Third attempt by Brussels to introduce a uniform multinational tax in Europe
The European Commission on Tuesday presented a new proposal for member states to follow the same rules for calculating the multinational tax, the third attempt in the last 12 years to introduce legislation that has been rejected by several of the bloc’s partners.
This time, Brussels is trying to overcome the opposition of partners such as Ireland and Luxembourg with a watered-down version in which it renounces the idea of distributing the total profits of a business group taxed by the multinational tax among the different countries in which the company has been active.
Instead, it proposes a system that aggregates the taxable profits of each subsidiary and calculates the tax payable in each country on the basis of the historical record of the last three years, which in practice means that each multinational will continue to pay in each country what it paid in previous years.
Moreover, instead of highlighting the fight against tax evasion as in previous drafts of the legislation, the new approach emphasises the reduction in administrative costs that the new framework will mean for companies, which has been christened BEFIT to forget the old acronym: CCCTB, which stands for Common Consolidated Corporate Tax Base.
“There have been previous attempts in the past, but I am optimistic that this proposal has a much better chance of success,” said economy commissioner Paolo Gentiloni at a press conference, who also argued that the regulation is in line with OECD agreements.
The tax on multinationals would be implemented in 2028 and would affect some 4,000 companies.
The new framework would be applied from 2028 onwards on a mandatory basis to some 4,000 companies with annual revenues of more than 750 million euros, although companies that do not reach this threshold will also be able to follow its provisions on a voluntary basis.
The legislative text does not change national tax rates (which vary from 31.5% in Portugal to 25% in Spain and 9% in Hungary), but aims to harmonise the calculation of the tax base so that each country can then apply the rate it has set within its competence.
The starting point will be the preliminary tax result of each company that forms part of a group obtained through financial accounting standards accepted in European legislation, such as GAAP and IFRS.
On this preliminary result, a series of “limited” adjustments will then be made to obtain the taxable base that will later be added to the rest of the preliminary results obtained by all the subsidiaries of the same corporate group.
Distribution of tax payments between countries
Subsequently, each company will pay in the country of its tax residence a percentage of the aggregate tax base, calculated on the basis of the average profits obtained in each country in the last three years.
This will, however, be a “transitional” solution since Brussels’ intention is to replace this model for allocating the taxable profits of each group subsidiary with a “permanent” one, which, however, would not be ready until the middle of the next decade and would not start to be applied before 2035 at the earliest.
This system is, in fact, the main difference with previous proposals that sought to facilitate the payment of taxes in the territory in which each subsidiary carries out its commercial activity and obtains its income.
In this line, the European Commission accompanies the previous proposal with another directive to harmonise throughout the bloc the rules applicable to so-called transfer prices, which are international transfers of goods, services or intangible products such as patents within two companies of the same group.
Payment for intellectual property rights, for example, is one of the tools used by many multinational companies to transfer income from one country with a high tax burden to another where the tax burden is lower.
