What is the future of taxation in Europe: impact on multinational enterprises

Mon 19 Jun 2023

Initiatives mentioned in the previous article already affect and will further affect multinational companies in a significant way.

The first step for multinational companies  to consider is how to build stakeholders’ understanding of the impact these changes in domestic legislation will have on the business. In the case of Pillar 2, for example, this means that both strategic and operational people within the organisation, including group financial directors, tax directors and financial controllers, should pay attention to the potential impact that the top-up-tax, including domestic minimum tax, can have on the business. As such, companies are advised to consider developing working groups to identify and manage the full range of potential business impacts.

Another important aspect to consider is the number of additional reporting requirements and associated data collection systems due to the increased disclosure obligations. These will inevitably increase the tax compliance cost and the governance and public relation requirement for communicating with outside stakeholders.

In addition, the impact of these initiatives will require more input from different departments across the multinational business, leading to the need for a multidisciplinary internal working group. In this sense, it would be advisable for the finance and tax teams to increase their collaboration to create the comprehensive information and accounting data needed to comply.

Since challenges usually come with opportunities, multinational groups should consider introducing more sophisticated and streamlined processes and technology to easily gather the information needed and take advantage of the opportunities created by these changes.

From another perspective, DEBRA’s new interest limitation rule will impact both large multinational groups as well as small and medium-sized enterprises (SMEs). While SMEs are generally not affected by ATAD, since it typically includes a de minimis threshold for net interest expense of €3m, they will be impacted by DEBRA’s interest limitation rule as it does not have a de minimis rule.

Therefore, in general terms and without analysing its compatibility with the internal market, the tax planning activity of all companies will be impacted by DEBRA. This means that multinational companies should remain flexible in their approach to different forms of financing.  Indeed the Member States of Belgium, Cyprus, Italy, Malta, Poland and Portugal already offer tax-deductible equity allowances.

Finally, if implemented, BEFIT will have an impact on multinational companies’ transfer pricing policy in place. In fact, it may lead to a mismatch in the assessment of transfer prices and the allocation of profits among entities within the BEFIT group and those located outside the EU. This is because, transfer pricing rules are based on the actual functions, risks and assets of the companies involved in intra-group transactions rather than a simple or standard formula which is to be fully developed.