This week in tax: UK set on tax data grab
This week the UK tax authority HM Revenue and Customs (HMRC) moved to collect yet more data from taxpayers in preparation for the post-pandemic future.
HMRC is making a concerted effort to expand its data collection. As well as introducing powers to obtain data from the financial sector, the tax authority is implementing obligations for marketplaces to report sellers’ data, and expanding its Making Tax Digital (MTD) project.
HMRC has introduced Financial Institution Notices (FINs) which allow the authority to request information from financial institutions such as banks about their customers. FIN powers apply to all notices issued after June 10 2021, when the Finance Bill 2021 passed into law.
Previously, such a request could only be issued with the permission of the taxpayer or the First-tier Tribunal (FTT), but HMRC will no longer need consent from taxpayers to collect such data.
In addition, HMRC will soon have access to unprecedented amounts of sales data. The UK government plans to implement OECD standards on e-commerce tax reporting to an estimated two to five million businesses.
Online marketplaces, including Amazon and eBay, will have to report the income of sellers to HMRC from January 2023. The household names of the gig economy will be drawn into the reporting net. However, the data grab will not stop there.
HMRC also intends to extend its MTD project from business taxes to income taxes from April 2023. Landlords and self-employed people with property or business income of more than £10,000 a year will be required to keep digital records for every quarter.
The MTD project obliges businesses to keep digital records as part of collecting VAT. Ultimately, the UK government wants to digitalise the entire tax system. But this is a difficult plan to execute when it comes to direct taxation and transfer pricing.
The UK government has increased HMRC’s powers as the state needs more tax revenue to help pay for the vast amounts of emergency spending during the pandemic.
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In other news, the European Court of Auditors (ECA) has issued a warning to the European Commission over its evidence standard in state aid investigations. Meanwhile, the Middle East may be about to see more localisation as a result of the rise of e-invoicing.
ECA calls for higher evidence standards in state aid investigations
The ECA warned the European Commission against depending on complaints to pick-up state aid breaches if the shortcomings in the Directive on Administrative Cooperation (DAC) framework are not fixed.
The Commission is re-evaluating the level of evidence needed to refer state aid cases to the European Court of Justice (ECJ) after facing criticism from the ECA in 2021 for losing certain cases. The ECA found it takes too long for the Commission to gather evidence and adopt a decision on pursuing state aid cases involving large technology companies such as Apple in Ireland and Amazon in Luxembourg.
“We really need to find the right cases where we have all the sufficient information to move forward with an infringement procedure on certain issues,” said Henrik Paulander, head of administrative cooperation in taxation at the Commission. “We need a high level of proof to convince the Court of Justice [about our positions].”
The ECA released a 2021 report about stricter enforcement of state aid policies, where it recommends that the Commission increase resources for regulatory authorities. This would help authorities improve on niche market knowledge to speed up state aid investigations, particularly in technical areas such as the finance and technology sectors.
The ECJ believes that the Commission took too long to pursue certain state aid cases. This held back the Commission in its court battles with Apple and Amazon.
E-invoicing requirements in the Middle East could force localisation
Hardware-based e-invoicing requisites in Egypt and the Kingdom of Saudi Arabia (KSA) could indicate increasing local presence requirements for multinational enterprises (MNEs).
Tax professionals criticised e-invoicing legislation in Egypt and the KSA that requires MNEs to have some form of domestic presence, introducing complications and increasing the compliance burden for MNEs. With countries across the Middle East and Africa (MEA) set to introduce e-invoicing, these requirements could be replicated across the region.
“Egypt has set an unfortunate precedent by requiring hardware-based digital signatures based on local standards and certification,” said Christiaan van der Valk, VP of strategy and regulatory at Sovos. “The Egyptian authorities are thereby insisting on something that a very small minority of countries in the world require for mandatory e-invoicing.”
Meanwhile, the KSA requires digital invoices to be stored locally, creating additional obligations for MNEs. “The country is departing from recognised best practices by requiring digital invoices to be stored on local soil,” said van der Valk.
As neighbouring jurisdictions prepare to introduce e-invoicing, taxpayers are concerned that the requirements in Egypt and the KSA could create a trend for similar legislation. Tunisia, Uganda, and Kenya have all taken steps towards continuous transaction controls (CTCs) or e-invoicing, and tax directors expect the Gulf Cooperation Council (GCC) countries to follow the KSA.
There are many positives to Egypt’s e-invoicing roll-out, including the country’s support for taxpayers. “The government appointed a good, trained team from the government body for digitalisation, called e-finance,” said Abdelrahman Ali, regional tax manager at Hitachi ABB Power Grids. Yet hardware requirements are causing problems for MNEs.
Next week in ITR
ITR will be launching a series of articles covering the most important tax trends in the Asia-Pacific region. This includes everything from changes in Indian tax policy to the impact of COVID-19 on supply chains across Asia.
BEPS 2.0 will feature strongly since Asia-Pacific nations are also grappling with how to tax the digital economy. The OECD still hopes to agree standards for most countries by October, but the clock is ticking.
In the meantime, there are the first signs of an audit wave in some countries. Multinational companies are rushing to prepare their transfer pricing files in Qatar due to a rise in audits. ITR will provide in-depth analysis of this trend.
Readers can expect these stories and plenty more next week.
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