EU’s new unified corporate tax regime likely derailed by lack of unanimity

Dubbed the Business in Europe: Framework for Income Taxation (BEFIT), the bill is the EU’s third bid to unify business tax across the region. With it, the EU hopes to “rethink taxation”, according to Paolo Gentiloni, the European Commissioner for the Economy in a statement.

“As our economies transition to a new growth model supported by NextGenerationEU, so too must our tax systems adapt to the priorities of the 21st century,” he said.

For BEFIT to come into effect, however, unanimity among all member states is essential. And yet, even with the economic fallout of the pandemic, various member states are still unlikely to support the directive, with Ireland likely to oppose the EU’s plans, according to various sources.

Committed to OECD

When asked to provide a statement for Accountancy Age on Ireland’s stance on BEFIT, the Irish Ministry of Finance spoke about the OECD instead.

“Ireland is focused on achieving a global agreement this year at the OECD on reframing the international tax rules. This is the priority for Ireland, and we have a long-standing position that addressing aggressive tax planning is a global issue which requires a global agreement,” according to a spokesperson for the Irish Ministry of Finance. “Such an agreement will be important in ensuring certainty and stability in the coming years to promote growth and investment.”

“The January 2021 update to Ireland’s Corporation Tax Roadmap sets out the measures we have taken, and also signals further actions that Ireland will take over the period ahead to fully implement the EU Anti-Tax Avoidance Directives,” the spokesperson adds.

Big plans

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 tax treaties. “Ireland has already objected to the idea and I suspect other countries will too,” says David Sayers, international tax partner at Mazars.

“It proposes to replace the internationally accepted arm’s length standard with the arbitrary formulary apportionment that is used in the US to divide income between states,” says Sayers. “Any US tax adviser will tell you that is an imperfect system which has many faults. If it doesn’t work in the US, why should it work in the EU?”

The EU, however, hopes that through BEFIT it will create a much fairer system than the one currently in play. Possibly coming into force in 2023, the directive will also prevent companies from moving to countries with lower taxation rates, such as Malta and Ireland, thereby cracking down on the abusive culture of shell companies.

Further, 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 make it easier for companies to operate cross-border by reducing red tape and lowering compliance costs.

Repackaging CCCTB

The EU first presented a unified business tax, known as the Common Consolidated Corporate Tax Base (CCCTB), in 2011. Given how closely governments guard their national taxation systems, CCCTB proposed to unify what was taxed, as opposed to how much was taxed. Even so, member states rejected the proposal, viewing it as a precursor to interfering with a national tax regimes.

A second attempt, which involved a less dramatic two-step approach, was made in 2016 amid a surge in tax avoidance crackdowns. It too was rejected – by Denmark, Ireland, Luxembourg, Malta, Sweden, The Netherlands and the UK.

Despite the new name, Sayers believes that BEFIT is simply a repackaging of the CCCTB proposals. “They have rightly been rejected twice already and clearly the EU is looking to piggyback on the OECD reforms under Pillar One and Pillar Two in the hope that they can gain some new momentum. It’s an idea driven by dogma rather than commercial reality,” says Sayers.

Meanwhile, Rob Mander, international tax services consultant at RSM International, believes that BEFIT has a greater chance of success than the CCCTB. “Compared to earlier approaches, there is now greater recognition that the digital economy is inherently international, and will continue to grow its economic footprint, and one country solutions are not sustainable in the long term.”

Third time lucky?

Although BEFIT promises to encourage job creation, entrepreneurship and more taxation revenue for member states – it also creates a level of financial interference that some countries are unwilling to permit. Given Ireland’s stance on this point in particular, it seems unlikely that it will budge this time around. Those that objected to CCCTB may also object to BEFIT on these grounds.

“If it’s to be a tax directive, this would require unanimity and I think it is unlikely to pass unless it can be done by qualified majority voting,” says Sayers.

Mander agrees that unanimity will be difficult to achieve. “There is no single outcome that will please all countries, so some negotiation and compromise is inevitable if BEFIT is to succeed.”

Despite hoping to use the OECD’s new global tax rules as a springboard for its own tax agenda, Ireland’s opposition right off the bat suggests that BEFIT is likely to fail like its predecessors.