This week in tax: EU appeals Amazon decision
The European Commission is appealing the General Court decision in the Amazon state aid case. The Commission hopes to force Luxembourg to claim €250 million ($294 million) in tax from the US technology company.
Amazon can expect to go another round in court, but victory is far from certain. The Commission is continuing its fight to win this case against the company from a defensive position.
The Commission did not prove that Amazon had secured an “undue reduction” in its tax base, according to a May 12 ruling by the European General Court. As a result, the court found that there was “no selective advantage” in favour of Amazon’s Luxembourg-based subsidiary.
The court, which is a constituent court of the European Court of Justice (CJEU), said the Commission’s 2017 findings on the case were “incorrect in several respects”. This was a serious blow to the Commission’s efforts to curtail what it sees as abusive tax structures perpetrated by multinational enterprises (MNEs) such as Apple.
The stakes are much greater than the sum of €250 million since many multinational companies have had similar arrangements in Luxembourg. Tax disputes can set powerful precedents for tax strategy.
Colombian protests lead to corporate tax hike
The Colombian government has been forced to abandon its VAT reform in favour of a corporate tax hike. This is after weeks of mass demonstrations against plans to close $20 billion worth of loopholes in the VAT system.
The government is planning to raise the corporate tax rate from 31% to 35%, which makes it an international outlier. Most countries have corporate tax rates of below 30% and some below 25%. This will raise $4 billion, but the government will need to find more revenue somewhere to keep its credit rating.
Colombian President Iván Duque pursued VAT reform to secure Colombia’s investment grade amid the dire impact of the COVID-19 pandemic. The country still faces a ballooning deficit and a contracting economy.
With the government facing an economic crisis and damaged reputation, a lack of tax reform could see Colombia sink to junk status among credit agencies such as Fitch Ratings and Moody’s.
Double taxation still needs to be addressed following G20 meeting
Tax authorities have many questions to settle in negotiations to tackle the risk of double taxation across jurisdictions when implementing the OECD’s two-pillar tax framework.
The July G20 meeting marked the endorsement of the OECD’s two-pillar solution, but with over 130 jurisdictions joining the agreement, settling some of the key details remains a challenge for global tax policymakers ahead of the next G20 meeting in October 2021.
Adopting the two-pillar tax framework will require a significant level of collaboration from tax authorities to mitigate the risk of a double taxation.
“It is one thing to agree a headline approach to change the international tax regime, but a very different thing to achieve consensus on methods of calculation, apportionment, exclusions, and the like,” said Matt Stringer, head of international tax at Grant Thornton.
To this date, members of the Inclusive Framework (IF) have agreed to adopt pillar one – which aims at reallocating profits of multinational enterprises (MNEs) with a global turnover over €20 billion ($23.6 billion) – and pillar two, set to impose a global minimum tax rate of at least 15% on multinationals within the €750 million threshold.
Tax policymakers are yet expected to deliver further details around the agreement, which could be critical for the final implementation of the tax framework.
UK audit review
The UK audit industry has undergone its annual review. Big Four firm KPMG and mid-tier firms BDO and Mazars are facing criticism from the Financial Reporting Council (FRC) for “unacceptable” audit standards.
The FRC found that 29% of 103 audits carried out by KPMG needed ‘improvement’ or ‘significant improvement’. This is slightly better than the 2020 review when 33% of the audits reviewed needed improvement.
The audit watchdog found that more than half of BDO’s sample of audits needed improvement, while three out of seven of Mazars’ audits reviewed needed ‘improvement’ or ‘significant improvement’.
By contrast, Deloitte and EY each got a positive audit score of 79% whereas PwC got a positive score of 80%. However, it was Grant Thornton that received the highest score – 86% – out of the top seven audit firms.
These results follow the FRC investigation into the collapse of Greensill Capital and the role of its audit firm Saffrey Champness. Critics will continue to call for audit reform, but, in the meantime, the market will be left to raise its own standards.
Tax advisors expect more joint audits as reporting troubles grow
The use of joint audits is increasing to mitigate cross-border issues from the expansion of tax transparency under Directive 2011/16/EU (DAC), especially as over-reporting with Directive 2018/822 (DAC6) continues to persist.
Taxpayers are still struggling to manage tax uncertainty risks, including digital audits, coming from an increase in global tax transparency, particularly after tax authorities started data sharing under DAC6 in 2020. Advisors are highlighting an increased use of joint audits to mitigate cross-border challenges and potential litigation issues in a more data-driven international tax environment.
Many taxpayers continue to take a blanket approach in reporting their cross-border arrangements and relevant transactions under DAC6 to avoid non-compliance penalties. As a result, some are also avoiding creating any more structures that could lead to a DAC6 reporting obligation because of the reputational risks associated with falling within scope of the regime regardless of the nature of the transactions, according to tax experts attending ITR’s Women in Tax (WiT) – Europe forum.
“In certain jurisdictions there is a perception that things may be tainted if they [taxpayers] must report, and therefore they try to mitigate any reporting obligation,” said Marie-Theres Rämer, partner at DLA Piper in Germany.
“However, there are fairly standard transactions that need to be reported too, and clients cannot really mitigate that over fears of getting branded as aggressive,” she said.
The DAC6 regime’s broad hallmarks put a number of standard structures under scrutiny, including those in the funds industry, where tax receipts for transactions of insurance companies and pension funds were not intended to be included but ended up within scope of the legislation anyway.
Next week in ITR
Readers can expect an update on the international tax crackdown on cryptocurrencies. This time the Indian government is going after foreign cryptocurrency exchanges and aims to extend 18% GST to the sector.
The OECD will be releasing its corporate tax statistics and ITR will be providing its analysis of the figures and what they say about corporate tax policies worldwide.
Likewise, ITR will be taking an in-depth look at the Singaporean government’s transfer pricing guidelines and what they mean for multinational companies.
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