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This week in tax: US election uncertainty continues

Closing in

In the week that saw the US elections reach a nail-biting stalemate, the European Commission may be planning to go ahead with its digital tax plan regardless of whether the OECD reaches a final agreement.

The US presidential election was held on November 3, but there is still no final result three days later. The world is waiting for a definitive conclusion to the voting  and American businesses fear the outcome could mean the end of the Tax Cuts and Jobs Act (TCJA).

The Trump tax cuts were the Republicans’ landmark fiscal achievement of the last four years. The TCJA introduced radical provisions into the US tax code to restrict aggressive tax planning and incentivise reshoring of cash and other assets.

The Biden tax plan will mean a return to higher corporate tax rates, as well as a “beef up” minimum tax rate and fewer deductions. “Politicians don’t always keep their promises, except when they promise to raise your taxes,” said one tax director at a US manufacturing company.

“Those tax increases will be effective January 1 2021, regardless of when in 2021 they are enacted. The US Supreme Court has already ruled that that much retroactivity is not unconstitutional,” said the tax director.

At the time of writing, Democratic candidate Joe Biden is the front-runner for the White House, however, Congress will likely be split between Republicans and Democrats. This could make it difficult to implement the Biden tax plan in full, but not impossible. The last ballots are still being counted in key states.

Meanwhile President Donald Trump is taking the battle to the courts. This is far from a normal election and whatever result is reached will be controversial for years to come.

EU DST could go ahead regardless of OECD plans

As enthralling as the US election is, ITR never loses track of crucial developments all over the world and the race to find a solution to digital tax is still on.

The European Commission is revising its package of “own resources” for the European budget and will publish the latest developments by June 2021, including details on a digital levy to help pay for the economic fallout from the COVID-19 pandemic.

The tax will take the OECD’s outcomes into account, including the blueprints that have been released for a public consultation with a deadline to comment on December 14 2020 and a public meeting in January 2021.

Some advisors suggested that the EU's power position is not clear as member states are still divided on the OECD’s digital tax plans. Furthermore, plans for the EU digital levy remain unlikely under unanimous voting by member states.

“I see no revival of an EU-level DST given lack of unanimity, so the Commission will have to introduce other options,” said one policy advisor at the European Parliament.

“The reality is that the unanimity rule cannot be circumvented, not by using the market distortion rules. These can only be used for specific harmful tax practices,” he added.

However, there has been talk of reforming the voting system in the EU to allow such proposals to pass with a qualified majority. This would be a game-changer for digital tax. The Commission may have the political will to do so, even if there are obstacles for it to overcome.

Some taxpayers suggest differences between the ongoing development of the EU and OECD proposals could derail efforts to reach a final agreement for a global solution in mid-2021, and leave negotiations at a standstill.

Tax treaties at risk of ‘political meddling’

Developing countries may encounter hurdles to tax treaty negotiations including a lack of treaty policy and an imbalance in power with more developed nations, according to panellists at a webinar hosted by the Platform for Collaboration on Tax (PCT).

“The US has entered into treaties for political reasons and almost every one of those treaties has been used for abusive purposes,” said Patricia Brown, director of the graduate program in taxation and lecturer in law at the University of Miami.

Treaty negotiators will find negotiations difficult if the choice of which countries to approach, and the reasoning behind this decision, has been made by politicians without involving tax officials.

Brown suggested that there should be a separation between politicians and tax officials, referring to a directive in the US that delegates sole responsibility for tax treaty negotiations to the Treasury Department and the Office of Tax Policy.

This means that ambassadors are not allowed to discuss tax treaties with other country, which keeps tax treaty measures “insulated from political meddling”, Brown said.

Martin Hearson, international tax program lead for the International Centre for Tax and Development (ICTD), suggested that a clear policy helps a country to stand fast in negotiations by delineating its “red lines”, or non-negotiables, ahead of time. Without this, Hearson said it can be “difficult for developing countries to walk away”.

Hearson stressed that a strong policy also gives countries “the institutional and political backing they need to be able to negotiate with the full strength of the government”. He proposed that political involvement should be allowed but channelled in a constructive way.

This might be the most realistic approach to the problem given that tax policy is inextricably linked to politics.

Next week at ITR

Next week ITR readers can expect more coverage of the US election results as multinational companies have been preparing for different outcomes.

Although the final results have yet to be declared, many businesses are racing to close deals before the end of 2020 in case there is a change of government. A new administration could mean higher taxes for such deals.

We will be returning to the subject of corporate tax residency issues in the age of COVID-19. Since the OECD has proposed governments ‘suspend’ normal rules, tax directors fear this will generate far greater demands for tax revenue once the crisis has passed.

These are just some of the stories ITR will be covering next week.

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