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This week in tax: UN votes on Article 12B and banks respond to tax allegations

Banks' CbCR data was used by an EU NGO to assess tax compliance

In the week that the United Nations voted on whether to include a new provision, Article 12B, into the UN Model Tax Convention, EU research showed banks are still using legal loopholes to avoid tax.

During the 21st session of the Committee of Experts on International Cooperation in Tax Matters, country representatives came together to discuss the UN Model Tax Convention, UN Transfer Pricing Manual, the handbook on taxing the extractives industry, as well as developing new handbooks on tax dispute avoidance and resolution and on environmental taxation.

This week, 12 of the 22 countries participating in the discussions backed the inclusion of the UN Model. Article 12B allows a contracting state to tax income from certain digital services paid to a resident of the other contracting state on a gross basis at the rate negotiated bilaterally, but recommends having a “modest” rate of 3% or 4% to prevent excessive or double taxation.

However, as 10 countries opposed the change, no final decision was made and the committee will reconvene next year to allow certain nations to explain the flaws they see with the proposed Article 12B.

On the UN TP Manual, the committee discussed, among other issues, the guidance on the relationship between transfer pricing and intra-group financial transactions, and on centralised sales functions.

Meanwhile, on OECD developments, conversations have turned to cryptocurrency. Tax administrations are planning to use the OECD’s recently released guidance to help standardise the tax treatment of crypto-assets in the digital economy that could include a financial transactions tax and more disclosures under the common reporting standard.

The changes planned by many tax authorities in line with the OECD’s guidance would have a significant impact on the financial services (FS) sector.

In a further blow, a number of banks were under the spotlight this week for allegedly shifting profit to avoid tax. The data was extracted from publicly available country-by-country reports.

Research by anti-corruption watchdog Transparency International EU (TI EU), carried out using country-by-country reporting (CbCR) data, suggested widespread use of profit shifting and tax havens among 39 of the largest EU and UK banks. Banks such as HSBC, Deutsche Bank, Banco Santander and Crédit Agricole were part of the report. However, the report’s annex included responses from many of these banks justifying their practices.

In further news for the FS sector, banks are having to consider different approaches to past inter-company (IC) loans to secure repayments, while the pricing of new loans remains stable for the time being. This is because of the impact COVID-19 is having on inter-company loan calendars and cost management, especially where debtors are unable to repay loans on time.

Other global developments

In the EU, policymakers are working on proposals to advance the European Commission’s Green Deal with the aim of pushing forward the plan in the summer 2021.

In an article for ITR, Gerassimos Thomas, director-general of European Commission’s taxation and customs union (DG TAXUD) explained the EU’s vision for a more environmentally friendly future and the two flagship priorities in his tax agenda towards a greener EU.

Meanwhile, tax directors are turning their attention to the UK corporate criminal offence (CCO) rules to ensure they are compliant.

HM Revenue and Customs (HMRC) has increased the number of cases it is reviewing under the measures that were introduced in 2017, which pose a serious financial and reputational risk for multinational enterprises (MNEs) that either operate in the UK, have any associated companies carrying out part of their business in the UK, or are at risk of evading any UK tax, directly or indirectly, anywhere around the world.

Also in the UK, HMRC this week released guidance on how accounting for VAT on goods moving between Great Britain and Northern Ireland will work from January 1 2021.

The concerns of tax directors are also increasing in India, where MNEs say India’s equalisation levy continues to cause uncertainty. Taxpayers operating in India say that the broad scope of the equalisation levy continues to create uncertainty, unfairly impacting certain sectors and complicating compliance.

Moreover, an article written by Mohan Nusetti, vice president and head of indirect tax at Lupin, for ITR adds to taxpayer burdens. Nusetti explains that Businesses need to adapt quickly in response to the transformational reforms introduced by Indian Customs because of COVID-19, which is part of a wider digital transformation.

As tax functions around the world turn to technology, some tax directors told ITR how they have reduced VAT compliance by going digital.

Tax directors say they have reduced the time invested in VAT compliance by using internal macros, external software and robotic process automation (RPA). But convincing senior executives to invest in tax technology is the first hurdle, with some offering tips to overcome this.

Next week in ITR

Next week in ITR, we will have full coverage of the US election results, explaining what the corporate tax implications will be.

Ferdinand Kandlhofer, group VAT manager at Siemens AG in Munich, will also explain how foreign companies supplying goods and services to customers in Germany from 2021 will be affected by the change to the ‘work supplies’ definition in the VAT rules in an article for ITR.

In addition, Evgenia Kokolia, policy officer at the European Commission, talks to ITR in an article about how the EU’s free alternative dispute settlement mechanism, SOLVIT, can be an effective tool for businesses trying to deal with VAT double taxation disputes.

Further, we will be reporting on the feedback on the Platform for Collaboration on Tax’s toolkit on tax treaty negotiations, which is being discussed next week, and providing details on why the EU may not abandon its proposed digital services tax even if an OECD agreement is reached.

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Advances in compliance tools in international markets and the digitalisation of global tax administrations are increasing in-house demand for technologists.
The US fast-food company has agreed to pay €1.25 billion to settle the French investigation into its transfer pricing arrangements over allegations of tax evasion.
HM Revenue and Customs said the UK pillar two legislation will be delayed until at least December 2023, while ITR reported on a secret Netflix settlement and an IMF study on VAT cuts.
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