European Commission Renames and Revises CCCTB Proposal

On 18 May 2021, the European Commission presented a renamed and revised proposal for the Common Consolidated Corporate Tax Base (CCCTB). The CCCTB proposal will therefore be withdrawn by the European Commission. The new proposal is called Business in Europe: Framework for Income Taxation (BEFIT).

Alongside BEFIT, the European Commission announced that it would (i) table a legislative proposal for the publication of effective tax rates paid by large companies based on the methodology under discussion in Pillar 2 of the OECD negotiations (by 2022), (ii) table a legislative proposal setting out union rules to neutralize the misuse of shell entities for tax purposes (by Q4 2021), (iii) adopt a recommendation on the domestic treatment of losses and (iv) make a legislative proposal creating a Debt Equity Bias Reduction Allowance (DEBRA) (by Q1 2022).

BEFIT vs. CCCTB

In substance, the BEFIT proposal is quite similar to the CCCTB proposal. BEFIT would create a common rulebook for groups of companies operating in the European single market in more than one member state and change the allocation of taxing rights within the European Union from a system based on the arm’s length principle to a system based on formulary apportionment.

Other Legislative Proposals and Recommendations

In addition to BEFIT, the European Commission announced it shall propose:

• Mandatory publication of effective tax rates under the Pillar 2 methodology by large companies (by 2022);
• Rules to neutralize the misuse of shell entities for tax purposes (by Q4 2021); and
• A Debt Equity Bias Reduction Allowance (DEBRA), which is likely to take the form of a notional interest deduction (i.e., deduction or allowance based on the equity of a company) (by Q1 2022).

Next Steps

The BEFIT proposal is yet to be published by the European Commission. Given the European Commission’s communication in the area of business taxation, it is likely that the proposal will be put forward in 2023.

Prior to proposing BEFIT, the European Commission will table the other proposals mentioned above.

All proposals are subject to political agreement between a sufficient majority of member states (i.e., the required majority depends on the type of proposal). Proposals in the area of direct taxation require unanimity. However, if the proposal has a different legal basis, a smaller majority may be required, which could be the case, for example, for the mandatory publication of effective tax rates under the Pillar 2 methodology by large companies).

Key Takeaways

The European Commission has tried for years to introduce the CCCTB. However, as harmonization in the area of direct taxation requires unanimity and member states were not keen on transferring a significant portion of sovereignty that direct taxation represents, there was never political alignment on the introduction of the CCCTB.

The European Commission, likely driven by the political momentum concerning Pillar One and Pillar Two created among others by the alternative put forward by the Biden Administration, and the COVID-19 pandemic’s significant increase in government spending, has seen the momentum to put forward the CCCTB proposal in a new guise.

The European Commission, in its communication on business taxation for the 21st century of 18 May 2021, mentions the year 2023 for tabling the BEFIT proposal.

Before tabling of BEFIT, the European Commission intends to table three other legislative proposals, mainly in the area of tax transparency (mandatory publication of effective tax rate) and direct taxation (neutralization of misuse of shell entities for tax purposes and the introduction of a Debt Equity Bias Reduction Allowance).