This week in tax: OpenLux and UK sales tax row

An investigation, known as OpenLux, was published on February 8 that found more than half of the companies registered in Luxembourg are not declaring their beneficial owners on the public register, while others are giving conflicting information.

The research showed the failures of public beneficial ownership registers. Tax justice campaigners were quick to highlight this and the other flaws of such tax transparency initiatives.

“What makes OpenLux so striking is that it‘s not a leak from a shady service provider, but a deep dive into public government data that had been made unwieldy to connect dots with,” said Markus Meinzer, director of financial secrecy and governance at the Tax Justice Network (TJN).

However, the Luxembourg government did not take kindly to the accusations, saying it “refutes” the various allegations and the “unfounded assertions”.

“There is no specific tax regime in Luxembourg for multinational companies, nor digital companies. These companies must comply with the same tax rules and the same legislation as any other company,” the government said in a statement on January 9.

It said the public register of beneficial owners and the data entered therein are continuously evaluated and improved if necessary. “At the end of 2020, the completion rate of the register was around 90%,” the government said.

Nevertheless, the revelations have reignited debates over tax transparency across the EU. With Portugal in charge of the EU Council presidency, public country-by-country reporting (CbCR) is on the agenda, as well as a revised criteria for the EU tax blacklist.

Public CbCR will be debated on February 25 at the Council of Ministers meeting for Internal Market and Industry, according to news reports, and a vote may be successful as a growing number of member states are now rumoured to support the initiative.

In addition, the mandate of the Code of Conduct Group on Business Taxation is being evaluated and will be revised by the beginning of 2022. This could happen much sooner after Lyudmila Petkova, director of the tax policy directorate at the Bulgarian Ministry of Finance, was reappointed as the chair of the group for another two years.

In the meantime, the group will be reassessing countries on the EU tax blacklist, as well as reviewing progress on CbCR and beneficial ownership registers.

In the lead up to the UK’s annual budget statement on March 3, a row has broken out over whether the government should introduce a tax on online retailers or a one-off excess profits tax on digital companies, like Amazon, whose profits have soared during the pandemic.

The CEO of UK supermarket Tesco wrote a letter, with 17 other brick and mortar retailers, to the Treasury, calling for a level playing field between traditional and digital businesses as the government reviews business rates.

These traditional businesses say they are being penalised for having a physical presence on UK high streets, which requires them to pay certain business taxes that online retailers do not. They have called for a “sales tax” on online businesses.

Online retailers have hit back at the suggestion. The boss of online supermarket and retailer Ocado described the proposal as inappropriate because the UK already has a VAT regime that taxes the sale of goods.

Ocado CEO Tim Steiner also said an excess profits tax on the companies that did well during the pandemic would be an unfair charge because businesses will be paying additional corporate and other taxes on extra revenues.

The UK introduced a digital services tax (DST) of 2%, effective from April 1 2020, applicable to any revenue earned from UK users of social media platforms, search engines and online marketplaces. A sales tax would be on top of the DST.

Mark Hart, partner at advisory firm Blick Rothenberg, agreed with Steiner, saying a sales or excess profits tax will not offer a benefit to the UK’s economy. He believes the corporate tax rates should be increased instead.

“An online sales tax should be used as a short-term measure. What is needed is a long-term review of local government funding and the rates system to address the structural changes that are affecting the retail sector,” said Hart.

“A fairer system would be increasing the rate of corporation tax to cover the loss in revenue from rates and then look at the mechanism of allocating this to local authorities coupled with a wholesale review of local government funding,” Hart added.

According to Chris Denning, head of corporate and international tax at MHA MacIntyre Hudson, a thorough analysis of the societal shift against bricks and mortar retail is needed.

“The key question about an online sales tax is whether we are witnessing a permanent shift away from the high street model,” Denning said.

However, Richard Asquith, Avalara’s VP of global indirect tax, warned against a sales tax, describing it as a “panicked and confused measure to reassure the public the government is acting on the COVID deficit and ensuring companies that have benefitted from the pandemic pay their fair share”.

Ultimately, next month’s budget will show what the UK government has decided to do.

In the Middle East, governments are busy shoring up their revenues by introducing tax measures. In Oman, the VAT regime will enter into force in April 2021, while Qatar is enhancing its transfer pricing (TP) reporting requirements.

Tax professionals in Oman, however, are becoming impatient as the publication of VAT executive regulations and guidance continues to be delayed. There are concerns that despite the UAE, Bahrain and Saudi Arabia all having a VAT regime in place, Oman will not learn from their mistakes.

If so, Oman might not deliver on an efficient VAT system. As such, taxpayers are having to guess some aspects of compliance until the rules and guidance are published.

Meanwhile, Coca-Cola released its fourth quarter and full year 2020 results on February 10, which showed its underlying effective tax rate (non-GAAP) is estimated to be 19.5% in 2021. Although, this does not take into account the company’s ongoing tax dispute with the US Internal Revenue Service (IRS) over its TP arrangements.

One possible outcome is that the soft drinks corporation will face a tax bill of more than $12 billion if the case does not go its way. This would set a troubling precedent for taxpayers with similar arrangements.

In other news:

1. India’s Minister of State for Finance Anurag Singh Thakur confirmed in Parliament that an application has been filed in the High Court of Singapore to appeal the Vodafone case and the government is considering the same actions in Cairn, according to an article in the Economic Times;

2. Japan and Switzerland have agreed in principle on a protocol amending their 1971 tax treaty; and

3. Switzerland is planning significant changes to its corporate tax regime to make it more competitive. ITR’s Switzerland Focus provides more details.

US companies have filed their 2020 annual statements to the Securities and Exchange Commission (SEC). ITR will be looking at the financial reports of Amazon, Facebook, and Netflix, which all show higher global tax burdens. We will dive into why this is empowering tax justice campaigners to lobby lawmakers to levy excess profits taxes on these large digital companies.

Following on from ITR’s coverage this week of why tax insurance policies are becoming increasingly popular for TP risks, the second article in this series will examine how tax insurance is being used to de-risk post-COVID cross-border transactions.

There will also be articles analysing the impact of Kenya’s digital services tax and a podcast with a top tax director, as well as much more.

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