The European Commission published a new package of proposals on 12 September to put forward (i) a single set of tax rules for doing business in the EU (Council Directive on Business in Europe: Framework to Income Taxation (BEFIT)), (ii) harmonised transfer pricing rules within the EU ( Council Directive on Transfer Pricing) and (iii) a Head-Office Tax system for micro, small, and medium-sized enterprises (SMEs) (Council Directive establishing a Head Office Tax system for micro, small, and medium-sized enterprises, and amending Directive 2011/16/EU (the HOT proposal).
The takeaways:
- BEFIT could be a simplification for business, but the introduction of so many new concepts and lack of alignment with the GloBE rules will need to be carefully handled, otherwise it may prove challenging to implement in tandem with other tax reforms.
- A level playing field with respect to transfer pricing is welcomed. But given that the codification of transfer pricing principles is a balancing act between the ambitions of the Commission and the sovereignty of Member States, a mandatory corresponding adjustments system between Member States could improve the proposal.
- While the Head Office Tax proposal for SMEs provides welcome simplifications, it is very narrow in its application and may be of limited practical use. Broader scope would be highly beneficial to crucial growing SMEs in the EU.
All three proposals require a unanimous vote of support from the EU Member States, and this must be achieved before the EU Commission term ends next Spring. Although it is too early to tell whether any or all of these proposals will ultimately be adopted, the TP proposal may find support with many Member States.