The COVID-19 pandemic may be a catalyst for collaborative international tax reform, but this is not guaranteed. According to the OECD secretary-general, there is also a risk that the world could move towards greater protectionism and trade wars.
“We are at a crossroads: push forward with greater effort on tax cooperation, or face the risk of countries taking unilateral measures,” wrote Angel Gurría in an article for The Guardian. “This would not only result in increased tax uncertainty but could provoke a tax-driven trade war.”
Gurría said that ongoing international tax talks have been more than a decade in the making. “It took the huge upheaval of the 2008 global financial crisis to change the game,” he wrote. “In the absence of modern tax regulation, governments in desperate need of revenues realised how far their sovereignty had been eroded.”
Since then, the increasing digitalisation of the world economy has made reforms increasingly necessary. “The economy has changed dramatically over the past 40 years. Bricks and mortar businesses have given way to a digitalised economy driven by intangibles,” said Gurría.
The OECD’s work to secure reforms has finally paid off as a break-through moment saw the US announce support for a global minimum corporate tax rate of 21%. The Paris-based organisation has a tight schedule to deliver a final agreement by mid-July.
ITR has covered the digital tax debate since it began and will continue to follow the policy developments in close detail. At the same time, we are not losing sight of tax trends around the world. Here are some of our headlines from this week:
Top direct tax and transfer pricing disputes in Q1 2021
VAT and GST in a digital world
IRS views NFTs as tax evasion threat, but cryptocurrency experts disagree
Turning point in US tax policy
US President Joe Biden announced a $1.8 trillion plan to improve the country’s social safety net. This is in addition to other plans to increase infrastructure investment and stimulate economic growth during the COVID-19 pandemic.
The American Families plan, alongside the Made in America tax plan, may lead to the first US federal tax increases since 1993. The Biden administration has hopes of raising the corporate tax rate from 21% to 28%, as well as increasing the top income tax rate from 37% to 39%.
These plans are projected to raise $1.5 trillion. This could be a game-changer in US politics. Almost 80% of the US public supports the American Families plan, but the big question is whether the administration can secure enough support in Congress to enact the plan.
There are signs that President Biden can make this happen. The Biden administration lacks a strong majority in Congress, but it did manage to secure enough support to pass the $1.9 trillion stimulus package.
In other words, the US could be on the verge of enacting landmark reforms. Nothing like the American Families plan, or the Made in America plan, has been seen in US politics since the Great Society initiatives in the 1960s.
Biden and the environment
The US administration has also been changing the conversation around environmental taxes. Discussions have rumbled on for years, but the US throwing its weight behind climate-friendly reforms has revitalised the debate.
While Biden is reticent about carbon taxes due to concerns about social inequality, the US made a dramatic U-turn on the topic of carbon borders. The US climate envoy John Kerry said in March that the EU’s planned carbon border adjustment mechanism (CBAM) should be a “last resort”.
Yet by April, Biden had told 40 world leaders at a climate summit that the US is considering a carbon border of its own to protect domestic industry. There are questions about CBAM and trade protectionism, which ITR is looking into.
This week, industry bodies including the European Steel Association advocated for a CBAM to ensure that EU companies remain globally competitive. This follows endorsements for a carbon tax from the American Petroleum Institute and the shipping industry. It is clear that, as the political momentum builds, support for carbon taxes and border controls is also revving up among industry.
Qatar turns up the heat on taxpayers
Companies could face issues with Qatar’s incoming VAT regime, similar to those that the introduction of VAT has caused in other Gulf Cooperation Council (GCC) countries. Qatar’s VAT system has yet to be announced but, in the meantime, MNEs are dealing with increasing scrutiny from the Qatar revenue authority.
Qatar’s Dhareeba tax returns system has given the General Tax Authority (GTA) increased access to company data since its introduction in July 2020, and the trend is likely to continue as the GCC countries consider introducing e-invoicing.
“If I were in that position, I would have a very robust tech platform and run sophisticated analytics before I provided the tax authorities with my data,” said Jay Riche, partner at PwC Middle East which has advised some governments in the GCC.
Dhareeba, Qatar’s platform for online tax filing and returns, is modernising tax compliance and improving the GTA’s system in anticipation of a VAT regime. The system also gives the revenue authority greater access to taxpayer data because it is linked to the Ministry of Commerce and Industries (MOCI) and the National Authentication System (NAS), which deals with Qatar IDs and immigration.
These links intensify the pressure on MNEs to keep proof of consistent calculations across all the systems. “It’s all synchronised, so if a company has problem with MOCI, this could cause problems on the tax side too,” said Govind Jha, associate director of assurance at RSM Qatar.
One example from Saudi Arabia demonstrates the consequences of increasing links. The connection between the Saudi tax returns site ERAD and the financial information system Qawaem highlights discrepancies that caused problems for taxpayers.
“They linked the two systems together and found many mismatched cases where the financial data did not match what the taxpayer had reported,” said Hany Elnaggar, head of tax for the Middle East at Nissan.
MNEs should be prepared for this level of transparency to apply to Qatar’s long-awaited VAT regime.
Next week in ITR
ITR readers can expect more coverage of blockchain and tax. Governments are taking steps towards regulating blockchain transactions for tax transparency, but there are hurdles to overcome. Nevertheless, the regulations could spell trouble for taxpayers.
Following the launch of ITR’s environmental tax survey, the team will continue to investigate carbon tax policy. Carbon borders may mark the beginning of revolutionary environmental reform, but the risk of protectionism must be addressed.
These are just some of the stories ITR will be covering.
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