The European Commission has introduced its "Business in Europe: Framework for Income Taxation" proposal, along with reforms to transfer pricing regulations.
The Commission claims that these new and simplified rules could potentially reduce tax compliance costs for businesses operating within the European Union (EU) by up to 65%. Additionally, the reforms aim to streamline the process for national tax authorities in determining appropriate tax liabilities.
This framework, often referred to as BEFIT, represents a combination of the Commission's common consolidated corporate tax base plan and the Organization for Economic Cooperation and Development's (OECD) two-pillar solution. It comes one year after the Commission's commitment to establish a "single set of tax rules for doing business in Europe."
The consultation period for BEFIT concluded in January, and the proposal has now been unveiled. BEFIT introduces several key elements:
Common Tax Base: Companies within the same group will be required to calculate their tax bases using a common set of rules.
Aggregated Tax Base: The tax bases of all group members will be consolidated into a single tax base.
Percentage Calculation: Each member of the BEFIT group will have a percentage of the aggregated tax base calculated based on the average taxable results of the previous three fiscal years.
These rules would be mandatory for groups operating within the EU with an annual combined revenue of at least €750 million ($804.5 million). Additionally, they would be compulsory when the ultimate parent entity holds a minimum of 75% ownership rights or profit entitlement.
For smaller groups, these rules would be optional, allowing them to opt in as long as they prepare consolidated financial statements.
In addition to BEFIT, the European Commission has proposed measures to harmonize transfer pricing rules across the EU. Valdis Dombrovskis, an executive vice-president of the European Commission, emphasized the significance of these proposals, stating, "Today's proposals build on work done by the OECD/G20 to establish a common set of rules to determine the tax base of companies and to address problems related to transfer pricing – such as profit shifting, tax avoidance, and double taxation – so as to improve tax certainty while reducing opportunities for aggressive tax planning."
The Commission has outlined the expected timeline for these proposals, pending adoption by the European Council. Transfer pricing reforms are set to take effect on January 1, 2026, while BEFIT is scheduled to enter into force on July 1, 2028.
These initiatives reflect the EU's ongoing efforts to modernize and simplify tax regulations while promoting fairness and transparency in the business taxation landscape.
By fLEXI tEAM