EU’s New Tax Proposals – Introduction
On 12 September 2024, the European Commission unveiled a set of new tax proposals aimed at simplifying tax rules and closing loopholes that big corporations sometimes use.
The key part of this package is the Business in Europe: Framework for Income Taxation (BEFIT), which proposes a single set of tax rules across the EU.
Another important element is the directive focused on harmonising transfer pricing rules.
These proposals could reshape how companies across Europe pay taxes.
Let’s take a closer look at what these proposals include.
What is BEFIT?
BEFIT stands for Business in Europe: Framework for Income Taxation. It’s a new proposal from the European Commission aimed at creating a common set of tax rules for businesses across the EU.
Right now, every country in the EU has its own tax laws. Under BEFIT, businesses would calculate their profits using the same formula, no matter where in the EU they operate.
On the one hand, this might potentially reduce the complexity and cost of doing business across borders, and it would also make it more difficult for companies to shift their profits to low-tax countries within the EU.
However, it will also effectively erode the control that a country has over tax as a method of shaping its economic policies – what good a carrot offered to businesses if the EU rules simply cancel it out?
Harmonising Transfer Pricing Rules
Another big part of the new proposals is the plan to harmonise transfer pricing rules across the EU. Transfer pricing refers to the prices that one part of a company charges another part for goods or services.
Sometimes, companies use transfer pricing to shift profits to parts of their business located in countries with lower taxes.
This practice has been controversial, as it allows companies to avoid paying taxes in higher-tax countries.
The new directive would create a standard set of transfer pricing rules across the EU. This would make it harder for companies to use transfer pricing to reduce their tax bills.
The idea is to ensure that companies pay taxes in the countries where they actually make their profits, rather than shifting those profits around to save money.
Why Do These Proposals Matter?
The European Commission’s proposals are arguably part of a larger effort to create a neutral tax system across the EU where there is no tax competition amongst member states.
If these proposals are accepted, they could have a big impact on how businesses operate in the EU. Companies would need to adjust to the new rules and might have to pay more taxes in some countries.
However, this would also effectively water down each member state’s ability to control their own tax affairs which would be controversial.
EU’s New Tax Proposals – Conclusion
By creating a single set of rules across the EU, the European Commission hopes to prevent tax avoidance, ensure that businesses pay their fair share of taxes and that tax competition is moved from the equation when it comes to where a company might choose to do business.
However, for many, this will represent evidence of over-reach by the EC.
Final Thoughts
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