Dubbed Business in Europe: Framework for Income Taxation (BEFIT), the bill is the EU’s third attempt to unify business tax in the region. With it, the EU hopes to “rethink taxation”, according to Paolo Gentiloni, the European Commissioner for the Economy in a declaration.
“As our economies shift to a new growth model supported by NextGenerationEU, our tax systems must also adapt to 21st century priorities,” he said.
For BEFIT to enter into force, however, the unanimity of all member states is essential. And yet, even with the economic fallout from the pandemic, various member states are still unlikely to support the directive, with Ireland likely to oppose EU plans, according to various sources.
Committed to the OECD
When asked to provide a statement for Accountancy Age on Ireland’s position on BEFIT, the Irish Department of Finance referred instead to the OECD.
“Ireland is focused on reaching a global agreement this year at the OECD on reframing international tax rules. This is the priority for Ireland, and we have a long-standing position that tackling aggressive tax planning is a global problem that requires a global agreement, ”said a spokesperson for the Irish Department of Finance. “Such an agreement will be important to ensure certainty and stability in the years to come in order to promote growth and investment.”
“The January 2021 Irish Corporate Tax Roadmap update sets out the steps we have taken and also signals new steps Ireland will take over the coming period to fully implement. implement EU directives against tax avoidance, ”the spokesperson added.
Ireland is unlikely to be the only EU member state to reject the EU’s new unified corporate tax regime. If BEFIT is implemented, the EU will have to recast all its double taxation treaties. “Ireland has opposed the idea before and I suspect other countries will too,” said David Sayers, international tax partner at Mazars.
“He proposes to replace the internationally accepted arm’s length standard with the arbitrary form-based allocation that is used in the United States to divide income among states,” Sayers said. “Any American tax advisor will tell you that this is an imperfect system with many flaws. If it doesn’t work in the US, why would it work in the EU? “
However, the EU hopes that through BEFIT it will create a much fairer system than the one currently in force. Possible entry into force in 2023, the directive will also prevent companies from setting up in low-tax countries, such as Malta and Ireland, thus combating the abusive culture of shell companies.
In addition, BEFIT aims to reduce the burden on national tax systems struggling to cope with the volume of cross-border business activities. The new rules also aim to facilitate cross-border business operations by reducing red tape and compliance costs.
The EU first introduced a unified business tax, known as the Common Consolidated Corporate Tax Base (CCCTB), in 2011. Given the rigor with which governments monitor their tax systems national governments, CCCTB proposed to unify what was taxed, as opposed to how much was taxed. Despite this, member states rejected the proposal, seeing it as a precursor to interfering with national tax regimes.
A second attempt, which involved a less dramatic two-step approach, was made in 2016 amid an upsurge in crackdowns against tax evasion. It was also rejected – by Denmark, Ireland, Luxembourg, Malta, Sweden, the Netherlands and the United Kingdom.
Despite the new name, Sayers believes that BEFIT is just a repackaging of the CCCTB proposals. “They have already been rightly rejected on two occasions and the EU is clearly seeking to graft onto the OECD reforms under pillars 1 and 2 in the hope that they can gain new momentum. It’s an idea driven by dogma rather than business reality, ”says Sayers.
Meanwhile, Rob Mander, international tax services consultant at RSM International, believes that BEFIT is more likely to be successful than CCCTB. “Compared to previous approaches, there is now greater recognition that the digital economy is inherently international and will continue to grow its economic footprint, and that single country solutions are not sustainable in the long term. “
Third time lucky?
While BEFIT promises to encourage job creation, entrepreneurship and more tax revenue for member states, it also creates a level of financial interference that some countries are unwilling to allow. In view of ireland position on this point in particular, it seems unlikely that he will move this time around. Those who objected to CCCTB can also object to BEFIT on these grounds.
“If it is a tax directive it would require unanimity and I think it is unlikely to be passed unless it can be done by qualified majority,” Sayers said.
Mander agrees that unanimity will be difficult to achieve. “There is no one outcome that will appeal to all countries, so negotiations and compromises are inevitable for BEFIT to be successful.”
Despite hopes to use the new global tax rules from the OECD as a springboard for its own tax agenda, Irish opposition from the outset suggests that BEFIT is likely to fail like its predecessors.