Consultation on “Business in Europe: Framework for Income Taxation” (BEFIT) as a coherent approach to corporate taxation in the EU
Consultation on “Business in Europe: Framework for Income Taxation” (BEFIT) as a coherent approach to corporate taxation in the EU
1. General remarks
BDI, as the voice of German industries, welcomes the opportunity to provide input and comments on the European Commission’s public consultation on “Business in Europe: Framework for Income Taxation” (BEFIT) as a coherent approach to corporate taxation in the EU The removal of income tax obstacles in the single market would be an essential measure that can enhance both growth and competitiveness of the economy, foster innovation, and support the creation of jobs within the EU.
A new European corporate income tax framework could be built on internationally established standards in the context of the global OECD/G20 tax reform. However, the timing is not optimal as businesses around the world and especially in the EU have to implement the OECD Two-Pillar solution in the next two years. Since the European Commission rightly aims at a convergence of the requirements, it should first concentrate on sensible compliance reduction in the OECD Two-Pillar solution and only then start its BEFIT initiative. This will also allow the relevant taxpayers a more meaningful involvement as the capacities are currentlyvery stretched by preparing the implementation of the OECD Two-Pillar solution.
Once the global tax reform is implemented, BEFIT could pave the way for administrative simplifications, such as the possibility of a single EU corporate tax return for a group. By addressing issues such as transfer pricing and cross-border loss relief, BEFIT could furthermore strengthen the European corporate tax framework for businesses. It must however be ensured that BEFIT doesnotleadtocompetitivedisadvantagesforEuropean businessescompared to businesses from third countries such as the US.
2. Main features of BEFIT
We believe that BEFIT should primarily focus on reducing cross-border tax obstacles for businesses in the single market, which is the basis of Europe's success, prosperity, and stability. However, today the deepening of the single market is still an unfulfilled task that continuously negatively affects recovery and growth. The tax obstacles in the single market are predominantly limited to the areas of CIT (Corporate Income Tax) and VAT (Value Added Tax). The European Commission itself notes in its report on barriers in the single market that the lack of tax harmonization remains one of the main obstaclesfaced by businesseswhenoperating cross-border.1 Manytaxobstacles
in the single market are indeed related to the lack of cross-border profit and loss relief as well as cross-border tax disputes that frequently result in double taxation.
The creation of a single corporate tax rulebook for the EU (BEFIT) announced for 2023 is therefore an appropriate step to reduce tax obstacles in the European single market. It should be considered as an instrument to promote growth and jobs in the interest of facilitating business investments and sustainable growth in the EU.
As a prerequisite, the EU must implement the agreement on a reform of the global tax system for business profits in a consistent and internationally streamlined manner. BEFIT should therefore strive to harmonize the existing different corporate tax systems in the EU. At the same time, it must be ensured that the rules on income calculation under BEFIT are aligned with the provisions under OECD Pillar Two.
It is furthermore important that harmonization of the tax base as well as consolidation of profits and losses are implemented at the same time Only consolidation guarantees a substantial degree of simplification for businesses. The European Commission must pay attention to avoiding double taxation risks for companies and ensure sufficient flexibility to be able to react to changesin taxlawin importantthirdcountriesin thefuture. Atthesametime, BEFIT must be designed to create a competitive corporate incometax regime compared to other parts of the world.
a. Scope
Generally, voluntary participation even for businesses with < 750 MEUR revenue is preferable and they should have the possibility to apply the rules of the new system. We are however against making BEFIT obligatory for all EU companies that are part of a group. In order to reduce administrative burden, therulesshould bedesigned from thebeginning in away that alsoallows their application by SMEs.
b. Calculation of the tax base
A common corporate tax system can create relief if it is based on a uniform accounting system and this accounting system is also already applied by the respective company today. This can be IFRS, for example.
However, for businesses that prepare their accounts according to the local accounting standards of their parent company, e.g German HGB, the transition to IFRS would entail additional costs. It ispossiblethatthesegroupsmay have to transition to IFRS anyway when Pillar 2 is introduced. It therefore
makes sense to base a uniform corporate taxbase on the rules of OECD Pillar Two in order to avoid having to set up another set of calculations. Nonetheless, the current rules under OECD Pillar Two already create additional bureaucratic burden for businesses, also partly due to their inconsistent nature.
On the one hand, if IFRS were used for the determination of the tax base, some OECD Pillar Two adjustments would not become necessary. For example, if IFRS is used as the starting point for tax calculation, no deferred taxes on balance sheet differences arise, so conversely, no complex OECD Pillar Two adjustments on deferred taxes are needed.
Ontheother hand,considerableadministrativeburdenarisesfrom thevarious German trade taxes at regional level as their tax bases tend to differ significantly from the respective CIT assessment bases. BEFIT should therefore be seen as an opportunity to create a uniform CIT system as this would already lead to a substantial simplification for businesses.
c. Distribution of the tax base across EU countries using a formula (formulary apportionment)
We welcome the idea of formulary apportionment of profits and losses in a legally watertight manner as this could be a substantial simplification compared to the existing transfer pricing system and would make a large number of tax disputes obsolete. In this context, we ask the European Commission to examine whether intangibles could be included in the formulary approach considered in BEFIT. This would be especially important in order to not disadvantagecompaniesthathaveinvestedheavilyin IP development in thepast or that are currently particularly efficient
d. Allocation of profit to companies outside the BE-
One major issue which needs to be considered is the interaction with third countries outside the EU as BEFIT would only provide simplification within the EU.
3. Administration
We believe that greater difficulties will exist in the procedural aspects of BEFIT and not in its material aspects and therefore advocate for focusing on the procedural aspects in the initial phase. Therefore, BEFIT should put a special focus on reducing administrative costs for businesses. This can be best achieved if it is guaranteed that the rules provide for competitiveness and are applied in all EU Member States in the same way, e.g. by harmonizing procedural rules across the EU. In addition, a “one-stop-shop” solution allowing for the filing of one consolidated tax return would also reduce the administrative costs of interacting with numerous different tax administrations in the EU. A “one-stop-shop” where a group would be in contact with only the filing tax authority would limit intra-EU tax disputes and generate real relief for businesses.
4. Final remarks
Once the global tax reform is implemented, a swift introduction of BEFIT including both stages (harmonisation of the tax base and consolidation of profits and losses) could pave the way for administrative simplifications (such as the possibility of a single EU corporate tax return for a group), thereby helping dismantle tax barriers in the single market. Without consolidation, however, it would not provide the improvements in the taxation on earnings in the single market that businesses need. In addition, double taxation risks have to be avoided and the new system must be flexible enough to adapt to changes in the tax laws of important third countries.
Consultation on “Business in Europe: Framework for Income Taxation” (BEFIT) as a coherent approach to corporate taxation in the EU
About BDI
The Federation of German Industries (BDI) communicates German industries’ intereststo thepolitical authoritiesconcerned Sheoffersstrong support for companies in global competition. The BDI has access to a wide-spread network both within Germany and Europe, to all the important markets and to international organizations. The BDI accompanies the capturing of international markets politically. Also, she offers information and politico-economic guidance on all issues relevant to industries. The BDI is the leading organization of German industries and related service providers. She represents 40 inter-trade organizations and more than 100.000 companies with their approximately 8 million employees. Membership is optional. 15 federal representations are advocating industries’ interests on a regional level.
Imprint
Federation of German Industries e.V. (BDI)
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www.bdi.eu
T: +49 30 2028-0
Lobby Register Number: R000534
EU Transparency Register: 1771817758-48
Contact Dr Monika Wünnemann
Head of Department Tax and Financial Policy
T: +49 30 2028-1507
m.wuennemann@bdi.eu
Philipp Gmoser
Senior Manager Tax and Financial Policy
T: +32 2 79210-12
p.gmoser@bdi.eu
BDI document number: D 1714