How to prepare for the EU’s BEFIT initiative

1 November 2023
EU member states must transpose EU regulations into law, but they may interpret regulations and enforce their laws in different ways. Critically for organisations expanding into or operating in multiple EU countries, each member state has its own tax regime. This can create significant compliance challenges.

These differing tax rules may deter some multinational companies from establishing a presence in the EU, so regulators there have begun to take steps to simplify the situation. In September 2023, the European Commission (EC) officially published its proposal for a new directive called Business in Europe: Framework for Income Taxation, or BEFIT. The directive seeks to introduce a single set of tax rules and provides a common EU corporation tax framework for companies with a taxable presence in the EU.

This article summarises the proposed directive, explains how it could affect businesses operating in the EU, and suggests steps businesses can take to prepare.

What BEFIT entails

The introduction of a common EU corporation tax framework is aimed at simplifying and minimising administrative burdens for companies operating in the EU.

BEFIT is the spiritual successor of the common corporate tax base (CCTB) and the common consolidated corporate tax base (CCCTB) initiatives, which have been around since 2011 in one form or another. In 2021, the European Commission withdrew the CCTB and CCCTB proposals and introduced BEFIT.

The BEFIT proposal aligns with the OECD/G20 international tax agreement on a global minimum level of taxation and the Pillar Two project, which is focused on reducing corporate tax avoidance and underpayments.

The EC says the newly proposed directive is designed to ensure that tax profits are allocated more effectively across EU member states, while reducing tax compliance costs for companies operating in the EU and creating a more coherent approach to corporate taxation in the region. One OECD analysis found that BEFIT could reduce compliance costs by as much as 65 percent for businesses.

Who’s affected

Companies will be grouped together to form a BEFIT tax base. The directive applies to multinational companies operating in the EU with annual combined revenues of at least €750 million and to companies where the parent entity holds at least 75 percent of ownership rights or the rights to profits.

For groups that contain companies headquartered in what’s known as third countries — that is, non-EU countries or countries whose citizens don’t have freedom of movement in the EU — different thresholds apply. For companies with a presence in the EU, the EU group members would need to have at least €50 million in combined annual revenues in two of the last four fiscal years or account for at least 5 percent of total revenues of the group.

Smaller groups outside these categories can choose to opt out of the rules if they prepare consolidated financial statements.

How BEFIT is structured

BEFIT is divided into two parts, an income tax portion and transfer pricing portion.

The rules are complex, but at a high level, the starting position of the calculation is the financial accounts of the BEFIT group entities. The BEFIT tax base of each BEFIT group member is determined by a series of adjustments to consolidated financial statements. These amounts are then aggregated into a total amount and allocated among BEFIT group members.

BEFIT also aims to simplify transfer pricing compliance between BEFIT group members and non-BEFIT group members through what’s known as a traffic light system. For limited risk distribution and contract manufacturing activities, member states must determine whether these activities fall into a low, medium or high transfer pricing risk zone using specific EC rules that compare profit performance to public benchmarks. Depending on what percentile these activities fall within, they’ll be assigned a risk zone. Low-risk activities won’t require further review, while member states will need to monitor medium-risk activities and review or audit high-risk activities.

The EC says the proposed directive should strengthen tax certainty, reduce the risk of litigation and double taxation, and make it more difficult for companies to use transfer pricing rules to minimise their tax obligations. Should the proposed directive become law, member states will need to implement the simplified transfer pricing rules by 1 January 2026.

To comply with the proposed rules, each group will need to file one consolidated BEFIT return through an appointed filing entity. The return must be filed within four months of the end of the fiscal year. Individual entities within the BEFIT group must still file an individual return no later than eight months after the end of the fiscal year. All BEFIT group members must operate under the same 12-month fiscal calendar.

How multinational organisations can prepare

Unanimous agreement within the EU is required to enact BEFIT. In practical terms, this means one country can effectively veto the proposal. As each country has its own taxation requirements based on its own political and economic realities, a common tax framework may be very difficult to implement.

Though the future of BEFIT is uncertain, multinational companies can learn from the larger signals this latest proposal sends and plan appropriately for potential future changes. BEFIT shows that — similar to previous EU initiatives such as country-by-country reporting, BEPS Pillars One and Two, and DAC6 and DAC7 —preparing a tax return is no longer a “fill in the box” exercise for multinationals.

Proposals and rules are subject to change and indeed are changing. Regulators and tax authorities are increasingly focused on fostering greater transparency and tax disclosures, along with what they regard as a more equitable split of tax allocation rights that requires multinational enterprises to focus on more than just the bottom line.

Multinational companies should therefore review their internal and external global supply chains against the current international and domestic tax requirements in the countries where they operate. Performing a review will ensure your company is not only compliant, but also help you avoid potential non-budgeted and unforeseen tax expenses.

For entities with activities in multiple jurisdictions, effective tax management has become an integral part of better financial stewardship. To compete in a volatile, competitive global economy, they must develop and implement plans to keep abreast of tax-rule changes and potential changes in all their countries of operation.

Shoaib Shafi, manager, international corporate tax advisory at Vistra, contributed to this article.