Insurance Europe has shared its views on the European Commission’s proposal for a ‘Business in Europe: Framework for Income Taxation (BEFIT)’.
While the insurance industry supports the goal of harmonizing corporate tax rules across the EU, it raises serious reservations about the current draft EU Directive.
The European Commission’s proposal for a ‘Business in Europe: Framework for Income Taxation‘ (BEFIT) represents a significant shift in the approach to corporate taxation within the European Union (EU).
BEFIT is designed to streamline the tax framework for businesses operating within the EU, fostering a more unified market by reducing administrative burdens and tax obstacles that currently hinder cross-border economic activity. This proposal is part of the broader EU agenda to ensure fair taxation, promote economic growth, and enhance the competitiveness of European businesses on the global stage.
The industry is concerned about the interplay between the proposed European framework and existing legislation, notably the EU’s Minimum Corporate Taxation Directive and the Country-by-Country Reporting (CbCR) Directive.
The industry also notes that the relation between BEFIT and the already implemented International Financial Reporting Standard (IFRS) 17 and 9 is not clear and must be addressed before the draft Directive is adopted.
Furthermore, the insurance industry is concerned about the level of flexibility for Member States in applying additional post-allocation adjustments in areas not addressed by the common framework.
Insurance Europe calls for a limit to possible national adjustments, to achieve the goal of a streamlined, European, corporate taxation framework.
The proposal should also effectively consider aspects specific to the insurance industry, such as the tax treatment of technical reserves.
Therefore, to achieve a clear and coherent legislative framework, and to avoid undue burden on companies, the insurance industry urges EU legislators to postpone negotiations on BEFIT until any legislative overlap is clear and addressed.
Background and Rationale
The initiative arises from longstanding concerns about the complexities and inefficiencies inherent in the current system, where 27 different national tax regimes coexist.
This fragmentation creates significant compliance costs for businesses, leads to double taxation, and fosters aggressive tax planning. The European Commission has long sought to address these challenges, with BEFIT representing the latest, and perhaps most ambitious, effort to harmonize corporate taxation across the bloc.
Key Features of BEFIT
BEFIT proposes a unified set of rules for calculating companies’ taxable profits in the EU. Its cornerstone is the introduction of a common corporate tax base, which means that companies would follow the same rules across the EU for determining their taxable income. This approach aims to eliminate the mismatches and discrepancies that currently exist between national tax systems, simplifying cross-border trade and investment.
Another pivotal aspect of BEFIT is the allocation of taxing rights among Member States based on a formula that considers various factors such as sales, assets, and labor.
This formulaic approach seeks to distribute tax revenues in a way that reflects where economic activity and value creation actually occur, moving away from the traditional emphasis on physical presence.
Global Context and Next Steps
BEFIT is not only about reforming taxation within the EU; it also aligns with global efforts to address the challenges posed by the digitalization of the economy and to combat tax avoidance.
The proposal complements initiatives by the Organisation for Economic Co-operation and Development (OECD) to establish a more equitable and stable international tax framework.
The European Commission’s next steps involve detailed negotiations with Member States and consultations with stakeholders to refine the proposal. The aim is to draft legislation that could be proposed for adoption, setting the stage for a gradual implementation of BEFIT across the EU.
How will this directive affect the European insurance market?
The Business in Europe: Framework for Income Taxation (BEFIT) proposal, while primarily focused on corporate taxation, has several indirect implications for the European insurance market. The impact on this sector can be multifaceted, influencing operational structures, investment strategies, and cross-border activities. Here’s an analysis of how BEFIT might affect the European insurance market:
Harmonization of Tax Rules
BEFIT’s aim to harmonize tax rules across the EU could simplify the regulatory landscape for insurance companies operating in multiple Member States. Currently, insurers must navigate a complex patchwork of tax regulations, which can be both costly and administratively burdensome. A unified tax framework could reduce these hurdles, potentially making it easier and more attractive for insurance companies to offer services across borders. This harmonization could lead to increased competition and innovation within the European insurance market.
Investment and Allocation of Resources
The insurance industry is heavily dependent on investment income. The introduction of BEFIT could influence the allocation of resources and investment strategies within European insurance companies. If the new tax framework leads to changes in the after-tax return on investments, insurers might adjust their portfolios accordingly. Moreover, the formulaic approach to allocate taxing rights among Member States, based on factors such as sales, assets, and labor, might encourage insurance companies to reassess their operational and investment footprints across the EU.
Impact on Cross-Border Mergers and Acquisitions
The simplification of tax rules under BEFIT could stimulate cross-border mergers and acquisitions within the insurance sector. By reducing the tax complexity associated with operating in multiple jurisdictions, BEFIT might lower the barriers to entry for insurance companies looking to expand their presence across the EU. This could lead to a more consolidated European insurance market, with larger players gaining a stronger foothold.
Tax Planning and Structuring
Insurance companies, like other multinational corporations, engage in tax planning to optimize their tax liabilities. The introduction of a common corporate tax base and the allocation of taxing rights based on a specific formula could necessitate a reevaluation of existing tax planning strategies. Insurers will need to adapt to the new rules, potentially leading to changes in how they structure their operations and transactions within the EU.
Compliance and Administrative Costs
In the short to medium term, transitioning to the BEFIT system may result in increased compliance and administrative costs for insurance companies. Adapting to new tax rules, updating systems, and retraining staff will require investment. However, over the longer term, the expectation is that a more streamlined and consistent tax framework will lead to cost savings and greater efficiency.
While BEFIT is not specifically targeted at the insurance industry, its broad implications for corporate taxation in the EU will undoubtedly impact the sector.
The directive aims to create a more level playing field, reduce administrative burdens, and promote efficiency and fairness in taxation across the Single Market. For the European insurance market, this could mean opportunities for growth and expansion but also challenges in adapting to a new tax regime. The actual impact will depend on the final details of the BEFIT proposal and how insurance companies and regulators respond to the changes.