For many years, the European Union (EU) has been trying to make a single business tax base. The European Commission's recent 'Business in Europe: Framework for Income Taxation' (BEFIT) proposal and two related proposals on transfer pricing are the next steps in its legislative efforts to make the CCTB (common corporate tax base) and CCCTB (common consolidated corporate tax base) proposals law.
The new ideas are meant to make it easier to follow transfer pricing rules across borders and deal with profit-shifting in a more unified way. Even though BEFIT might make things more complicated for businesses, the plan does have some good points. It reduces the smaller risks that come with harmonizing tax bases and gives businesses a lot of relief from withholding taxes in the EU, which would make it cheaper to do business across borders.
Even though BEFIT might be better than CCCTB, none of the current proposals would make business income taxation in the EU much better overall.
It was never made a law because of political and technical problems, and the Commission took it back when BEFIT was introduced. But from 2011 to now, there have been a lot of conversations about this issue that BEFIT evaluators can use to look at the current legislative plan. What's more, it's important to know the main technical differences between the CCCTB, BEFIT, and the EU's own impact study.
Different Degrees of Harmonization
The 2016 CCCTB plan was mostly about making a single corporate tax base for companies that make more than EUR 750 billion a year and figuring out how much tax they owe at the Member State level. Member states could only make small changes to their national tax bases, like deciding whether or not to allow deductions for retirement accounts.
The BEFIT plan, on the other hand, would target the same group of taxpayers but make them file an extra tax return for the whole group against the made-up BEFIT tax base. Members of the BEFIT group get a share of this combined group tax base depending on how much they contributed over the last three fiscal years. The BEFIT tax return could be used by the government to figure out how likely it is that transfer pricing rules will be followed and to lower the risk of lawsuits.
Under BEFIT, their company tax obligations would still be based on national tax rules, not the BEFIT base. The only part of BEFIT that would directly affect businesses' tax obligations is getting rid of withholding taxes in the EU for corporations that file, which would lower their costs of doing business across borders.
Still, the BEFIT proposal puts pressure on national policymakers to make sure that their company tax bases are in line with BEFIT so that compliance costs are not incurred twice. Because of this, it is helpful to know how the tax bases for both plans are different.
Differences in Tax Bases
The CCCTB base had a lot of good points. It would have created an Allowance for Corporate Equity (ACE), fixed the problem of the debt bias in the corporate income tax system, and let people use Last-In-First-Out (LIFO), which is the fairest way to reduce inventory costs. The BEFIT base doesn't have an ACE and only lets you use the Average Cost and First-In, First-Out (FIFO) ways to treat inventory. This is a step backwards in the legislative plan.
Carryover provisions help businesses "smooth" their risk and income, making the tax code more neutral across investments and over time. However, neither plan goes far enough to address these provisions. CCCTB would have limited carryforwards to 50% of taxable income above EUR 1 million per year, but there would have been no time limit on using past losses to cover future losses. The BEFIT plan isn't clear on whether or not carryforwards should be limited in time, but it doesn't say anything about a maximum amount. Companies can also use their losses between subsidiaries to file their BEFIT tax return. This is something that the CCCTB plan only let them do for a short time.
It's not clear from either plan how carryback provisions would be used. However, a number of large European economies already use them to make their tax systems more fair for investments with variable income profiles.
Lastly, both plans use the straight-line depreciation method to take investment costs out of taxable income, though the specifics change for each type of asset. The CCCTB plan includes a super discount for investments in research and development, with a higher rate for small businesses that choose to join the program on their own.
Allocation of the Tax Base to National Jurisdictions
The BEFIT proposal would split the company tax base among Member States based on the amount of BEFIT income that comes from each Member State, which would be found by taking the average of the taxable results from the three previous fiscal years. It would also leave the door open for formulary sharing when the time comes. This method is more like how national tax bases are currently set up using transfer pricing, but it includes new rules to make sure everything is clear and follows the rules.
The CCCTB's allocation rule was based on three factors that were each given equal weight: labor input (such as payroll costs and the number of workers), tangible capital, and sales volume by destination country. When the shared tax base was given to different national governments, inventory costs and intangible assets were not taken into account. This method was in line with the proposal's goal to stop companies from avoiding paying taxes by carefully putting intangible assets in places with low taxes.
| CCCTB Proposal 2016 | BEFIT Proposal 2023 | |
|---|---|---|
| Harmonized Income Definition | Taxable profits as defined under the common tax base rules | Financial profits as defined by accounting standards and adjusted to align closer to taxable profits |
| National Taxable Income Definition | Common tax base rules with minor national adjustments | National tax rules |
| Income Allocation | Formulary apportionment to jurisdictions based on three equally weighted factors (labor – payroll and number of employees, tangible assets, and sales by destination) | Share of BEFIT base originating in a jurisdiction based on previous three years’ profitability in the jurisdiction. Option for future formulary apportionment |
| Loss Carryovers | Yes, no time limit on carryforwards, up to 50 percent of taxable profits beyond EUR 1 million. Unclear on carrybacks | Yes, unclear on time limitations |
| Loss Offsets between Subsidiaries | Yes, EU-wide. Under limited time period and other restrictions | Yes, EU-wide |
| Depreciation | CCCTB common depreciation schedules (straight Line depreciation). National option for 25 percent declining balance depreciation for short-lived assets. Super-deductions for R&D expenses, enhanced for SMEs | BEFIT common depreciation schedules (SL depreciation for assets over EUR 5.000) |
| Inventory | LIFO | FIFO/AC |
| Allowance for Corporate Equity | Yes, form unspecified | No. Adjustments according to national tax base |
| Threshold for Application | EUR 750 million in global revenues | EUR 750 million in global revenues, additional criteria for enterprises with an EU ownership share below the 75 percent threshold |
Is BEFIT an Improvement?
The pros and cons of each method are different. The CCCTB method made it possible for multinational companies to do all of their business in one place, but it did so at the cost of harmonized tax rules that aren't as good as what Member States do best.
The BEFIT plan, on the other hand, will require companies to file their BEFIT tax returns against a fake tax base. This will add another step to the process, but it may help with transfer pricing compliance and withholding taxes. The initiative's narrower scope makes it a better tool for reaching this goal than the CCCTB plan, which would create a whole new corporate tax system.
The BEFIT program is still putting pressure on Member States to make sure that their own tax rules are in line with the BEFIT base so that they don't have to pay twice for the same things. As a result, it is still important to make the BEFIT base based on what Member States do best, just like a real tax base.
Policymakers shouldn't try to make rules more similar just because they are similar. Policies that affect the whole EU should add something that can't be done as well at the level of the Member States. So, if the EU wants to harmonize its tax base, it shouldn't just look for the lowest common denominator. Instead, it should do it in a way that makes EU tax policy more efficient and competitive as a whole.
