The European Union has presented two directive proposals that could have a
significant impact on the taxation of multinational corporations in Europe. Both
proposals fall under the umbrella of BEFIT but differ in their objectives and
scope.One of them pertains to the regulation of transfer pricing and aims to
incorporate the principle of fair competition into EU legislation, harmonize the main
transfer pricing rules, clarify the role of the OECD and its guidelines, and open the
possibility of establishing binding common rules in the EU for certain aspects of
transfer pricing, always in line with the OECD guidelines.
Focusing on the Directive Proposal on Transfer Pricing, its relevance lies in the
following four objectives:
1. Incorporating the principle of full competition into EU legislation.
2. Harmonizing the main transfer pricing rules.
3. Clarifying the role and status of the OECD and its guidelines
4. Opening the possibility of establishing binding common rules in the EU.
The proposal deserves applause because it effectively standardizes a treatment in
which, even though countries primarily follow the guidelines, the regulations vary,
and the legal value of the guidelines is not consistent. The transposition of the
directive, in its current wording in Spain, would not encounter issues because the
essentials are already in our legislation. Perhaps some pertinent changes
can be noted:
● Minor nuances in the definition of related parties (essentially still following the
25% shareholding threshold).
● An attempt to institutionalize the expedited elimination of double taxation
caused by an inspection in one state without the need for a friendly
● Conditions for the acceptability of a year-end compensatory adjustment are
● In line with the existing regulations in Spain, the directive governs the
authority of the Administration to almost automatically resort to the median of
the range to adjust a declared price that falls outside the range.
The directive does not replicate all the guidelines, raising the question of how our law
relates to those guidelines that are not directly incorporated. It is crucial to remember
that the guidelines serve as a means of interpretation in our country, and our
legislation must be applied “in accordance with” what is established in them. Some
relevant judicial decisions, either directly or in reference to the OECD model
convention, have questioned the immediate applicability of a norm that constantly
changes without the intervention of the Spanish legislator, a phenomenon known as
dynamic or ambulatory interpretation.
The new proposal states that the guidelines are applicable and specifies that the
“latest version” is to be applied. It appears that this is sought to be achieved simply
by adhering to the consensus of the OECD, as expressed by the Council of the
Union in accordance with Article 218.9 of the Treaty, which, in our opinion, may be
insufficient. For this reason, it is suggested that the EU could also promote an
amendment to the directive to reflect successive changes in the guidelines, a more
complicated but safer process. In summary, we believe that this proposal is
beneficial as it harmonizes the treatment of related transactions in the European
context and, in principle, clarifies the complex interaction between legislation based
on OECD consensus and the legal framework of the EU and its member states.
More significant (and therefore, more complex in its approval process) is the BEFIT
proposal, the latest effort by the Commission to standardize direct taxation of
companies within the European Union. Perhaps due to this complexity, a transitional
period is proposed, spanning from 2028 to 2035, with the following key features:
● Mandatory for groups with a turnover of more than 750 million.
● Optional for others.
● Applicable to all entities with at least a 75% ownership.
● Unified calculation of a preliminary taxable base per entity and country.
● Arithmetic aggregation of these bases (allowing for profit and loss offsetting).
● Distribution of the taxable base based on the proportion of local taxable base
to the total in the last three years.
● Application of the local tax rate (not harmonized) to the portion of taxable
base assigned to each country.
The BEFIT proposal aims to facilitate the approval of countries by keeping the
distribution of the taxable base unchanged during a transition period from 2028 to
2035. This avoids disputes among Member States over the allocation formula. While
maintaining the principle of full competition during this period, it is anticipated that it
will be replaced by a formula in a later phase. Additionally, an unusual rule is
introduced, which considers any alteration in related income or expenses exceeding
10% as contrary to the principle of full competition and will not be considered in the
The local taxable base prior to aggregation is calculated using a simplified method
based on adjustments to the accounting result, which must be calculated according
to the accounting plan of the parent company, provided that it is tax-resident in a
Member State. Some of the most significant adjustments include:
● Exclusion of 95% of dividends or distributions received, under certain
● Exclusion of 95% of profits from the sale of shares.
● Exclusion of variations due to changes in fair value.
● Exclusion of results related to permanent establishments.
● Exclusion of results related to permanent establishments.
● Non-deductibility of illegal payments, fines, and penalties.
● Non-deductibility of Corporate Tax.
● Deductions for income resulting from the sale and reinvestment in fixed
● Exclusion of unrealized gains or losses from currency fluctuations and
provisions for these losses.
● Specific guidelines on the deductibility of depreciation of fixed assets and
rules for accruals for inventories, work in progress, risk provisions,
insolvencies, long-term contracts, and financial hedges.
Once the incomes are combined and the portion assigned to each group member is
redistributed, it will still be possible to make certain changes at the local level
(including the offsetting of accumulated losses before joining the group), as well as
apply the deductions or tax benefits that countries choose independently.
From the perspective of European multinationals, the approval of this directive would
be positive due to regulatory simplification and the ability to offset profits with losses.
This aligns with the European Union closely following OECD international reforms,
but now addressing issues created by the diversity of tax systems within its own
member countries. Often, these measures are presented under the pretext of
combating tax fraud.
B Law & Tax International Tax & Legal Advisors.
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