Allocation of the BEFIT tax base example

Once the different preliminary tax results are calculated, they are aggregated into a single EU-wide BEFIT tax base. Cross-border loss relief would be allowed (i.e. with negative income decreasing the aggregated BEFIT tax base), and in those cases where the aggregated tax base is negative, it would be carried forward and set off against the next positive BEFIT tax base in a future fiscal year (Article 42).
When it comes to the allocation of the tax base between the different entities (and thus the future tax collection by the different Member States), the European Commission had initially expressed its intention to introduce a mechanism based on formulary apportionment, building on the formula used in Pillar One. However, the final proposal puts forward a transitional allocation rule, which would be terminated in 2035 at the latest (Article 45). This transition phase ‘would pave the way towards a permanent mechanism’ at a later stage, which ‘could be based on a formulary apportionment’, the Commission states. This decision was made to ensure that any future decision on a permanent mechanism would benefit from greater information and data regarding the (revenue) impact and workings of Pillar Two.
This transition allocation rule would work as follows: once the BEFIT tax base of the business group is established, it would be divided between the group’s members in line with a baseline allocation percentage whereby the profits are allocated in line with the average of the taxable results of group members in the last three fiscal years.
The allocated amount per Member State can then be further adjusted in order to account for certain items of income in which were deliberately left out of the preliminary tax calculation in order to avoid that they are shared among all Member States (Article 48). Examples include e.g. gifts and donations or tax incentives for research and development. Finally, each Member State taxes its allocated shares at their national corporate tax rate.