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We and others say “Non, merci” to EU’s latest Corporation tax proposal

I’ve written previously in these pages of the EU’s proposed directive introducing a common framework for corporate taxation in the EU with the “Proposal for a council directive on Business in Europe: Framework for Income Taxation (BEFIT)”. I’ve called this CCCTB2.0 in that the previous Common Consolidated Corporate Tax Base was intent on every EU country having the same tax law for companies. Ireland constructively engaged with that initiative, but we weren’t a fan. It was withdrawn in the end but now we have BEFIT.

The EU Commission describes the BEFIT as a “One-Stop-Shop” allowing the corporate group to file an information return with the tax bases of all the group members with the tax administration of one Member State. Those tax bases are then aggregated at EU group level and allocated to each company in the group (a kind of formulary apportionment of the tax base). Finally, Member States would apply their own adjustments and corporate tax rate to the allocated tax base of the company established in that country. The joint Committee on Finance, Public Expenditure and Reform, and Taoiseach published its reasoned opinion recently.

BEFIT has certain mandatory and optional applications. It will be mandatory for groups operating in the EU with an annual combined revenue of at least €750 million. For other groups, their EU group members would need to have at least €50 million of annual combined revenues in at least two of the last four fiscal years or at least 5% of the total revenues of the group. In addition, smaller groups may choose to opt in as long as they prepare consolidated financial statements.

That’s the theory, but we’re already dealing with the OECD Pillar Two legislation brought about by an EU directive. That’s the new-fangled effective 15% rate of corporation tax I’ve written about previously in this column. The Committee recognised that noting BEFIT could lead to considerable complexity for tax administrations and business already grappling with the implementation of the OECD’s Two-Pillar Solution to Tax Challenges Arising from the Digitalisation of the Economy. It continues that BEFIT would appear to replace a large part of domestic tax laws with an EU corporate tax system over which individual member states would have only very limited control. In addition, the Committee points out that formulary apportionment of profits, if introduced, would also likely lead to a considerable redistribution of corporate tax revenues across the EU and would be likely to benefit larger Member States at the expense of smaller ones such as Ireland.

But all of the above forms evidence of the potential legal conflict that the BEFIT could bring about. I’ve done a number of guest lectures in Ireland’s universities this year and cited the movie a “A Few Good Men” where Tom Cruise bellows “it doesn’t matter what I believe it only matters what I can prove, so please don’t tell me what I know and don’t know, I know the law”. The students hadn’t heard of the movie because it’s over thirty years old, let that sink in. Anyway, in making the case against the BEFIT, Ireland has, along with others, said we know the law!

Article 5(3) of the Treaty of the Functioning of the EU brings about the legalistic term called “subsidiarity”. It says that in areas which do not fall within its exclusive competence, the EU will act “only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level”. This is a kind of “when all else fails, we don’t” approach in EU law, but critically all else must fail first. Because of all the matters outlined in its reasoned opinion, some of which are outlined above, the Committee opined that the proposal “does not comply with the principle of subsidiarity”.

The Committee noted that such proposals “must bring with them benefits that outweigh the cost and complexity of introducing them and be balanced with the need to retain the competence of individual Member States in the area of taxation and the ability for Member States to determine their own tax base”. The reasons cited in the Committee’s opinion explain why this is not the case.

Among others, Sweden recently published its own reasoned opinion on BEFIT. Sweden noted that “the fundamental principle of tax sovereignty for the member states must be safeguarded in the area of direct taxation. It falls within the national competence of each member state to safeguard welfare by levying and using tax revenues in an appropriate way”. Given what I’ve said earlier you can guess the way this opinion would go.

The Swedish Parliament went on to refer to the calculation of the BEFIT tax base, noting that the proposal entails two tax calculations; one to calculate a preliminary result for an aggregated tax base, followed by a final tax calculation according to national rules. Sweden noted that this part of the proposal was not likely in its opinion “to lead to the simplification and reduced administrative burden that the Commission claims”. In the end the Swedish parliament summed up its opinion that BEFIT “conflicts with the principle of subsidiarity”.

Malta’s House of representatives published a similar “non, merci” reasoned opinion. Before you turn the first page of the three-page opinion it recalls Malta’s reasoned opinion on CCCTB and says BEFIT “raises similar concerns on the principle of subsidiarity”. Malta goes on to say that the multinational groups to which BEFIT mandatorily applies overlaps with the scope of Pillar 2 and then says, “the inadequacy of such instruments has hardly been demonstrated, particularly considering that the Pillar 2 directive is only now taking effect from 1 January 2024”.

The above countries did not mince words. In short, when it comes to BEFIT the EU should do a Disney’s “Frozen” on it and just “let it go”.

Please note this article first featured in the Business Post on Sunday, 17 March 2024 and was re-published kindly with their permission on our website.