Article: BEFIT and Formulary Apportionment: Should Intangibles Be Included in the Formula?

Abstract

In 2021 the European Commission proposed a new framework for taxing corporate income (“Business in Europe: Framework for Income Taxation”, or BEFIT). Consolidated profits of European Union (EU) based groups will be aggregated into a single tax base, and then allocated to Member States (MS) through a formulary approach. Critical issues in defining the formula comprise how assets (including intangibles) should be reflected. The purpose of this article is to discuss some core topics related to intangible recognition and its potential impact in the formulary approach considered in BEFIT. More precisely, the topics addressed are: (1) should intangibles be included in the asset component of the formula, alongside with sales and employment? (2) considering the several types of intangible assets, which ones would merit inclusion? Our view is that intangibles acquired to other companies belonging to the group (related party transactions) and intangibles developed internally by group members but that do not meet criteria for accounting recognition, should be out of the formula. Contrarily, intangibles developed internally that fulfil criteria for accounting recognition, and intangibles acquired to third (independent) parties should be included, with an exception for recognized goodwill. BEFIT, formula apportionment, EU corporate taxation, intangibles