comparison of options in terms of how they could contribute to achieving the
identified objectives of this initiative.
The quantification of costs is extremely difficult for a multitude of reasons. The absence of a
precedent of comparable magnitude to the initiative leaves little room for solid cost-estimation
based on historical data. What is more, the nature of the initiative is cost reduction through
significant simplification. Costs linked to the introduction are therefore transitional of nature as
both tax administrations and businesses will have to adjust to the new rules. Much of these
adjustments will be linked to the phasing-in of new IT solutions, or upgrade of existing systems.
Both taxpayers and tax administrations will have to make that investment.
For businesses, a point of orientation may be the 2022 Commission proposal regarding VAT rules
for the digital age62
(ViDA) which suggests an EU-wide digital reporting requirement (DRR) for
62
Proposal for a Council Directive amending Directive 2006/112/EC as regards VAT rules for the digital age.
COM(2022) 701 final. Available here.
48
VAT, preferably for intra-EU transactions. One of the main objectives is to standardise the
information that needs to be submitted by taxable persons on each transaction to the tax authorities
in an electronic format. While the nature of ViDA is different, there are similarities to the
envisaged initiative. For example, there are administrative costs of implementation and linked to
running a digitally supported, more standardised system that enables the exchange of information
between firms and authorities.
The Impact Assessment associated with the proposal for the VAT in a digital age (hereafter: IA
ViDA)63
, which is in turn supported by a dedicated study (hereafter: ViDA study)64
, reckons that
DRRs generate administrative burdens in the form of implementation costs and ongoing costs.
Implementation costs include acquiring physical and intangible capital, know-how. These
investments will turn into costs as they are written off, resulting in annualised costs. Ongoing costs
mainly cover recurrent expenses for personnel running the system. Already today, there are a
number of different DRR systems in the EU. Among those, SAF-T (Standard Audit File for Tax) is
a file containing reliable accounting data exportable from an original accounting system, for a
specific time period and easily readable due to its standardisation of layout and format that can be
used by authority staff for compliance checking purposes. One of its possible uses is the reporting
of transaction data. Therefore, while of course not tailored to the envisaged initiative, SAF-T is
relatively close to what is needed, i.e., the exchange of accounting information and transactions,
based on a simple standardised file that can be read by firms and authorities across the EU.
SAF-T today is in place in Lithuania, Poland and Portugal.65
Based on the existing evidence, the
ViDA study has come up with an estimation of the implementation costs and ongoing costs
imposed by the application of SAF-T per company and year. Four firm size classes are
distinguished, see columns 2 to 4 in Table 5. The study covers the first ten years after
implementation of SAF-T. One-off costs are annualised through depreciating physical and
intangible investment over a period of five years.66
Table 5: SAF-T system: implementation and ongoing costs, EUR per year and firm (annualised)
Distribution of taxable persons potentially covered by DRR (intra-EU transactions only). Source: ViDA IA, pp. 139-140 for the
distribution of firms.
Other sources: ViDA Study, pp. 44-45 for the cost per firm (col. 1 to 3); Table 4 above for the absolute firm population, TAXUD
calculations.
Remark: Definition of Micro companies: less than 10 employees; small companies: 10-49 employees; medium-sized companies: 50-
249 employees; large companies: 250 employees and over.
63
Impact assessment report - SWD(2022)393. Available here.
64
European Commission, Directorate-General for Taxation and Customs Union, Luchetta, G., Giannotti, E., Dale, S. et
al., VAT in the digital age – Final report. Volume 1, Digital reporting requirements, Publications Office of the
European Union, 2022, https://data.europa.eu/doi/10.2778/541384.
65
ViDA IA, p. 14.
66
ViDA Study, p. 43.
Implemen-
tation
Ongoing
costs Total
EUR/year/firm
All SME
Micro 130 80 210
Small 620 290 910
Medium 1060 250 1,310
Large 1900 570 2,470
49
Taking these costs per firm as a reference, one can use them to calculate the cost per group of
companies in BEFIT. Using the number of groups in Figure 5 above, namely that we have a total of
19,112 MNEs (of which 4,082 are MNEs with a turnover of EUR 750 million and 5373 and SME
groups).
If we consider all possible large MNEs in scope of BEFIT and that they face administrative costs of
EUR 570 on average per year, this makes a total cost of some EUR 8 million per year for these
MNEs. The cost for SME groups would be (taking an average value of EUR 207 for SMEs) a total
of about EUR 1 million. This means total recurrent administrative costs of about EUR 9 million. In
the long run, these costs are expected to decline due to learning effects. Following a similar
process, we obtain the following one-off costs due to the implementation of the initiative, this is
EUR 29 million. One can see these costs as an upper-bound estimate as the frequency of reporting
information for BEFIT purposes to tax authorities will be (much) lower than would be the case for
transaction-based information exchanges in the context of VAT.
This means that a direct comparison with the cost estimates for the ViDA proposal may
overestimate the implementation costs of this initiative. For this reason, if we were to consider only
half of the costs estimated in relation to SAF-T, then a lower-bound estimate would correspond to
one-off costs of about EUR 15 million and recurrent costs of around EUR 5 million per year.
For tax administrations, the annual costs of DRR in the form of SAF-T systems are much lower
than for businesses. A consultation amongst tax administrations where SAF-T is in place resulted in
estimated one off costs of up to EUR 11 million and per Member State, i.e., a total of EUR 297
million.67
Likewise, this amount covers the cost induced by all firms who have to deal with the
administration of VAT, whereas the number of MNEs in scope of the initiative is much smaller.
6.3.6. Environmental and social impacts
No particular and direct environmental impact is expected. Indirectly, one could perhaps consider
that the resources freed from tax compliance costs could be used by companies to invest in more
environmentally sustainable production methods if companies wished. Regarding employment and
social impacts, resources freed from tax compliance costs could be used in productive activities.
These in turn could mean hiring new staff and/or training new staff. Alternatively, companies could
choose to use the extra resources, in order to pay higher wages. In both cases, this could have a
potential positive employment and social impact. Additional resources, either as savings or
generated via investment could also be distributed among shareholders. It is however difficult to
estimate such impacts with precision since they would depend on the decision of each company on
how to use its additional spare resources.
6.3.7. Additional impacts
The analysis also considered whether the initiative may impact fundamental rights. It is not
expected that there would be a considerable effect. The initiative would contribute to levelling the
playing field, removing cross-border barriers, and providing certainty. While that does not mean the
problems outlined in Chapter 2 lead to any discrimination or unjustified restrictions, this could be
67
ViDA Study, p. 33.
50
beneficial for equal treatment, the freedom to conduct a business and the protection of property.
The proposal will also ensure that the protection of personal data is guaranteed.
The impacts on competition have also been taken into account, as described, for instance, in the
competitiveness check in Annex 5. Certain policy options are more likely to have such impact than
others. For example, for BEFIT, the options for the scope will be a decisive factor. An optional
scope under the Light Version may be cost-efficient as it will allow businesses that are likely to
benefit to opt-in but it would nevertheless be less effective in reducing complexity or levelling the
playing field. The Comprehensive Version, on the other hand, would be more effective but would
not necessarily reduce compliance costs for all groups of companies as it does not consider
differences in size and activities. Finally, the Composite Version seems to strike a balance between
ensuring a level playing field for the groups of companies that are most likely to be affected by the
current differences in the internal market but without increasing compliance costs for groups that
are less likely to benefit from a single set of rules.
7. HOW DO THE OPTIONS COMPARE?
The initiative has three general objectives: to simplify tax rules, to stimulate growth and investment
in the EU, and to ensure fair and sustainable tax revenues for Member States (Chapter 4). These are
to be achieved through several specific objectives: reducing tax compliance costs; encouraging
cross-border expansion; tackling distortions in the internal market and thereby levelling the playing
field; reducing risks of double and over-taxation as well as of tax disputes; and increasing tax
certainty for businesses (Chapter 4). To fulfil the envisaged objectives in the most efficient way, the
assessment considers three Versions that are designed on the basis of different combinations of
policy options (Chapter 5) and, accordingly, have different impacts (Chapter 6).
In this Chapter, we compare effectiveness and efficiency of the three Versions and check their
coherence with existing policies of the Commission in the field of direct taxation. The tables below
show a scale that indicates to what extent each of the three Versions contributes to achieving the
envisaged specific objectives and in turn the general objectives. The scale is based on the following
four steps: (0) irrelevant/no change, (+) limited contribution, (++) partial contribution, and (+++)
substantial contribution.
51
7.1. Comprehensive Version: Mandatory for all with the highest degree of
harmonisation and immediate application
Comprehensive Version: Mandatory for all and fully-fledged corporate tax base
Objectives
To reduce tax
compliance
costs
To encourage
cross-border
expansion
To tackle
distortions in
the market
and thereby
level the
playing field
To reduce the
risk of double
and over
taxation and
tax disputes
To increase tax
certainty and
fairness for
businesses
BEFIT
Scope: Mandatory
for all EU members
of groups
+ ++ +++ +++ ++
Tax base:
Comprehensive set of
tax rules
+ ++ +++ +++ ++
Allocation of the
aggregated tax base:
Formulary
apportionment with
intangible assets
++ 0 + +++ +
Transactions with
associated
enterprises outside
the group: Simplified
approach to transfer
pricing risk
assessment
+ ++ + ++ ++
Administration:
Advanced One-Stop-
Shop
+ ++ 0 ++ ++
Rating for BEFIT + ++ ++ +++ ++
Common
Approaches to TP
Inclusion of the
OECD arm’s length
principle and
Transfer Pricing
Guidelines in EU
law and coordination
towards common EU
Guidance
++ 0 ++ +++ +++
OVERALL
RATING
++ ++ + ++ ++
52
Effectiveness:
• The mandatory-for-all character of this version in combination with the common rules for
computing the tax base should diminish the differences between corporate tax systems.
Version 1 therefore substantially contributes to eliminating distortions in business
decisions caused by the interaction of disparate tax systems and also the risk for double-
and over-taxation. The inclusion of the arm’s length principle in EU law and the prospect
for common approaches among Member States to the interpretation of the OECD Transfer
Pricing Guidelines also contributes substantially to eliminating double taxation. This
outcome would also enhance tax certainty and fairness for taxpayers.
• A mandatory-for-all system is expected to encourage cross-border expansions due to the
common rules. However, this positive effect could be significantly mitigated, especially at
the outset, by the introduction of a fully-fledged corporate tax system, which would involve
high transition costs. This could cause a temporary set-back for many EU businesses,
notably groups of a smaller size and with less resources.
Efficiency:
• The mandatory character for all is likely to create important costs for compliance for
groups of companies of a smaller size. These would primarily be one-off costs linked to the
transition towards a new tax system and in the longer term, could contribute, in a limited
manner, to the reduction of compliance costs. The expected decrease in the numbers of
transfer pricing disputes should bring some cost-savings but this would not necessarily be
enough to make up for the expenses of the new BEFIT administrative structures that
would apply to all groups of companies.
7.2. Light Version: Optional, with the least degree of harmonisation including a
transition allocation rule
Light Version: Optional, with the least degree of harmonisation including a transition allocation rule
Objectives
To reduce tax
compliance
costs
To encourage
cross border
expansion
To tackle
distortions in
the market
and thereby
level the
playing field
To reduce the
risk of double
and over
taxation and
tax disputes
To increase tax
certainty and
fairness for
businesses
BEFIT
Scope: Optional
for all EU
members of
++ +++ 0 + 0
53
Effectiveness
• The optional-to-all scope of this Version demonstrates some degree of effectiveness in
reducing compliance costs, but the optionality has no effect on tackling distortions in the
market, or increasing tax certainty for taxpayers. There is only limited effectiveness in
reducing double taxation.
• Under an optional scope, the ‘traffic light system’ can still contribute, to a limited extent,
to preventing double taxation and securing tax certainty, in particular, for taxpayers.
• The inclusion of the arm’s length principle in EU law would contribute to having less
divergent interpretations of the OECD Transfer Pricing Guidelines and to eliminating
double taxation as well as to enhancing tax certainty and fairness for taxpayers.
However, in the absence of EU coordination on future revisions of these Guidelines, its
effectiveness would be limited.
groups
Tax base:
Limited tax
adjustments
+++ +++ ++ ++ ++
Allocation of the
aggregated tax
base: Transition
allocation rule
++ 0 + +++ ++
Transactions
with associated
enterprises
outside the
BEFIT group:
Keep the current
transfer pricing
principles
0 0 0 + +
Administration:
Limited One-
Stop-Shop
+ + 0 + +
Rating for
BEFIT
++ + + ++ +
Common
Approaches to
TP
Inclusion of the
OECD arm’s
length principle
and Transfer
Pricing
Guidelines in EU
law
+ 0 ++ + +
OVERALL
RATING
++ + + ++ +
54
• For groups that may be planning to expand across the border, simplification would
broadly address most objectives and notably, the reduction of compliance costs and the
avoidance of double taxation.
Efficiency
• This Version shows limited efficiency because, by making optional the scope of BEFIT, it
would involve, for tax administrations, the setting up a new tax system without knowing
how many eligible groups will opt in. In other words, it could be too costly an exercise and
cost-ineffective in delivering on the objectives.
• Legislating to integrate the OECD arm’s length principle in EU law, without including
any dynamic reference to the OECD Transfer Pricing Guidelines, would be an inefficient
way to achieve the objectives of this initiative, as it would require that a new EU legal
instrument be proposed each time that the Guidelines are revised.
7.3. Composite Version: Features of mandatory harmonisation including a transition
allocation rule
Composite Version: Features of mandatory harmonisation including a transition allocation rule
Objectives
To reduce tax
compliance
costs
To encourage
cross border
expansion
To tackle
distortions in
the market and
thereby level
the playing
field
To reduce the
risk of double
and over
taxation and
tax disputes
To increase tax
certainty and
fairness for
businesses
BEFIT
Scope: ‘Hybrid’,
i.e., mandatory
for all EU
members of
groups with
annual combined
revenues
exceeding a
certain threshold
and optional for
EU members of
groups with
revenues below
this
++ +++ +++ ++ 0
55
Tax base:
Limited tax
adjustments
+++ ++ +++ +++ ++
Allocation of the
aggregated tax
base: Transition
allocation rule
++ 0 + +++ ++
Transactions
with associated
enterprises
outside the
BEFIT group:
Simplified
approach to
transfer pricing
risk assessment
+ ++ + ++ ++
Administration:
Hybrid One-Stop-
Shop
+ ++ 0 ++ ++
Rating for
BEFIT
++ ++ ++ ++ ++
Common
Approaches to
TP
Inclusion of the
OECD arm’s
length principle
and Transfer
Pricing
Guidelines in EU
law and
coordination
towards common
EU positions
++ 0 ++ +++ +++
OVERALL
RATING
++ ++ ++ +++ ++
Effectiveness
• For the groups of companies within the mandatory scope of BEFIT, the system achieves high
effectiveness in tackling market distortions and reducing the risk of double taxation and
tax disputes. However, the overall picture, as it also includes the optional element for groups
below the agreed threshold, eventually contributes only partially to the above objectives. It
could be that over time it becomes attractive to more firms, increasing its effectiveness.
• For groups that may be planning to expand across the border, the options above contribute
effectively to this objective because the rules are optional and therefore, can be used by those
who can benefit from the system.
56
• The aggregation of tax bases within the group and a common, simple method for allocating
income would contribute to reducing instances of double taxation as well as disputes. As a
result, there will be less costly procedures related to transfer pricing. However, this
contribution would be partial, if compared to the overall picture, because it would only concern
the BEFIT group members. So, double taxation will persist amongst those outside the scope of
the BEFIT and, possibly, in transactions between BEFIT group members and entities outside
the group.
Efficiency
• Although the OSS will involve one-off costs, in order to be set up (i.e., staff training, IT
systems, etc.), the BEFIT Teams would contribute to some degree of tax certainty.
• Keeping the rules optional for groups outside the mandatory scope, would allow them to
choose the simplest and most cost-efficient option. Such a prospect would maximise the
potential positive effects of BEFIT.
• As it is difficult to estimate the effect of formulary apportionment as a method for allocation
of the BEFIT tax base with accuracy, given uncertainties and limited data availability, this
option also appears more efficient for the general objective to ensure the sustainability tax
revenues. A transition rule ensures stability and allows to estimate the impact of the new tax
base and potential effects of introducing formulary apportionment with more accuracy.
7.4. Overall comparison and Coherence with other EU policies
How Do the Versions Rate in Achieving the Objectives?
To reduce tax
compliance
costs
To encourage
cross border
expansion
To tackle
distortions in
the market
and thereby
level the
playing field
To reduce the
risk of double
and over
taxation and
tax disputes
To increase tax
certainty and
fairness for
businesses
Comprehensive
Version: Mandatory
for all and fully-
fledged corporate
tax base
++ ++ + ++ ++
Light Version:
Optional, with the
least degree of
harmonisation
including a
transition allocation
rule
++ + + ++ ++
Composite Version:
Features of
mandatory
harmonisation,
++ ++ ++ +++ ++
57
including a
transition allocation
rule
7.4.1. Comparison between the Three Versions: The Trade-offs
The Comprehensive Version provides for the most extensive degree of harmonisation, which
implies that its features score high in effectiveness (i.e., substantially or partially effective) when
they are assessed against the specific objectives of the initiative. On the other hand, the components
of this Version lose in efficiency, as they are quite expensive to run, in particular when it comes to
setting up the requisite administration structures for operating a OSS. In addition, it would be a
difficult exercise for Member States to compromise for political agreement on a fully harmonised
corporate tax system.
The Light Version, on the other hand, stands on the opposite side of the spectrum. Its features
allow a significant degree of fragmentation to persist and on this basis, their effectiveness in
achieving the objectives is assessed to be lower than under the Comprehensive Version. However,
the discretion that this Version allows Member States could make political agreement easier to
obtain, especially if Member States consider that their businesses can reap some simplification
benefits in an efficient manner, meaning without a need for very costly investments on the side of
the tax administrations. In addition, given that BEFIT would be optional, groups of companies
would only opt in if they were convinced that the benefits would make up for the costs involved in
transitioning to the new system.
Finally, the Composite Version scores the highest of the three Versions because it not only
proves effective in achieving the specific objectives of the initiative but in addition, demonstrates
efficiency, as its limited mandatory scope is delineated to solely include those groups who can
mostly benefit from the common rules and can afford the transition. Furthermore, it envisages a
method of allocation based on previous years’ tax results, which would ensure the sustainability of
national tax revenues and allow for a possible future evaluation of a formulary apportionment
method.
7.4.2. Coherence with other EU Policies
Other EU policies in the area of corporate taxation include the Parent-Subsidiary Directive, Interest
& Royalty Directive, the Merger Directive68
, the ATAD, and the Pillar 2 Directive. These policies
address double taxation in cross-border payments of dividends, interest, and royalties as well as
mismatches between national corporate tax systems that arise in cross-border situations.
BEFIT would be specific to groups. Where there is an overlap in scope with, for instance, the
Parent-Subsidiary Directive, BEFIT would prevail as lex specialis. Other policies such as the
ATAD would act as a complement to BEFIT for anti-tax abuse, which can be clarified in the
68
Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers,
divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member
States and to the transfer of the registered office of an SE or SCE between Member States.
58
proposal, and certain specific adjustments to the interest limitation rule would be integrated for
consistency. For the interaction with the Pillar 2 Directive, see Chapter 1 and Annex 6.
Comparing the different Versions, it should be noted that each Version consists of the same
building blocks and coherence will mainly be ensured at a technical level. Nonetheless, the
Comprehensive and Composite Versions almost obtain the same rating in achieving the objectives
but experiences from other initiatives, e.g., UNSHELL and DEBRA, show that Member States are
often only willing to agree to common rules that are strictly necessary. Chances for a successful
outcome are therefore more likely for the Composite Version. This is also coherent with the Pillar 2
Directive (as it will be largely based on the same rules for adjusting the financial accounting
statements for tax purposes). Regarding Pillar 1, it seems that BEFIT can accommodate where there
is an overlap in the two systems. For more details, see Chapter 1 and Annex 6.
From a broader perspective, the initiative would also interact with other policies. The agreement of
common approaches to transfer pricing may establish a level playing field and ensure a stronger
legal base in the fight against aggressive tax planning practices which are carried out through
transfer pricing arrangements. The Commission, and in particular DG COMP, has carried out
numerous assessments as to whether such arrangements may constitute illegal state aid. However,
without an EU approach to transfer pricing, such arrangements can rarely be effectively addressed
by state aid rules. This creates an inconsistency with the Commission priority to create an economy
that works for people.
8. PREFERRED OPTION
Chapter 5 outlined the available options, including discarded options, Chapter 6 presented selected
combinations of options in three distinct Versions and assessed the impact of each. Chapter 7
compared these Versions against the objectives (from Chapter 4) on the basis of effectiveness,
efficiency and coherence. On the basis of the assessment conducted, the preferred Version is the
Composite version with features of mandatory harmonisation including a transition allocation
rule. Each of the preferred options, which feature in Composite, are analysed below.
8.1. A common set of rules for the corporate income tax base of companies within
large groups (BEFIT)
All the options considered for the purposes of BEFIT were based on the creation of a group
taxation system. The mandate for this project in the Communication on Business Taxation for the
21st Century required the development of a tax system that builds on the existing international tax
framework, in particular the OECD/G20 Inclusive Framework Two Pillar Approach. Therefore, the
preferred policy option for this component can co-exist with existing Member State corporate tax
systems and be compatible with the two Pillars. The overall structure of BEFIT in five building
blocks was taken as a given starting point from the outset of the project and this is why the
existence of the building blocks a prerequisite and never questioned. The analysis below is about
the options under each of the five building blocks.
59
8.1.1. Scope: Hybrid option
BEFIT will have a hybrid scope (option 3). This means that the system will be mandatory only for
groups that prepare consolidated financial accounting statements and earn annual combined
revenues exceeding EUR 750 million. The system will be optional for smaller groups of companies
but it will always be a condition of eligibility that they prepare consolidated financial accounting
statements. This threshold will be in alignment with the GloBE Rules under Pillar 2, which ensures
a consistent approach that complements this internationally agreed framework on a minimum level
of taxation.
The hybrid scope therefore strikes the best balance between achieving the objective of simplicity
for large groups of companies without forcing a greater administrative burden on smaller-sized
groups. Accordingly, it ensures tax certainty for larger groups, which generally have greater cross-
border exposure, and optionality for smaller groups. It creates the best mix of the optional and
mandatory scope for groups, which leads to a business environment that can stimulate growth and
investment in the internal market.
8.1.2. Tax base calculation: Limited tax adjustments to the financial accounts
Option 1 for a simplified tax base complies in the best way the objective to simplify tax rules and
stimulate growth and investment. The calculation of the tax base will be the result of applying a
limited series of tax adjustments to the financial accounting statements of each BEFIT group
member, as prepared to reconcile with the consolidated statements of the group. Additionally, the
framework follows closely the approach in Pillar 2, which should imply that Member States will
have familiarity with the rules. To provide space for growth and investment, Member States will
also be allowed to individually apply additional adjustments to their allocated part in areas not
covered by the common rules (e.g., certain tax incentives). The alternative option, which would
resonate the CCCTB, would contribute to simplicity but to a lesser extent, as it would replace 27
tax systems but set up a detailed framework which would be entirely different from accounting
rules.
8.1.3. Allocation of the aggregated tax base: Transition rule for allocating the
aggregated tax base
Option 3 is the preferred choice. This will be a tax base allocation referring to the average of the
taxable results of each BEFIT group member over previous fiscal years, for instance three fiscal
years (rolling baseline percentage). This option would allow for the possibility of introducing an
allocation formula based on substantive factors at a later stage.
The preferred option is a compromise which immediately addresses the existing challenges in the
internal market through a simple system while accommodating the general views of stakeholders in
the public consultation with regard to the challenges of introducing a new comprehensive corporate
tax system at the same time as Member States are in the process of implementing the OECD Pillars
1 and 2.
A review mechanism would ensure that the effects of the rolling tax base allocation will be
monitored and analysed. Together with new CbCR data and studies of the impact of Pillars 1 and 2,
these data will inform on the prospect for introducing a profit allocation rule that could be based on
a formula. The aim would be to arrive at a permanent allocation rule that would better reflect the
60
modern economic reality and the tax environment after the OECD Pillars 1 and 2 have come into
effect. A dynamic approach would, to the greatest extend possible, contribute to the objective of
stimulating growth.
8.1.4. Transactions with associated enterprises outside the BEFIT group: Simplified
approach to transfer pricing risk assessment
Option 2 is the preferred one for this building block. It aims to introduce simplification in the
method for assessing the risk of transfer prices between BEFIT group members and their associated
enterprises. The options were to keep the existing framework or introduce a risk assessment tool for
transfer pricing arrangements. Considering that simplification is an overarching issue in BEFIT, the
introduction of a transparent and harmonised framework for risk assessment using profit markers
should lower compliance costs for EU businesses and improve efficiency in the use of resources
within businesses and tax administrations. On this basis, BEFIT will propose the introduction of a
‘traffic light system’ under which, each transaction will have to be assessed as being of low,
medium or high risk, depending on how it compares to a series of pre-set benchmarks. This system
will allow predictability of tax administrations and in this way, provide an incentive to taxpayers
for further engagement. Accordingly, an increase in commercial activity will open the way for
growth and, accordingly, higher tax revenues.
8.1.5. Administration system: Hybrid One-Stop-Shop
The preferred option is the Hybrid OSS. This option combines the Advanced OSS and the Limited
OSS. It means that the BEFIT Information Return would be dealt with centrally via the Filing
Authority whereas the individual tax returns would be filed by each BEFIT group member with its
local tax authority. The local tax authorities would also remain responsible for the BEFIT group
members’ settling of tax liabilities, as well as audits and dispute settlement in conformity with
national tax sovereignty. When it comes to elements of the administration of BEFIT, which touch
upon national tax sovereignty, in particular audits and dispute resolution, it is unavoidable that local
tax authorities have to maintain most part of their current role and therefore the limited OSS
applies.
This option prioritises simplicity and the avoidance of increased administrative burden for tax
administrations and creates the best possible balance between the simplicity of an OSS and the role
played by Member States’ national authorities. The BEFIT Teams will play an important role in
this balance. They will aim to reach early agreement on several items of the BEFIT Information
Return and provide tax certainty, which should decrease compliance costs, at least gradually, and
foster the internal market as an environment of growth and investment.
8.2. Common approach to transfer pricing
The preferred option is to include the OECD arm’s length principle and Transfer Pricing
Guidelines in EU law alongside the gradual development of common approaches to the practice of
applying transfer pricing. This option will ensure a coordinated interpretation and application of
the arm’s length principle within the EU. It will provide tax certainty for taxpayers, and tax
administrations will have to deal with less disputes. Furthermore, making this a binding approach,
and in combination with anti-abuse provisions, it should bring down the opportunities for
companies to use transfer pricing for aggressive tax planning purposes. Option 2 will deliver the
best on all pursued objectives. It will ensure greater simplicity by encouraging a common
61
interpretation and application of the arm’s length principle and the OECD Transfer Pricing
Guidelines. In addition, it will stimulate growth and investment through ensuring that the EU can
react quickly and coordinate on the interpretation and application of the guidance.
8.3. REFIT (simplification and improved efficiency)
All groups in the mandatory scope of BEFIT and all groups that file consolidated financial accounts
and opt into BEFIT will benefit from tax simplification by applying a single set of tax rules to
calculate their tax base across the internal market.
This simplification will reduce tax compliance costs (e.g., administrative, legal and time costs),
because BEFIT groups will no longer be required to prepare and compute their taxable results
according to complex sets of national tax rules but, rather, be able to file a centralised tax return
(one-stop-shop) and will benefit from early, EU-wide tax certainty on some items of the tax base,
thanks to the closer cooperation within the BEFIT Teams, explained above. It also entails, for
example, limited additional learning costs to familiarise with the common corporate tax rules, as
the rules for computing the tax base will be harmonised. Finally, by allowing this system to be
optional for smaller groups as long as they file consolidated financial statement, they will be given
the opportunity to reach a business decision that suits best, namely after assessing the compliance
costs and administrative complexity that can arise from dealing with distinct tax rules.
8.4. Application of the ‘one in, one out’ approach
The ‘one-in, one-out’ approach consists of offsetting any new burden for citizens and businesses
resulting from the Commission’s proposals by removing an equivalent existing burden in the same
policy area. As noted above, the preferred option has the potential to significantly reduce tax
compliance costs for groups of companies. Estimated tax compliance cost savings could range from
EUR 11 million to EUR 22 million if only MNEs with a turnover of EUR 750 million are in and
EUR 42 million per year to EUR 80 million per year if smaller groups of companies also opt in.
While it is difficult to identify the precise nature of such costs savings, one can assume that the
great majority are related to administrative activities/reporting obligation linked to national tax
rules, rather than adjustment costs. On the other hand, the additional costs for businesses that will
apply the new rules are tentatively estimated between EUR 15 million to EUR 29 million one-off
costs to businesses and around EUR 297 million one-off costs for tax administrations. Recurrent
costs would range from EUR 5 million to EUR 9 million per year for business groups.
62
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?
Monitoring and evaluation are key constituents of this initiative, regardless of the policy options to
be finally selected. Progress towards achieving the objectives of the initiative will be monitored and
evaluated on the basis of the data already collected and possible new information.
9.1. Monitoring
The Commission will periodically monitor the implementation of the legal proposals and their
application in close cooperation with the Member States. Monitoring in a continuous and
systematic way will allow the Commission to identify whether the policy proposal is being applied
as expected and to address implementation problems in a timely manner. Collection of factual data
on the suggested monitoring indicators will also provide the basis for the future evaluation of the
initiative (see section 9.2).
In terms of objectives, as described in Chapter 4, the general objectives of the proposal are to
simplify tax rules for businesses in the EU and have the effect of stimulating growth and
investment and ensuring sustainable tax revenues for Member States. The specific objectives that
have to be materialised to set the path for achieving this are to: (i) reduce compliance costs, (ii)
encourage cross-border expansion, (iii) ensure a level playing field and reduce distortions in the
internal market, and (iv) reduce the risk of double and over-taxation.
Below, indicators are suggested to measure the success of the initiative on both BEFIT and transfer
pricing, in light of these objectives. The tools in Table 6 are targeted to specific objectives, which
are more suited for measurement.
• A positive evolution of EU GDP, which could indicate that the initiative has effectively
reduced distortions in the internal market and stimulated growth and investment in
the EU;
• A decrease in the number of cases in which Member States had to shut down artificial tax
schemes, which could indicate that the initiative has reduced distortions in the internal
market and enhanced tax certainty and fairness.
• A decrease in the number of mutual agreement procedures (MAPs) between Member State
tax administrations, which could indicate that the initiative has reduced the risk of double
or over-taxation and disputes.
• A positive evolution of the corporate income tax base of Member States, which could
indicate that the initiative has contributed to ensuring fair and sustainable tax revenues
for Member States.
• An increase in the number of large groups that fall under the mandatory scope, which would
reflect that groups in the EU have grown larger and increased their revenues, which could
indicate that the initiative has effectively encouraged cross-border expansion and
stimulated growth and investment in the EU.
• An increase in the number of groups below the threshold for mandatory application which
have opted in. This would indicate that the benefits, such as possibly reducing compliance
costs and enhancing tax certainty, of the new system have been effective from a business
perspective and contributed to stimulating growth and investment in the EU.
63
• A decrease in tax compliance costs for in-scope groups, relative to their turnover, which
could indicate that the initiative has effectively reduced compliance costs for EU
businesses.
• An assessment of good functioning of the administrative framework and in particular, of the
efficiency of the filing system through one tax authority as well as the effectiveness of the
BEFIT Teams in giving early legal certainty on certain items, could indicate having
achieved simplified tax rules, reduced compliance costs and/or enhanced tax certainty.
• A decrease in the number of transfer pricing disputes within the EU, which could indicate
that the initiative enhanced tax certainty and fairness. This indicator would measure
whether the aggregation of the BEFIT tax base and enhanced tax certainty for BEFIT
groups through risk assessment criteria, as well as the common EU approach to a series of
transfer pricing topics have effectively reduced the numbers of disputes.
Table 6: Objectives, Monitoring Indicators and Measurement Tools
Specific Objectives Indicators Measurement Tools
To reduce compliance costs
for EU businesses
Implementation and first BEFIT
running costs for groups under
BEFIT, relative to turnover
Training costs for human resources in
business and tax administrations
Number of groups that opted in
BEFIT
Number and cost of double taxation
disputes between Member States,
which feature as “new entries” (after
BEFIT started to apply) in MAP
procedures and Arbitration
Survey/questionnaire for large
groups, by DG TAXUD, possibly
with external assistance, in
cooperation with Member State
tax authorities
Data received by DG TAXUD
from Member State tax
authorities, which would have this
information available as ‘Filing
Authorities’
Data collected by DG TAXUD on
new MAPs and numbers of cases
under the Arbitration Convention
and Directive on tax dispute
resolution mechanisms
64
To encourage cross-border
expansion
Number of large groups that fall
under the mandatory scope of BEFIT
Number of groups opting to apply
BEFIT
Survey on aggregated data by DG
TAXUD for Member State tax
authorities, which would have this
information available
Data received by DG TAXUD
from Member State tax
authorities, which would have this
information available as ‘Filing
Authorities’
To reduce distortions that
influence business decisions
in the internal market and
thereby level the playing field
for EU businesses
Number of cases in which Member
States had to shut down artificial tax
schemes
Evolution of EU GDP
Information to be provided by tax
administrations through a survey
that will be circulated by DG
TAXUD
National accounts and GDP
statistics by Eurostat
To reduce the risk of double
or over-taxation and disputes
Number of double taxation disputes
between Member States, which
feature as “new entries” (after BEFIT
started to apply) in MAP procedures
and Arbitration
Data collected by TAXUD on new
MAPs and numbers of cases under
the Arbitration Convention and
Directive on tax dispute resolution
mechanisms
As for the sources of information that will be used, the official Balance-of-Payment statistics take
stock of the Foreign Direct Investment (FDI) flows and income streams thereof. From the macro-
economic perspective, this will also be a crucial publicly available indicator. Regarding tax
revenues and other administrative information, considering that the Commission is not a tax
authority, it does not possess primary sources of information. The main sources that TAXUD could
make use of, to derive useful and comprehensive information will be the tax administrations
themselves, as they will be operating the initiative, and the taxpayers in scope of the rules. It will be
important that Member States provide useful numerical data, including data that they will have
collected from taxpayers, to allow TAXUD to come to conclusions on the above topics. For this
purpose, the legal draft will lay down an obligation for Member States to report to the Commission
all requisite aggregated information for a comprehensive assessment.
In order to measure an isolated effect, the initiative can be monitored using also econometric
techniques which typically rely on time series of macro-economic magnitudes where the impact of
the shock can be controlled for. Provided there are no overlapping relevant legislative changes or
shocks, it will be possible to assign an increase in foreign direct investment (FDI) to the initiative
even in the short term, by comparison with a model-based reference scenario based on past
statistical information.
The Commission will review the situation in the Member States regularly and publish a report. The
monitoring framework will be subject to further adjustments in accordance with the final legal and
implementation requirements and timeline.
65
9.2. Evaluation
Considering the magnitude of the initiative and the fact that it will introduce several novel features
in corporate taxation, it will initially be necessary to give Member States time and all necessary
assistance, in order to properly implement the EU rules. On this premise, it would be more effective
to have the first evaluation not earlier than five years as of when the rules start to apply. After
establishing a first picture at that point in time, the evaluation of the initiative should assess the
extent to which the outlined objectives have been met. It will also analyse the extent to which the
expected simplifications for the targeted stakeholders have materialised and assess the related
administrative and regulatory burden. The Commission will inform about the evaluation results in
the form of a Report.
In addition, for BEFIT, it is foreseen that the evaluation will include a review of the transition
allocation rule. The review will inter alia be based on information gathered on the application of
BEFIT together with new CbCR data and an analysis of the impact of OECD Pillars 1 and 2. The
aim of the review is to ensure that the allocation method reflect the modern economic reality and
the new corporate tax environment after the OECD Pillars 1 and 2 have come into effect. If the
Commission deems it appropriate based on the review, it may adopt a legislative proposal to amend
the allocation method, possibly by introducing a formula.
66
ANNEX 1: PROCEDURAL INFORMATION
10. LEAD DG, DECIDE PLANNING/CWP REFERENCES
The lead Directorate General is the Directorate General for Taxation and the Customs Union (DG
TAXUD).
References:
- Agenda Planning: Business in Europe: Framework for Income Taxation (PLAN/2022/663)
- Call for Evidence for an Impact Assessment: Business in Europe: Framework for Income
Taxation (BEFIT) (Ref. Ares(2022)7086603)
- The initiative was announced in the Communication on Business Taxation for the 21st
Century,
COM(2021) 251 final.
11. ORGANISATION AND TIMING
An interservice steering group was set up to steer and provide input to this impact assessment
report. The steering group, led by the Secretariat-General, met on: 2 September 2022, 18 November
2022, 6 March 2023 and 11 April 2023. The following Directorates General were invited to the
Inter-Service Steering Group (ISSG): AGRI, BUDG, CNECT, COMM, COMP, ECFIN, EEAS,
EMPL, ESTAT, FISMA, GROW, INPTA, JRC, JUST, REGIO, SJ, OLAF, TRADE. In addition to
the meetings of the Inter-Service Steering Group, DG TAXUD met in bilateral meetings with
representatives of the following Directorates General to discuss the analysis in the impact
assessment, the design of options, and other policy issues: COMP, FISMA, GROW, JRC. The
report was submitted to the Regulatory Scrutiny Report on 26 April 2023.
12. CONSULTATION OF THE RSB
The Impact Assessment report was scrutinised by the Regulatory Scrutiny Board and discussed in
the relevant meeting on 24 May 2022. In the opinion dated 26 May 2023, the Regulatory Scrutiny
Board outlined recommendations which were integrated in the impact assessment.
It was found necessary that the initiatives assessed in the report that received the positive opinion
with reservation from the Regulatory Scrutiny Board will be presented as separate proposals. For
this reason, this impact assessment report only assesses the impact of the proposal for a Council
Directive on BEFIT and the proposal for a Council Directive on Transfer Pricing.
This represents faithfully the analysis on BEFIT and Transfer Pricing contained in the scrutinised
impact assessment and integrates the recommendations of the Regulatory Scrutiny Board in that
regard. The main changes to the document are summarised in Table A1.
Table A1: TAXUD revisions following the RSB positive opinion with reservations
Comments of the RSB How and where comments have been addressed
(C) What to improve
(1) The report should elaborate on the We have further clarified the lessons learned
67
lessons learned from the previous
corporate tax initiatives. It should better
explain how the initiative fits with the
OECD Pillar I and Pillar II work. It should
also summarise the main features of the
national tax frameworks.
from previous corporate tax initiatives in the
introduction (Chapter 1). This part now includes
an assessment of the outcome of previous
negotiations and how this has been reflected in
the proposal.
The report now also includes a better
explanation of links with Pillars 1 and 2. This
is addressed in the introduction (Chapter 1) and
the dedicated Annex 6 on the OECD Two Pillar
Approach. In the introduction, this is done in
different places: (i) how the use of financial
accounting statements in Pillar 2 corresponds to
a lesson learned from the 2011 and 2016
corporate tax proposals; (ii) to illustrate, among
others, that the context for tax policy has
significantly changed; and (iii) on which design
features BEFIT builds. In Annex 6, the parts on
Pillar 1 and on Pillar 2 have both been extended.
The two Pillars are also addressed in the new
Section 2.4 that was added to explain how the
problem will evolve with EU intervention.
Section 2.2 ‘What are the problem drivers’ now
summarises the main features of the national
tax frameworks. In particular, it explains that
all systems have a common aim and include
rules on income, deductible expenses,
adjustments, the allocation of income of cross-
border businesses, and common features to deal
with mismatches/interactions between the
systems (treaties, exchange of information, anti-
abuse rules, disputes). This section has also been
extended with elements from the Commission’s
most recent Annual Report on Taxation (ART)
of 2023, which includes a comprehensive
overview of the different features of the tax
systems of the Member States.
(2) The report should better discuss the
robustness of the Corporate Income Tax-
related compliance cost estimates under
the baseline. It should also better
substantiate, with further evidence, the
description of the consequences. It should
clarify the causal link between the design
of a particular tax system and business
decisions and discuss the available
evidence on the magnitude of double
The robustness of the Corporate Income Tax-
related compliance cost estimates under the
baseline are set out in greater detail in Section
6.3.1.1 and Annex 4. The report acknowledges
limitations of the available data in this regard. It
also clarifies that the 10% assumption is an
illustrative scenario to be able to estimate the
effects, in absence of reliable information about
cross-border investment behaviour following a
reform of BEFIT’s nature and magnitude. Annex
68
taxation and/or over-taxation. It should
explain how the problem will evolve
without EU intervention, with a
consideration of relevant ongoing and
existing legislation (including international
policies).
4 also provides more explanation for the
assumptions for the survey-based projection of
compliance cost reduction and explains the
regression results (see Chart A4.1).
The description of the consequences has been
further substantiated. In Sections 2.2 and 2.3 on
problems and consequences, stakeholders’ views
have been added to make it clearer that, in
addition to Annex 2 and the published factual
summary of the public consultation, the input has
been duly considered and that it confirmed
identified issues, from the perspective of
different categories of stakeholders. The
description now also refers to additional sources,
including the Commission’s own 2023 Annual
Report on Taxation (ART) and a study by the
European Parliament ‘Overview on the tax
compliance costs faced by European enterprises
– with a focus on SMEs’. As specifically
mentioned in the comments, the link between
the design of a particular tax system and
business decisions has been reformulated to
better correspond to what is intended. It is
elaborated on in Section 2.3.3 and now also
includes additional data, from the ART, and
stakeholder input from a survey – both in support
of what is indeed a logical explanation. The
available evidence on the magnitude of double
taxation and/or over-taxation is discussed in
Section 2.3.4. While available evidence is
limited, this part has been reviewed to make it
clearer that the number and costs of tax disputes
are a form of evidence of the importance of
double and over-taxation. In addition, the section
has been elaborated by adding limited numbers
and studies. For over-taxation, a hypothetical
example was added to illustrate how this is
relevant, even if the section does not include
numerical data. A new Section 2.4 was added to
explain how the problem will evolve with EU
intervention. This considers relevant ongoing
and existing legislation and international
policies. Notably, it discusses relevant EU
directives and the OECD/G20 IF Two-Pillar
Approach.
In addition, the part on subsidiarity (in Chapter
69
3) has been reviewed to clarify that better
cooperation between tax administrations cannot
solve the problems through bilateral agreements.
This part has also been expanded for transfer
pricing. In Chapter 4, the objectives have been
reviewed to include fair and sustainable tax
revenues as a general objective, rather than a
specific objective, because it did not directly
relate to an identified problem/consequence. The
general objective to ensure a level playing field
has been moved to the specific objective to
reduce distortions in the internal market. The two
are related. In Annex 3, a table has been added to
briefly explain how the objectives in Chapter 4
relate to the Sustainable Development Goals
(SDGs). Chapter 5 now includes explanation for
the exclusion of shipping activities. Chapter 5
has also been updated to reflect the legal draft as
much as possible (e.g., BEFIT ‘networks’ are
now BEFIT ‘teams’). More generally, the whole
document has been verified for consistency. The
report has also been updated in Chapter 8 to
reflect that the preferred option for the
administration of BEFIT would be a Hybrid
One-Stop-Shop.
(3) The report should better explain the
analysis of benefits. It should clarify the
validity of the cost saving estimates. It
should better explain the ‘simplified tax
regime’ variable used in the regression
analysis and clarify whether this is a
reasonable representation of the options
proposed in this initiative. The report
should better discuss the likely uptake (and
hence aggregate cost saving potential) of
the option packages with voluntary
elements. When presenting the
macroeconomic benefits, the report should
explain the assumptions and method
behind the estimates. It should strengthen,
with further evidence, the claim that
international companies are more
productive than their non-multinational
counterparts.
Chapter 6, as well as Annex 4, have been
updated to better explain the analysis of the
benefits. The assumptions and method behind
the broader macro-economic estimates are
further explained in Annex 4. The annex
provides additional explanation of the long-term
simulations, in particular Cortax. This includes
the assumptions made, which is also why it is
complemented by a series of sensitivity analyses:
the long-term effects on GDP and tax revenues
are set out for different hypotheses. It also
discusses the country-by-country reporting data
that is used for the analysis. Annex 4 also
clarifies the validity of the cost saving estimates
and includes an explanation of the ‘simplified
tax regime’ variable in Box 1. It provides
literature/studies as evidence on the point that
cross-border businesses would be more
productive than businesses which do not expand
across borders. In addition, a Section 6.3.1.6 on
additional impacts has been added for
70
fundamental rights and competition.
To make the analysis of benefits more evident,
we have also added a dedicated summary of the
expected benefits of the three assessed Versions
in Section 6.3.3.
(4) The report should quantify the costs
introduced by this initiative. The analysis
should build on relevant examples as well
as stakeholder views. In line with this, the
report should strengthen the presentation
of the one in, one out approach and revise
the presentation of costs and benefits in
Annex 3.
Chapter 6 has been elaborated to include a
dedicated sub-section on estimating transition
costs. This part explains why it is difficult to
quantify the costs and it considers the ViDA
proposal and SAF-T as examples for
comparison. The same chapter provides a more
detailed explanation of the costs of tax
administrations for filing and for the BEFIT
Teams. We have also revised Annex 3 to include
costs estimates and to address the comments as
best as possible. However, the report also affirms
that it is difficult to estimate as BEFIT has no
precedent. The report and the corresponding
Annex 2 also provide further details on the views
received from different stakeholder groups.
(5) The report should better present and
discuss the distributional impacts of the
initiative. It should provide the estimates
of the GDP and tax revenue % increases in
absolute (EUR) terms.
A discussion of the estimated distributional
impacts of the initiative is difficult in the current
circumstances with the available CbCR data and
while the implementation of Pillars 1 and 2 is
pending. The proposal therefore only includes a
transition allocation rule which refers to the
average of the tax results of the previous three
fiscal years, with the purpose of ensuring that the
impacts of the BEFIT framework can be
assessed more accurately once the effects of
implementing Pillars 1 and 2 materialise.
(6) The report should present a consistent
description of the monitoring arrangements
with indicators that more clearly outline
what success would look like for this
initiative.
Chapter 9 has been revisited in order to provide
a consistent description and to factor in more
targeted monitoring for the initiative. It now
includes more indicators and the description of
the tools that will be used for measurement are
more detailed. We also clarified where the
information could be gathered, and that
evaluation would require cooperation from the
Member States. As indicated, this has also been
added in the legal draft.
71
13. EVIDENCE, SOURCES AND QUALITY
The evidence base for this impact assessment report is based on various different sources:
• Modelling by the European Commission’s Joint Research Centre based the CORTAX
model.
• Feedback on the open public consultation and call for evidence, as summarised in the
synopsis report in Annex 2.
• Exchanges with additional stakeholders through the Platform for Tax Good Governance and
with Member States in Commission Working Party IV
• Further exchanges with additional stakeholders (i.e., MNEs) on an ad-hoc basis.
• Desk research and quantitative analysis.
72
ANNEX 2: STAKEHOLDER CONSULTATION (SYNOPSIS REPORT)
1. The stakeholders’ Engagement Strategy
The consultation strategy for the present initiative encompasses the following activities:
– Feedback to the Call for Evidence published on the Commission website on 13 October 202269
.
– Public consultation from 13 October 2022 to 26 January 2023.
– Targeted consultation to key stakeholders.
The main objectives of the different consultation streams are to (i) provide stakeholders and the
wider public with the opportunity to express their views on relevant elements, (ii) gather specialised
input to support the analysis of the impact of the initiative and the risks it may entail, (iii) contribute
to design the technical aspects of the future initiative, and (iv) to satisfy transparency principles and
help to define priorities for the future initiative.
2. Feedback on the Call for Evidence
The consultation period through this feedback mechanism took place between 13 October 2022 and
26 January 2023 via the Commission website70
. 46 contributions were submitted during this
consultation period by the following categories of stakeholders:
Overall, stakeholders supported the objectives of the initiative and confirmed existing challenges
for the internal market. It was recognised that businesses face complexity and high cost in order to
comply with the rules of 27 different national corporate tax systems. In principle, feedback showed
that a common corporate tax system can help achieve the envisaged policy objectives of the
initiative. However, respondents also expressed diverging views on the proposed policy options.
Some of the respondents acknowledged that a common corporate tax system together with a
69
https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13463-Business-in-Europe-Framework-
for-Income-Taxation-BEFIT-_en
70
https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13463-Business-in-Europe-Framework-
for-Income-Taxation-BEFIT-_en
73
formulary apportionment of the aggregated tax base to eligible Member States could be an
important step towards fairer taxation. Others underlined that a global approach would be more
favourable. Regarding the timeframe, respondents, especially businesses and business associations,
raised concerns due to the implementation of the global OECD Two-Pillar Approach which will be
burdensome for businesses in the coming years. On this basis, the respondents stressed that this
implementation should be completed and assessed before introducing another set of multilateral
corporate tax rules.
Regarding the scope of BEFIT, several respondents suggested that the BEFIT proposal should have
a broad scope. Most of them preferred the rules to be optional for all companies, including SMEs.
One stakeholder also underlined that this integration of SMEs should apply regardless of cross-
border activities and also be applicable to partnerships.
Regarding the formulary apportionment, 17 respondents (37%) were in favour of including
intangible assets in the formula, while four respondents were against it. The remaining respondents
did not have a clear opinion on intangible assets as they presented a two-sided view. On the one
hand, these respondents argued that intangible assets are the main value driver of most MNEs and
should, therefore, be included to reflect economic reality. On the other hand, they argued that
intangible assets should be excluded in order to prevent tax avoidance. Several respondents also
underlined that due to differences in business activities there should also be sector specific
formulae.
Concerning the administration of BEFIT, both business associations and businesses strongly
supported the proposed “One-Stop Shop”. They also stressed the importance of tax certainty and a
tax disputes mechanism.
In general, business associations welcomed an initiative that could reduce administrative burden
and compliance costs and, additionally, strengthen competitiveness within the EU. Some
stakeholders, however, raised concerns as to whether BEFIT would be the right proposal to
achieving the envisaged objectives. In their concerns, business associations questioned whether the
proposed BEFIT approach, ultimately, would be able to reduce the administrative burden. They
underlined that BEFIT would introduce a new Corporate Income Tax system within the EU which
would operate alongside the existing systems in Member States. They emphasised the need for
ensuring compatibility of BEFIT with international tax standards and tax treaties as the Arm’s
Length Principle would still be applicable to transactions with entities located in non-EU-
jurisdictions. In this regard, concerns were also raised as to whether BEFIT could end up increasing
administrative costs, rather than reducing them.
3. Public Consultation
The public consultation was launched on 13 October 2022. It remained open until 26 January 2023
for a total of 12 weeks. The consultation questionnaire was first published in English. Two weeks
later it was published in the other 22 official EU languages.
The questionnaire consisted of 18 questions which cover the main impact assessment elements,
including the problem definition, envisaged objectives, and the various policy options for the
design of the features of BEFIT. Views were, in particular, requested on: (i) The scope of a new
corporate tax framework; (ii) The calculation of a common tax base; (iii) the aggregation of the tax
bases of members of the BEFIT group and the allocation of this aggregated tax base across Member
74
States; (iv) The application of transfer pricing rules to transactions with parties outside the BEFIT
group; (v) Administrative simplifications.
Stakeholders also had the opportunity to upload additional contributions.
In total, 77 responses were received. The majority of the respondents (Almost 73%) were business
associations and businesses.
The respondents that represented businesses, business associations, organisations etc. differed in
size. Out of these, 10 were micro (1 to 9 employees), 13 were small (10 to 49 employees), 16 were
medium (50 to 249 employees), and 26 were large (more than 250 employees).
The respondents also had numerous countries of origin, in particular Member States. The highest
number of replies came from Germany (22), followed by respondents that could not be traced back
to one single Member State (“EU wide”)(12), France (9), Italy (7), Netherlands (5), and Austria (3).
36
20
12
2
4
1 1 1
Survey Respondents by Category
Business Association
Company/business
EU Citizen
Other
Academic/Research Institution
NGO (Non-governmental organisation)
Public authority
Trade Union
Chart 2 - Overview of stakeholders providing feedback to the public consultation
3
1 1 1 1
2
9
22
2
7
1 1 1
5
1 1 1
2
12
2
1
0
5
10
15
20
25
Chart 3 - Country of origin of stakeholders providing feedback to the public consultation
75
In addition to, or instead of, replies to the standardised questionnaire, 30 position papers were
submitted by stakeholders, mainly representing research institutions and business associations.
Seven respondents provided identical, or quasi-identical, replies. This analysis considered all such
answers. However, one stakeholder submitted two replies to the public consultation. Since this does
not comply with the rules for feedback, one of the two answers was disregarded, while the other
was considered for the purposes of this analysis.
All respondents did, in general, acknowledge the idea of introducing a proposal that would remove
obstacles related to corporate income taxation and distortions in the internal market. However, most
of the respondents had various concerns about the timing due to the implementation of GloBE rules
under Pillar 2 that effectively enter into force on 1 January 2024. While some respondents,
particularly business associations, pointed out that the scope should be aligned with Pillar 2, others
only expressed interest in a fully optional BEFIT system. For a new common set of corporate tax
rules, the majority of the respondents would prefer to use financial accounting statements as a
starting point for computing the tax base followed by a limited series of tax adjustments. Some
respondents had concerns about the formula for the apportionment of the tax base, while many
others stressed the importance of including intangible assets in the formula. Especially businesses
did not seem to support the idea of neutralising intra-group transactions within the BEFIT group
through the aggregation of tax bases, when current transfer pricing rules (following the arm’s
length principle) would remain applicable to transactions with related parties outside the BEFIT
group. As a dual system could create additional administrative costs, the majority of respondents
would prefer to keep status quo for transfer pricing. This said, a majority would agree to the
potential benefits of streamlining the tax authorities’ transfer pricing risk assessment. To reduce the
administrative burden, most respondents strongly supported filing simplifications, e.g., through a
“One-Stop-Shop”.
3.1 Views on Problem Definition
50 respondents (65%) agreed, or partly agreed, that the current situation with 27 different national
corporate tax systems in the Member States gives rise to problems in the internal market. Less than
10 % (partly) disagreed. Furthermore, 39 respondents (51%) agreed, at least to a great extent, that
high compliance costs constitute one of the problems.
7
22
17
17
17
6
9
5
6
13
13
13
9
0
6
2
0
3
2
3
4
18
17
22
Competitive disadvantage for EU businesses, compared
to businesses operating in large markets outside the EU
High tax compliance costs
Risk of erosion of EU countries’ tax bases due to
aggressive tax planning
Problem Definition
To a very great extent To a great extent Neutral To some extent
To a very limited extent Not at all Do not know Blank
Chart 4 - Problem Definition, what do you think are the problems?
76
3.2 Views on Objectives for a new EU corporate tax framework
Respondents found the three most important objectives of BEFIT to be stimulating growth of
business activity in Europe (26), ensuring greater legal certainty (22), and reducing compliance
costs for businesses (14). The reduction of administrative costs for national tax authorities and
raising more tax revenues were considered as the least important objectives by the respondents.
3.3 Views on Main Features of BEFIT
To inquire about the most effective scope of application for BEFIT, several questions were asked in
this regard. 41 respondents (53%) considered a threshold for mandatory application with a
possibility to opt in for others to be (very) effective. A threshold without a possibility to opt in, i.e.,
mandatory for, and applicable to, only certain groups of companies, was not considered effective.
23 respondents (30%) considered that a mandatory application without a threshold, i.e., mandatory
for all groups of companies, would be (very) effective.
Concerning the potential threshold, nearly 1/3 considered that BEFIT would be very effective if a
threshold were set at consolidated global revenues exceeding EUR 750 million.
In contrast, less than 10% considered a threshold below EUR 750 million, but exceeding EUR 50
million, in consolidated global revenues to be very effective. The respondents considered that
BEFIT would be very effective either: (i) if the threshold is above EUR 750 million, or (ii) if it is
mandatory for all groups of companies.
Concerning the possibility of excluding some businesses from the scope of application due to
certain sector-specific activities, nearly 50% disagreed or partly disagreed with such a prospect.
13
2
22
10
13
19
9
28
13
25
12
5
7
7
4
13
15
14
A compulsory system without a threshold
A threshold for compulsory application without a
possibility for groups below the threshold to opt in
A threshold for compulsory application with a possibility
for groups/companies (including SMEs) below the
threshold to opt in
Scope (1)
Very effective Effective Not very effective Not effective at all Do not know Blank
Chart 5 - Answers on the Scope of BEFIT (1)
22
4
5
14
9
23
12
8
8
8
9
15
15
6
7
4
21
25
29
23
9
13
12
7
18
10
12
12
13
12
Groups with over EUR 750 million of consolidated global…
Groups with over EUR 250 million of consolidated global…
Groups with over EUR 50 million of consolidated global…
All groups, regardless of their revenues (including SMEs)
Standalone companies, regardless of their revenues
Scope (2)
Very effective Effective Not very effective Not effective at all Do not know Blank
Chart 6 - Answers on the Scope of BEFIT (2)
77
Approximately 20% expressed (at least partly) support for such an approach.
Another main feature of BEFIT is the calculation of an aggregated tax base. In this regard, 45
respondents (58%) considered that using the financial accounting statements as a starting point
followed by certain tax adjustments for arriving at the BEFIT tax base (same principles as in
GloBE rules under Pillar 2) could be (very) effective. 42 respondents (55%) would be in favour of
restricting the required tax adjustments to a minimum, i.e., they (at least partly) agree.
With regard to the actual required tax adjustments, respondents had different views on which tax
adjustments to the financial accounts should be the key. According to the replies, adjustments that
(i) give tax credits for tax already due on income outside the EU, and (ii) take into account interest,
royalties and other income paid to a company within the scope of BEFIT were considered to be the
most important. Adjustments in relation to entering and leaving BEFIT (corporate restructuring
and transition phase) were seemingly the least important.
In relation to the prospect for cross-border loss relief, respondents had a strong joint view. Whereas
only 3% (out of 64 respondents who replied to the question) disagreed, a strong majority of more
than 2/3 were in favour. Taking into account those respondents who also partly agreed, almost 90%
supported cross-border loss relief.
The aggregated tax base will be allocated using a formula to the Member States in which a group
operates. As to whether the tax base should be apportioned to the eligible Member States using a
formula, respondents also had a strong view. Whereas 18 respondents disagreed or partly disagreed
with such an approach, more than 50% (42 of 77) thereof agreed or partly agreed. Without taking
into account those who did not answer or had no answer, a strong majority of 2/3 (42 of 62) was in
favour of this approach.
Considering how a formula for the apportionment of the aggregated tax base should be designed,
the respondents had different opinions, particularly in regard to whether intangible assets should be
taken into account. In fact, their answers seemed relative to the different respondent categories
which they belong to.
Out of the 34 respondents (44%) who supported the idea of including intangible assets in the
formula, 31 came from the area of business associations or businesses. Those who were in favour
of excluding intangible assets from the formula (almost 25%) were EU citizens or came from the
academic research area. Only 5, corresponding to less than 10% of the respondents, who would
agree to exclude intangible assets came from the field of business associations or businesses.
On the weight of different factors in the formula, a fifth part of the respondents (approximately
20%) agreed or partly agreed with the approach of giving higher weighting to sales by destination.
However, the opinions were widely spread as almost 30% disagreed or partly disagreed with the
idea of giving sales by destination more weight.
On questions concerning how transactions between members of the BEFIT group and related
parties outside the BEFIT group should be treated, the respondents had the clear view that the status
quo for transfer pricing rules should be maintained. From a group of 57 respondents (excluding
those who did not reply or did not know), a majority of 35 (60%) were in favour (agreed or partly
agreed) of this approach, whilst almost 1/3 opposed (disagreed or partly disagreed). Regarding the
78
idea of using certain pre-fixed benchmarks for the allocation of profit to related parties outside the
BEFIT group, the majority did not respond or had no opinion.
In relation to risk assessments performed by national tax authorities in transfer pricing cases
concerning transactions between members of the BEFIT group and related parties outside the
Group, 42 respondents (more than 50%) agreed or partly agreed to a possible streamlining across
the Member States. Only 9% (partly) disagreed. On this approach, almost two thirds had the
opinion that a possible streamlining should be applicable to both inbound and outbound
transactions. Only 2 respondents did not favour this approach (under 3%).
Finally, respondents had a clear message regarding potential simplifications in relation to the
administration of BEFIT. Out of 60 respondents, almost two thirds (63%) would prioritise filing
simplifications over audit simplifications. The least favoured option for potential simplification and
reduction of compliance costs was dispute resolution. It was favoured by only 20% but almost 50%
ranked it as the least effective option which could provide for simplification.
The results in this sub-section have to be considered with the caveat that a significant percentage of
the respondents to the survey did not provide replies directly to the questionnaire but submitted
own comments through position papers.
4. Position Papers
A total of 30 position papers were received. Out of these, 8 position papers were already included
and evaluated in the Call for Evidence. Two of them were not linked to BEFIT. A synopsis of the
relevant comments is grouped in 3 categories depending on the industry/sector of the respondent.
4.1 Positions of Tax Advisers
6 position papers came from respondents in the area of tax consultancy. From this category, most of
the respondents argued that they are in favour of addressing the issues related to the existence of 27
different corporate tax systems in the internal market and establishing a common corporate tax
framework within the EU. They emphasised that, if designed accurately, such an initiative could
boost the competitiveness of the internal market, reduce compliance costs, and support investment
in the EU.
49
2
26
Streamlining Risk Assessments in Transfer Princing
Yes No Blank
Chart 7 - Streamlining tax authorities transfer pricing risk assessment
79
Aside from the potential benefits of a common corporate tax framework, the respondents raised
concerns about the timing as introducing new rules would entail a risk of increasing the
administrative burden. Such risk is not desirable when businesses are currently engaged in
implementing GloBE rules under Pillar 2. Nonetheless, all respondents of this category pointed out
that it would be important to closely align BEFIT and Pillar 2 and ensure a proper interaction
between the two systems, in order to achieve the envisaged policy objectives, particularly the
simplification prospect.
The majority of the respondents also supported the idea of using the consolidated financial
accounting statements as a starting point for the calculation of the BEFIT tax base as this would
ensure cost efficiency and entail greater simplicity for businesses.
Finally, all respondents of this category had a clear common view on the formulary apportionment.
According to their replies, the formula (and the factors it will be built on) should appropriately
reflect the contribution to value creation. Profits should be attributed to the jurisdiction where the
economic activity and investment take place. On this basis, all respondents stressed the need for
including intangible assets as a factor in the formula. Several respondents even pointed out that the
formula should distinguish between acquired and self-generated intangible assets.
4.2 Positions of Business Associations
13 position papers were received from respondents qualified as business associations. Respondents
of this category argued that the current EU tax framework is inadequate for taxpayers. In addition,
most of the respondents underlined that the removal of income tax obstacles in the internal market
would be essential to enhance growth and competitiveness in the EU. Removing such obstacles
could also foster innovation and support the creation of jobs. All of them saw the harmonisation
and streamlining of tax rules as a way forward to facilitate cross-border trade and activities.
Nonetheless, some of the respondents had strong doubts as to whether BEFIT would be the right
initiative to tackle the issues.
Respondents recognised enhanced tax certainty as the most important objective of an initiative like
BEFIT. All of them strongly supported that BEFIT should be aligned with existing multilateral tax
agreements and other international initiatives, such as the GloBE rules under Pillar 2. Like in the
position papers from tax advisors, the respondents of this category were concerned about the
potential risk that BEFIT increases the administrative burden, even if it would only be for a short
period, due to businesses’ ongoing process of implementing Pillar 2.
For the scope of BEFIT, the respondents supported the idea that BEFIT should be optional for all
groups of companies, including both MNEs and SMEs. If, however, the mandatory application
were to be subject to a threshold, the respondents stressed that the possibility for opting-in should
be considered for the groups not reaching the threshold.
Regarding the calculation of the BEFIT tax base, the respondents of this category did not
demonstrate a joint view. Some stressed that a common corporate tax base should be based on a
uniform accounting system, such as IFRS. Since this accounting system is already applied, it would
lead to an effective cost relief for businesses. However, some respondents also underlined that the
tax base calculation should be aligned with the GloBE rules under Pillar 2 in order to avoid the
need for complying with several sets of rules and calculations.
80
Respondents pointed out that the formulary apportionment could lead to a substantial
simplification. In order to achieve a fair distribution of the taxable base among Member States,
intangible assets should be included as a factor in the formula as they represent a key value driver
in many businesses. Without intangible assets the composition of the formula would not reflect
modern economy and the formula would already be considered “outdated”.
Respondents also stressed the need for a reduction of compliance costs for businesses operating in
the internal market. In particular, they underlined that BEFIT should remove unnecessary reporting
requirements. Several respondents favoured the proposed “One-Stop-Shop” solution, which would
allow groups in scope to settle all filing issues with only one tax authority. In their view, this would
effectively reduce the administrative burden and limit tax disputes.
Finally, the respondents found that the proposal was not clear regarding the coexistence of BEFIT
and transfer pricing rules. Although some respondents acknowledged that BEFIT could eliminate
tax frictions resulting from transfer pricing disputes, others pointed out the importance of keeping
the current transfer pricing principles.
4.3 Positions of Academia
One academic research organisation submitted a detailed position paper welcoming an EU initiative
targeted at strengthening the competitiveness of EU businesses and increasing the willingness to
invest in the EU. The respondent underlined that a common corporate tax framework in the EU
which is closely aligned with the OECD Pillar 1 and 2 projects represents a promising approach to
tackle issues related to administrative burdens and tax certainty.
In order to achieve the main objectives of BEFIT, such as a reduction of compliance costs, it is
argued that the proposal should have a wide scope and allow for SMEs to opt in. This would ensure
a level playing field and, at the same time, not force SMEs to apply BEFIT rules.
Regarding the formulary apportionment, the respondent underlined that the inclusion of intangible
assets could lead to tax planning due to the high mobility of these assets. Consequently, intangible
asset be excluded from the formula.
This position paper pointed out, in line with the other respondents, that BEFIT could increase the
administrative burden, at least in the transition period immediately after the adoption of the
initiative. On this basis, it was stressed that the proposal should carefully balance tax accuracy and
administrative costs.
5. Targeted Consultations
Over the course of the policy development process, a number of interviews and meetings were
carried out with different stakeholders, including businesses of different sizes operating in different
sectors. The key take-aways from these discussions are compiled in separate meeting reports that
can be found in Annex 2A. Overall, it can be said that the stakeholders favour the objectives of
simplification, tax certainty, and tax competitiveness but their views on the design of the initiative
vary relative to their size and activities.
Many stakeholders were from bigger groups that would be in scope of BEFIT irrespective of
whether a threshold of EUR 750 million was introduced. The stakeholders did, in general, see a
value in having a broad scope and alignment with GloBE rules under Pillar 2. One stakeholder
81
found that there could be competition between companies around the scope of the proposal, e.g., if
a EUR 750 million turnover criteria is introduced, as groups may try to limit their turnover if they
wish to avoid being in scope of BEFIT. Another stakeholder was in favour of introducing BEFIT
rules with a narrow scope with the possibility of widening it over time.
Some financial and insurance institutions proposed to exclude certain business sectors, such as
banks and insurance companies, from the scope as these sectors operate on the basis of a peculiar
business model and are already highly regulated by sector specific rules.
Stakeholders which were members of bigger groups were, generally, in favour of a simple approach
using a common accounting standard, such as IFRS, as a starting point for the calculation of the tax
base. In the absence of one common standard, one member of a bigger group asked for guidance on
how to reconcile the differences between accounting standards, such as US GAAP and IFRS, for
both taxpayers and tax administrations in the EU. Many stakeholders informed that they do not
currently have consolidated financial accounts at EU level and that this could create an additional
administrative task.
Most stakeholders did not wish for a fully harmonised tax base. Instead, they drew attention to then
need for applying a number of limited tax adjustments, though, the opinions on which tax
adjustments are needed vary. Some of the adjustments that were considered important, included
depreciations, cross-border loss relief, dividends, amortisation. Stakeholders also seemed to share
the view that Member States should still be able to design specific aspects of their apportioned
share of the tax base. One question how revenue deriving from activities in third countries would be
treated in the calculations.
Some stakeholders from financial and insurance institutions stressed that if they were to be in the
scope of BEFIT, an alternative sector specific formula should apply. One proposed that adjustments
to the formula for financial services in the CCCTB proposal could be followed.
On the allocation of the aggregated tax base, most stakeholders preferred a hybrid approach with a
formula that includes intangible assets. Different opinions were expressed on how to estimate the
value of the intangible assets. Sales and labour were considered other important factors in a well-
functioning formula. As to the effects of the apportionment, several stakeholders asked for
clarification on the interaction between BEFIT and the OCED’s Pillar 1 and/or 2 projects. One
stakeholder expressed concerns regarding the timing of BEFIT and these cost-heavy OECD
projects, while other stakeholders expressed the need for a transition period.
In general, not many views were exchanged on transfer pricing as most stakeholders seemed to
favour a continuation of the current rules. While one stakeholder underlined the need for guidance
on how to use the arm’s length principle in the EU, others were in favour of the ‘traffic light
system’ in the risk assessment.
All stakeholders favoured administrative simplifications and found a “One-Stop-Shop” to be crucial
for legal certainty and reducing compliance costs. Some added that a common administration
should have features that provide for filing one single tax return, sorting out disagreements with all
EU tax administrations at an early stage, and a dispute resolution mechanism.
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ANNEX 2A: TARGETED CONSULTATIONS – COMPILATION OF
INTERVIEW REPORTS
Key Takeaways from the BEFIT Building Blocks Interview 25.3.22 #1
25.3.2022
The interview opened with a short overview from the company about their business
model and the tax considerations for them. They are a telecommunications company.
On the tax base they believe that simplicity is key and the closer we can align to
accounting standards the better. A One Stop Shop is critical for any proposal and legal
certainty is one of the biggest challenges facing companies. They were involved in
providing stakeholder input on the CCCTB proposal in the past and are supportive of the
BEFIT goals. Tax planning is not a major feature of their industry as it is difficult to shift
the tax base. Important elements of a tax base would be capital allowances (depreciation),
and rules on rollover relief, and dividends should be exempt. IFRS should be the basis
and adapted to the specifics.
However MS should also be able to design locally specific aspects of the tax base and
consideration should be given to accommodate national rules. Local tax should also be
taken into consideration as a tax expense for reducing the corporate tax base.
Regarding the methods for profit allocation, they liked the second option – the hybrid
option, which involves using pre-determined benchmarks for remunerating the routine
functions and a formula for apportioning the residual. They noted that in their industry
intangibles are often kept where they were acquired, as business expansion happens
through acquiring local telecoms. Withholding taxes, in particular when they are charged
outside the EU on inbound payments, are also something that should be dealt with in a
proposal.
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Key Takeaways from the BEFIT Building Blocks Interview 30.3.22 #2
The company began by giving a general overview of their business, they are a large
company in the retail sector.
TAXUD gave the background to the project and structured the conversation around the
four building blocks.
I. Scope
On scope they did not have much to add on this point as they will be in scope regardless
of the option chosen due to their large turnover. They noted that there could be
competition between companies around the scope of the proposal – for example if set at
€750m turnover then companies may try to limit their turnover if they wish to avoid
being in scope.
II. Tax Base
On the base they noted the general trend is to follow IFRS. They stated this is positive for
large groups. They were not in favour of creating a harmonised EU tax base from scratch.
The company thought the starting point should be to use the second sub option based on
the financial accounts: To use the financial accounts of each EU tax resident entity within
the group. This would be easiest and simplest way to proceed. A participation exemption
or double tax relief adjustment will be needed.
The company stressed the importance of using a common standard for the accounts
otherwise we cannot compare different companies. Most companies use IFRS, apart from
US where US GAAP is more common. Adjustments to the financial accounts should be
limited but it is also important to maintain certain tax incentives to keep the EU
competitive. They also noted that third country losses should be taken into account.
III. Profit Allocation
For building block 3 the question is how do we simplify the profit allocation rule?
TAXUD explained the two different options – either a formula or a hybrid approach.
The company preferred an option as close as possible to Pillar 1 – the hybrid approach.
They raised the questions: what is the rule order between BEFIT and P1, and what
happens if you distribute to countries outside the EU. TAXUD noted that the purpose of
BEFIT is to establish a new tax system and arrive at a corporate tax liability, but P1
comes on top of this. To be reflected how we can ensure P1 obligations are fulfilled for
MNEs in scope.
85
IV. Administration
As regards administration the company expressed preferences for a One Stop Shop,
Dispute Resolution provisions, and the elimination of double taxation – it is important
that tax doesn’t need to be paid twice on the same income.
Key Takeaways from the BEFIT Building Blocks Interview 07.4.22 #3
This is a company that operates in the pharmaceutical sector, conducting R&D,
manufacturing and distribution activities.
TAXUD gave the background to the project and structured the conversation around the
four building blocks.
I. Scope
On scope the company did not have much to add on this point as they will be in scope
regardless of the option chosen due to their large turnover. They were just asking for
clarifications on the computation of the thresholds, within or outside EU. They had
understood the 250 mil and 750 mil threshold as a cumulative conditions: 750 mil for the
group to be in scope, and eventually 250 mil for the EU part of the activities.
II. Tax Base
On the tax base they noted that, as per now, their general trend is to follow local national
GAAP and when they consolidate they follow IFRS (+ adjustments). At present they do
not consolidate financial account at EU level and as a consequence either of the two sub-
options would be entail some work for them, but feasible. They do plan to move to IFRS
in the future.
Should the IFRS be among the accounting principles selected for BEFIT, the
accounting/tax adjustments to be ruled shall include the tax amortisation for those
intangibles – such as trademark and goodwill – for which IFRS prescribe impairment and
no annual amortisation: for instance, a specific tax rule in this respect, allowing tax
amortisation, had to be enacted by Italy (without such rule, groups like this company
might reconsider adopting IFRS due to, among other reasons, this unfavourable
mismatch if compared with local GAAP, where amortisation is allowed). They suggest to
explore what if a PE does not file financial accounts according to national law.
86
On the depreciation/ amortisation side, a simpler, standardised time horizon of
depreciation of assets would be a plus (against declining balance method in CCCTB).
Cross-border loss relief also important to be explored under BEFIT; like the IT rules,
e.g., a % of the EU consolidated tax base.
III. Profit Allocation
For building block 3 the question is how we simplify the profit allocation rule. TAXUD
explained the two different options – either a fully fledge formula or a hybrid approach.
The company explored and raised several questions;
Among the proposed options, they seem to prefer the hybrid approach. They noted that
the value of intangibles are not visible (so a formula based on “labour and (fixed) assets”
would not suit their activity). They are sceptical on establishing a “fixed margin
remuneration” for routine activity and they would rather prefer a ‘traffic light system’,
considering that the possibility to vary remuneration within pre-determined ranges can
better mirror changes in the group P&L structure due to restructuring or refocusing
activities (e.g., new competitive forces, new portfolio etc.); they mentioned that the
possibility to agree in advance with tax administrations on the range of the remuneration
or to rebut the presumption of a “fixed margin” would be key in any case;
With regard the allocation of residual profit, they noted that considering only third-party
costs as allocation key seems too narrow and that also related party cost should be
considered e.g., cost contribution arrangements which are ultimately beneficial to the
entire group.
IV. Administration
As regards administration the company expressed preferences for a multilateral tool, risk
reduction tool, to cope with the implications arising from BEFIT, which would put all
national tax administrations together (opt in/ opt-out).
87
Key Takeaways from the BEFIT Building Blocks Interview 07.4.22 #4
The company began by giving a general overview of their business. They are a company
that operate in the haut-de-gamme manufacturing sector. They are in favour of
simplification, tax certainty, but also tax competitiveness.
TAXUD gave the background to the project and structured the conversation around the
four building blocks.
I. Scope
On scope the company did not have much to add on this point as they will be in scope
regardless of the option chosen due to their large turnover.
II. Tax Base
They have a preference for sub option i) – to use financial accounts of each EU entity (+
adjustments) and then consolidate. They already follow IFRS, but they do not
consolidate the EU tax base. On the base they noted they already follow IFRS (+
adjustments). Moreover, as they do not consolidate at EU level at present; their position
is neutral; they would need to appoint one EU entity to consolidate, but that is feasible.
They are in favour of IFRS with few adjustments.
High interest on the future scope for competition among MS: What is the definition of
profit in (should the tax base be determined at the level of EBIT or anything else): is the
tax rate left to MS to decide?; what is the treatment of interest deduction (NID when
financing through equity), will tax incentives still be available (e.g. patent box income,
R&D costs incentives, tax credits…). TAXUD explained that some aspects of the tax
system will remain within the prerogative of the MS (provided all other rules are
respected, e.g. MET rate, patent boxes), and some of them still need to be explored and
taken into account in light of future actions, such as DEBRA etc. On the other hand, we
expect that MS in the negotiation phase will defend as much as possible their possibility
to remain competitive in this area, and the tax incentives.
III. Profit Allocation
For building block 3 the question is how do we simplify the profit allocation rule.
TAXUD explained the two different options – either a formula or a hybrid approach.
The company seem to prefer the hybrid approach. They are not in favour of an approach
that would allocate too much profit (give a premium) to “market jurisdictions”; In any
case, they stress that a common set of rules could be helpful but what is key is having a
common administration of the rules with the possibility to have an early tax certainty in
agreement with the EU tax administrations.
88
IV. Administration
As regards administration the company expressed preferences for a One stop shop; one
tax return, dispute resolution provisions – all crucial if BEFIT is meant to reduce
“compliance costs”. Multilateral agreement, risk reduction tool, to cope with the
implications arising from BEFIT, which would put all national tax administrations
together.
89
Key Takeaways from the BEFIT Building Blocks Interview 8.04.2022 #5
The company began by giving an overview of their business: they are a financial
institution.
TAXUD explained the goal of the proposal is to create a new tax system for the EU, the
intention is not to look at rates as this is being dealt with by Pillar 2.
This company are the first financial services company interviewed. While they
considered that the second policy option involving a hybrid approach to profit allocation
was the best, however they are of the view that the banking industry should be carved out
either from the BEFIT proposal altogether or only from the formulary apportionment for
allocating profits. They noted that banking is a highly regulated industry. They do not
believe that a formula is an effective method to allocate profit within a banking group.
They also noted that intangibles are not a feature of the banking industry and explained
that they often use Cost Sharing Agreements for doing their transfer pricing across the
group. They also clarified that they provide banking services from “bricks and mortar”
offices around Europe and they are not a fintech company.
90
Key Takeaways BEFIT Interview 12.4.22 #6
This is a fashion company. The company understands that the aim of this proposal is
simplification. From their point of view, transfer pricing is simple. The company
indicated they would like a follow up meeting to further discuss the proposal. They
undertook to go into detail on the options paper and come back to COM.
Tax Base
As regards the tax base, not all companies in their group use IFRS. The company would
like to see an simplification of the tax base. They believe that relying on financial
statements would bring simplicity. COM noted that all companies in the group would
have to file on the basis of the same system. The company noted that Pillar 2 and the
process to arrive at an effective tax rate will create a lot of complications in practice.
Transfer Pricing
As regards transfer pricing they have selected their TP approach in consultation with tax
authorities. They did not have an initial view on the ‘traffic light system’. As regards
benchmarks they noted that in the past they have preferred a worldwide approach.
As regards country by country reporting they noted that it involved a huge amount of
work for MNEs however they do not receive feedback from tax authorities and so it is
difficult to know their views on the relevance of the information they provide.
Administration
On tax administration the company do not have a difficulty dealing with more than one
tax authority. They have joined the OECD International Compliance Assurance
Programme and their relationship is very good with the tax authorities. Their tax strategy
is based on maintaining good relations with the tax authority.
91
Key Takeaways from the BEFIT Building Blocks Interview 26.4.2022 #7
This is a large multinational group involved in the design, construction, operation etc. of
transport infrastructure
Scope: On scope they believe that we should maintain consistency with other initiatives
such as the CCCTB proposal, Pillar 2 and Country by Country Reporting. A level
playing field is an important consideration as regards the scope. In the construction
industry, branches are needed as the entity should be present in the country.
Tax Base: The company believe that we should stick as close as possible to financial
accounts. They noted that there had been moves in this direction in the 1990s in Spain.
The company use IFRS and they find that financial accounting rules are quite appropriate
for dealing with their business due to the fact that construction normally takes more than
one year. The company also thought it would be better to use the financial accounts of
each EU tax resident entity within the group
Profit Allocation: The key consideration here is that this should be kept as simple as
possible. It is natural to allocate on the basis of sales. Any profit allocation formula
should take into account how to treat licenses under the assets factor (such as for toll
roads), without creating a distortion.
92
Key Takeaways from the BEFIT Building Blocks Interview 27/04/2022 #8
The Interviewed MNE is a European fashion brand and have local subsidiaries in 7
Member States and 25 third countries.
They mentioned that their main intercompany transactions are covered by Advance
Pricing Agreements
On the scope of BEFIT, they agreed that the tax group should be a sub-set of the global
group and encompass only the EU tax resident entities. They were also in favour of
aligning the threshold for the captured groups with that of Pillar 2 (i.e., annual combined
worldwide revenues of 750 million).
On the determination of the tax base, they expressed the view that the use of IFRS as a
starting point can be tricky and influence the tax results. In this regard, they gave the
example of leases. As every lease is treated as a financial lease under IFRS, the notional
interest is not reflected in EBIT (earnings before interest and tax), which is calculated
through the Profit & Loss Account. In addition, in relation to the adjustment for taxation
of items of the Balance Sheet which are entitled for an accounting entry of longer than a
year, there are discretionary choices which one can agree with auditors and this could
leave room for circumvention.
They informed that more than 60% of their revenues come from non-EU customers and
wondered how this would impact the allocation of income via the formulary
apportionment. In addressing intangible assets in the formula, they identified the
following assets as critical: the brand (marketing and promotional expenses), design and
patents (high-quality and exclusive raw materials).
93
Key Takeaways from the BEFIT Building Blocks Interview 24/05/2022 #9
The interviewed MNE is an entertainment company. It provides B2C services and is
present in the EU with local subsidiaries in many Member States.
They expressed positive feedback about BEFIT as long as double taxation is avoided.
They however raised concerns about the system’s potential interaction with Pillar 2,
which would require further elaboration.
The discussion focused on the use of financial accounts as a starting point for computing
the tax base and on transfer pricing. They also insisted on the need for maintaining tax
incentives per sector; e.g., for production, job creation, that is if BEFIT is meant to tackle
tax incentives that lack economic substance.
As a group with their Ultimate Parent entity outside EU, they would need to identify and
designate one jurisdiction in the EU for their tax filing under BEFIT and also determine
which accounting standard the group would have to use as a starting point for computing
the tax base in the EU.
They explained that due to the distinct features of the various financial accounting
standards, individual elements and differences between the standards are likely to have
an impact on the outcome of the tax rules that will be used for adjusting the financial
accounts. On this point, they stressed the need for elaborating Guidance on how to
reconcile the differences between US GAAP and IFRS for both taxpayers and tax
administrations in the EU. The interviewed MNE pointed out to four main areas where
there are significant differences between US GAAP and IFRS:
• Impairment losses: the IFRS allow tangible assets to be revalued (except
for goodwill) while the US GAAP prohibit taking impairment into
account.
• Intangible assets accounting / R&D costs for intangibles: under IFRS, the
costs can be capitalised (and thus depreciated over time) while under the
US GAAP, development costs are immediately expensed.
• Fixed assets - Tangibles – value for depreciation purposes: under IFRS,
the value is first recorded at cost and can be revaluated later on up to
market value while under US GAAP, the property is valued and
depreciated at historical cost.
• Fair value measurement: under IFRS rules, fair market value is taken into
account while this is not allowed under US GAAP.
94
On the formulary apportionment, they were reticent about using the costs of R&D,
marketing and advertising as a proxy for the value of intangible assets, as they find that
businesses can still choose where they incur such costs.
Additionally, it was mentioned that if the aim is to go beyond the CCCTB, there will be a
need for Guidance on how to use the arm’s length principle (ALP) in the EU.
Specifically, this would concern the question of whether the ALP is still an income
allocation rule. On this point, it would also be necessary to look into the interaction with
Pillar 2.
For transactions with related parties outside the BEFIT group, the interviewed MNE
seemed to be in favour of the ‘traffic light system’, but mentioned that such a system
should be linked to cooperative compliance initiatives (fast track - low risk to avoid
auditing). They would also be in favour of developing an Amount B-style method for
income allocation in the EU.
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Key Takeaways from the BEFIT Building Blocks Interview 31-05-2022 #10
This is a financial institution with a large insurance business.
• Scope :
The company raised the question of whether the insurance sector (same as banking)
should be in scope of BEFIT, or excluded altogether (same as in Pillar 1), given: their
activity is highly regulated and the presence of local capital /people/ premises in each
jurisdiction. If it were finally decided to bring financial institutions into the scope of
BEFIT, the formulary apportionment would need to be adjusted, in order to address the
special nature of financial services.
Also, IFRS allow the use of materiality thresholds in consolidation. So, entities are
excluded from the consolidated financial accounts (threshold being agreed with external
auditors). BEFIT should allow those exclusions as the group does not even collect the
local financial accounts of excluded entities and this would create workload. The same
issue exists however with the application of the Globe Rules.
• Transactions with related parties outside the Group and EU
The company is in favour of a risk assessment mechanism. They have a rather a positive
experience with something similar in UK. However, given the complexity of their
business, which is divided in life and non-life insurance, it would be doubtful whether the
insurance sector could ever qualify for low risk and benefit from simplified compliance.
• Accounting standards:
It is necessary to choose one acceptable accounting standard in the EU (IFRS being the
most natural one). However, as the application of IFRS 17 is extremely recent, its impact
on the insurance industry is still unknown, so using it as a tax base could be pre-mature.
The use of local GAAPs could result in material differences as local GAAPs can vary
significantly.
• Tax consolidation regimes:
They vary a lot between MS and cannot be harmonised or compared easily. It is then
important to agree on key principles for the consolidation level of the BEFIT
methodology, as the tax effects of such consolidation regimes are significant in terms of
money for the group and/ or for the national budgets involved.
• Allocation and formula:
Two activities to be distinguished: - insurance activity and asset management. Allocation
formula will need to be tailored.
Insurance activity: intangible assets are not a relevant factor to the insurance industry
while financial assets are linked and proportionate to the premiums. The payroll factor is
96
complex as some very large contracts can be managed by very few employees and a
contrario, a large number of small contracts will require a large number of employees for
regulation purposes. Sales by destination could be used as a factor but adjusted, e.g.,
turnover should be net of reinsurance.
For this company, the risk of the reallocation is that the losses in their parent MS will
have to be shared with the other MS. The current system prevents this outcome.
Asset management: management of assets for 3rd
parties, for insurer with this company
or real estate management. It should be explored how to address the fees received for this
activity in the formula: fees received for such services (part of sales)
• A dispute resolution system should be made available from the beginning.
• One stop shop – not realistic (from their experience with a TP file having lasted 5-7
years).
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Key Takeaways from the BEFIT Building Blocks Interview #11 10-06-2022
This is a financial institution.
As well as seeking input from this company on the main building blocks of the BEFIT
proposal, this meeting also aimed to gather evidence on the case for the inclusion or
exclusion of financial services from the BEFIT scope.
1. Scope: The company believes that a wide scope is best. They suggested that a staged
approach could be worth considering and the proposal could begin with a narrow scope
and then widen over time to include more companies. They did not suggest the exclusion
of Financial Services, though some sectors with specific taxation rules could be
excluded.
2. Tax Base: A common accounting standard would be a simplification. Every
translation to another accounting standard is time lost. In relation to possible adjustments
to reach the tax base, the company suggested that these should be kept to the minimum.
MS should have freedom to implement specific national additional adjustments. Key
common adjustments would be for dividends, depreciation, intangibles, tax loss carry
forward/back. They suggested following and trying to build on Pillar 2 as regards
adjustments.
3. Formulary Apportionment: the company believes that intangibles are an important
element that should be included in any envisaged formula, though they are not a major
aspect for banks. Sales and labour are important factors in the formula, and this should be
reflected. The adjustments to the formula for financial services in the CCCTB proposal
could be followed. The company noted the political difficulties involved in reaching
agreement with EU MS if the formula was to lead to a significant redistribution.
4. Allocation of Profit with Related Entities outside the Group: The company did not
see a major issue with continue to apply traditional transfer pricing rules with related
entities outside the group. The simplification arising from the use of a formula within the
EU is on its own a significant development.
5. Administration: The company suggested that the point of contact with the tax
authority will be an important element of BEFIT. Courts with specific competency to
deal with BEFIT could be needed. Multilateral audits and a One Stop Shop would be
good ideas. Businesses may choose to move their Head Office within the EU to MS that
have tax authorities perceived as being less aggressive. Therefore, a consistent approach
to the rules and penalties is important.
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Key Takeaways from the BEFIT Building Blocks Interview 24/06/2022 #12
Business sector: Healthcare, Life science
By way of general comment, they expressed strong support for BEFIT if this could do
away with a third of their transfer pricing documentation.
Scope:
On the Scope, they made no special remark. This is a large group, which falls within the
ambit of Pillar 1.
Calculation of tax base:
They consolidate their financial accounts in accordance with IFRS (listed ultimate parent
company in a stock exchange in the EU).
They mentioned that their business involves very high R&D costs.
Allocation of tax base via a formulary apportionment
They focused on intangible assets and pointed out that, given the competition which is
fostered by the existence of different tax rates, any allocation key needs to bring global
tax balance and tax certainty.
Transactions with related parties outside the BEFIT group and in third countries
They provided positive feedback on the prospect for pre-setting benchmarks. They noted
that if possible, the benchmarks should be pre-determined and published but clarified that
different industries may call for different benchmarks (per Europe market), e.g.,
distribution, contract manufacturing, contract R&D.
The also explained that disputes are currently very lengthy and last many years, in
particular when it comes to activities outside the EU.
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Key Takeaways BEFIT Interview 28.06.2022 #13
This is a food company.
Tax Base
For building the tax base, the company argued that BEFIT should avoid multiple
accounting GAAPs to coexist and it should be based on an audited reporting base which
should be unified.
The company underlined that for a common EU tax base the key reference should be
Pillar 2 rules and that any adjustments to the financial accounting statements should be
kept as simple as possible and not require any new IT update within the group, as it
would be difficult to cope with several new data collection and treatment systems at the
same time. A major update has to be put in place for the purpose of applying Pillar 2 and
there is no margin for setting up a new specific one for BEFIT.
Formulary apportionment
Formula
The company explored the possibility of designing more formula models, to achieve a
greater degree of precision: possibly by sector, country, pre- and post-BEFIT.
The treatment of intangible assets in the formula should take place at their value, rather
than through using a proxy, for instance based on R&D costs.
Effects of the apportionment
The company put forward some ideas to alleviate the impact of income allocation
through the formula in the event that the outcome is not tax neutral for MS. More
specifically, they suggested:
- either implementing a transition period (e.g., 3-5 years) whereby the tax liability of a
group in a jurisdiction would also take into account the current corporate tax rules. So, if
BEFIT leads to a lower tax liability, the difference of tax up to the current status quo
would be due, in pro-rata, over a number of years; or
- agreeing compensatory payments of tax amongst MS concerned, if after the allocation –
a MS challenged that its tax base is too low in comparison to previous years (for the same
group) – by a certain (fixed) amount. Then, that MS would receive a budgetary
compensation from the MS where the tax base increased by x% (amount).
Administration:
The company expressed support for OSS, joint/coordinated audits, provided that the
parties (tax administrations involved) are obliged to come to a result.
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Another idea was to make one single tax administration (i.e., the one of the headquarters)
responsible for the payment of the entire tax liability of the MNE group.
Key Takeaways BEFIT Interview 10.10.22 #14
The company noted that they are a large company, based in NL. They gave a description
of their business model and treatment of IP.
On the formula they explained that tangible assets are worth less in their industry. They
indicated they would support the inclusion of intangible assets. If you acquire a
trademark this is an intangible asset, however if it is self developed this is harder to
identify. They were also interested in whether the formula would be industry specific, in
particular as regards the weighting. They noted that the industry specific modifications
would need to be limited to keep the system manageable. On the possible options for
intangible assets they could see different issues arising depending on the approach taken.
It can be difficult to decipher where costs were borne.
They explained that they do not consolidate their accounts just for Europe. Therefore
BEFIT may create an additional exercise.
The company asked about what would happen to exit taxation under the BEFIT proposal.
As regards administration, the company noted that one tax return should provide more
certainty. They also favour dealing with a lead tax authority in one MS. The company
were interested in how the EU and non EU parts of the group will be dealt with.
The company also asked about the potential interaction with Pillar 1.
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Key takeaways from BEFIT interview 10-11-2022 #15
General remarks:
The company is a financial services company with a significant European presence.
The broad BEFIT objective of providing simple rules is very welcome. Paying tax on
consolidated accounts makes sense and it could make international business easier.
Banks will however present particular difficulties that will need to be worked out. The
company’s main concerns are how the formula apportionment will work and its
interaction with TP with third countries.
Scope
They have no definite view at this point on whether financial services should be within
the scope. In the EU the company structure is a mix of branches and subsidiaries.
Transactions with related parties outside the Group and EU
They have a range of transfer pricing approaches (some will be as simple as cost plus).
On the application of a benchmark analysis which could be published for businesses
(whether as a safe harbour or a risk assessment of the rules), the company believes that
for the easier transactions, a standard/benchmark would reduce the amount of work for
them and tax administrations. Other, more complex, transactions would be hard to find
benchmarks for, but if this simplification could narrow down the effort expended on this
by companies and tax administrations then this would be of significant benefit.
Both a safe harbour or a risk assessment approach for the less complex transactions
would be a good idea.
Tax Base
If we had to prepare a set of tax rules, there would be differences in MS tax treatment of
the base. With the general move towards accounting standards these differences might
have evolved.
The company are consolidated at US level but don’t have a EU parent. The requirement
to reconcile their individual financial statements with one single acceptable accounting
standard would be an additional burden.
The company are keen for tax and regulation to go hand in hand. A coordination with the
regulatory environment is very much needed, or there is a risk of conflict between tax
and other policy objectives.
Formulary Apportionment
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The company are in favour of consistency amongst MS and believe it is important that all
MS use the same formula to calculate the apportionment. COM clarified that the formula
would be set down in the proposed directive and would be the same for all MS. In
relation to possible formula factors, for banks: capital is very important; regulators want
banks to have capital available. Employees are very important too as well as customers.
As for intangible assets, they do not know what drive banks’ profits.
On the question of a sector-specific formula for banks and what could be part of the
intangibles for the financial sector, the company will reflect and provide follow up.
104
ANNEX 3: WHO IS AFFECTED AND HOW?
1. PRACTICAL IMPLICATIONS OF THE INITIATIVE
The initiative will directly impact businesses with presence in other Member States and
also national tax authorities. Citizens will indirectly benefit from the increase in GDP and
tax revenues. The implications below relate to the preferred option, as described in
Chapter 8 of the impact assessment report and summarise what is explained in section 6.3
(Impact of BEFIT).
The parent company of a BEFIT group will be required to aggregate the tax base of all
BEFIT group members, apply the allocation method (to distribute the aggregated tax base
among the group members), and finally to prepare the BEFIT Information Return and
submit it to the Filing Authority. These companies will bear some initial adjustment costs
for training the personnel to the new rules and acquiring customised IT software
(necessary to adapt their Enterprise Resource Planning (ERP) system and to automatise
the procedures). It is expected that these recurrent costs will become “business as usual”
quite shortly and indeed replace the current way of dealing with tax compliance.
Enhanced tax certainty for transfer pricing, as a result of the transitional risk criteria for
intra-group transactions within the BEFIT group (and potentially elimination of the
requirement to remain consistent with the arm’s length principle, i.e., in the case of
formulary apportionment) as well as the ‘traffic light system’ for transaction with related
parties outside the BEFIT group, should also bring some cost savings for MNEs thanks
to the expected decrease in the number of litigation cases.
Tax authorities will be impacted by the role as ‘Filing Authority’ and the BEFIT Teams.
The burden (mainly on human resources) will depend on the number of BEFIT groups in
scope and the role in the BEFIT Teams. However, apart from the initial cost for training,
the additional human resources devoted to implementing BEFIT are expected to be
limited, especially considering that BEFIT will replace national corporate income tax
systems for the in-scope groups. In addition, tax authorities will enjoy a reduced burden
linked to transfer pricing risk assessment, audits and disputes thanks to the fact that both
BEFIT and the common EU approach to transfer pricing will include criteria that provide
more predictability and harmonisation, and that can, as such, assist tax administrations in
their efforts and reduce litigation costs.
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As indicated for the initiative’s objectives in Chapter 4, the below table provides an
overview of the Sustainable Development Goals (SDGs)71
that are at stake and the
progress that is expected under the preferred option for BEFIT, as described in Chapter 8.
Overview of relevant Sustainable Development Goals – Preferred Option
Relevant SDG Expected progress towards
the Goal
Comments
SDG no. 8 – Promote
sustained, inclusive and
sustainable economic
growth, full and productive
employment and decent
work for all
The initiative will reduce
tax compliance costs, have a
positive effect on cross-
border investment and
tackle distortions in the
market, thereby stimulates
economic growth and
investment in the EU.
BEFIT is expected to lead
– in the long term to a
positive impact on GDP –
see below
SDG no. 9 - Build resilient
infrastructure, promote
inclusive and Sustainable
industrialization and foster
innovation
Although not possible to
quantify, the overall
reduction in compliance
costs may indirectly
contribute if the freed
resources are used by
businesses to invest in
innovation.
The implementation will
also require substantial
investment in IT for
taxpayers and tax
administrations.
Digitalising the tax
compliance of cross-border
large groups is likely to
trigger innovation and
71
See Resolution adopted by the UN General Assembly on 25 September 2015, A/RES/70/1, Transforming
our world: the 2030 Agenda for Sustainable Development | Department of Economic and Social Affairs
(un.org).
106
encourage progress in IT
and artificial intelligence, in
order to tackle the
challenges of this
unprecedented structure.
2. SUMMARY OF COSTS AND BENEFITS
As explained in section 6.3.4, it has not been possible to estimate costs with any
precision because the envisaged proposals have no precedent that we can refer to. Also,
stakeholders were not in the position to provide any quantitative estimations of such
costs, not even at a qualitative level.
In addition, depending on the business model of the different groups, the cost of
implementing BEFIT is expected to differ substantially. For instance, a group which is
centrally organised would have less costs than a retail group which maintains a large
number of subsidiaries with presence in most Member States.
Below, an attempt is made to describe some of the possible costs, noting that these are
likely to be relatively very small when compared to the potentially large cost savings
derived from simplification.
– I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Reductions of CIT-related
compliance costs for cross-
border operating firms
(large enterprises and SME
groups included).
For all large MNE groups of companies:
- Upper-bound estimation: EUR 80 million
per year
- Lower-bound estimation: EUR 42 million
per year
For only MNEs with turnover above EUR 750
million:
- Upper-bound estimation: EUR 22 million
per year
- Lower-bound estimation: EUR 11 million
per year
Chapter 6 provides explanation for
estimates under different scenarios.
Cost savings in legal advice
and litigation procedures
concerning transfer pricing
for MNEs.
Difficult to estimate. Litigation costs can range
from several thousands to a few millions per
firm per case. More tax certainty and common
rules can lead to a substantial reduction of such
107
costs.
Common rules for the tax
base, will lead to higher
company investment, and
higher GDP.
In the long run, from cross-border loss relief: EU
GDP could be higher by +0.1% relative to the
status quo for MNEs with turnover above
EUR 750 million.
In the long run, from harmonised EU rules on
tax depreciation: GDP could be higher by some
+0.04% for all MNEs.
Indirect benefits
Administrative cost savings related to the ‘one in, one out’ approach(*)
Reductions of CIT-related
compliance costs for cross-
border operating firms
(large enterprises and SME
groups included).
For all large MNE groups of companies:
- Upper-bound estimation: EUR 80 million
per year
- Lower-bound estimation: EUR 42 million
per year
For only MNEs with turnover above EUR 750
million:
- Upper-bound estimation: EUR 22 million
per year
- Lower-bound estimation: EUR 11 million
per year
(*) While it is difficult to identify the precise nature of the costs savings, one can assume that the great
majority are related to administrative activities/reporting obligation, rather than adjustment costs.
• II. Overview of costs – Preferred option
• • Citizens/Consum
ers
• Businesses • Administrations
• One-off Recurren
t
One-off Recurrent One-off Recurrent
BEFIT
Direct
adjust
ment
costs
N/A N/A From
EUR 15
million to
EUR 29
million
EUR 297
million
Direct
administrative costs
N/A N/A N/A From
EUR 5
million to
EUR 9
million
per year
N/A Staff devoted to exchange of
information among tax
administrations in MS where
each BEFIT group maintains
taxable presence. There not
necessarily additional to the
current system, but resources
108
will be used differently
(reallocation of existing
resources)
Direct enforcement
costs
N/A N/A N/A N/A N/A Negligible (reallocation of
existing resources)
Transfer
Pricing
Direct adjustment
costs
N/A N/A Cost of
training to
become
familiar
with the
new rules
N/A Cost of
training to
become
familiar
with the
new rules
N/A
Direct
administrative costs
N/A N/A N/A N/A N/A N/A
Direct enforcement
costs
N/A N/A N/A N/A N/A N/A
As explained above, it has not been possible to estimate costs for stakeholders with any
precision.
• Costs related to the ‘one in, one out’ approach
Total
Direct and
indirect
adjustment costs
N/A N/A From EUR 15
million to
EUR 29
million
N/A
Administrative
costs (for
offsetting)
N/A N/A N/A From EUR 5
million to
EUR 9 million
per year
(1) Estimates (gross values) to be provided with respect to the baseline; (2) costs are provided for
each identifiable action/obligation of the preferred option otherwise for all retained options when
no preferred option is specified; (3) If relevant and available, please present information on costs
according to the standard typology of costs (adjustment costs, administrative costs, regulatory
charges, enforcement costs, indirect costs;). (4) Administrative costs for offsetting as explained in
Tool #58 and #59 of the ‘better regulation’ toolbox. They should be presented as “recurrent
annual costs” and “one-off costs” (presented as net present value of costs over the whole period).
The total adjustment costs should equal the sum of the adjustment costs presented in the upper
part of the table (whenever they are quantifiable and/or can be monetised). Measures taken with a
view to compensate adjustment costs to the greatest extent possible are presented as relevant in
the section of the impact assessment report presenting the preferred option.
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ANNEX 4: ANALYTICAL METHODS
1. Assumptions for the survey-based projection of compliance cost reduction
A company survey for the European Commission on Tax Compliance Costs, conducted
by VVA/KPMG and published in January 2022, is the major source of analysis.72
It looks
at firms’ tax compliance costs caused by specific types of taxes. Apart from Corporate
Income Tax (CIT), the survey also covers administrative burdens caused by Value Added
Tax, wage-related taxes, property and real estate tax and local taxes. The sample covers
around 2 400 firms, and the dataset also provides weights for each firm, needed to project
the total firm population represented by the sample. Survey questions refer to the
situation of the respective firm in the year 2019.
The Compliance Cost projections in Chapter 6 take into account both outsourced and
internalised compliance activities. If internalised, the survey asks for frequency of data
collection as well as the hours spent on data collection, preparation, review, submission
and other related activities. It is thus possible to calculate total hours internally spent
within the firm on the different CIT-related compliance activities. These hours were then
multiplied by average hourly labour costs for administrative and support activities.73
Total CIT Compliance Costs are then the sum of outsourced and internalised compliance
costs.
The survey information also includes relevant firm characteristics:
• the size of the firm (turnover, number of employees);
• whether not the firm operates cross-border74
;
• whether or not the firm in subject to ‘regular’ CIT or to some kind of ‘simplified
tax regime’. For information see Box 1.
72
VVA/KMPG for the European Commission (2022). See https://op.europa.eu/en/publication-detail/-
/publication/70a486a9-b61d-11ec-b6f4-01aa75ed71a1/language-en
73
Source: Eurostat, series Labour cost levels by NACE Rev. 2 activity
[LC_LCI_LEV__custom_5553786].
74
In the study, cross-border activities are defined as “all activities which involve the selling of goods,
services or intangibles to a country other than the enterprise’s home country” (European Commission,
2022, p. 11). In other words the definition is quite broad and not necessarily just about what we consider
foreign direct investment.
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Box 1: “Simplified Tax Regimes” as identified in the VVA/KPMG survey
2. What is the potential of reducing CIT related compliance costs through
simplifying corporate taxation?
To approximate the potential decline of CIT-related compliance costs through reduced
complexity of a tax system, a linear regression analysis was performed. The model
explains total (logarithm of) CIT-related Compliance Costs, calculated as explained
above, on a set of explanatory variables that include:
• the (log) number of employed workers (in quintiles),
• the (log) turnover (in quintiles),
• a binary dummy CROSS, informing about whether the firm operates cross-
border,
• a binary dummy SIMPL informing whether the firm is subject to a ‘simplified tax
regime’ or CIT,
• an interaction term CROSS x SIMPL informing whether the impact of operating
cross-border is moderated by the availability of a simplified tax regime,
• fixed effects controlling for the sector and the jurisdiction in which the firm
operates.
The table below shows to what extent the CIT-related compliance costs would decline,
relative to the respective reference category. For Model 2, which contains the interaction
term, the reference category are purely domestic firms not subject to simplified tax rules.
All coefficients are highly statistically significant (p<.001).
Table A4.2: Explaining CIT related CC, regression analysis, selected coefficients
Variable % change relative to reference
Model 1 Model 2 Model 3
The VVA/KPMG company survey includes one dedicated question on whether the
respective enterprise is “subject to Corporate Income Taxation or a simplified tax regime on
income”. A simplified tax regime could be a lump-sum tax, the filing of simplified tax
returns requirements, simplified accounting rules, balance sheet or income statement
requirements, or other simplified documentation rules. Stakeholders interviewed for the
study tend to have a positive view on Simplified Tax Systems, considering them as a
solution for reducing administrative burdens.
112
CROSS +2% +10% +29%
SIMPL +30% +35% +24%
CROSS x SIMPL -25% -54%
Control for firm size yes yes no
Source: Commission services, based on data from VVA/KMPG (2022).
All models control for country- and sector specificities. Only Models 1 and 2 control for
firm size (the number of employees, the firm’s turnover) The simple model without
interaction term (Model 1) reveals that operating cross-border increases CIT-related
compliance costs overall. However, if the interaction term is included in the model
(Model 2), it becomes clear that the availability of simpler tax rules matters a lot for
the level of compliance costs. If a simplified tax regime is not available, cross-border
operating firms have, on average, 10% higher CIT compliance costs than domestic firms
not subject to a simplified tax regime (the reference group). By contrast, if there are
simplified tax rules, cross-border operating firms have 25% lower compliance costs than
the reference group. Therefore, the regression analysis suggests that the simplification of
tax rules has a very positive effect on cross-border operating firms in the sense that they
are able to reduce compliance costs very substantially: by 32%, relative to cross-
border operating firms with no access to simplified rules.75
The chart illustrates these regression results, normalising the CIT compliance costs of
domestic firms without simplified tax regime to a value of 100. This is the reference
situation. The CC for cross-border operating firms without simplified regime would be
110 (+10% higher than in the reference situation), while with simplified regime they
would amount to 75 (25% lower than in the reference). For cross-border operating firms,
simplified schemes would then make a difference of 35, corresponding to 32% of 110.
Chart A4.1: Illustration of the regression results: CIT compliance costs by firm type
75
That is: (100%-25%)/(100%+10%)=(100%-32%).
113
Source: Commission services, based on data from VVA/KMPG (2022).
The findings strongly support the introduction of a new, simpler Corporate Tax System
in the EU. Model 3 above does not control for the number of employees and turnover,
both representing firm size. The interaction effect of operating cross border and dispose
of simplified tax system is then much stronger. This implies that the interaction effect is
stronger for big firms. Big multinationals find it easier to exploit simplified tax systems
for tax compliance.
3. The estimated scope of BEFIT based on the EuroGroups register and CbCR
Estimating the number of MNEs in scope is not straightforward. Aggregate CbCR data
can assist insofar as it covers MNEs with a consolidated yearly revenue exceeding EUR
750 million. For the most recently published reporting year (2018), CbCR data suggests
that 4,082 MNEs fall in this category. By contrast, in the firm-level database Orbis,
3,647 MNEs with consolidated revenue exceeding EUR 750 million can be identified.
From these two data sources one could thus derive a selection bias of around 11% (i.e.,
3,647/4,082=89%). When it comes to MNEs whose annual combined revenues are up to
EUR 750 million and who prepare consolidated accounts, their number in Orbis is
14,000. With a selection bias of at least 11% this would imply an additional at least
15,700 MNEs in scope.
An alternative source of data, the ECB’s EuroGroups Register (EGR) reports some
213,000 MNE groups for the year 2018. Subtracting 4,082 groups with a consolidated
100
110
75
0
20
40
60
80
100
120
Domestic firms Cross-border operating
firms
Cross-border operating
firms
WITHOUT simflified scheme WITH simflified scheme
Normalised to a value of 100
35 (32% of 110)
114
yearly revenue exceeding EUR 750 million would yield some 209,000 groups below that
threshold. Of those, one can estimate that around 7.5% (15,700/213,000) groups) prepare
consolidated financial statements.
4. The potential impact of more productivity-enhancing investment: a
simulation with Labour Market Model (LMM)
LMM is a general equilibrium model jointly used by DGs EMPL and TAXUD. It
incorporates a very explicit description of labour market institutions.76
It therefore allows
modelling of structural reforms in the labour market, such as investment in human
capital. It distinguishes eight age- and three qualification-groups. LMM is run at state
level.
LMM is used to demonstrate the impact of a potential boost in investment as firms save
on compliance cost and gain more legal transparency and certainty as they operate cross-
border. In other words, the concept of compliance costs used for this simulation is a
wider as it does not only include the direct reduction of pecuniary costs today’s MNEs
could benefit from. It is assumed that the (re-invested) cost reduction will be -0.1% of
GDP. The exact reduction is unknown. The interesting information to extract from the
analysis is the multiplier effect of a given investment on GDP.
A simulation will be performed for all 15 Member States currently supported by LMM.
Investing 0.1% of GDP in productivity-enhancing training for workers would result in
the following changes:
Model simulation: estimated effect on selected variables of a reduction of CIT
compliance cost, reinvested in firm-sponsored training (15 Member States)
Source: TAXUD calculations with LMM
76
Berger, J., Keuschnigg, C., Keuschnigg, M., Miess, M., Strohner, L. and Winter-Ebmer, R. (2009),
Modelling of
Labour Markets in the European Union - Final Report to the European Commission (Parts I to IV).
min (15 cntr) max (15 cntr)
GDP +0.1% +0.3%
Investment +0.1% +0.3%
Employment +0.1% +0.2%
Wages +0.2% +0.3%
115
Due to technical limitations of LMM in the context of simulation CIT-related policy
measures, the changes are to be interpreted as lower-bound estimates.77
The training will
directly translate in higher labour productivity, fuelling demand for workers (hence
pushing wages) and physical investment. The simulation shows that productivity-
enhancing investment could results in GDP-increases up to three times the initial
investment.
5. On Country-By-Country Reporting data
One of the data bases of Chapter 6 is the OECD’s Country-By-Country Report (CbCR)
data. CbCRs are typically filed by large MNEs (consolidated turnover at least EUR 750
million) to the tax administration of the country where the ultimate parent entity is
located. As a next step, tax administrations compile the different reports into a single
dataset and share it with the OECD who will produce the anonymised dataset.
CbCR data includes a number of variables such as revenues, Profit/Loss Before Tax,
taxes paid, sales, production etc. at firm level. It also includes information on employees
and on related and unrelated party revenues. CbCR includes all global activities of MNEs
and allows for the domestic and foreign activities of MNEs to be separately identified.
What makes it particular is that it shows this data in a matrix format: For each
headquarter of the MNE by subsidiaries in partnering jurisdiction. It informs about those
variables by subsidiary, allowing to analyse how they are distributed across the countries
in which the respective MNE is present. Public CbCR data78
is provided at group level,
aggregated by jurisdiction. Explanatory reports about CbCR data are available.79
CbCR data comes with an array of caveats and limits. There seems to be limited
reporting in some EU countries. There may also be differences in accounting rules across
jurisdictions. There may be some double counting, as MNEs may have included intra-
country dividends in their profits. Another problem is timing. The latest published
aggregated CbCR data in the OECD website relates to 2018. According to the OECD,
77
Declining compliance costs cannot be modelled with LMM. The exact measure simulated here is a state
subsidy granted to firms for offering firm-sponsored training to workers, funded via lump-sum taxes from
households. The above interpretation, i.e., declining compliance costs generating additional resources for
firms to sponsor training, is not perfectly accurate in that context. Higher taxes on households would cet.
par. dampen economic activity somewhat.
78
OECD.stat website: Table I - Aggregate totals by jurisdiction (oecd.org).
79
OECD, Corporate Tax Statistics, 4th
Edition, 2022. Available at: Corporate Tax Statistics: Fourth Edition
(oecd.org)
116
2019 and 2020 CbCR data is due to be published only mid-2023. An overview of
potential limitations is given by the OECD.80
80
OECD, Important disclaimer regarding the limitations of the Country-by-Country report statistics, 2022.
Available at: Important disclaimer regarding the limitations of the Country-by-Country report statistics
(oecd.org)
117
ANNEX 5: COMPETITIVENESS CHECK AND SME TEST
1. OVERVIEW OF IMPACTS ON COMPETITIVENESS
Dimensions of
Competitiveness
Impact of the initiative
(++ / + / 0 / - / -- / n.a.)
References to sub-sections of the
main report or annexes
Cost and price competitiveness ++ Chapters 3.2, 4, 6, 7
International competitiveness + Chapters 3.2, 4, 6, 7
Capacity to innovate + Chapters 3.2, 4, 6, 7
SME competitiveness + Chapters 3.2, 4, 6, 7
Synthetic assessment
By introducing a common approach and common rules, the initiative is expected to have a positive
impact on cost and price competitiveness. The initiative pivots on simplifications of the current
corporate tax rules which will reduce compliance costs for business operating in all sectors in the
internal market. For example, for BEFIT, the calculation and aggregation of the tax base based on
EU-wide common rules will do away with complex and costly practices.
The rules are also expected to establish a level playing field, break down barriers to cross-border
expansion and trade and, as such, improve the international competitiveness of EU businesses vis-à-
vis non-EU businesses, particularly those operating in other big markets. For BEFIT, the alignment
with GloBE Rules under Pillar 2 and the aggregation and allocation of a common tax base may,
further, contribute to creating a competitive and forward-looking business environment in the EU.
The common approach to transfer pricing norms is also expected to add to this outcome.
BEFIT does not directly touch upon businesses’ capacity to innovate as such. Although the overall
reduction in compliance costs may, indirectly, have an impact as it will release an amount that can
be used on a number of activities, including investing in innovation. For BEFIT, the calculation of
the tax base allows for additional adjustments to the allocated part of the aggregated tax base in
areas not covered by BEFIT, which may provide space for stimulating growth and investment, also
in targeted areas, such as research and development.
2. THE SME TEST
Identification of SMEs: The initiative is not specifically addressed to SMEs. However, BEFIT
offers optional rules for SMEs which are part of a group that will enable them to choose the
simplest and most cost-efficient option based on their individual needs. All SME groups that file
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consolidated financial statements are eligible under BEFIT. In addition, the common approach to
transfer pricing will apply to SMEs which are part of a group.
Consultation of SME stakeholders: See Annex 2.
Impacts: BEFIT, with all the simplifications that it offers for groups of companies, is open to all
SME groups provided that they file consolidated financial statements. Considering that the system
is optional for SMEs, we do not estimate adverse effects. SMEs which are part of a group would
already have to comply with transfer pricing rules. The introduction of the common approach may
entail limited transition costs but, over time, it is expected to decrease compliance costs, enhance
legal certainty and reduce disputes.
Consultation of alternative options: It was considered to make BEFIT mandatory for smaller groups
which file consolidated financial statements. The administrative burden and compliance costs were,
however, found to potentially outweigh the benefits of a common system for smaller businesses.
Minimising negative impact on SMEs. Policy options in this proposal have considered an optional
or mandatory scope for SMEs group and under the preferred policy option, SMEs are free to opt-in.
The initiative will thus not impose any requirements on SMEs if you do not opt in.
119
ANNEX 6: THE OECD TWO-PILLAR APPROACH
Background
Mandated by the G20, the OECD/G20 Inclusive Framework is currently working on the
implementation of a global, consensus solution to reform the international corporate tax framework.
The reform is based on two main work streams: Pillar 1 (re-allocation of taxing rights) and Pillar 2
(minimum effective taxation). The two Pillars aim to address different but related issues linked to
the increasing globalisation and digitalisation of the economy.
Pillar 1 aims to better link taxing rights to the market jurisdiction where the final customers are. It is
noteworthy that the scope of Pillar 1 will be limited to a relatively low number of the largest and
most profitable multinationals only, while Pillar 2 will apply to multinational groups with annual
combined revenues that exceed the EUR 750 million threshold, thus leaving all companies below
this threshold out of the scope. Pillar 2 is expected to put an end to the race to the bottom in tax
competition among jurisdictions and to tackle aggressive corporate tax planning. The
implementation of Pillar 2 is quite advanced, and the Pillar 2 Directive81
requires Member States to
enact national transposition measures by 31 December 2023. It is expected that the majority of
global partners will follow the same (or similar) timeline for their implementation of minimum
effective taxation of multinationals’ profits.
For such a global agreement to function effectively, it needs to be administrable for, and among,
more than 140 jurisdictions, with diverse economic profiles and levels of administrative capacity. In
addition, extensive global reforms may lead to an increase in the compliance burden for taxpayers
and tax administrations.
Interaction between the initiatives and the Pillars
Pillars 1 and 2 will co-exist with the national corporate tax rules of each jurisdiction. Although the
Pillars address related issues, their focus and objectives do not necessarily coincide with those of
general corporate tax systems. Pillar 1 thus deals with re-allocating the taxable income of the most
profitable groups of companies worldwide, in order to better adapt the corporate tax systems to the
new ways that businesses organise themselves in. Pillar 2 aims to ensure that the corporate income
tax liability of a group of companies does not fall below a level of 15% per jurisdiction.
Pillar 1
Pillar 1 uses a formula based on sales by destination to re-allocate part of the tax base of certain
very highly profitable MNE groups towards the market jurisdictions where the group meets the
81
Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation
for multinational enterprise groups and large-scale domestic groups in the Union.
120
‘new nexus’ requirement; this is based on a revenue threshold regardless of the physical presence of
the group in the jurisdiction. As a result, some jurisdictions increase their tax base whereas others
have it diminished. The aim is to bring more fairness in the distribution of the tax base within large
multinational groups by allocating higher amounts to the jurisdictions of the customers’ location.
The Pillar 1 framework is expected to include parameters for determining which jurisdiction is a net
receiver and which a net contributor within the structure of an in-scope group. Many elements of
Pillar 1 are currently still under discussion and on this basis, it is difficult to reach definitive
conclusions on all aspects.
Instead of Pillar 1 interacting with the domestic corporate income tax systems, it will have to
interact with BEFIT for large groups, as this common system will replace the national corporate tax
rules for the groups in scope. Member States will consequently need to adjust the tax base granted
under BEFIT with either additional tax base allocated under Pillar 1 or offset an amount for
eliminating double taxation. In this way, the outcome of the re-allocation of the Amount A under
Pillar 1 would be fully respected in a manner integrated within the BEFIT rules. Another synergy
will be the ongoing work on Amount B under Pillar 1, which also aims to provide more certainty to
businesses on transfer pricing compliance. The ‘traffic light system’ under BEFIT should aim to
achieve the same purpose for the risk assessment benchmarks, taking inspiration from Amount B,
and the initiative on Transfer Pricing will integrate the OECD arm’s length principle into EU law.
In this way, these initiatives are closely related and complementary.
Pillar 2
Pillar 2 aims to ensure that corporate tax was charged at a minimum tax rate of 15% per
jurisdiction, while BEFIT essentially concern the tax base. Unlike Pillar 1, which also deals with the
tax base, Pillar 2 and BEFIT concern different substantive areas.
Nonetheless, there can be interactions to the extent that Pillar 2 and BEFIT have the same scope.
For BEFIT, the preferred option is to align the mandatory scope with the Pillar 2 Directive, which
means BEFIT would apply to the same groups, but limited to their EU sub-set. In this way, BEFIT
would build on the existing policy, which remains clearly delineated and consistent. Groups that
would voluntarily apply BEFIT are not concerned by Pillar 2.
Introducing a common approach to transfer pricing would in principle also apply to the groups in
scope of Pillar 2. There is no direct interaction or conflict between the minimum tax rate of Pillar 2
and the integration of the OECD arm’s length principle and Transfer Pricing Guidelines in EU law,
or at least not more than with any other corporate tax rule that is used to determine the tax liability
of a group. Additionally, the fact that both Pillar 2 and the transfer pricing initiative follow an
international approach that is discussed at the same organisation, the OECD, will ensure the highest
level of compatibility.
BEFIT will replace national corporate tax systems for the groups of companies in scope of Pillar 2,
which means the rules of Pillar 2 will naturally come into play after the group has been charged
corporate tax, in order to confirm whether the actual level of corporate tax liability corresponds to a
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rate of at least 15%. It follows that the sequencing between BEFIT and Pillar 2 is quite
straightforward.
It is also worth recalling that the design of a new system like BEFIT will be able to align with
features of Pillar 2, contrary to national corporate tax rules which are already in place and which
differ between Member States. For instance, the preferred option under BEFIT is to apply limited
tax adjustments to the financial accounting statements. This can, and it is envisaged that it will,
closely follow the rules of Pillar 2, which is currently not the case for the national corporate tax
accounting rules to calculate the tax base. On the assumption that BEFIT will indeed take the
financial accounting statements as a starting point, the room for discrepancies between BEFIT and
Pillar 2 is thus expected to be limited.
Nonetheless, a few issues have been identified and will be resolved in the legal design or in practice
in the context of regular communication and coordination between the Commission services and the
OECD Secretariat. This will also be a more efficient way to address any mismatches, rather than
having to address varying mismatches with national rules at the same time.
In a nutshell, the initiative interacts in a more complex way with Pillar 2, compared to the currently
applicable national corporate tax systems. In fact, BEFIT contributes a degree of simplification to
the extent that it is closely based on the Pillar 2 rules.
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ANNEX 7: TRANSFER PRICING
1. What is Transfer Pricing about?
Transfer pricing refers to the setting of prices for transactions between associated enterprises (i.e.,
members of the same Multinational Enterprise - MNE) involving the transfer of property or
services.
A significant volume of global trade82
consists of international transfers of goods and services,
capital and intangibles (such as intellectual property) within an MNE; such transfers are called
“intragroup transactions”.
The “intragroup transactions” are not necessarily governed by market forces but may largely be
driven by the common interests of the group as a whole.
Since tax calculations are generally based on entity-level accounts, the prices or other conditions at
which these intragroup transactions take place will affect the relevant entities’ income and/or
expenses in relation to those transactions, and as a consequence, will impact on the amount of profit
each group entity records for tax purposes.
A higher price increases the seller’s income and decreases the buyer’s income. A lower price
decreases the seller’s income and increases the buyer’s income. The transfer price therefore
influences the tax base of both the country of the seller and the country of the buyer involved in a
cross-border transaction.
It is therefore important to establish the appropriate price, called the “transfer price”, for intragroup
transfers. “Transfer pricing” is the general term for the pricing of transactions between related
parties.
2. What is the key principle of transfer pricing?
Transfer pricing rules are based on the so-called arm's length principle (ALP). This principle was
developed by the League of Nations in the 1920s and is embedded in the tax treaties (usually article
983
) since then.
82
A study of the World Trade Organization (Nordas, 2003) estimates intra-firm trade at 1/3 of world trade
flows in 2003.
83
For example, art. 9 par. 1 of the OECD Tax Model Convention provides that “Where
123
In simple terms, the arm’s length principle prescribes that individual group members of a MNE
must transact with each other as if they were independent third parties. In other words, the
transactions between two related parties should reflect the outcome that would have been achieved
if the parties were not related, i.e., if the parties were independent of each other and the outcome
(price or margins) was determined by (open) market forces.
Under the arm’s length principle, transactions within a group are compared to transactions between
unrelated entities under comparable circumstances to determine acceptable transfer prices. Thus, the
market place comprising independent entities is the measure or benchmark for verifying the transfer
prices for intragroup transactions and their acceptability for tax purposes.
Under the arm’s length principle, intragroup transactions are tested and may be adjusted if the
transfer prices or other terms of the transactions are found to deviate from those of comparable
uncontrolled transactions.
The arm’s length principle is recognised as international standard for allocating profit between
associated enterprises in both the OECD and UN Model Conventions.
3. What is the relevant legislative framework for transfer pricing?
As said above, transfer pricing rules are based on and implement the provisions of the Associated
Enterprises Article (generally Article 9) of most bilateral tax treaties.
Both article 9 of the OECD Model and article 9 of the UN Model contain similar provision which
allow for profit adjustments if the actual price or the conditions of transactions between associated
enterprises differ from the price or conditions that would be charged by independent enterprises
under normal market commercial terms, i.e., an arm’s length basis.
In order to avoid double taxation, both provisions also require that, under certain conditions, an
appropriate “corresponding adjustment” be made by the other Contracting State. In other words, if
one country increases the profit attributed to one side of the transaction, the other country should
a) an enterprise of a Contracting State participates directly or indirectly in the management, control or
capital of an enterprise of the other Contracting State, or
b) the same persons participate directly or indirectly in the management, control or capital of an enterprise
of a Contracting State and an enterprise of the other Contracting State,
and in either case conditions are made or imposed between the two enterprises in their commercial or
financial relations which differ from those which would be made between independent enterprises, then
any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of
those conditions have not so accrued, may be included in the profits of that enterprise and taxed
accordingly.”
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reduce, under certain conditions, the profit attributed to the other side of the transaction otherwise
the same profit will be taxed twice. The competent authorities of the Contracting States are, if
necessary, to consult with each other in determining the adjustment.
Over time the OECD has developed the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations which provide guidance on the meaning of the arm’s length
principle, primarily for OECD member countries to use in resolving transfer pricing disputes under
tax treaties. Those guidelines have been developed as a non-binding instrument with the aim to
assist MNEs and tax authorities in finding solutions to transfer pricing cases that minimise conflicts
and limit litigation. The OECD guidelines were first published in 1995 and are regularly updated.
For its part, the UN has elaborated the United Nations Practical Manual on Transfer Pricing
whose aim is to contribute to a common understanding of how the arm’s length principle is to be
applied under article 9 of the UN Model Convention in order to avoid double taxation and prevent
or resolve transfer pricing disputes.
Article 9 (Associated Enterprises) of the UN and OECD Models sets out the basic conditions for
transfer pricing adjustments and for corresponding adjustments where economic double taxation
arises. Although article 9 endorses the application of the arm’s length principle it does not set out
detailed transfer pricing rules. The article is not considered to create a domestic transfer pricing
regime if this does not already exist in a particular country. In fact, it is generally understood that
article 9 is not “self-executing” as to domestic application—it does not create a transfer pricing
regime in a country where such a regime does not already exist.
Thus, jurisdictions normally have in place domestic legislation that ensures some harmonisation on
basic principles, in accordance with the arm’s length standard, even if the application is not
identical around the globe. Further, jurisdictions may have in place their own administrative
guidance and/or regulations to better explain the national provisions and provide guidance on their
interpretation.
In practice, domestic legislations and tax treaty principles co-exist. While domestic provisions grant
tax administrations the power to tax, bilateral tax treaties (which usually include provisions
regarding the arm’s length principle) limit the jurisdictions’ right to tax, in order to prevent or solve
situations of double taxation vis-à-vis other jurisdictions.
4. What are the issues related to the application of the transfer pricing rules?
While it is relatively easy to describe the arm’s length principle, the practical application of the
principle is a complex task.
The current transfer pricing rules are inherently complex and highly subjective. The OECD
guidelines themselves caution that “transfer pricing is not an exact science” and “that the choice of
125
methodology for establishing the arm’s length transfer pricing will often not be unambiguously
clear”.
The complexity of the transfer pricing rules gives rise to a number of problems:
A) Profit shifting and tax avoidance84: transfer prices are easily manipulated to shift profit and be
used in the context of aggressive tax planning schemes.
B) Litigation85
and double taxation: transfer pricing is more subjective than other areas of direct
and indirect taxation and, for this reason, sensitive to disputes. In addition, it should be
recognised that tax administrations do not always share a common interest. This is because, to
prevent double taxation, a well-founded primary (upward) adjustment by one tax administration
should be followed by a corresponding (downward) adjustment by the other. This implies that
the second tax administration would have to reduce its tax base accordingly, which is most
probably an option that a tax administration would preferably avoid taking, especially when the
interpretation of the transfer pricing rules differs.
In the European Union, the problems related to transfer pricing described above are exacerbated
because although there is an internal market, national tax systems are not harmonised. In addition,
the status and role of the OECD Guidelines differ from Member State to Member State
creating different interpretations of the arm’s length.
5. What is the state of play of transfer pricing rules in the EU?
84
At the beginning of the BEPS project in 2013, OECD estimates that the scale of global corporate income
tax revenue losses due to BEPS practices could be between USD 100 to 240 billion annually (see
https://www.oecd.org/tax/beps-project-explanatory-statement-9789264263437-en.htm); Transfer Pricing
manipulation was identified as one of the major BEPS practices.
85
The OECD official statistics show that at the end of 2021 the number the pending Mutual agreement
procedures (MAPs) activated to resolve double taxation arising from Transfer Pricing cases has increased
by 33% compared to the 2016 (the MAP inventory at the end 2021 results to be 6000 against the 4500
pending MAP cases at the end of 2016). OECD MAP statistics are available at:
https://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics-2021-inventory-
trends.htm#tpcases
Also the EU official statics on MAPs under the Arbitration Convention show an increase of transfer pricing
disputes between Member States of 17% compared to the previous year (tot MAP inventory of Member
States at the end of 2020 is equal to 2213 while tot MAP inventory of the Member States at the end of 2019
is equal to 1889). EU MAP statistics are available here: https://taxation-customs.ec.europa.eu/taxation-
1/statistics-apas-and-maps-eu_en
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The table below provides a detailed overview of the state of play of transfer pricing rules in the EU
Member States. The situation can be summarised as follows:
a) EU law: Transfer pricing rules are not harmonised at EU level through legislative acts.
The Commission has currently no policy initiative86
in place in the area of transfer pricing
which would allow for reaching a common approach.
In the past, the Commission dealt with transfer pricing issues through the work of the Joint
Transfer Pricing Forum (JTPF), an expert group set up by the Commission in 2002 whose
mandate expired in March 2019 and was not renewed.
b) Domestic legislation: all Member States have implemented the arm’s length principle into
their domestic legislation. The overwhelming majority of Member States have in place a
“short provision” that merely reflects art. 9 of the OECD model tax convention. Still,
domestic legislation of Member States shows relevant differences in the definition of
associated enterprises and in particular, in the notion of “control” which is normally the pre-
condition to apply transfer pricing. For example, the German transfer pricing rule applies to
intercompany transactions where there is a substantial shareholder > 25% while in France or
Belgium, the transfer pricing rule only applies where there is a substantial shareholder >
50%. There are also differences in domestic legislation regarding the exclusions from the
scope of the rule. For example, the newly adopted transfer pricing legislation in Malta
excludes in any case from the scope of the rule the SMEs as defined by the EU State Aid
Regulations while such exclusion is not provided in the Italian legislation and many others.
c) OECD guidelines: Only 23 out of 27 EU Member States are also OECD members
(Bulgaria, Romania, Malta and Cyprus are not OECD members) and therefore are
committed to follow the OECD principles and the OECD guidelines to interpret the arm’s
length principle. Still the status and role of the OECD guidelines differ from Member State
to Member State even among those who are OECD members. For example, one group of
Member States (Spain, Italy and Germany) makes direct reference to the OECD guidelines
in their national provisions recognising the OECD guidelines as a source of interpretation
not only for article 9 of the tax treaties but also for domestic legislation as long as the
guidelines do not conflict with specific domestic regulations. Another group of Member
States (France, The Netherlands, Croatia and others) has not explicitly implemented the
86
An ongoing EU soft-law initiative related to TP is ETACA (European Trust and Cooperation approach).
ETACA is an EU program that aims to increase tax certainty by bringing together, on a voluntary basis,
Member State tax administrations to perform a multilateral risk assessment of the transfer pricing policy of
MNEs operating within the internal market.
127
OECD guidelines into their internal legislation; they report to follow the guidelines in
practice, but the legal status of the Guidelines is unclear. Another group (Estonia, Hungary)
explicitly reports that the OECD guidelines are not recognised as legally binding but that
their administrative regulations are based on the same principles contained in the OECD
Transfer Pricing Guidelines. Another element that remains unclear is whether Member
States adopt a dynamic (which seems the case for Austria and Denmark) or a static (which
seems the case for Germany) approach to the OECD guidelines, i.e., whether they make
reference to the last version or rather a specific version of the OECD guidelines (taking in
consideration that the OECD guidelines were first published in 1995 and then updated
several times ever since).
The table below summarises the state of play of the implementation of the arm’s length principle
and OECD guidelines in domestic legislation of EU Member States.
The information has been collected from the public OECD TP country profile and has been cross-
checked with the information contained in the EU TP country profile elaborated by the Joint
Transfer Pricing Forum.
Member
State
Is the arm's length principle
implemented in the
domestic legislation?
What is the role of the OECD
Guidelines?
Austria YES
Section 6 paragraph 6 of the
Austrian Income Tax Act
(“ITA”)
The OECD Guidelines serve as a tool
for interpretation of Austrian tax treaties
(see Article 31 paragraph 3 sub-
paragraph b of the Vienna Convention
on the Law of Treaties). The role of the
OECD Transfer Pricing Guidelines is
explicitly mentioned and explained in
the Austrian Transfer Pricing Guidelines
2021 (“Austrian TPG 2021”; the official
regulation of the Austrian tax
administration regarding the application
of the ALP under Austrian tax treaties).
128
Belgium YES
Art. 185, §2, BITC
Belgium legislation incorporates specific
guidance for the interpretation of the
mentioned articles with reference to the
OECD Transfer Pricing Guidelines. The
2020 circular letter comments on
Chapters I, II, III, VI, VII, VIII and IX
of the 2017 OECD Transfer Pricing
Guidelines. It also includes guidance on
financial transactions. Finally, the
application of the Authorised OECD
Approach (AOA) on the attribution of
profits to Permanent Establishments is
also described. Where useful and
appropriate, the administration's
preference is set out.
Bulgaria YES
Corporate Income Tax Act,
Chapter 4, Art. 15
Although there is no specific reference
to the TPG in the Bulgarian TP
legislation, Bulgaria generally follows
them. However, there are certain
differences (e.g. there is a hierarchy of
the methods under the Bulgarian
legislation)
Cyprus YES
Income Tax Law (Art. 33 Law
No.118(I)/2002)
Altough there is no specific legal
provision, in practice OECD Transfer
Pricing Guidelines are followed.
Croatia YES
Profit Tax Act, art13
Even if there is no direct reference in
Croatian legislation (in Profit Tax Act
and Profit Tax Ordinance), the Croatian
Tax Administration uses the OECD
Transfer Pricing Guidelines in practice
Czech
Republic
YES
The Czech Income Tax Act
586/1992 Coll., Section 23
para 7
The OECD TP Guidelines are not
implemented into the Czech tax
legislation directly, but in the Guideline
GFD D-22 (which provides for a
uniform procedure for the application of
certain provisions of the Czech Income
129
Tax Act) there is the recommendation to
use TPG.
Denmark YES
The arm’s length principle is
governed by the Tax
Assessment Act
(Ligningsloven), Section 2.
The Danish Tax Assessment Act,
Section 2, includes a direct reference to
the TPG in the explanatory memoranda.
In Denmark the arm’s length provision
is interpreted according to the arm’s
length principle contained and described
in the OECD TPG.
Estonia YES
Subsection 50 (4) of the
Income Tax Act
The TPG have no legal status within the
Estonian tax system. However, they
have been translated into Estonian and,
according to Article 20 of the
Regulation no. 53 (Transfer Pricing
Regulation) drafted by MoF (in force
since 1.01.2007), taxpayers and tax
administrations are encouraged to use
the TPG for those situations not covered
by the Transfer Pricing Regulation, as
far as the guidance in the TPG is not in
contradiction with it.
Finland YES
Session 31 of the Assessment
Procedure Act
The OECD Transfer Pricing Guidelines
are a source of interpretation as far as
the tax treaties and domestic legislation
are concerned.
The OECD TPG have been referred to
in the Government Bill (107/2006 vp.)
updating transfer pricing legislation and
introducing transfer pricing
documentation requirements as an
interpretation guidance in applying the
domestic legislation (Act
on Assessment Procedure § 31). The
reference has been made also in the
Government Bill (142/2016 vp.)
130
updating transfer pricing documentation
requirements and in the Government
Bill (188/2021 vp.) updating transfer
pricing legislation. In addition, the
Supreme Administrative Court has
referred to OECD TPG as an
interpretation source in several
decisions (e.g. KHO 2013:36).
France YES
Article 57 of the General Tax
Code (Code général des
Impôts) is the equivalent in
domestic law of Article 9 of
the OECD Model Tax
Convention.
Although the OECD Transfer Pricing
Guidelines are not prescriptive under
French domestic law or regulation,
French administrative doctrine makes
express references to them. French
domestic administrative doctrine refers
to the OECD Transfer Pricing
Guidelines for the arm’s length principle
and for the methods used for
determining the transaction price
between related parties under this
principle
Germany YES
Section 1 External Tax
Relations Act
(Außensteuergesetz)
The External Tax Relations Act aims at
allowing to apply the OECD Transfer
Pricing Guidelines under German law.
Furthermore, the German Federal
Ministry of Finance’s circular on
transfer pricing not only refers to the
OECD Transfer Pricing Guidelines but
includes them as an annex
Greece YES
Income Tax Code
(L.4172/2013, Article 50)
The provisions of Income Tax Code
with regards to Transfer Pricing are
applied and interpreted consistently with
OECD general principles and the OECD
Transfer Pricing Guidelines. The OECD
TPG are also followed during MAPs and
APAs procedures
131
Hungary YES
Section 18 of the Act LXXXI
of 1996 on Corporate Tax and
Dividend Tax.
The OECD TP Guidelines are not
legally binding in Hungary, however the
Hungarian TP regulations are based on
the OECD Transfer Pricing Guidelines.
Section 31, paragraph 2, subparagraph b
of the Act LXXXI of 1996 on Corporate
Tax and Dividend Tax contains
reference to the OECD TPG.
Ireland YES
Section 835C of the Taxes
Consolidation Act 1997 (as
substituted by section 27 of the
Finance Act 2019).
[ SMEs are out the scope]
Ireland’s transfer pricing rules are
construed in accordance with the
OECD’s Transfer Pricing Guidelines for
Multinational Enterprises and Tax
Administrations published by the OECD
on 10 July 2017 (“TPG”) supplemented
by - - the Guidance for Tax
Administrations on the Application of
the Approach to Hard-to-Value
Intangibles, - the Revised Guidance on
the Application of the Transactional
Profit Split Method, and - Any
additional guidance published by the
OECD on or after the date of the passing
of the Finance Act 2019 (i.e., 22
December 2019) as the Minister for
Finance may designate by order.
Italy YES
Income Tax Code (approved
by Presidential Decree No.
917 of 22 December 1986):
Art. 110 para. 7 as recently
updated in June 2017.
The Ministerial Decree dated 14 May
2018, in setting out the general guidance
for the proper application of the arm’s
length principle established by law in
Article 110, paragraph 7, of the Income
Tax Code, makes explicit reference to
the OECD Transfer Pricing Guidelines
and to the OECD Final Report on BEPS
Actions 8-10 as well. See Preamble of
the Ministerial Decree.
132
Latvia YES
Corporate income tax law,
Section 4 Paragraph 2
Subparagraph 2-e
The OECD Transfer Pricing Guidelines
are used as best practices and
recommendations on dealing with the
following transfer pricing issues: - How
to apply transfer pricing methods; - How
to make a functional analysis and
comparable benchmark; - To promote
the cooperation between taxpayers and
tax administrations and to avoid double
taxation; - To justify certain controlled
transactions or commercial relations.
Lithuania YES
Clause 3 of the Rules for
Implementation of paragraph 2
of Article 40 of the Republic
of Lithuania Law on Corporate
Income Tax and paragraph 2
of Article 15 of the Republic
of Lithuania Law on Personal
Income Tax approved by the
Minister of Finance of the
Republic of Lithuania (the TP
Rules)
The Lithuanian TP rules are mainly in-
line with the OECD Transfer Pricing
Guidelines (‘OECD TPG’). Moreover,
Lithuanian TP Rules recommend the use
of the OECD TPG insofar as the
provisions do not contradict the
provisions of the TP Rules.
Luxembourg YES
Art. 56 and 56bis of the
modified law as of 4th
December 1967 concerning
income tax (“LITL”).
The OECD TPG are the base reference
in domestic legislation. They constitute
the framework for any TP analysis.
Malta YES
Article 5(6) of the Income Tax
Management
In the absence of specific domestic
legislation regarding transfer pricing,
reference is made to the OECD Transfer
Pricing Guidelines. These, however, are
not binding
133
The
Netherlands
YES
Art. 8b CIT act
The OECD Transfer Pricing Guidelines
(“TPG”) are not incorporated in Dutch
legislation, however based on the Dutch
Transfer Pricing Decree, the TPG are
considered as internationally accepted
guidance providing explanation and
clarification of the (application of the)
arm’s length principle.
Poland YES
Article 11c para. 1, 11j para. 1
of the Corporate Income Tax
act (CIT act)
Article 23o para. 1, 23v para. 1
of the Personal Income Tax act
(PIT act)
The OECD Transfer Pricing Guidelines
are not part of the Polish law, however
they are used as an explanatory
instrument. Also in accordance with
regulations contained in the PIT and CIT
act, the Minister of Finance act on TP
assessments procedure and Minister of
Finance act on TP documentation take
into account mainly the OECD Transfer
Pricing Guidelines
Portugal YES
Article 63 of the Corporate
Income Tax Code
The OECD Transfer Pricing Guidelines
are referred in the Portuguese legislation
as a source of guidance in the
application of the arm’s length principle.
The preamble of the Ministerial Order
(Portaria) n.º 268/2021, of the 26th of
November, refers that the OECD
Transfer Pricing Guidelines should be
taken in consideration in the application
of the transfer pricing legal framework
and of the arm’s length principle, given
the complexity of the issue, and the need
to avoid double taxation and litigation.
Romania YES
Tax Act, Section 11, para 4
(art 11 alin. 4 cod fiscal)
Ord 442/2016- TP File
Romanian legislation incorporates
guidance for the interpretation of the
articles in the Tax Act concerning
transfer pricing with reference to the
OECD Transfer Pricing Guidelines
(TPG). Also, in applying the Arm’s
Length Principle Romanian legislation
134
has direct reference to the OECD TPG
Slovak
Republic
YES
Income Tax Act, Article 17,
para 5 and Article 18, para 1
The OECD Transfer Pricing Guidelines
(TPG) are not legally binding, but
acceptable as an explanatory instrument.
Slovenia YES
The Corporate Income Tax
Act and the Rules on Transfer
Prices (Translation Updated
until 2016)
The TPG is used as a practical tool by
the taxpayer and by the tax
administration (Financial
Administration) to determine the arm’s
length remuneration based on the
relevant law in the field of transfer
pricing, that is the Corporate Income
Tax Act and the Rules on Transfer
Prices. The OECD Transfer Pricing
Guidelines (2010) were translated into
Slovene language and published on the
website of the Ministry of Finance and
Financial Administration.
Spain YES
Corporate Income Tax Act,
Art.18.1 (Ley 27/2014, 27
November 2014)
The OECD TPG are recognised by the
Preamble of the Corporate Income Tax
Act as a source of interpretation of the
internal legislation and as far as the
Guidelines do not conflict with the
domestic regulations
Sweden YES
Section 14 para 19 of the
Swedish Income Tax Act
(1999:1229).
There is a reference to the OECD TPG
in decisions by the Supreme Court (RÅ
1991 ref. 107 and HFD 2016 ref. 45).
Also, in the preparatory work to the
transfer pricing documentation
legislation a reference is made to the
transfer pricing methods described in the
OECD TPG.
135
136
ANNEX 8: TERRITORIAL IMPACT ASSESSMENT – NECESSITY
CHECK
Background
Territorial impact assessments (TIA) are recommended by the Regulatory Scrutiny Board to be
conducted for any policy on the EU level that is likely to have relevant territorially differentiated
impacts on the regions. Deciding whether or not that is the case for a given policy or legislative
proposal however is not always easy as no policy will affect all regions throughout the European
Union exactly to the same extent. It is thus necessary to determine, if there are relevant respectively
significant variations in impacts.
Necessity Check
A meeting was held between DG REGIO, DG AGRI, and DG TAXUD on 14 December 2022 to
discuss possible territorially differentiated impacts on the regions of the BEFIT proposal. Following
this discussion TAXUD undertook to carry out a Territorial Impact Assessment Necessity Check.
DG TAXUD carried out the online Territorial Impact Assessment Necessity Check on 3 March
2023 and the result of that check was that the initiative does not require a TIA.
The problem and its consequences that this initiative aims to address (complexity and high
compliance costs) are spread across the Union evenly, indeed they are a product of the existing of
many systems. The initiative itself will not impact regions differently.