Common system for calculating taxable income of corporations - MEPs adopt their position

MEPs on Wednesday adopted their position on proposed legislation establishing a common way for calculating the tax base of multinationals operating in the EU.

MEPs propose five notable changes to the Commission’sBusiness in Europe: Framework for Income Taxation (BEFIT) blueprint.

MEP proposed changes

While broadly backing the key elements of the Commission proposal, MEPs also add a ‘significant economic presence clause’ whichstates that companies having more than EUR 1 million in revenues in a member state willbe considered to be permanentlyestablished there. This clause would help in the identification of which member states are to be considered for the apportionment of tax thatamultinational needs to pay in the EU. This would especially ensure that digital companies pay taxes in thejurisdictions where they are effectively making profits, whether by providing services or selling products, irrespective of whether they have an important physical presence there.

To guarantee a minimal level of taxation of royalties, MEPs propose introducing a royalties limitation rule for companies forming part of a‘BEFIT group’. If a company in the group pays royalties or licence fees to another group company in the EU that is taxed at less than 9%, the paying company must add those payments back to its own taxable income — unless the receiving company carries out substantive economic activity supported by staff, equipment, and offices.MEPs also propose introducing asimilarrule to prevent companies from shifting profits to subsidiaries innon-EUlow taxjurisdictions that lack real economic activity.

Another amendment adopted by the committee provides for faster tax write-offs for certain assets that support EU climate, social, digital, or defence goals. This would help spur investment, achieve a sustainabletransition and enhance the EU's ability to prevent and respond to emerging threats and crises.

Finally, to reduce abuse of potential losses, if a subsidiary’s loss creates a negative taxable amount, the parent company can usethis to reduce its own taxable income, but only for up to five years and shall be set off against the next positive tax base.The eventual tax deductions cannot reduce the company’s taxable income to below zero.

Quote of the rapporteur

After the vote, the Rapporteur Evelyn Regner (S&D, AT) said, “Europe needs a fairer and more simplified approach to corporate taxation. A message communicated clearly by the Parliament to the Council through today’s BEFIT vote. BEFIT aims to build a system fit for today’s digital and global economy through modernizing the provisions on permanent establishment rules, strengthening anti-avoidance measures, and increasing transparency and much more. The outcome of the vote reflects a balanced compromise that supports businesses, protects vital public revenues, and helps us deliver on our social and environmental goals.”

Next steps

The position as adopted by plenary with 370 votes in favour, 160 against and 107 abstentions, will now betransmitted to the member states whomust then adopt the final text, taking account of Parliament’s position.

Background

This legislation is underpinned by already agreed rules setting a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU. Together, they are expected to lead to more tax simplicity,transparency and fairness, providing advantages both to companies and society.

A single set of corporate tax rules for international activity is expected to result in enhanced tax certainty and less tax disputes. This would make it easier for businesses tocomply with such rules when theyoperate across borders and to encourage those who wish to further expand abroad in the single market. It will also lead to less opportunities togame the system,thereby decreasing tax avoidance and aggressive tax panning.

The common framework will replace the current 27different ways fordetermining the taxable base for groups of companies which have annual combined revenues exceeding EUR 750 million. Smaller groups can choose to opt-in. It will also replace the Commission’s Common Corporate Tax Base and Common Consolidated Corporate Tax Base proposals, which were withdrawn.