EU Tax Reforms: Forging a Unified Path in Corporate Taxation and Transfer Pricing

EU Tax Reforms

By Shannon Power, 5th October 2023

In a significant leap toward ensuring fair and consistent taxation across the European Union (EU), the European Commission unveiled ground-breaking proposals on 12th September 2023. These proposals, the Business in Europe: Framework for Income Taxation (BEFIT) Directive and the Transfer Pricing (TP) Directive, aim to revolutionise the EU’s corporate tax landscape. This blog explores the key aspects of these directives and their potential impact on businesses and members.

What are the New Proposed Directives?

The BEFIT Directive: Simplifying Corporate Taxation

At the heart of the BEFIT proposal lies the ambition to introduce a uniform framework for corporate income taxation within the EU. This directive intends to streamline the process of determining taxable bases for companies with consolidated combined revenues exceeding €750 million in at least two of the last four financial years. By establishing a common approach, the BEFIT Directive seeks to replace the current patchwork of regulations, reducing administrative burdens and costs and promoting a business-friendly environment.

Under this proposal, each entity’s taxable bases will be determined individually, with adjusted profits aggregated to form the BEFIT tax base. The directive also allows for cross-border set-off of losses, fostering a more integrated and efficient corporate tax structure across member states.

The TP Directive: Ensuring Fair Transfer Pricing

The TP Directive, on the other hand, addresses the complexities of transfer pricing rules within the EU. Currently, variations exist in the application of the OECD Guidelines, leading to discrepancies in the arm’s length principle between member states. The new directive seeks to harmonise these rules, providing a common definition of associated enterprises and an appropriate mechanism for adjustments.

Key Measures Introduced

  1. Common Arm’s Length Definition: The TP Directive introduces a consistent interpretation of the arm’s length principle, ensuring uniformity in transfer pricing practices across the EU.
  2. Associated Enterprises Threshold: A common threshold of 25% for associated enterprises will be applied, providing clarity on which entities fall under the directive’s purview.
  3. Mechanism for Better Adjustments: The directive establishes a mechanism for matching adjustments, preventing double taxation when an intercompany transaction is adjusted in one member state. Adjustments falling outside the interquartile range are admitted, enhancing tax certainty.
  4. Compensating Adjustments: Member states will recognise compensating adjustments made by taxpayers at the end of their fiscal year, provided the adjustment is within the arm’s length range and justifications are provided.

What’s Next?

Both directives are now in the negotiation phase among member states. The proposed timeline indicates that the BEFIT Directive should be transposed into national laws by 1st January 2028, with rules effective from 1st July 2028. The TP Directive is expected to be transposed by 31st December 2025, becoming operational from 1st January 2026.

The unveiling of the BEFIT and TP Directives marks a pivotal moment in the EU’s pursuit of tax harmonisation and fairness. By fostering consistency in corporate taxation and transfer pricing practices, these directives promise to reduce complexities, mitigate legal disputes, and create a more conducive environment for businesses to thrive. As member states move towards implementing these directives, the EU stands on the brink of a new era in taxation, one that prioritises transparency, fairness, and economic growth.

If you have any questions regarding the proposed directives or any tax-related obligations related to your company, please do not hesitate to contact the Company Bureau team. Give us a call at +353(0)1 6461625 or fill out our online contact form.

Disclaimer This article is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by Company Bureau for any action taken or not taken in reliance on the information set out in this article. Professional or legal advice should be obtained before taking or refraining from any action as a result of this article. Any and all information is subject to change.