This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: new acronym.

On September 12 the European Commission released its long-awaited corporate tax harmonization plan. The Business in Europe: Framework for [Income] Taxation, or BEFIT, proposal follows other attempts that ran into insurmountable opposition from member states.

So what makes this plan different, and will we finally see a successful effort?

Here to talk more about this is Brussels reporter Elodie Lamer. Elodie, welcome back to the podcast.

Elodie Lamer: Hi. Thank you for having me.

David D. Stewart: So why don't we start off with just the basics: What is this BEFIT proposal?

Elodie Lamer: So BEFIT stands for Business in Europe: Framework for Income Taxation. And it's basically an attempt of the commission to try to harmonize certain aspects of corporate income tax in Europe.

David D. Stewart: So [where's] this need to harmonize coming from?

Elodie Lamer: Here in Europe, we have an internal market with a lot of common rules — for example, for consumer protection, and so on. But when it comes to tax rules, companies that operate cross-border have to operate with 27 different tax systems.

So it's a lot of compliance costs for them. It's incentive not to operate cross-border. And for EU competitiveness, which is something that the commission is always talking about right now, it's important especially because we want to have a better competitiveness after the U.S. came up with its Inflation Reduction Act — though BEFIT was a project that was planned before the Inflation Reduction Act.

David D. Stewart: So some of your description of this proposal, it rings familiar. Have there been similar efforts in the past?

Elodie Lamer: Sure. Well, the commission right now has made it clear that it doesn't like the comparisons, but they've tried to come up with common rules in 2011 and 2016. The 2016 attempt was already a lower-ambition proposal, as you would have common corporate tax rules, but then you would consolidate profits, and then you would share the taxation between member states.

And back then the commission wanted to have a formulary — what they call a formulary apportionment. So you would divide the taxation of those profits based on sales, the number of employees in each country, and the assets, such as buildings, which they did not do this time.

David D. Stewart: So I take it you're talking about this: If I remember correctly, the common consolidated corporate tax base, CCCTB, was the 2011, and then the 2016 was when they lopped off a C.

Elodie Lamer: Yeah. In 2016 we had CCTB and CCCTB, because in the EU, apparently we love walking step by step. So they wanted the EU member states to actually agree on harmonization of certain elements of the tax base. And then as a second step, if they still had appetite for that, then we would have the consolidation aspect, which is the extra C.

David D. Stewart: So now that we're leaving behind those other proposals, what's in this new BEFIT proposal?

Elodie Lamer: So the first one was already — the 2011 one was already withdrawn when they came up with the second one. And then they're supposed to withdraw the 2016 CCTB and CCCTB. And now we're only supposed to discuss BEFIT. So BEFIT, basically there are two main changes compared to the 2011 and 2016 proposals.

The first one is that the commission has decided to give up this formulary apportionment based on sales, employees, number of employees, and assets, even though until April they were saying that they were considering it, and they were even considering a formulary with a fourth factor, which was intangible, which was really controversial.

But in the end they decided that we would have some sort of transitional allocation rules between member states where they say each member of the BEFIT group will have a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years. So based on the percentage of tax you paid, you would aggregate the tax base based on your taxable results in the three previous fiscal years in each member state.

And then the second main change that they did is that they didn't come up with a proper set of rules to calculate the tax base, but they just said that each group will calculate their tax base by making some adjustment to their financial accounting statement. And there they took an inspiration from pillar 2 of the global tax plan.

So these are the two main changes, I guess, they did compared to the 2016 proposal. And it's quite clever, because in the EU we have small countries with very low population, very little population, and then we have big member states. So if you do something based on the number of employees or the sales, you could really disadvantage smaller countries. And it's been a problem in the past. So maybe this would've been settled with the intangibles, introducing the formula, but the commission went for the easiest way.

But what they say is that "We don't have the data to propose a good formula right now." So they want to see — I think they said that the last data that they have is from 2018, and now we're going to implement pillar 2 in January, and many things will change. We don't know how a company will react, how behavioral changes can happen.

So basically the commission is saying we will reflect also based on the implementation of pillar 2, and then after BEFIT is into force a few years after, I think it's four years after, we will — if needed, if appropriate — we will propose a formulary apportionment.

And if we don't, then this statistical formula based on your taxable result from the three previous years will become the rule. So it's possible that we will never have a formula based on sales, labor, costs, and assets.

David D. Stewart: But at least this proposal would get to a common tax base, I take it.

Elodie Lamer: Sure. It would be like they say — it would be a massive simplification for companies. They also believe that it will reduce avenues for tax abuses. And when it comes to compliance costs, I think that the commission says the new simple rules of BEFIT could reduce businesses' current tax compliance costs up to 65 percent. That's what they say.

David D. Stewart: So it seems that there may be a lot of benefits to this. What are member states saying? Is this running into similar opposition that previous proposals saw?

Elodie Lamer: So what I've heard so far is that it's clever because it leaves the most controversial aspect out of the proposal, and the hard talks are for later. What is true also, and that I heard from stakeholders, is that we will implement pillar 2, there's a lot of changes coming, so businesses do not really want this right now. It doesn't seem like they really want this right now.

There's some kind of reform fatigue at some point also because we've had many antiabuse proposals over the last few years that were adopted — ATAD 1 (anti-tax-avoidance directive), ATAD 2. They're still negotiating the proposal to tackle the misuse of shell companies. So there's been a lot of corporate income tax proposals over the last few years, and I think companies want to digest everything before they get to BEFIT, even if BEFIT is supposed to be a simplification.

So maybe if members say, "See that there's not a broad support from companies," or that they ask for more time — and I mean, those kinds of proposals, they take years to negotiate because you need unanimity.

David D. Stewart: So you've mentioned the anti-tax-avoidance directives that are out there, the unshell proposal. Are there other corporate tax proposals that are out there that we should be tracking?

Elodie Lamer: So with the BEFIT proposal, the commission came up with two other proposals, one that they called HOT. So the same day we had BEFIT and HOT. So BEFIT will be only mandatory for companies with a turnover of €750 million a year, and it would be optional for smaller companies. But the commission wants SMEs (small and medium-size enterprises) to be able to speak to the tax office of their own country to be able to do their tax business if they operate cross-border. So that's a second simplification, second proposal that the commission presented the same day. And still the same day they came up with a proposal on transfer pricing.

So what the commission explained a few months ago was that this proposal would be some sort of reaction to their failure, their loss in the Fiat case. So basically the commission was saying that Luxembourg gave an undue tax advantage to Fiat, and the court said that the commission was wrong because the commission applied the transfer pricing OECD guidelines and not the Luxembourg transfer pricing guidelines.

So the court said you cannot use OECD guidelines and put it above the national guidelines. So basically the commission wants to put it in EU law so the OECD guidelines will be applied the very same way in every member state. So that's a second proposal that they came up with this year.

But what we have to know is that we have 24 languages in the EU, and now member states will have to wait for the official translation of each of these proposals. It might take months before we have a first political debate, so it might take months before we know what member states really think once they've read everything into details, when they've consulted with their industry also. So it might take months before we can see clearly what the positions are.

David D. Stewart: OK, so what is the next official step? So we'll hear from the member states on what they think of this, but what is the next step that the EU as an institution has to take?

Elodie Lamer: So member states will start discussing it at the technical level. They will read article by article and ask questions to the commission to make sure that they understand everything that is in the proposal. Then the tax experts that are based in Brussels will report back to their capitals. The text will be translated in all new languages.

And then, I guess, at some point, I hope — because it happens that we don't sometimes have a first ministerial debate. And what is good with this debate is that they are public, so we can see what every country thinks, or the position of each country. And then it will go back to the technical level. And sometimes they will ask for political guidance if there's something that is too controversial.

It also has to be seen if member states will want to adopt some of the texts and not the others. For example, if they really like the transfer pricing directive, will they decide that they can adopt it without BEFIT or without the SME proposal, the HOT proposal? I don't think it's clear yet. So yeah, basically these are the next steps. The Parliament will also have to give an opinion on the proposal, and their opinion is nonbinding, but as long as they don't adopt it, legally the council cannot adopt BEFIT. But it will take years of negotiation if this time it succeeds.

David D. Stewart: Well, it sounds like there is a lot to digest in this, but we should have plenty of time to do it. Elodie, thank you so much for being here and talking to us.

Elodie Lamer: Thank you.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Eli Dubin examines the tax treatment of purchasers of loan assets from banks and FDIC receivership. Bradley Borden argues for extending like-kind exchange deadlines to the next business day.

In Tax Notes State, Lynn Gandhi wonders what happened to allocable income. Five Deloitte practitioners discuss recent changes in apportionment systems that make it challenging to apply standard apportionment rules to economic activity.

In Tax Notes International, Błażej Kuźniacki analyzes the clash between pillar 2 and international investment agreements. Lorraine Eden critiques the latest public consultation document for pillar 1 amount B. She proposes options for increasing the likelihood of its adoption and success.

And finally, in featured analysis, Marie Sapirie considers the implications of a proposed bill that would require OIRA (the Office of Information and Regulatory Affairs) to review tax regulations.

David D. Stewart: That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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