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This week in tax: US elections worry corporate taxpayers

Large businesses should prepare themselves for a higher tax burden following the November 3 elections

In the week that the German Football Association was raided for suspected serious tax evasion, Australia announced corporate tax residency rules changes and concerns over the tax implications of the US elections increased.

Football clubs and their players were once again in the spotlight, but this time in Germany. ESPN reported that German prosecutors and tax authorities searched offices of the German Football Association (DFB) and the private homes of current and former officials on suspicion of serious tax evasion linked to falsely declaring advertising income as asset management income.

Meanwhile, in the US, large businesses should prepare themselves for a higher tax burden following the November 3 elections.

The biggest election threat for businesses in this year’s US election is presidential candidate Joe Biden’s proposal to raise the US corporate income tax rate from 21% to 28%. In addition, the global intangible low-taxed income (GILTI) rate is likely to increase no matter who wins next month.

“I am usually optimistic, but in this case the future does look gloomy for large businesses,” said one managing director of tax at a package delivery service company about higher tax burdens in the US.

US tax directors are also cautioning their peers to take care when using the tax incentives included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which include relaxing net operating loss (NOL) rules and changing the terms of section 163(j) of the Internal Revenue Code.

Sara Beugelmans, managing director at Brookfield Asset Management, said that when considering their options, MNEs need to think about “where you really get the most bang for your buck”.

Meanwhile, the New Zealand elections take place on October 17 and many are bracing themselves for another digital services tax (DST) to be announced soon after.

Australia’s budget changes corporate residency rules

In neighbouring Australia, Treasurer John Frydenberg promised to rebuild the economy without raising taxes in his budget speech to Parliament on October 6. However, that did not mean there were no tax measures forthcoming.

In Frydenberg’s speech, he announced that 99% of businesses will be able to write off the full value of any eligible asset they purchase for their business under the instant asset write off scheme that was expanded during the COVID-19 crisis. Effective as of October 7, all businesses will a turnover of up to A$5 billion ($3.6 billion) can use the incentive until June 2022.

In addition, eligible companies with a turnover of less than A$5 billion can now offset losses incurred up to June 2020 against profits made in or after the 2018‑19 financial year.

However, the more significant news for multinationals was hidden in one of the budget documents, which stated that the government will make “technical amendments” to clarify the corporate residency test.

The law will be amended so that a company that is incorporated offshore will be treated as an Australian tax resident if it has a “significant economic connection” to Australia. This connection will be met if a company’s core commercial activities are undertaken in Australia and its central management and control is also in that country.

The change follows the Board of Taxation’s review of the definition and the recommendations included in its 2020 report. However, the move means the treatment of foreign incorporated companies will reflect the position the Australian Taxation Office held before the High Court decision in the 2016 case of Bywater Investments Ltd v Federal Commissioner of Taxation.

Tax commentators have warned that this could be the start of a mini controlled foreign corporation rule if other countries follow Australia’s approach.

India offers soft landing period for e-invoicing

E-invoicing became mandatory as of October 1 for taxpayers with an annual turnover exceeding INR 5 billion ($67 million) in India.

However, the government has relaxed the rules for the first month to allow taxpayers to adjust without incurring penalties.

MNEs have welcomed the last-minute relaxation as they struggled to keep pace with a number of changes to the requirements, as well as the impact of COVID-19.

“This is a welcome move,” said Vikas Garg, head of indirect taxes at Siemens.

Also effective on October 1 is a rule that requires e-commerce operators to apply a 1% withholding tax rate on the gross amount of sales of goods or provisions of service facilitated through a digital or electronic platform.

Meanwhile, Vodafone’s victory in the landmark India case will not stop controversial, retrospective tax collections on transfers in India, which continue to limit large business investment in the country.

While the government could amend the law that grants extensive powers to the Indian tax administration to seek retrospective payments on offshore transfers, tax experts across businesses and advisories are expecting the government to appeal the decision in another international arbitration court in Singapore. This will mean the tax authority is likely to continue its crusade on retrospective payments.

Anticipation grows for OECD digital tax blueprints

Looking ahead to October 12, the OECD will publish its pillar one and pillar two blueprints. Many are anticipating the documents to include a significant amount of detail and some clarity on areas that had yet to be finalised.

Although the documents have been leaked, tax directors continue to warn of the complexities the measures will bring.

One head of transfer pricing at a biotechnology company described the additional tax demands that will be put on his department as a result of pillar two as a “monster”.

“Both pillars are big concerns for us. Pillar two could be an administrative monster because of the complexity of the new framework and level of data and financial reconciliations required - IFRS versus local GAAP versus tax accounting,” said the head of TP, who was speaking at ITR’s Global Transfer Pricing Forum – Europe.

He discussed how his department may have to change to adapt to the new world of BEPS 2.0.

Transfer pricing directors should also take note of TP changes planned in Denmark that could lead to more tax authority scrutiny through discretionary assessments.

Other news

In other news happening this week, the EU updated its tax blacklist, removing the Cayman Islands and Oman but adding Anguilla and Barbados.

The removal of the Cayman Islands has surprised some tax analysts and is a welcome change for some businesses with entities in the British overseas territory.

Also in the EU, the Court of Justice of the European Union (CJEU) has ruled that EU member states can prevent taxpayers subject to a tax investigation from launching a direct action against an information exchange request to prevent their financial data being shared in a case concerning data exchange between Luxembourg and Spain.

Meanwhile, companies should prepare themselves for the financial transactions tax being implemented in Spain on January 1 after two tax bills were passed by the upper house of Parliament on October 7. Parliament also passed laws to introduce a DST from next year.

While Spain’s DST appears to be smooth sailing for now, Kenya’s DST has run into trouble with the US. Documents on free trade negotiations between Kenya and the US show that the North American country is demanding that the East African nation does not implement a DST. This could stop Kenya from introducing its unilateral tax from 2021 as planned.

However, the African Tax Administration Forum (ATAF) has issued a policy brief to help its 38 member countries across the continent introduce a DST. The organisation also doubts there will be international consensus on the OECD proposals before 2021.

Next week in ITR

Next week, ITR will be bringing you full coverage and reactions in relation to the release of the OECD pillar one and pillar two blueprints.

We will also be focusing on US regulations on the base erosion and anti-abuse tax (BEAT), foreign-derived intangible income rules and GILTI, as well as looking at how Brazilian taxpayers are struggling to benefit from favourable indirect tax judgments.

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