Recent proposals for EU directives and their potential impact on MNEs and SMEs

February 2024 | SPOTLIGHT | CORPORATE TAX

Financier Worldwide Magazine

February 2024 Issue

Last year, the European Union (EU) published four ground-breaking proposals for council directives that could potentially reshape the business and tax landscape for multinational enterprises (MNEs) and small and medium-sized enterprises (SMEs) within the EU in the near future.

Harmonising tax horizons

In 2016, discussions about the common corporate tax base (CCTB) and the common consolidated corporate tax base (CCCTB) shaped the direct taxation discussion in the EU. However, the CCTB and the CCCTB were never enacted, primarily due to a lack of consensus among EU member states.

Now, in another effort to streamline and harmonise income taxation regulations across the EU, the European Commission has introduced a proposal for a council directive titled ‘Business in Europe: Framework for Income Taxation’ (BEFIT). This directive aims to establish a unified framework for the taxation of business income, potentially reshaping the landscape for MNEs with an annual turnover of over €750m that are operating within the EU.

The BEFIT proposal seeks to alleviate the complexities and inconsistencies that MNEs face when navigating diverse tax regulations across different member states. By introducing the concept of a consolidated corporate tax base for groups of companies, the BEFIT could simplify the calculation of taxable profits for multinational groups of companies. This could lead to a reduction in administrative burdens, making it easier for MNEs to comply with tax laws and operate seamlessly across borders.

For MNEs, the proposal also addresses the challenge of double taxation. BEFIT outlines mechanisms for coordinating the allocation of taxing rights between member states, thus providing a framework to prevent MNEs from being subjected to redundant taxation on the same profits. This could significantly improve the efficiency and competitiveness of MNEs.

If successfully implemented, the BEFIT proposal could bring about a more harmonised, efficient and equitable system, fostering a beneficial environment for MNEs within the EU. However, as discussions surrounding the adoption of BEFIT progress, challenges may emerge, and not a few of them were already ‘deal-breaking’ issues when discussing the CCTB and the CCCTB.

Member states will need to reconcile their individual tax policies with the proposed framework, and concerns about national sovereignty may complicate negotiations. Furthermore, the BEFIT proposal appears to be not perfectly aligned with the Global Anti-Base Erosion Rules (GloBE)/Pillar Two rules regarding a minimum taxation from a prima vista perspective, meaning that additional coordination work in order to align the rationale of those EU directives might be a recommendable way forward on the EU-level.

If adopted, the rules would have to become effective at member state level as of 1 July 2028.

Shaping fair practices

The proposal for a council directive on transfer pricing (TP) might also be seen as a significant step toward fostering fairness, transparency and consistency in cross-border transactions within the EU. Aimed at regulating the pricing of transactions between affiliated companies, this proposal carries implications for both MNEs and SMEs operating in the EU.

For MNEs, the directive addresses a longstanding challenge associated with TP – the potential for profit shifting through intragroup transactions. By introducing a common set of principles to determine the arm’s length nature of these transactions, the directive aims to curtail practices that artificially shift profits to jurisdictions with lower tax rates. This aligns with broader international efforts to combat tax avoidance (e.g., the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project) and ensures a level playing field for MNEs operating across member states.

The directive also proposes enhanced documentation requirements for MNEs engaged in cross-border transactions. While this may introduce an additional administrative burden, it is a crucial step toward providing tax authorities with the necessary tools to assess whether intragroup transactions are carried out at arm’s length. The increased transparency may ultimately contribute to more efficient dispute resolution mechanisms, reducing uncertainty for MNEs in cross-border transactions.

SMEs, often facing resource constraints and challenges in navigating complex tax regulations, may also experience noteworthy impacts. The directive’s efforts to standardise TP practices could be beneficial for SMEs by promoting a more transparent and predictable TP environment. As a result, SMEs engaged in cross-border transactions may find it easier to understand and comply with TP regulations. What is more, a codification of some of the principles of the OECD’s TP guidelines into hard law may be beneficial for legal certainty, especially taking into account that the guidelines would then be subject to the jurisprudence of the European Court of Justice (ECJ).

However, as with any regulatory change, challenges and considerations exist. In some points, the proposed regulations would be stricter than the OECD TP guidelines, which might prevent member states from continuing certain current practices, leading to the fact that they might not support the proposal. Furthermore, both MNEs and SMEs will need to adapt to the new documentation requirements, and concerns about potential compliance costs may be raised during the implementation phase.

And yet, the potential benefits of a more equitable and transparent TP framework could outweigh these challenges, creating a business environment that supports fair practices for enterprises of all sizes within the EU. However, the very fundamental question regarding the implementation of a new ‘hard law TP understanding’ within the EU is whether or not we even have a need for that, as there is already an established OECD-based soft law TP practice, which is generally followed not only by member states of the EU, but also by plenty of economically significant nations around the globe.

If adopted, the rules would have to become effective at member state level as of 1 January 2026.

Paving the way for growth

The proposal for a council directive introducing a head office tax (HOT) system for standalone micro, small and medium-sized enterprises that are engaged in cross-border activities exclusively via permanent establishments (PE) is a forward-looking initiative aimed at simplifying tax compliance processes and fostering growth within the EU. This directive proposal holds the promise of streamlining tax compliance for such SMEs, potentially providing a significant boost to their resilience and competitiveness.

Recognising the unique challenges faced by SMEs, especially concerning administrative burdens and compliance costs, the HOT system aims to create a more favourable tax environment for these businesses. The most important aspect of the proposal is to establish a unified tax system for the head office of such SMEs, specifically designed to simplify the calculation of taxable income for their foreign PEs. This streamlined approach could translate into significant time and cost savings for such SMEs, empowering them to allocate resources more efficiently toward cross-border business development and innovation.

As the directive progresses through discussions and negotiations, SMEs that are within the envisaged scope of the proposal will closely monitor the developments. If adopted, the HOT system could mark a significant step forward for these businesses, levelling the playing field and enabling them to compete more effectively with larger enterprises. By fostering an environment that supports cross-border growth, the HOT directive has the potential to unlock new possibilities for such SMEs, encouraging entrepreneurship, innovation and economic development within the EU.

On the other side, the scope of the proposal is quite narrow and may therefore be limited in terms of practical significance.

If adopted, the rules would have to become effective at member state level as of 1 January 2026.

Accelerating progress

The proposal for a council directive on faster and safer relief of excess withholding taxes (FASTER) represents a significant leap forward in taxation, aiming to streamline and expedite the process of relief for excess withholding taxes on dividend and interest payments. This proposal carries substantial implications for both MNEs and SMEs, promising a more efficient and secure tax landscape in the near future.

MNEs, often engaged in cross-border transactions, encounter challenges related to withholding taxes, where a portion of their income is retained by the source country. In today’s tax practice, refunds can take years, having a negative impact on availability of funds.

The FASTER directive addresses this by proposing mechanisms to accelerate and streamline the relief process, reducing delays and administrative burdens associated with obtaining refunds of excess withholding taxes. This improvement can lead to better cash flow for MNEs, allowing them to reinvest funds more quickly into their operations and investments. Member states can either choose the ‘relief at source’ procedure or the ‘quick refund’ procedure, allowing tax authorities a maximum period of 50 days for the refund, starting from the date of payment of the excess withholding tax.

The directive also includes a standardised reporting obligation, requiring member states to establish a national register of certified financial intermediaries (which will, on a voluntary basis, also be open to non-EU and smaller EU financial intermediaries).

For SMEs, the impact of FASTER is equally noteworthy. SMEs will benefit even more from quicker access to funds, as they are typically more constrained than their bigger counterparts.

If adopted, the rules would have to become effective at member state level as of 1 January 2027.

Raphael Holzinger is a partner and Matthias Jancura is a senior associate at Grant Thornton. Mr Holzinger can be contacted on +43 699 1726 1593 or by email: raphael.holzinger@at.gt.com. Mr Jancura can be contacted on +43 664 8815 1647 or by email: matthias.jancura@at.gt.com.

Raphael Holzinger and Matthias Jancura

Grant Thornton