This week in tax: EU pushes ahead with unilateral digital tax

March 19 2021

The EU says it needs its own digital tax to manage the economic implications of COVID-19

The EU is pushing ahead with its digital levy despite the US participating in OECD negotiations, while the UK has launched a consultation to break up the “dominance” of the Big Four accounting firms.

European Commission Executive Vice-President Valdis Dombrovskis said the EU is “continuing preparations” to propose an EU digital levy to “serve as an EU own resource by 2023”.

In a press conference after an informal meeting of the Economic and Financial Affairs Council on March 16, Dombrovskis said the economic crisis created by the coronavirus pandemic makes it “even more important to agree on the taxation of digital businesses and other issues such a minimum tax rate”.

Although the minister said a global agreement at the OECD level is still necessary and the change of position by the US administration is welcome, the EU does need to make its own efforts. However, he stressed that any EU rules would complement the OECD process and be compatible with World Trade Organisation rules.

The EU Commission’s statement will be unwelcome news for former Australian finance minister Mathias Cormann, who plans to begin his five-year term as OECD secretary-general by focusing on the coronavirus economic recovery, climate change and digital tax.

The OECD intends to reach an international agreement on digital taxation by July 9 but the conflicting demands of developing and developed economies could delay a consensus. Alternative tax proposals, such as the UN’s treaty-based solution to taxing digital services, for which a final version is due to be agreed in April could also create issues for the OECD.

Nevertheless, an OECD official believes the deadline is achievable. Speaking at a recent ITR event, the official said the US global intangible low-taxed income (GILTI) rules and OECD global minimum tax regime under pillar two will be better coordinated now that the US is involved in talks, creating a simpler two-pillar multilateral tax solution.

UK’s audit reform proposals to break Big Four dominance

In the UK, two years after the Competition and Markets Authority (CMA) investigated the audit sector following the Carillion scandal, the government has launched a consultation to reform the industry.

The proposals would reduce the dominance of the Big Four firms by introducing a market cap and shared audits. However, critics say the measures do not go far enough and lack a clear roadmap.

Separately, the unexpected 30% stamp duty rate increase on stock transfers announced in Hong Kong SAR’s budget on February 24 offers an opportunity for change, according to tax professionals.

The proposal led to the shares on the Hong Kong Stock Exchange (HKEX) tumbling by 8.8%, but it could precipitate a dialogue between taxpayers and the government to deal with intermediary exemptions and outdated administrative requirements.

At the same time, the Indian Supreme Court’s ruling on the taxation of software licensing fees is still being debated. Tax professionals expect multinational enterprises (MNEs) to challenge any attempt by the Indian government to target software licensing fees under the planned expansion of the equalisation levy, after the government lost the landmark Supreme Court case.

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In other news, Ireland’s Department of Finance has opened a public consultation seeking feedback on how it plans to apply the OECD approach to the attribution of profits to branches of non-resident companies. The consultation closes on April 16.

In South Africa, the South African Revenue Service (SARS) published on March 16 a binding private ruling to clarify the tax consequences when transferring a reinsurance business from a resident company to a local branch of a foreign company.

Meanwhile, the Australian government submitted on March 17 a bill to Parliament proposing to reform the country’s offshore banking unit regime. The proposals intend to prevent Australia being listed on the EU’s tax blacklist and address concerns raised by the OECD about the regime’s ring-fenced nature and 10% concessional tax rate.

Finally, according to an EY tax alert, Argentina plans to increase its corporate income tax rates from tax years beginning January 1 2021. A bill is due to be submitted to Congress soon.

Next week in ITR

Next week, ITR will be assessing how acquisition structures are changing after the Court of Justice of the EU’s 2019 judgments in the Danish beneficial ownership tax cases. The rulings have revised the substance requirements of holding structures involved in M&A activity and led to an increased use of special purpose acquisition companies (SPACs) during the pandemic to manage tax uncertainties.

Foreign corporations, meanwhile, are struggling to prepare for Thailand’s VAT on e-businesses and digital services, which will be introduced on September 1. Taxpayers tell ITR how they are dealing with a lack of clarity from revenue authorities on in-scope services. This includes transitional issues, verification of customer status and efficient tax payment options. Tax professionals advise proactively engaging with the revenue authority to gain reassurance and influence the guidelines.

On US matters, taxpayers say they are seeing limited benefits from the base erosion and anti-abuse tax (BEAT) and GILTI regulations. Although, the GILTI high-tax exception offers an annual election to taxpayers, allowing companies to plan more effectively and factor in the unpredictability of international tax.

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