COMMISSION STAFF WORKING DOCUMENT Subsidiarity Grid Accompanying the documents Proposal for a Council Directive on Business in Europe: Framework for Income Taxation; Proposal for a Council Directive on establishing a Head Office Tax system for micro, small and medium sized enterprises and amending Directive 2011/16/EU; and Proposal for a Council Directive on Transfer Pricing
Date: 2023-09-12
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: European tax cooperation, basis of tax assessment, business tax, corporation tax, head office, right of establishment, single market, small and medium-sized enterprises, tax harmonisation, tax law

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  EN 

   EUROPEAN COMMISSION  Strasbourg, 12.9.2023  SWD(2023) 301 final  COMMISSION STAFF WORKING DOCUMENT Subsidiarity Grid Accompanying the documents   Proposal  for a Council Directive          on Business in Europe: Framework for Income Taxation;                  Proposal for a Council Directive          on establishing a Head Office Tax system for micro, small and medium sized enterprises      and amending Directive 2011/16/EU;                  and                  Proposal  for a Council Directive on Transfer Pricing {COM(2023) 528 final} - {SEC(2023) 308 final} - {SWD(2023) 302 final} - {SWD(2023) 303 final}  
 
 
Subsidiarity Grid 

1.  Can the Union act? What is the legal basis and competence of the Union’s intended action? 

1.1 Which article(s) of the Treaty are used to support the legislative proposal or policy initiative? 

Article 115 of the Treaty on the Functioning of the European Union (TFEU) constitutes the legal base 
for legislative initiatives in the field of taxation. Although no explicit reference to direct taxation is 
made, Article 115 refers to issuing directives for the approximation of national laws as those that 
directly affect the establishment or functioning of the internal market. It follows that, under Article 
115 TFEU, directives are the appropriate legal instrument for the Union in this field. Based on Article 
288 TFEU, directives shall be binding as to the result to be achieved upon Member States but leave 
the choice of form and methods to the national authorities. 

Three  proposals  are  meant  to  address  the  current  challenges  in  the  internal  market  related  to 
corporate taxation: (i) a proposal for a Council Directive establishing a Head Office Tax (HOT) system 
for  micro,  small  and  medium-sized  enterprises  (SMEs);  (ii)  a  proposal  for  a  Council  Directive  on 
Business  in  Europe:  Framework  for  Income  Taxation  (BEFIT);  and  (iii)  a  proposal  for  a  Council 
Directive on Transfer Pricing (Transfer Pricing Directive).  

(i) 

(ii) 

(iii) 

The HOT system for SMEs will provide tax simplification for SMEs with limited presence 
in other Member States;  

BEFIT  will  lay  down  a  common  set  of  rules  for  computing  the  tax  base  of  groups  of 
companies in the EU;   

The Transfer Pricing Directive will integrate key transfer pricing principles into EU law 
and  put  forward  certain  common  approaches  to  Member  States’  practices  in 
interpreting and applying the OECD Transfer Pricing Guidelines.  

1.2 Is the Union competence represented by this Treaty article exclusive, shared or supporting in 
nature? 

In the case of direct taxation, as far as the proposals relate to the establishment or functioning of 
the internal market, the Union’s competence is shared.  

2.  Subsidiarity Principle: Why should the EU act? 

2.1 Does the proposal fulfil the procedural requirements of Protocol No. 21: 

-  Has there been a wide consultation before proposing the act? 
- 

Is there a detailed statement with qualitative and, where possible, quantitative indicators 
allowing an appraisal of whether the action can best be achieved at Union level? 

The proposals fulfil the procedural requirement of Protocol No. 2, as shown below. 

In general, there has been an extensive consultation process while preparing the three proposals. 
The following steps have been pursued in order to determine their designs in the best way: 

-  Call  for  Evidence  and  the  Public  Consultation  in  which  123  contributions  were  received. 
Around  half  were  submitted  by  business  associations  that  represent  general  business 
interests, tax advisers, lawyers, or specific business sectors, such as insurance. Respondents 
also  included  citizens  and  both  larger  and  smaller  businesses,  as  well  as  academic  and 

1 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12016E/PRO/02&from=EN  

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research  institutions,  non-governmental  organisations,  and  trade  unions.  No  input  was 
received from national authorities. 
Targeted  consultations  were  conducted  with  different  key  stakeholders, 
businesses of different sizes operating in different sectors;  
SME  stakeholders  were  consulted,  and  views  were  exchanged  regarding  the  options 
envisaged specifically for SMEs operating cross-border during a meeting with the SME Envoy 
Network, an Expert group consulted regularly by DG GROW;  
Platform on Tax Good Governance were used for discussions in an expert group composed 
of Member States, business and the civil society;  

including 

- 

- 

- 

-  Receiving input from various other sources. Among others, the Commission has relied on 
publicly available information and OECD reports and on the expertise of its Joint Research 
Centre, which used the CORTAX model to study the possible impacts of the initiative. 
-  Using  other  networks,  such  as  consultations  with  the  OECD  secretariat  and  input  from 
academics specialized in the field of transfer pricing through a virtual panel discussion. 

The  necessity  for  EU  action  was  supported  by  the  majority  of  the  stakeholders  during  the 
consultations. 

For the HOT system for SMEs, the main message from stakeholders was to ensure that the measure 
provides for a simplification. 

For BEFIT, insights received from stakeholders were considered which have led to the design of the 
measure  that  strikes  a  balance  between  the  preferred  objectives,  e.g.,  simplifying  tax  rules  for 
businesses and stimulating growth. The views on the actual design of the main features of a new 
system  were more  divided.  The  proposed  design  takes  into  account  the options  that  were most 
favoured by stakeholders, for example with regard to the scope, the computation of the tax base, 
the introduction of cross-border loss relief, timing, administrative simplification, etc.  

For  the  Transfer  Pricing  Directive,  the  respondents  underlined  that  simplification  should  be 
envisaged.  However,  the  respondents  did  not  have  a  strong  view  on  the  usage  of  certain 
benchmarks  to  facilitate the  risk  assessment  when applying  transfer  pricing  rules.  Regarding the 
inclusion of both the inbound and outbound transactions, a majority of almost two thirds of the 
respondents were in favour whereas one third were against such an approach.  

Reference is made to the impact assessment reports which reflect in more detail the outcome of 
the various consultations and sources used in the preparation of the three proposals as well as the  
explanatory memoranda which support the proposals and in which the principle of subsidiarity has 
also been duly considered as explained in question 2.2 below. 

2.2 Does  the  explanatory  memorandum  (and  any  impact  assessment)  accompanying  the 
Commission’s proposal contain an adequate justification regarding the conformity with the 
principle of subsidiarity? 

The explanatory memorandum and the impact assessments contain adequate justification regarding 
the conformity of the proposals with the principle of subsidiarity. 

All  proposals  comply  with  the  principle  of  subsidiarity  as  set  out  in  Article  5  of  the  Treaty  on 
European Union (TEU). They fall within the field of direct taxation and cover cases which primarily 
revolve around cross-border activity. It is thus the cross-border nature of the problems at stake that 

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calls for common initiatives across the internal market, and by reason of the scale or effects of the 
proposed action, the objective pursued can be better achieved at an EU level.  

EU  businesses  increasingly  operate  across  borders  in  the  internal  market,  but  the  current  tax 
framework in the EU consists of 27 different corporate tax systems. This multiplicity of rules results 
in  fragmentation  and  presents  a  serious  impediment  to  business  activity  in  the  internal  market. 
Indeed, cross-border businesses face high tax compliance costs in the internal market, as they must 
comply with various legal frameworks. This is particularly the case for SMEs, for whom these costs 
are  proportionately  much  higher.  Moreover,  the  disparities  between  Member  States  create 
mismatches that can lead to double non-taxation and unintended tax benefits. 

These problems are common to all Member States and cannot effectively be addressed by national 
actions.  As  they  are  the  result  of  having  different  tax  systems  in  the  first  place,  national 
uncoordinated action would produce insufficient and uncoordinated effects. Similarly, while better 
cooperation may also be beneficial, this approach has mainly been bilateral and, therefore, limited 
in its effects, especially for groups that operate in more than two Member States.   

In  this  context,  only  EU-wide  initiatives  can  be  effective.  The  complexity  of  current  corporate 
taxation in the internal market and its consequences would be significantly reduced by introducing 
common initiatives specifically targeted at the different issues that businesses face. The variety of 
doing business in the internal market implies that three proposals are needed to address the current 
issues:    

(i) 

(ii) 

A  simplification  framework  for  SMEs  would  make  it  possible  for certain  SMEs  to 
comply with the substantive tax rules of one Member State and interact with only 
that Member State. This would reduce a fundamental barrier to trade and cross-
border  expansion  as  tax  compliance  is  a  significant  cost  for  smaller  business. 
Similarly  for  SMEs,  the  simplification  can  only  effectively  work  on  the  basis  of 
mutual recognition between Member States of their national tax rules. 

A single EU-wide set of corporate tax rules primarily for large groups of companies 
would create clear added value if action were taken at EU level. Aggregation and 
allocation of the tax base would, for instance, be more objective and less costly than 
the  current  transfer  pricing  rules  in  determining  the  tax  liabilities  of  groups  of 
companies.  However,  Member  States  cannot  effectively  use  such  measures 
individually because the risk of double taxation and disputes would remain if the 
allocation method were not uniform for the whole group and the allocable tax base 
of the group were not computed in accordance with a single set of rules. Common 
substantive rules can also be governed by a simplified administrative framework, 
which would have definitive advantages for EU businesses and tax administrations. 
Instead  of  filing  in  each  Member  State,  a  one-stop-shop  would  allow  groups  of 
companies to comply with many administrative requirements by referring to one 
single entity.  

(iii) 

A  common  approach  to  transfer  pricing  which  is  built  on  internationally  agreed 
principles.  Transfer  pricing  rules  are  currently  implemented  nationally  by  the 
Member  States  and  a  coordinated  approach  would  diminish  the  current 
fragmentation  of  the  legal  framework  for  transfer  pricing  and,  thus,  reduce 
complexity and compliance  costs.  For tax administrations, which currently assess 
the tax liabilities of the same cross-border businesses separately but each only with 
their own resources, it would be possible to collectively use those resources in a 

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more effective and targeted manner. In addition, cross-border issues may require 
agreement between different Member States and often result in lengthy disputes 
or procedures.  

A legislative approach for all initiatives is therefore in accordance with the principle of subsidiarity, 
as set out in Article 5 TEU, considering that the objectives cannot be sufficiently achieved by the 
Member States, and a common approach for all Member States would have the highest chances of 
achieving the intended objectives.  

2.3 Based on the answers to the questions below, can the objectives of the proposed action be 

achieved sufficiently by the Member States acting alone (necessity for EU action)? 

The objectives of the three proposals cannot be sufficiently achieved by the Member States acting 
alone for the following reasons: 

Since  the  identified  problems  in  the  area  of  corporate  taxation  are  primarily  of  a  cross-border 
nature, the individual uncoordinated action by the Member States, as it has taken place so far, would 
only add to the current fragmentation of the legal framework for corporate taxation, continue to 
constitute  a  barrier  to  trade  and  growth  and  fail to achieve  the  intended results.  Therefore,  the 
matter can only be effectively tackled by laying down legislation at the EU level. Adopting common 
approaches for all Member States is necessary and would be the most effective and efficient way to 
rectify the current distortions in the functioning of the internal market and in achieving the intended 
objectives.  

These initiatives are therefore in line with the principle of subsidiarity, as laid down in Article 5(3) 
TEU, considering that their objectives cannot be sufficiently achieved by the Member States, and a 
common approach for all Member States would have the highest chances of achieving the intended 
objectives.   

(a)  Are there significant/appreciable transnational/cross-border aspects to the problems being 

tackled? Have these been quantified? 

Today’s  business  models  increasingly  involve  economic  groups  that  operate  globally,  including 
across more than one Member State within the EU. Consequently, groups have to comply with (up 
to)  27  different  corporate  tax  systems  in  the  EU.  This  creates  a  serious  impediment  to  business 
activity in the internal market, as different country-specific rules imply high compliance costs for 
such businesses operating cross-border. The need to comply with various legal frameworks creates 
barriers.  Such  a  large  administrative  burden  and  tax  uncertainty  discourage  cross-border 
commercial  activity.  This  is  particularly  the  case  for  SMEs,  for  whom  tax  compliance  costs  are 
proportionately  much  higher  and  could  impede  them  from  crossing  the  border  altogether.  In 
addition, the complexity, which inherently exists in dealing with more than one tax administration, 
can  give  rise  to  lengthy  and  costly  legal  disputes  and/or  result  in  double/over-taxation.  This  is  a 
situation which again discourages cross-border investment. This situation is exacerbated by the fact 
that Member States’ practices of applying the internationally agreed transfer pricing standards tend 
to vary.  

Regarding the quantification, reference is made to the impact assessments. Only certain points will 
be recalled here:  

On the compliance costs  

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If one looks only at the directly related expenses, tax compliance costs for businesses are found to 
be high. A comprehensive survey-based study presenting extensive analysis of the administrative 
costs  to  comply  with  tax  obligations  (tax  compliance  costs)  has  been  carried  out  on  behalf  the 
European  Commission  (2022,  see  Impact  Assessment).  This  study  estimates  the  administrative 
burden of tax compliance for small and large businesses in Member States and the United Kingdom 
finds that ‘differences in the broader public administration of the countries do have an impact on the 
burden of compliance’. In general, businesses incur an annual cost in meeting their tax compliance 
obligations  that  amounts  to  1.9%  of  their  turnover.  Businesses  in  these  28  countries  spend  an 
estimated  annual  amount  of  around  EUR  204  billion  to  comply  with  their  tax  obligations  (tax 
compliance costs for all types of taxes). Furthermore, tax compliance costs have not declined over 
time. Total corporate tax compliance costs increased significantly (i.e., 114%) from 2014 to 2019. In 
addition,  these  compliance  costs  are  regressive,  which  means  that  the  relative  burden  of  tax 
compliance is disproportionately higher for small businesses.  

On the mechanisms to prevent and resolve tax disputes  
The unpredictability and inconsistency of tax administration practices across 27 Member States as 
well as somewhat ineffective mechanisms for dispute prevention and resolution contribute to tax 
complexity. Data  regarding the  use  of the procedure under the  Arbitration Convention show  for 
example that in 2021, there were some 3,200 ongoing MAPs to settle disputes on the questions of 
transfer pricing. On average, these procedures last around three years, and only half of them close 
with an agreement.2 Today, disputes associated with transfer pricing tend to be extremely lengthy 
(they may extend for over a decade), time-consuming and costly. Costs include those for staff of 
legal departments in companies, but also costly external legal advice. In 2017, 2,400 firms informed 
that they had, on average, cost for outsourcing of compliance activities of more than EUR 4,000 per 
firm.  For  litigations  in  particular,  the  costs  are  a  multiple  of  that  amount.  Moreover,  costs  of 
litigation also include the teams in national tax administrations administering these cases. 

The  three  proposals  would  reduce  such  compliance  costs,  and  significantly  limit  the  room  for 
mismatches and tax disputes and, as such, address the problems in a comprehensive and targeted 
manner.  

(b)  Would national action or the absence of the EU level action conflict with core objectives of 

the Treaty3 or significantly damage the interests of other Member States? 

National  actions  would  not  be  sufficient  to  address  the  problems  as  their  origin  stems  from 
individual uncoordinated initiatives by the Member States. The cross-border nature of the problems 
requires coordinated action from the EU as a whole. Removing the current barriers in the internal 
market caused by the existing 27 nationally designed corporate tax systems in the Member States 
would  better  guarantee  the  principles  upon  which  the  Union  is  built,  such  as  the  fundamental 
freedoms ensured by the Treaties.  

(c)  To  what  extent  do  Member  States  have  the  ability  or  possibility  to  enact  appropriate 

measures? 

Member States have the possibility to introduce measures in the area of corporate taxation through 
better tax treaties and closer cooperation between tax administrations. These actions are, however, 
insufficient to address the identified issues in the internal market. Such actions would only create 
more  extensive  fragmentation  among  national rules through  bilateral agreements  (treaties)  and, 
thereby, further complexity which would feed into the core of the problem which the proposals seek 

2 OECD, Multiannual Agreement Procedure Statistics. 
3 https://europa.eu/european-union/about-eu/eu-in-brief_en  

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to address. While double or over-taxation can indeed be prevented through bilateral tax treaties 
between Member States, such frameworks are only rectifying instances of occurred double/over 
taxation while the dispute resolution processes are lengthy and costly. The diversity of the national 
tax rules has led to tax complexity and barriers, and to the existence of loopholes that may open 
opportunities for tax planning or contribute to double/over taxation.  

The outcome of individual actions by the Member States is another layer in the fragmented EU tax 
environment  and  does  not  address  the  reality  of  today’s  business  environment  where  groups 
operate in the internal market in more than two Member States.  

(d)  How  does  the  problem  and  its  causes  (e.g.  negative  externalities,  spill-over  effects)  vary 

across the national, regional and local levels of the EU? 

The identified problems seem to be mainly of a national nature. The current systems of corporate 
income taxation in the EU gives rise to high complexity and an uneven playing field for businesses 
that operate in the internal market. Stakeholders in the consultations confirmed that this translates 
into  businesses  facing  high  compliance  costs,  barriers  to  cross-border  operations,  high  risks  of 
double or over-taxation leading to tax uncertainty and frequent, time-consuming legal disputes.  

These  tax  barriers  for  businesses  impede  the  proper  functioning  of  the  internal  market  and 
compromise  the  prospect  for  achieving  its  potential in  terms  of  efficiency  gains.  As  a  result,  the 
competitiveness  of  the  internal  market  is  undermined.  The  problems  that  the  initiatives  aim  to 
address are complexity and an uneven playing field.   

(e)  Is the problem widespread across the EU or limited to a few Member States? 

The  aforementioned  obstacles  are  widespread  across  the  EU  and  common  for  taxpayers  in  all 
Member States. The coexistence and parallel application of 27 different corporate tax systems lie at 
the  core  of  the  problem  as  they  hamper  cross-border  investment  and  business  activities,  while 
distorting competition and hindering EU competitiveness.  

(f)  Are Member States overstretched in achieving the objectives of the planned measure? 

The three proposals only seek to introduce common rules and approaches where this is necessary 
to achieve the envisaged objectives. Member States will therefore have to implement the proposed 
measures by complementing their current tax rules, to be fully compliant with the standards set by 
these initiatives. In general, and as a result, Member States’ systems would become more efficient, 
the allocation of tax base would become more predictable, the current tax disputes arising from 
transfer pricing application should be reduced, and tax administrations should have the possibility 
of dedicating more resources to better follow the taxpayers and also of re-allocating their resources 
to the other high-risk cases. 

To the greatest extent possible, the initiatives build on existing rules and policies. For example, for 
the  HOT  system  for  SMEs,  the  simplification  framework  for  SMEs  is  built  on  mutual  recognition 
between Member States of their current tax systems rather than by introducing new common rules 
in this respect. For BEFIT, the mandatory scope is limited to the EU sub-set of the large groups which 
also fall within scope of the Pillar 2 Directive, unless a large group is headquartered outside the EU 
but has limited activity in the internal market (materiality threshold). Applying the rules in a uniform 
manner to these groups would ensure coherence with the Pillar 2 Directive  and allow leveraging 
interactions and keeping the costs of implementation to a minimum. Processes can also be aligned, 

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for instance, they both rely on financial accounting statements as a starting point and companies 
must apply the EU-wide tax adjustments for both sets of rules.  

These are proportionate steps forward to simplify tax rules, create a level playing field and enhance 
tax certainty in the EU, and thus render the impact of the tax administration manageable. 

(g)  How  do  the  views/preferred  courses  of  action  of  national,  regional  and  local  authorities 

differ across the EU? 

There was no contribution or answer to the public consultation from national tax administrations  
in the EU. However, Member States were consulted at a technical level in Working Party IV. 
Out of all exchanges and input received from various stakeholders, it can be concluded that, while 
views differ on the specific design of the main features of the initiatives, there is a broad consensus 
on the problems arising from the differences between national tax systems and on the need for EU 
action to tackle the fragmented and inefficient situation. 

2.4 Based on the answer to the questions below, can the objectives of the proposed action be 
better achieved at Union level by reason of scale or effects of that action (EU added value)? 

The objectives of the proposals can be better achieved at Union level. It is the cross-border nature 
of the problems and the co-existence of 27 uncoordinated and different tax systems that require 
common rules across the internal market. 

The added value of EU action is broadly confirmed in the public and targeted consultations where 
there  was  broad  consensus  that  the  existing  problems  constitute  significant  barriers  and  that 
common rules would be more efficient.   

The HOT system for SMEs provides for a simplification which can only effectively work on the basis 
of mutual recognition between the Member State origin (head office) and the Member States of 
‘expansion’. It would consequently be possible for SMEs to interact with only one Member State. 

Furthermore, under BEFIT, the introduction of common rules for the computation and allocation of 
the tax base will decrease the need for thorough assessments of intra-group transactions to ensure 
consistence with the arm’s length principle and also provide cross-border loss relief. Such a common 
approach would be more objective and less costly than the current rules which are complex and 
cause many disputes. Member States cannot effectively use such approach individually, because the 
risk of double taxation and disputes would remain if the rules were not applicable to the whole EU 
group.  Common  rules  can  also  be  administered  by  a  common  framework,  which  would  have 
definitive advantages for EU businesses and tax administrations. Instead of filing in each Member 
State, a one-stop-shop could allow groups of companies to comply with many requirements through 
one single entity. A common administrative framework would also allow EU businesses to obtain 
early certainty on certain items.  

In general, for tax administrations, which currently assess the tax liabilities of the same cross-border 
businesses  separately  but  each  one  only  with  their  own  resources,  all  proposals  would  make  it 
possible to collectively use those resources in a more effective and targeted manner.  

(a)  Are there clear benefits from EU level action?  

Action  at  EU  level  would  bring  significant  and  clear  benefits  to  both  the  businesses  and  tax 
administrations. The key features of the three proposals have an inherent cross-border aspect and 
could only be addressed with an added value by a commonly agreed approach.  

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The introduction of the HOT system for SMEs that have taxable presence across the border will also 
significantly facilitate corporate decisions for business expansion, considering that SMEs tend to be 
short of resources in coping with a foreign tax system. Such simplification can only work on the basis 
of mutual recognition between the origin (head office) Member State and the Member States of 
‘expansion’, and thus common rules will bring a definitive advantage.  

Regarding BEFIT, common substantive corporate tax rules are also a prerequisite for administering 
a  ‘one-stop-shop’  for  groups  of  companies  operating  in  the  EU.  Such  solutions  would  both  be 
expected  to  introduce  the  necessary  unification  across  the  EU  and  not  only  simplify  the 
determination of the tax base for business, but at the same time, also successfully tackle the issue 
of mismatches between 27 different national systems.  

As  regards  transfer  pricing,  common  rules  would  provide  a  higher  level  of  tax  certainty  for 
businesses operating across the internal market and bring down compliance costs thus making it 
more beneficial to invest in business operations in the Union.  

In addition, for both BEFIT and the HOT system for SMEs, businesses active across the EU will have 
the opportunity to comply with their fiscal obligations by referring to only one system of corporate 
tax rules which will bring significant gains in terms of simplification. Common rules and approaches 
will be administered, to the extent possible, through a one-stop-shop, which will significantly reduce 
compliance costs for businesses. Dealing with the tax authorities of several Member States through 
a  streamlined  procedure  will  further  minimise  the  number  of  disputes  and  ensure  a  consistent 
application of the rules.  

(b)  Are there economies of scale? Can the objectives be met more efficiently at EU level (larger 

benefits per unit cost)? Will the functioning of the internal market be improved? 

The three proposals aim at simplifying tax rules for businesses, stimulating growth and investment 
and ensuring fair and sustainable tax revenues. By decreasing compliance costs and tax obstacles, 
the initiatives will in turn foster foreign and domestic investment as well as capital mobility in the 
EU,  both  for  large  groups  and  SMEs  with  cross-border  presence  or  plans  to  expand  abroad,  as 
businesses  operating  in  different  Member  States  will  be  able  fully  maximize  the  freedom  of 
establishment  and  the  free  movement  of  capital  without  being  hindered  by  tax  regulatory 
obstacles.  

Considering  the  scale  and  effects  of  the  envisaged  initiatives,  the  objectives  to  attenuate  the 
negative  effects  resulting  from  the  current  interaction  of  27  disparate  national  tax  systems  and 
divergent  transfer  pricing  practices  and  to  create  more  favourable  conditions  for  cross-border 
investment in the internal market are better achieved at Union level.  

(c)  What  are  the  benefits  in  replacing  different  national  policies  and  rules  with  a  more 

homogenous policy approach? 

The measures under the three proposals will facilitate cross-border investment by increasing tax 
certainty and reducing compliance costs and disputes both for taxpayers and tax administrations. 
They will allow the EU’s economy to grow in a sustainable way and be more competitive vis-à-vis 
other big markets. An economically stronger Europe will better serve its citizens and help the EU to 
play a stronger role on the global stage. 

Additionally,  the 
initiatives  will  ensure  more  coordination  among  Member  States’  tax 
administrations,  which  will  be  given  the  adequate  tools  to  address  or  to  avoid  the  current 

8 

 
 
 
 
 
 
 
 
mismatches and obstacles arising from a fragmentated tax environment. Therefore, these proposals 
aim to contribute to safeguarding the tax revenues of Member States, making tax systems  more 
predictable and ensuring a level playing field. 

(d)  Do the benefits of EU-level action outweigh the loss of competence of the Member States 
and the local and regional authorities (beyond the costs and benefits of acting at national, 
regional and local levels)? 

The  benefit  of  EU  action  on  these  initiatives  outweighs  the  loss  of  competence  of  the  Member 
States. From the tax administrations’ perspective, less resources would be required on average in 
the long term, to deal with the complex tax rules and procedures, lengthy disputes and litigation. 
This  would  allow  Member  States  to  free  ressources,  to  enhance  cooperation  between  tax 
administrations  as  well  as  the  national  tax  administration  and  taxpayers,  and  to  re-allocate 
ressources  to  high-risk  cases.  The  main  benefit  for  tax  administrations  is  the  availability  of  the 
appropriate information of the corporate tax payers and closer cooperation with tax administartions 
in other Member States. The common approach to transfer pricing is envisaged to entail benefits 
both for businesses and tax administrations. Thus, in the long term, there should be a need for less 
resources, on average, within the tax administrations to deal with the compliance of transfer pricing, 
lengthy disputes and litigation.  

In  relation  to  the  macro-economic  effects,  rules  provided  by  the  three  proposals  should  not 
significantly affect the tax revenues of the Member States.  

(e)  Will there be improved legal clarity for those having to implement the legislation? 

With the three proposals, there will be improved legal clarity.  

Under the HOT system, SMEs operating in (an)other Member State(s) through PE(s) would apply 
one single set of tax rules to compute their tax base across the EU.  

The  implementation of  BEFIT  would result in a  framework of rules for computing  a common tax 
base,  which  would  be  built  on  current  accounting  rules  with  limited  adjustments  and  a  simple 
allocation method for the groups’ tax base.  

In addition, the Transfer Pricing Directive would provide for more legal certainty as it would do away 
with national approaches which have shown to be highly subjective, and which often result in long 
and  costly  disputes  regarding  double  taxation  or  double  non-taxation  and  leave  room  for  tax 
planning practises.  

These key features of the proposals will result in lower administrative burden for taxpayers and tax 
administrations and hence time and costs savings for tax administrations and companies.  

3.  Proportionality: How the EU should act 

3.1  Does  the  explanatory  memorandum  (and  any  impact  assessment)  accompanying  the 
Commission’s proposal contain an adequate justification regarding the proportionality of the 
proposal  and  a  statement  allowing  appraisal  of  the  compliance  of  the  proposal  with  the 
principle of proportionality? 

The three proposals do not go beyond the minimum necessary level of protection for the internal 
market and are therefore compliant with the principle of proportionality.  

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Under  the HOT system, the  single set of rules that a standalone  SME  would  be  subject to  is the 
national  framework  of  the  Member  State  of  its  head  office.  The  simplifications  are  built  on  a 
principle of mutual recognition rather by introducing a new set of common rules. In addition, the 
system is optional for all eligible SMEs. 

BEFIT  does not  prescribe  full harmonisation of corporate  tax systems but only sets out  common 
rules to determine the taxable income of large groups of companies in the EU. The rules are targeted 
at businesses which are most likely to benefit from the rules while they are optional for others. The 
scope is, thus, limited to what is required to be able to attain the objectives of the initiative. Other 
aspects build on existing policies or remain fully in the competence of the Member States, such as 
tax rates and enforcement policies. For example, under BEFIT, the tax base will be primarily based 
on  existing  financial  accounting  rules  which  are  already  accepted  under  EU  law,  i.e.,  either  the 
national generally accepted accounting principles (GAAP) of the Member States, or the International 
Financial Reporting Standards (IFRS). The proposal does not harmonise tax base rules generally, but 
only where this is necessary and allows for additional adjustments after the allocation of the BEFIT 
tax base, in consideration for national policy needs. The mandatory scope is limited to the EU sub-
set  of  large  groups  that  are  also  within  scope  of  the  Pillar  2  Directive,  unless  a  large  group  is 
headquartered outside the EU but has limited activity in the internal market (materiality threshold). 
This targeted approach is taken in order to ensure consistency and coherence in the EU and because 
the common rules would benefit, in particular, these businesses. Large groups are thus most likely 
to have a strong cross-border presence and the new rules are aligned as closely possible with the 
Two-Pillar Approach.  

For the Transfer Pricing Directive, a common standard for arm’s length principle should result in a 
less fragmented application and interpretation of the arm’s length principle across the Union which 
should reduce disputes, litigation and the overall compliance costs for businesses operating across 
the Union.  

It  is,  however,  envisaged  that  the  three  proposals  would  imply  some  initial  adaptation  and 
administrative  costs.  These  costs are  however outweighed by compliance cost savings as well as 
simplified  administrative  procedures  and  as  a  result,  the  improved  allocation  of  resources  by 
businesses and tax administrations.   

As justified in the respective explanatory memorandum and impact assessment accompanying the 
initiatives, the proportionality principle is duly considered, and the initiatives do not go further than 
necessary in achieving the objectives. 

3.2 Based  on  the  answers  to  the  questions  below  and  information  available  from  any  impact 
assessment,  the  explanatory  memorandum  or  other  sources,  is  the  proposed  action  an 
appropriate way to achieve the intended objectives? 

The three proposals are appropriate to achieve the intended objectives as they do not go beyond 
what is needed: 

- 

For the HOT system, the simplification rules for SMEs operating cross border only apply to 
specific  limited  situations  of  cross-border  operations,  i.e.,  standalone  SMEs  with  limited 
cross-border activity and aim to encourage expansion. 

-  BEFIT  lays  down  a  framework  for  a  more coordinated  computation of  the  tax base.  Yet, 
further adjustments for tax purposes are allowed at national level against each allocated 
part, to take into account national policy needs.  

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- 

The  Transfer  Pricing  Directive  ensures  a  common  arm’s  length  principle  and  a  more 
harmonised approach towards transfer pricing. 

(a)  Is the initiative limited to those aspects that Member States cannot achieve satisfactorily on 

their own, and where the Union can do better? 

The three proposals are limited only to businesses with cross-border activities.  

The  HOT  system  is  addressed  to  SMEs  with  taxable  presence  in  (an)other  Member  State(s)  and 
provides for the possibility of using the rules of the jurisdiction of the Head Office in computing the 
tax base of the PEs.  

BEFIT  sets out  common  rules  for  computing  the  tax  base  of  groups  of  companies  in  the  EU,  but 
Member  States  remain  competent  to  make  additional  adjustments  to  the  tax  base  beyond  the 
common base, in consideration of their national policy needs.  

In  relation  to  the  Transfer  Pricing  Directive,  due  to  the  inherent  cross-border  nature  of  transfer 
pricing  and  the  current  fragmentated  approaches  to  its  application  among  the  Member  States, 
coordinated practices in transfer pricing can only be set an EU level. 

Investors  wishing  to  invest  cross-border  will  no  longer  be  faced  with  the  obstacles  arising  from 
double taxation, high compliance costs and disputes. These commonalities can only be set at an EU 
level. 

(b)  Is  the  form  of  Union  action  (choice  of  instrument)  justified,  as  simple  as  possible,  and 
coherent with the satisfactory achievement of, and ensuring compliance with the objectives 
pursued  (e.g.  choice  between  regulation,  (framework)  directive,  recommendation,  or 
alternative regulatory methods such as co-legislation, etc.)? 

In order to reach common features and procedures within the EU, the choice of three proposals for 
directives is justified. Moreover, a proposal for a directive is the only permissible legal instrument 
under the legal basis.  

Non-legally binding or bilateral actions, such as double tax conventions, were taken in the past but 
did  not  resolve  the  issues.  In  particular  and  for  example,  previous  Commission  Communication 
(COM/05/702) that presented a possible solution to the compliance costs and other company tax 
difficulties  that  Small  and  Medium  Sized  Enterprises  (SMEs)  face  when  doing  business  across 
borders. It provided for the general principles of a Home State Taxation system – to be implemented 
by bilateral conventions  amongst  Member State. It has however never been  followed up by any 
Member States. 

The network of bilateral conventions concluded by the Member States amongst each other and with 
third countries only deal with tax situation arising between two Member  States situations, being 
thus  inadequate  for  today’s  business  environement  where  large  groups  operate  worldwide  and 
across several Member States and also have transactions with associated parties outside the EU. 

In the past, the Commission dealt with transfer pricing issues through the work of the Joint Transfer 
Pricing Forum (JTPF), an expert group set up by the Commission in 2002 and whose work was to 
propose  to  the  Commission  pragmatic,  non-legislative  solutions  to  practical  problems  posed  by 
transfer pricing practices in the EU. Its mandate expired in March 2019 and was not renewed. The 

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Reports produced by the JTPF were non-legally binding and thus did not achieve the wanted results 
in the Member States.  

(c)  Does the Union action leave as much scope for national decision as possible while achieving 
satisfactorily the objectives set? (e.g. is it possible to limit the European action to minimum 
standards or use a less stringent policy instrument or approach?) 

The scope of the three proposals does not cover the tax rate. In addition, tax disputes and tax audits 
remain within the competence of the Member States. Each proposal leaves room for Member States 
to decide on aspects not covered. For example, in BEFIT, additional deductions after the allocation 
of the BEFIT tax base are left to Member States. 

(d)  Does  the  initiative  create  financial  or  administrative  cost  for  the  Union,  national 
governments, regional or local authorities, economic operators or citizens? Are these costs 
commensurate with the objective to be achieved? 

The  initiatives  will  directly  impact  businesses  with  presence  in  other  Member  States  and  also 
national tax authorities. Citizens will indirectly benefit from the increase in GDP and tax revenues.  
Reference is made to the Impact Assessments accompanying the proposals. Only certain points are 
recalled here: 

Impact on the business 

Under the HOT system, all SMEs with permanent establishment(s) in (an)other Member State(s) will 
receive  significant  benefits,  in  terms  of  simplification  of  compliance  as  well  as  additional  costs. 
Today, SMEs with taxable presence in other Member States bear costs for tax advisory services in 
respect of each jurisdiction in which they maintain a taxable presence, in order to comply to all their 
PEs in other Member States with the different national rules. With this initiative, SMEs will be able 
to apply the tax rules of the State of the Head Office to all PEs in other Member States which will 
reduce the overall administrative burden. In this way, more SMEs are expected to get incentivised 
to expand their activities across the border in the internal market. 

For BEFIT, the parent company of a BEFIT group will be required to aggregate the tax base of all 
BEFIT group members, decrease the need for thorough assessments of intra-group transactions to 
ensure  consistency  with  the  arm’s  length  principle,  apply  the  baseline  allocation  method  (to 
distribute the  aggregated tax base  among the group members), and finally to prepare the BEFIT 
Information Return  and submit  it  to  the  Filing  Authority.  These companies  will bear  some  initial 
adjustment costs for training the personnel to the new rules and acquiring customised IT software 
(necessary  to  adapt  their  Enterprise  Resource  Planning  (ERP)  system  and  to  automatize  the 
procedures). It is expected that these recurrent costs become “business as usual” quite shortly and 
indeed replace the current way of dealing with tax compliance.  

The Transfer Pricing Directive should also bring some cost savings for MNEs thanks to the expected 
decrease in the number of litigation cases as a result of the legal certainty. 

Impact on tax authorities  

The HOT system for SMEs will bring more work for the tax authority of the Head Office, as it would 
have to perform some actions in relation to the tax liability at the Member State of the permanent 
establishment  but  given  the  small  number  of  affected  taxpayers,  this  is  not  expected  to  be 
significant. 

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For BEFIT, the burden (mainly on human resources) will depend on the number of BEFIT groups in 
scope  and  the  role  in  the  BEFIT  Teams.  However,  apart  from  the  initial  cost  for  training,  the 
additional human resources devoted to implementing BEFIT are expected to be limited, especially 
considering that BEFIT will replace national corporate income tax systems for the in-scope groups. 
In addition, tax authorities will enjoy a reduced burden linked to transfer pricing compliance.  

(e)  While respecting the Union law, have special circumstances applying in individual Member 

States been taken into account? 

Yes. For example, some Member States have specific distribution-based tax systems (rather than 
the regular profit-based tax systems). BEFIT provides for customised rules to address the specific 
features of distribution-based systems where the taxation is triggered in the event of a dividend 
distribution. This will ensure the functioning of BEFIT in these Member States while allowing them 
to keep the general principles of their current systems. During the design of these rules in BEFIT, 
relevant Member States have been consulted. 

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