The similarities and differences between BEFIT and Pillar 2 are many, and their implications on multinational corporate taxation could be profound
In recent years, two groundbreaking initiatives — Business in Europe: Framework for Income Taxation (BEFIT) and Pillar 2 of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which came out of the collaboration of the Group of 20 (G20) and its Organisation for Economic Co-operation and Development (OECD) — have shaped the international taxation domain.
These initiatives have and will set the stage for significant reform in the region and around the world. Although they originated from different governing bodies and address distinct aspects of taxation, they share a common goal: To ensure that corporations pay a fair share of taxes in a rapidly globalizing economy.
BEFIT and Pillar 2 — What are they?
On September 12, 2023, the European Commission adopted BEFIT with the goal to simplify the European Union’s tax framework by creating a unified set of rules for corporate taxation. It sought to replace what could be viewed as a patchwork of individual countries’ national tax systems. Before the enactment of BEFIT, up to 27 EU member countries had different national tax systems, which in some cases made it difficult and costly for organizations to navigate. BEFIT’s primary goals are to reduce business administrative burdens, eliminate tax obstacles for cross-border investment within the EU, and combat tax avoidance.
On December 21, 2021, the OECD/G20 released Model Global Anti-Base Erosion (GloBE) under Pillar 2. It introduces a global minimum tax rate of 15% for multinational enterprises, aiming to prevent tax base erosion and profit-shifting to low or no-tax jurisdictions. Two significant components of Pillar 2 are the Income Inclusion Rule and the Undertaxed Payments Rule, which together ensure that multinational enterprises pay a minimum level of tax on their income regardless of where it is earned.
Similarities and differences
The enactment of BEFIT and Pillar 2 has created confusion for corporate tax departments as to whether these two tax regimes cover the same or similar tax provisions. Both BEFIT and Pillar 2 would say their goal is to combat tax avoidance by tackling aggressive tax planning and having corporations pay their fair share. In addition, both regulations’ core principle is for corporate taxation to align with the jurisdiction in which the economic activities take place, moving away from the traditional method that emphasized the businesses’ physical presence only instead of where its customers are. Lastly, the primary target for both BEFIT and Pillar 2 are multinational companies.
Yet, it is worthwhile to note how BEFIT and Pillar 2 differ as well. BEFIT’s scope and jurisdiction are specific to the EU’s member countries, and its goal is to create a simplified and more harmonious tax system among member countries. Pillar 2’s scope is global, and more than 140 countries have agreed to enact it. Another difference between the two policies is that BEFIT seeks to consolidate the tax base with profit allocation based on a specific formula, effectively redistributing taxing rights among EU countries based on fundamental economic factors. Pillar 2 instead seeks to create a floor for tax rates that multinational companies should pay globally.
Also, it is worth noting that implementing BEFIT would necessitate significant changes in national tax laws within the EU, requiring a unified approach to profit calculation and reporting. Pillar 2’s implementation, while also requiring changes in national laws, primarily involves ensuring that multinational enterprises pay at least the minimum tax rate, potentially leading to different administrative and compliance requirements.
Implications for multinational corporations
Multinational corporations operating within the EU and globally must navigate the implications of both BEFIT and Pillar 2. They will face more complex compliance obligations with both regulations and must adjust their tax planning and strategies in the regions in which they operate, not just in which they are physically located.
Corporate tax departments’ role in business decisions will become even more critical as they provide information on the potential impacts on center investment and growth decisions for the company, including whether to expand or contract the regions in which the company does business based on the tax implications.
Further, both BEFIT and Pillar 2 have sweeping implications for the countries and regions that participate in them and for the local stakeholders, including businesses, tax professionals, and policymakers.
Right now, these regulations are static, but they will continue to evolve. It is important for all stakeholders — especially corporate tax departments and the outside tax professionals that may advise them — to be aware and involved in the ongoing conversations on how to address possible challenges related to these regulations while achieving simplicity, fairness, and effective taxation.
