EU corporate taxation: impacts on businesses need more consideration

The European Economic and Social Committee (EESC) responds to the Commission proposal to develop a harmonised EU approach to company taxation, recommending improvements to minimise the burden on businesses and ensure global alignment.

For many years, the EU has sought to establish a common corporate tax base. The recent unveiling of the "Business in Europe: Framework for Income Taxation" (BEFIT) proposal by the European Commission marks the latest legislative effort in this ongoing pursuit.

BEFIT serves as a continuation of previous efforts, namely the common corporate tax base (CCTB) and common consolidated corporate tax base (CCCTB) proposals. The CCCTB failed to materialise into law due to a combination of political and technical challenges, ultimately leading to its withdrawal by the Commission and its substitution by the BEFIT proposal. The primary objective of the BEFIT proposal and the accompanying proposal on transfer pricing is to mitigate cross-border compliance costs associated with transfer pricing and address profit-shifting activities in a more standardised manner.

The EESC, in its opinion on the draft legislation, suggests that while BEFIT may introduce an additional layer of complexity for businesses, it offers certain advantages. Notably, BEFIT tackles smaller risks linked to tax base harmonisation and offers significant relief from withholding taxes within the EU, thereby reducing the operational costs of cross-border activities.

Reducing divergences and limiting fragmentation

The Commission’s renewed efforts to develop a common corporate tax base within the EU retain the support of the EESC, which welcomes such an approach as essential to the consolidation of the single market by reducing tax compliance costs for large businesses operating across borders, thereby making it easier for national authorities to determine which taxes are due.

“The current variety of different national rules results in fragmentation and discrepancies,” says rapporteur Petru Sorin Dandea. “This hinders cross-border activities in the internal market due to the high costs that companies incur to comply with multiple legal frameworks.”

The Committee's opinion outlines why aggregation of the tax base at EU group level is crucial for the functioning of the new framework: to allow for cross-border loss relief, since losses will automatically be set off against profits across borders.

Such relief is only rarely possible at the moment, the EESC points out, and could result in the over-taxation of group profits, discouraging businesses from operating across borders in the internal market – directly infringing the principles of the internal market, EU investment flows and the deeper integration of Member States’ economies.

Qualified support

The opinion acknowledges the value of allowing Member States a certain margin for manoeuvre in adding tax base increases, tax deductions or tax incentives to their allocated parts. However, the EESC remains concerned that such extended flexibility could undermine the simplification objectives pursued by the BEFIT proposal, potentially leading to differentiated taxation of corporate profits within the various Member States.

"The EESC supports the BEFIT/TP proposals of the EC and stresses under BEFIT, three sets of rules will be running in parallel: the domestic national revenue determination framework, the OECD Pillar Two system and the BEFIT system,” says Mr Dandea.

“We need to clarify how these systems interact to avoid additional burdens for businesses.”

The rapporteur asserts that such a disjointed framework could become burdensome for small Member States with very limited administrative capacity, especially when the headquarters of a large group are located in a small Member State.

Transfer pricing

The opinion accepts the Commission’s view about the need to clarify several concepts and issues related to transfer pricing legislation, shaping the legal framework in a manner that encourages certainty and predictability. In this respect, the EESC suggests re-establishing the Joint Transfer Pricing Forum to facilitate an open discussion on the need to handle transfer pricing disputes in the EU more effectively.

Such an approach could also cut compliance costs for SMEs in their everyday activities and potentially also decrease the procedural and litigation costs incurred by a significant number of enterprises every year.

However, the EESC believes that in this respect, the objectives of the Commission proposal could perhaps have also been pursued by improving the Directive on tax dispute resolution mechanisms, and that it remains to be seen how third-country jurisdictions will relate to the new EU approach to transfer pricing rules.