ALG contributes to IBA response on BEFIT and Transfer Pricing consultations

At the end of last year, the EU launched public consultations on two significant proposals; the Business in Europe: Framework for Income Taxation (BEFIT) and a Transfer Pricing Directive.

BEFIT

BEFIT was initially proposed in May 2021 as part of the European Commission’s Communication on Business Taxation for the 21^st Century and it is the latest iteration of the long-running plan for an EU wide consolidated tax base (formerly known as the CCCTB). A public consultation on that initial proposal was held in 2022, which raised substantial concerns with the proposal. A new draft BEFIT directive was published in September 2023, which was materially different to what was first proposed in 2021. Again, this proposal was opened to public consultation, which closed on 24 January 2024.

While the initial BEFIT proposal set out a formulary apportionment mechanism to re-allocate tax liabilities across EU Member States in which large groups (with revenues of at least €750m) operate, this latest proposal simply provides for a transitional mechanism which it envisages will eventually be replaced by an as yet unknown final formulary apportionment mechanism. While the stated aim of BEFIT is to simplify and reduce the costs of tax compliance for large groups within the EU, in its current form, it is difficult to see any real simplification for groups and it is likely to cause significant complexity for taxpayers and tax authorities. More serious concerns about this proposal include how it will interact with double tax treaties (both between EU Member States and between EU Member States and third countries), its interaction with the Pillar 2 rules, and the need for an effective and prompt dispute resolution (and prevention) mechanism.

EU Transfer Pricing Directive

Almost all EU Member States are also OECD Members and, therefore, committed to following OECD transfer pricing principles. However, the status and roles of the OECD Transfer Pricing Guidelines currently differs between Member States and there is a concern at EU level that the large discretion that Member States enjoy in interpreting and applying the OECD TP Guidelines gives rise to complexity and an uneven playing field for businesses. The European Commission has proposed a directive to harmonize TP rules within the EU in an effort to avoid profit shifting and tax avoidance, avoid litigation and double taxation, and to reduce compliance costs.

If this proposal is to be successful in achieving its goals, there are a number of issues which should be addressed including the interaction of this directive with double tax treaties, the operation of the rules with counterparties in non-EU jurisdictions, and the interaction of this directive with current and future OECD TP Guidelines. In addition, there are questions as to whether certain aspects of the directive which are more restrictive than the OECD TP guidelines are appropriate. For example, the directive applies a 25% threshold for entities to be “associated”, which is out of step with many EU Member States which have a 50% threshold. The directive also seems to require that the interquartile range is used for determining the arm’s length amount, which, again, is not an approach currently required in all Member States.

The Taxation Committee of the IBA has submitted a response to these consultations and Amelia O’Beirne, Partner and Dearbhla O’Gorman, Senior Associate from our Tax group were pleased to contribute to this response. You can read the full response here.

Date published: 31 January