This week in tax: Gas crisis undermines EU carbon tax plan
The energy crisis is increasing resistance to the European Green Deal, particularly with the plan to extend the Emissions Trading Scheme (ETS) and raise carbon taxes.
Natural gas import prices to the EU are up by 440% since 2020 and the rising gas prices are fuelling opposition to the EU carbon tax plan. Hostility from France and Spain is only going to intensify as citizens are hit with ever-higher bills.
The shortage of natural gas stems from maintenance work in the Russian gas industry, plus greater demand from Asia and Latin America, has left Europe facing steeper prices. The results may increase opposition to carbon taxes while forcing governments to consider emergency measures.
On the one hand, the French government fears the planned changes to the ETS could spark renewed protests. The memory of the gilets jaunes (yellow vests) movement is still fresh in the mind of President Emmanuel Macron, who is up for re-election in April 2022.
Meanwhile, the Spanish government is levying a windfall tax on energy providers, making ‘excessive’ profits from the surging price of gas. The plan is projected to raise €3 billion ($3.5 billion) for infrastructure investments, while taxes levied on household energy bills are reduced.
Outside the EU, the UK government is considering copying the Spanish windfall tax to try and offset the impact on living costs. The UK has seen some of the highest increases in gas bills in Europe, yet several energy providers have collapsed.
Much like the 2020 oil price shock, the results could have far-reaching political consequences. The European Green Deal aims to cut carbon emissions by 55% this decade, before cutting emissions to zero by 2050. The gas shortage puts these aims under tremendous strain.
ITR headlines this week include:
MNEs stand to gain greater tax certainty from joint audits
Multinational enterprises (MNEs) should embrace being audited by different revenue authorities at the same time, said tax professionals at an ITR conference. Panellists also discussed the reputational and financial benefits of tax transparency.
Transparency and collaboration with revenue authorities can yield reputational and financial benefits for MNEs, according to tax professionals at ITR’s Women in Tax forum – West Coast. This includes on issues such as joint tax audits, which often concern tax directors.
“I know that [joint audits] sound a little bit scary to a taxpayer… but they can also have advantages,” said a tax policy specialist.
“The taxpayer is actively participating in an audit and can provide the correct information… most importantly, the same information to all the tax administrations, so there is like an agreement on the facts,” they added.
As governments share an increasing volume of taxpayer information through mechanisms such as the automatic exchange of information (AEOI), there is a higher risk that discrepancies in tax reporting between jurisdictions will be identified and challenged.
Joint audits provide an opportunity to get multiple tax administrations to agree on a tax position, creating some certainty for the tax team. Other benefits of joint audits are that they can be less time-consuming than separate audits from each country, and that this open dialogue can improve relations between taxpayers and revenue authorities.
Brazil’s move to adopt OECD TP guidelines could boost FDI
The Brazilian government hopes it can boost investment by trying to simplify transfer pricing (TP) management and adopting OECD standards. However, these two aims may be at odds with each other.
Brazil might be able to secure greater foreign direct investment (FDI) by adopting OECD standards for transfer pricing, according to speakers at ITR’s Brazil Tax Forum. This would help align the country with the rest of the world.
“To align with the rest of the world, developing countries have adopted OECD guidelines for many years. This is the first thing that companies see as an advantage. Another advantage could be the reduction of double taxation because, to many, Brazil does not follow the arm’s-length principle (ALP),” said Gustavo Machado, head of tax at AstraZeneca.
“Our fixed margins are criticised, our prices have not necessarily aligned to benchmark studies and to what is practised between non-related entities,” he added.
While unilateral measures can reduce the risk of double taxation, Brazil joining the OECD and becoming aligned with OECD methods could be attractive to businesses and increase FDI.
Another advantage for Brazil, if adopting the OECD guidelines, would be the elimination of the freedom of choice given to taxpayers when choosing the best method, such as with smaller adjustments – which in some cases fail to respect the arm’s-length principle (ALP), according to Machado.
“In this case, the adoption of the OECD method may increase Brazil’s revenue collection. In fixed margins methods, it keeps a min level of profitability, especially in exports methods, so if you are at arm’s length prices, it may be that it will increase revenue and profitability,” said Machado.
While fixed margins can be considered incentives as corporations can pay less tax, particularly in the export methods, they are often not due to their lack of alignment with the ALP.
Next week in ITR
ITR will be looking at the future of the digital services tax (DST). Many countries have introduced DSTs in different forms in response to the rise of the online economy. The OECD aimed to stop this trend and reverse it by establishing a multilateral framework for digital tax.
As the OECD closes in on a possible final deal, governments can either withdraw the DSTs or keep them in place. The latter would create more complexity for multinational companies if the OECD secures an agreement. This looks increasingly likely.
Pillar two could also create more certainty in EU tax disputes such as the Cadbury Schweppes case. In the meantime, businesses continue to rely on advance pricing agreements (APAs) for transfer pricing certainty.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.