In recent years, Ireland has introduced a range of legislative changes to meet EU commitments, including CFC and interest limitation rules required under the EU Anti-Tax Avoidance Directive and mandatory disclosure rules required under DAC 6. In the upcoming Finance Bill, further amendments are expected to transpose the EU Minimum Taxation Directive into Irish law.
With European Parliament elections scheduled for June 2024, it is unlikely that the European Commission will launch any additional direct tax initiatives in the coming months (with the possible exception of EU action in relation to the OECD Pillar One proposals).
However, there are a number of ‘live’ proposals that are currently being examined by EU Member States. An overview of the measures of note is set out below.
BEFIT Directive proposal
In September 2023, the Commission issued a proposal for a Council Directive on Business in Europe: Framework for Income Taxation (BEFIT). The BEFIT proposal concerns the introduction of common rules for determining the corporate tax base for groups with EU-based operations.
Scope
BEFIT will apply to all groups with operations in the EU with annual combined revenues of at least €750 million. This would include non-EU headquartered groups, where certain additional scoping criteria are met. Smaller groups may also be able to elect to apply BEFIT on an opt-in basis.
BEFIT calculation
The BEFIT calculation is primarily derived from the financial accounting net income or loss of each BEFIT group member. A number of adjustments are then made (e.g., to exclude certain types of income, gains and losses, to add-back certain non-deductible expenses etc.) to arrive at a preliminary BEFIT tax result of each BEFIT group member. These results are then aggregated into a single combined BEFIT tax base.
The combined BEFIT tax base would be further adjusted to (i) remove the impact of intra-BEFIT group transactions and (ii) allow for the offset of losses on a cross-border basis throughout the BEFIT group, before being reallocated to the BEFIT group members in relevant EU Member States.
The proposals envisage a transitional seven-year period during which a baseline allocation would be computed based on each entity’s percentage share of the average taxable results of the BEFIT group in the previous three years. After the transitional period, the allocation may be based on a formulaic apportionment whereby the consolidated tax base would be split across Member States based on the Member State’s share of tangible assets, staff numbers/payroll costs, sales by destination and intangible assets.
After the BEFIT tax base has been re-allocated, further local adjustments may be required. Member States would be permitted to design incentives, restrictions and deductions that would apply locally. As a final step, the entity’s adjusted taxable profit would be subject to the corporate income tax rate applicable in that Member State.
BEFIT transfer pricing measures
Two new transfer pricing simplifications are included within the BEFIT proposal.
During the seven-year transition phase, transactions within the BEFIT group would be deemed to be priced in accordance with the arm’s length principle where they fall within a low-risk zone. The low-risk zone would apply where an expense incurred / income earned by a BEFIT group member increased by less than 10% compared to the average amount of the income or expense in the previous three years.
For transactions with associated enterprises outside the BEFIT group, a risk assessment tool is provided for low-risk activities performed by certain eligible distributors and contract manufacturers.
Member States would be required to assess in-scope transactions as being low, medium or high risk, depending on how the activity of the entity compares to profit markers derived from commonly accepted public benchmarks. Depending on the outcome of this assessment, Member States would adjust their approach to compliance interventions accordingly.
Status
The BEFIT proposal is currently the subject of a public consultation, which will close in November 2023. The proposal will require the unanimous approval of all 27 EU Member States in the Council. If adopted in its current form, Member States would be required to transpose the BEFIT proposal into domestic law by 1 January 2028, with the provisions applying from 1 July 2028.
Transfer Pricing directive proposal
Alongside BEFIT, the Commission also launched a proposal for a Council Directive on Transfer Pricing in September of this year. The Transfer Pricing proposal is intended to ensure that a harmonised approach to transfer pricing applies across the EU, by requiring that Member Sates incorporate the 2022 version of the OECD Transfer Pricing Guidelines into domestic legislation. However, the proposal also notes that, as the OECD Transfer Pricing Guidelines are amended from time to time, new versions of the guidelines should become the new binding reference framework.
A public consultation on the proposal is underway and will also close in November 2023. The proposal will require the unanimous approval of all 27 EU Member States in the Council. If adopted in its current form, the Transfer Pricing proposal would become effective from 1 January 2026.
FASTER Directive proposal
In June 2023, the Commission published a proposal for a Council Directive on its “Faster and Safer Relief of Excess Withholding Taxes” (FASTER) initiative, which aims to make withholding tax (WHT) relief procedures in the EU more efficient and secure for investors, financial intermediaries, and local tax authorities.
The key features of the FASTER proposal include:
- The development of a common EU digital tax residence certificate
- Two fast-track procedures complementing the existing standard refund procedure, including: (i) a relief at source system, and (ii) a quick refund system. Member States will be required to implement one of the two systems (or a combination of both).
- The introduction of National Registers for financial intermediaries that will be able to facilitate the fast-track procedures.
The public consultation on the FASTER proposal closed in September of this year. The Commission is expected to review the comments received from the public consultation with a view to informing discussions among the Member States in the appropriate Council working groups. Unanimous approval by all 27 EU Member States is needed. If adopted, the target date for implementation is 1 January 2027.
Unshell and SAFE proposals
The Commission’s Unshell proposal (often also referred to as ATAD III) was first launched alongside the EU Minimum Taxation Directive in December 2021. The Unshell proposal sets out a list of features, referred to as gateways, to filter entities at risk of being lacking in substance. High-risk entities may then be required to report on their substance through their annual tax return.
Companies failing to meet a set of substance indicators would be deemed to be ‘shell’ entities, potentially resulting in the denial of certain tax benefits otherwise available under double tax treaties and EU Directives.
Almost two years since its launch, the proposal remains the subject of detailed negotiation amongst EU Member States. It has been reported that discussions continue on a number of the core elements of the proposal, including the design of minimum substance criteria, the interaction of the proposal with existing anti-avoidance legislation in Member States, as well as the potential consequences for an entity that is deemed to be a shell under the Directive.
While Unshell was identified as a priority topic for agreement at the beginning of Spain’s Presidency of the Council of the European Union in July 2023, the timing for reaching agreement remains unclear. The Unshell proposal had originally been planned to be effective from 1 January 2024. However, it is now expected that this deadline will be adjusted to 1 January 2025 at the earliest.
The delay in reaching agreement on the Unshell proposal has also had an impact on the Commission’s “Securing the Activity Framework of Enablers” (SAFE) proposal which is intended to address the role of advisers and other intermediaries involved in facilitating tax evasion or aggressive tax planning in the EU. It is understood that the Commission is waiting for agreement on Unshell before it moves this proposal forward.
Queries? Get in touch
The measures announced in Budget 2024 will affect businesses and individuals across Ireland. If you have any queries on the impact of these changes for your business, please contact John Doran or Seán Sheridan of our tax team.
We'd be delighted to hear from you.
John Doran
Partner
KPMG in Ireland
Sean Sheridan
Partner
KPMG in Ireland
