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    BEFIT, does the EC strive to be the IRS of the EU?

    On 12 September 2023, the European Commission (‘’EC’’) published a proposal called ‘’Business in Europe: Framework for Income Taxation’’ (‘’BEFIT’’). The proposal is meant to introduce a common framework for Income Taxation in the EU. BEFIT introduces a common set of rules to determine the tax base of groups of companies. This proposal is far-reaching since it introduces a certain allocation of an aggregated tax base and has some similarities to the CC(C)TB.

    Status and timing

    The proposal still needs to be adopted by the Council. The goal is that the rules should be implemented in domestic legislation by 1 January 2028 and will enter into force on 1 July 2028. This intended date is 2 years after the implementation date of the also newly proposed TP Directive. This way the group companies can first align and harmonise their transfer pricing systems.


    BEFIT is meant to lower the compliance costs of MNEs. The proposal applies to EU companies and PE’s that belong to a group with a consolidated revenue of over €750 million in at least two of the last four years. A BEFIT group is formed if there are two or more EU companies or PE’s of which the ultimate parent owns at least 75% of the profit- and/or ownership rights. Smaller groups can opt in if they have consolidated financial statements.

    Allocation mechanism

    One of the key difficulties with such proposals is the determination of an allocation mechanism that is acceptable for all Member States, as Member States typically do not want to lose taxable income.

    The BEFIT group has to determine its tax base by means of a common set of rules. The tax bases of all members of the BEFIT group are then aggregated to one tax base. During the first years, a transition allocation rule applies. According to this allocation rule, the BEFIT tax base shall be allocated in accordance with the so-called “baseline allocation percentage”. This percentage is determined based on the average taxable results of the BEFIT group members in the three previous tax years.

    Historically, one of the reasons that the CC(C)TB proposals never made it was that it was based on allocations as FTEs and assets because of which there was always a tax authority that would see a material decline of its tax base. Applying the taxable results of the past three years may initially take away this objection. After the transition period there will of course be already some type of lock-in for authorities. The current idea is that the data that will be obtained in the transition phase would provide for a good basis to come up with an allocation mechanism that proves suitable to all Member States although this may be challenging.

    Risk zones

    The proposal works with so-called risk zones.

    Within the EU (intra-BEFIT group transactions):

    If the expense incurred or income earned from the group transaction increases by less than 10% compared to the previous three years a transaction between BEFIT group members  is seen as low risk. If the increase is 10% or more the intra-BEFIT group transaction is seen as high risk and substantiation has to be provided.

    Transactions with related entities outside the EU / BEFIT group:

    The proposal contains a few simplified approaches for tax compliance between a BEFIT group member and a group member outside of the BEFIT group (mainly meaning outside the EU). The simplified approach also contains risk zones. Placement in these risk zones is based on the interquartile range of public benchmarks.

    Link to Pillar 2

    For background, Pillar 2 will be introduced next year and would entail amongst others that the effective tax rate of each jurisdiction should be at least be 15%. Otherwise, a top-up tax applies.

    There is no direct linkage between BEFIT and Pillar 2. The expectation of Pillar 2 in the market is that most jurisdictions would move to a tax rate of at least 15% because of which the impact would eventually be limited (there can be exceptions as it is based on effective tax rate and other considerations).

    It seems to be expected by the EC that Pillar 2 would not have an (material) impact on its BEFIT proposal. It is to be considered what the background of that is. Given the goal of implementing in 2028 a lot can happen in the meantime of course.

    Comparison to US and sovereignty

    The EC has already for many years strived to come to a consolidated tax base within the EU. The focus of the EC with this proposal seems also to be to make it easier to do business within multiple EU Member States. Also, the intention seems to improve the competitive position of the EU versus other jurisdictions such as the US.

    Although not stated, it appears that the EC would like to gradually move towards a tax system that is more similar to for example the US. Implementing BEFIT would be a key step in this objective.

    It can be expected that there will be quite some difficulties in determining an appropriate allocation mechanism after the transition period has passed. Coincidentally, all Member States also contribute to the EU and are subsidized by the EU in various ways. Would this be a way to smooth out the allocation mechanism? If so, this would mean that the EU for the first time would mix corporate income tax with EU contributions and subsidies.

    As such, it is to be seen if all Member States will unanimously agree to this proposal and what the end-goal of the EC will be.

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