MEP Evelyn Regner (S&D, Austrian) proposes to introduce an allocation formula based on material factors at the end of the transition period, in her draft report on the ‘Business in Europe: Framework for Income Taxation’ (BEFIT) initiative.
Presented in September by the European Commission (see EUROPE 13248/20), BEFIT provides for a common framework instead of 27 national corporate tax systems. The aim is to simplify tax compliance and reduce the associated costs.
In her explanatory memorandum, the rapporteur expressed her support for the objectives of the proposal and said she was “convinced that further harmonisation of the corporate tax base is beneficial for the stability of the internal market, while safeguarding sustainable tax revenues for Member States”.
“The proposal [...] will also be an effective instrument for reducing opportunities for tax evasion and avoidance”, she said.
She also proposes a number of amendments to reinforce these objectives. The allocation formula based on material factors at the end of the transition period that she suggests provides for an equally weighted allocation between the factors of labour, wealth and sales. “Only a formula based on factors can fully exploit the potential for harmonisation of the tax base by eliminating the need to rely on transfer pricing for transactions within a BEFIT group”, she explained.
This formula should lead to a reduction in the compliance burden, better protection against tax base erosion and a better profit shifting.
Ms Regner proposes as well to lower the annual revenue threshold for multinational enterprise groups after the transitional period currently described in the proposal, so that all large groups fall within the scope of the proposal.
She also wants to slightly revise the interest limitation rules for BEFIT groups to reduce the distortion of the debt/equity ratio that can arise from over-reliance on intra-group debt financing and to reduce the scope for tax base erosion and profit shifting through excessive interest payments.
In addition, she introduces more robust Controlled Foreign Company rules to make them more resilient to profit shifting. She proposes as well to define the rules on depreciation in more detail, as “the current proposal could lead to a reduction in the tax base of around €31 billion, according to the Commission’s impact assessment”.
Lastly, she suggests limiting tax incentives, despite giving Member States greater flexibility in granting them. In this way, the rapporteur wants to encourage input-based incentives for research and development.
To read the draft report: https://aeur.eu/f/9s2 (Original version in French by Anne Damiani)