This week in tax: DST drama, COVID-19 and tax awards
In the week that Japanese Prime Minister Shinzo Abe resigned, the UK treasury denied rumours about cancelling its digital services tax, Facebook paid France €106 million in taxes and numerous VAT and COVID-19 announcements were made.
This week kicked off with a swath of weekend reading as the US Treasury Department released a package of final and proposed regulations on August 21, which were published in the Federal Register.
The final regulations, effective as of August 27, limit the deductions US shareholders can receive for dividends paid by foreign corporations under Section 245A of the Internal Revenue Code (IRC) and confirm the look-through exception to subpart F income under Section 954(c)(6) for certain dividends received by controlled foreign corporations.
In addition, the proposed regulations intend to address concerns raised by taxpayers that they would be paying excess tax because of the application of limitations under Sections 245A and 951A of the IRC.
The proposals state that the changes will “coordinate the extraordinary disposition rule under section 245A of the [IRC] with the disqualified basis rule under Section 951A”. Interested parties have until October 26 2020 to submit comments on the proposals.
Meanwhile, in the UK, The Mail on Sunday published an exclusive report on August 23 claiming that the UK was going to abandon its digital services tax (DST) to help trade negotiations with the US.
However, within 24 hours, the UK Treasury denied the claims and said it stands by its temporary tax on technology firms until there is a global solution.
Although the UK, like many other countries, has no choice but to keep its DST to appease voters and plug its financial deficit of £337 billion caused by COVID-19, some tax experts suggest looking at the tax trends of the past decade to work out what will happen over the coming year.
Brian Peccarelli, chief operating officer at Thomson Reuters, suggested in an article for ITR that small increases in headline income tax rates, corporation tax and VAT are all possible options for the government because reducing tax reliefs will not be enough.
This week in ITR
Keynote speaker Matt Andrew, head of the tax treaty, TP and financial transactions division at the OECD, told event delegates that the Paris-based organisation is planning to have draft TP guidance on COVID-related matters ready internally by September or October. It may be released to the public by November, but this depends on whether members of the Forum of Tax Administration and Working Party 6 agree.
Andrew also signalled that establishing segments and different entity levels within a group of companies may answer some of the questions the OECD is grappling with on the scope of Amount A and Amount B in the pillar one blueprint. He explained the questions the organisation is now working through, but the comments suggest administering and compliance with the Amount A requirements will be far from simple.
Sticking with TP, taxpayers also said they are facing more questions from revenue authorities about their advance pricing agreements (APAs) included in their master files as scrutiny of country-by-country reports steps up a gear.
Taxpayers told event attendees that they are expected to explain their APAs and the tax outcomes, although these questions do not appear to be developing into a trend of more audits yet.
In the Arab Gulf region, taxpayers say CbCR has helped them to gain a stronger understanding of business operations through better data management.
However, across African countries, TP is still a significant concern because of the knowledge gap when tax officers conduct audits.
“In Central and West Africa, less so in East Africa where expertise is still growing, we’ve seen a lot of audits and countries starting to understand transactions and functions of local subsidiaries, but they still don’t have the right expertise,” said one Africa-based head of tax at a retail products conglomerate.
Companies around the world are worried about how the COVID-19 crisis is leading to a rise of digital audits that disadvantage taxpayers.
“Here in Brazil it is almost impossible to build a relationship with tax authorities as the audits are getting more and more digital. We usually receive an e-mail with requests and we have to upload the answers directly on the RFB website, with no contact with the tax auditor,” said Angela Filipovith Simoes, direct tax manager at IBM Brazil.
This is a widespread and growing problem, although some companies are still dealing with historic losses at a time when many are trying to release cash flow for their businesses.
This week, Facebook settled its tax dispute with the French tax authorities, reportedly paying €106 million ($126 million) in back taxes and penalties concerning the years between 2009 and 2018 for alleged profit shifting to lower its effective tax rate in France.
For other big companies, the exit tax proposals in the Netherlands are causing worries for companies such as Unilever and Royal Dutch Shell. Some suggest the issue will go to the EU courts because it imposes restrictions on the free movement of capital in the EU.
In other key developments:
The UAE released guidance on the place-of-supply rules and the VAT collection of e-commerce sales and electronic services;
Thailand agreed to keeps its VAT rate at 7% for another year, while Poland plans to delay a cut to its VAT rate and amend some of its indirect tax rules; and
Singapore published an e-tax guide on the tax framework for variable capital companies.
Next week in ITR
Next week in ITR, we will bring you detailed coverage of what happened at the Asia Tax Forum through a range of articles, as well as the following:
Tax directors complain about the ‘mountain of work’ to support pillar one’s Amount A;
MNEs must review Singapore’s reverse charge position; and
Tax authority scrutiny of TP arrangements is driving OTP innovation.