The European Commission (EC) has recently set out its plans for business tax reform in the 21st Century. The BEFIT measure (which stands for "Business in Europe: Framework for Income Taxation") resurrects the old common tax rulebook idea, the common consolidated corporate tax base, and is noteworthy in the sense that the EC believes that now, on the cusp of global international tax reform, is the time to recast this proposal.

Emboldened by the OECD’s progress to implement new profit allocation rules (Pillar One) and a global minimum effective taxation of profit for multinational groups (Pillar Two), the EC seeks to go further. The communication document is keen to suggest that the BEFIT model builds on the OECD proposals, moving the notional common corporate tax base under Pillar Two to an actual common rulebook, and extending the formulary apportionment method of Pillar One to apply to all profits, not just the top slice of residual profits.

The earlier CCCTB proposal was under deliberation for several decades. The challenges posed with the proposals have resurfaced in the OECD conversations. Do you start with accounting profits, and if so under what standards? What common adjustments should be made to reach taxable profits? How do you deal with intra-group transactions? What incentives, like R&D, should be taken into consideration? How do you recognise losses? What are the correct allocation keys? The difficulty with all of these questions is that there is a political answer to each one. While the EC has failed in the past to convince Member States to give up their sovereignty on these points, the OECD is seemingly making more progress. It is not clear why this would be the case. Both the EC and the OECD proposals make corporate tax systems impotent to domestic reform, but perhaps because the OECD rules seek to operate in tandem with domestic rules (rather than rip them up) they appear politically more attractive. 

In light of the growing consensus for international tax reform and by building on these proposals the EC must surely believe its stars are aligning. The biggest hurdle the EC faces is reaching unanimity from all Member States to adopt the proposal. The UK was one of the Member States most resistant to the CCCTB proposal, but without the UK a number of smaller Member States may not feel they have the strength to oppose the measure. Given all EU members are either fully signed up OECD members or part of the Inclusive Framework (of territories tasked with international tax reform) this should also favour the EC delivering reform this time round, but there are some sceptics of the wider international reform and with the EC proposals going further than the OECD (seeking to fully adopt formulary apportionment) it may still prove one step too far.

BEFIT is just one of a number of proposals outlined in the communication published. Better coordination on the treatment of corporate tax losses between Member States is another proposal put forward. This is listed separately to the BEFIT but would be redundant if BEFIT was successful in being implemented. There is also a proposal to introduce an allowance for the costs related to equity financing to tackle the bias towards debt financing. This hints that the Commission is prepared to use the corporate tax system to incentivise certain behaviours and with more control over the tax base it would be interesting to understand if they would favour further restrictions on the deduction of corporate interest. The EC have also issued a renewed push on transparency and propose large companies will need to publish their effective tax rate based on the Pillar Two calculations. Support for public country-by-country reporting has increased so this feels like a quick win if the OECD proposals are introduced. The EC also set abusive arrangements involving the misuse of shell entities in their sights and may seek to strengthen economic substance rules. In the face of likely resistance to BEFIT, these other proposals may stand more chance of implementation and will be worth watching.