Business in Europe: Framework for Income Taxation (BEFIT)

In its communication Business Taxation for the 21st Century, the EU Commission announced a proposal for a new framework for income taxation for businesses to:

1. boost the competitiveness of the single market

2. reduce compliance costs, including for small to medium-sized enterprises (SMEs), and

3. to support investment in the EU

This new proposal is known as Business in Europe: Framework for Income Taxation (BEFIT). The Commission announced that BEFIT would be a single corporate tax rulebook for the EU, based on the key features of a common tax base and the allocation of profits between Member States by using a formula (also called ‘formulary apportionment’). As President von der Leyen announced in her 2022 State of the Union Address, BEFIT will make it easier to do business in our Union and improve access to the dynamism of our continental market.

Achieving a single corporate tax system across the EU for companies falling under BEFIT is fully in line with and will contribute to achieving the EU Commission’s priorities in the field of taxation. BEFIT will set up the business taxation framework for the 21st century: a framework to ensure a fair, modern and efficient tax system that meets public financing needs, while also supporting the recovery and the green and digital transition by creating an environment conducive to fair, sustainable and job-rich growth and investment. BEFIT will complement other EU policies on direct taxation such as the Anti-Tax Avoidance Directive3 and its amendments. Since its unveiling by the EU Commission in May 2021, this proposal has received widespread support from the civil society. In addition, the European Parliament recently called for the adoption of new legislative proposals in 2022-2023 and specifically supported the rationale of the EU Commission’s proposal on BEFIT4. Furthermore, the EU Commission identified BEFIT as a proposal to follow up on the requests made in the field of taxation at the Conference on the Future of Europe, which allowed people, academia and other stakeholders to debate the EU’s challenges and priorities for the future.

This initiative aims to address the complexity and high costs that businesses, notably those with cross-border activities, face as a result of having to comply with 27 different corporate tax systems when doing business across the EU. The lack of a common corporate tax system undermines the competitiveness of the single market, as a result of:

1. distortions in investment and financing decisions (which may also be driven by tax optimisation strategies rather than primarily commercial considerations); and

2. higher compliance costs for businesses active in more than one Member State as a result of having to comply with many different tax systems.

This situation creates a competitive disadvantage for the single market compared to large non-EU markets.

Based on Article 9 of the OECD Model Tax Convention, businesses involved in cross-border trade with entities of the same group must be taxed on the basis that they act at arm’s length in their dealings with each other. Over the last years, compliance with these transfer pricing rules has become increasingly more complex.

In addition, the current corporate tax systems do not fully reflect the realities of today’s economy and global developments as they are still mainly based on the principles of local brick-and-mortar production. These principles are believed to be outdated since globalisation, digitalisation and the intensified use of intangibles have substantially changed how companies do business. These changes should also be reflected in how they are taxed. As governments adopt anti-tax avoidance and evasion measures to combat fraudulent tax schemes, the disparity in solutions adds further complexity10. This disparity may be increasingly relevant for those SMEs that, thanks to their access to the EU single market, are growing in size and expect to increasingly expand across borders now that supply chains are being redesigned because of the Russian war of aggression against Ukraine and the EU’s action to strengthen its strategic autonomy.

According to the EU Commissione, without further policy action, the identified problems will persist and the compliance burden will remain high while the competitiveness of the single market will continue to be negatively affected.