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This week in tax: Companies are re-examining their tax strategies

Businesses are re-examining their tax strategies

Despite seeming like a quiet week in the tax world, there have been numerous developments that could impact tax planning strategies and the application of some tax laws.

Tax directors told ITR that they are scrutinising their cash-flow models, while some large businesses are outsourcing more of their tax functions to the Big Four accounting firms to help with incoming tax and legal changes in the US, UK, and EU.

These actions are similar to EY’s findings in a recent global survey that found most organisations are re-examining their tax operating model to add business value and pursuing some degree of operational transformation. The report found that technology, media, entertainment and telecommunications (TMT) companies must deal with compliance, technology and talent challenges to compete effectively.

TMT companies operating or planning to invest in Latin American countries could benefit from taking the time to understand the various tax rules, pitfalls and incentives across the region. Juan Frers, director of the Worldwide TaxNet, will be explaining how foreign businesses can use these tax benefits to prosper in the region in a free webinar on February 8.

However, transformations need to take place more widely.

UK revenue authority, HM Revenue and Customs (HMRC), has been criticised for spending too much money on “patching up legacy systems rather than modernising them”, meaning it struggles to “provide the reliable and timely financial estimates upon which good financial and operational planning depends”, according to a UK Public Accounts Committee (PAC) report published on January 20.

Implementing the COVID-19 schemes to help businesses and individuals cost HMRC an additional £53.2 million ($72.6 million), but failed to offer support to certain groups of individuals during the pandemic. Self-employed taxes was an area where data and technology infrastructures had not kept pace with developments since they were put in place in the mid-1990s.

“HMRC needs to redress the balance in its spending and use of tech, and get ahead on the basic financial and economic metrics that we need to adapt and respond to this pandemic in real time,” said Meg Hillier, chair of the PAC. “There is also a huge question about how our customs and revenue technology at the borders is coping, and will cope in the months and years to come. There isn’t really any breathing space – HMRC’s out of date systems need to catch up fast.”

Also in ITR this week:

EU tax haven blacklist criteria to change

In the EU, members of the European Parliament (MEPs) adopted a resolution on January 21 to change the EU list of tax havens to catch the worst offending countries. Described as “confusing and ineffective”, jurisdictions on the list cover less than 2% of worldwide tax revenue losses.

MEPs said the process of listing or delisting a country needs to be more transparent, stringent, consistent and impartial. EU member states should also be screened to see if they display any characteristics of a tax haven, and those falling foul should be regarded as tax havens too, because EU countries are responsible for 36% of tax havens, according to MEPs.

“While the list can be a good tool, member states forgot something when composing it: actual tax havens. The truth is, the list is not getting better, it's getting worse,” said Paul Tang, MEP and chair of the Subcommittee on Tax Matters.

The Cayman Islands is a particular jurisdiction of contention. It was removed from the blacklist in 2020, alongside Oman, despite having a 0% tax rate policy. The resolution adopted by MEPs would see all countries with a 0% corporate tax rate or with no taxes on companies’ profits be automatically placed on the blacklist.

The development could see a formal process for assessing jurisdictions become a legally binding instrument by the end of 2021. The responsibilities for assessing countries may also move from an informal body such as the Code of Conduct Group.

OECD guidance on COVID-19 and tax treaties updated

The OECD, meanwhile, has published updated guidance on tax treaties and the impact of the COVID-19 crisis to cover issues not addressed in the original April 2020 version.

As the impact of COVID-19 continues in 2021, the guidance reflects the general approach of Working Party 1 and illustrates how some jurisdictions have addressed the impact of COVID-19 on the tax situations of individuals and employers.

It also outlines the application of the existing rules and the OECD Commentary on concerns related to the creation of permanent establishments. Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, explains that the guidance concludes that “where, as a public health measure imposed or recommended by at least one of the governments involved, an individual teleworks from home (i.e. in a home office), that would not create a PE for the employer”.

The application of "tie-breaker" rules to dual residents is also covered, as well as the tax treaty treatment of income from employment.

“For example, it explains the tax treaty treatment of an employee who is a resident of Jurisdiction A, became stranded in Jurisdiction B during the COVID-19 pandemic and began to exercise his employment there,” Saint-Amans wrote in a blog post.

“Under provisions based on Article 15 of the OECD Model Tax Convention, Jurisdiction B would be permitted to tax the employment income if the employer was also resident in Jurisdiction B or bore the cost of the employee’s remuneration through a PE in that jurisdiction, “ he wrote. “Otherwise, Jurisdiction B would be entitled to tax the employment income only if the employee spends more than 183 days there.”

In other news:

  • Newly inaugurated US President Joe Biden has signed an Executive Order on climate change. This order may make a carbon tax or some form of environmental taxation much more likely;

  • The US Treasury issued the final regulations under Section 163(j) of the Internal Revenue Code to address carried interest, which were published in the Federal Register on January 19;

  • The South Africa Revenue Service is seeking feedback on its advance tax rulings process. It has set out 10 points it plans to review and is inviting responses until February 12 2021;

  • Irish Revenue has updated its Corporate Tax Roadmap to mark its progress against its 2018 commitments, as well as taking into account progress on the OECD digital tax proposal and stating what consultations and considerations are on its agenda;

  • The Platform for Collaboration on Tax released a toolkit to help developing countries effectively implement transfer pricing documentation requirements;

  • Despite earlier reports saying there will be no tax increases in the UK’s March budget, there appears to have been a U-turn. Conversations happening at the Treasury and news reports this week suggest a UK corporate tax rate rise could be possible if the country’s COVID-19 vaccine rollout remains on track.

Next week in ITR

Over the coming week, ITR will be looking at how President Biden’s incoming Treasury Secretary Janet Yellen will likely restart US negotiations with the OECD and other countries on finalising a multilateral tax approach to the digital economy in the coming weeks.

In addition, as Spain delays the payment and submission deadlines of its DST and financial transaction tax (FTT), we will be assessing the DST compliance requirements MNEs are most struggling with.

Ahead of India’s budget on February 1, we will also be reflecting on the Vodafone and Cairn cases, examining whether these cases might lead to the government opposing arbitration in digital tax.

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