This week in tax: EU set to fast-track minimum tax plan
This week the European Commission has hinted that there may be an EU directive to implement a global minimum corporate tax rate before the end of 2021.
The EU has a track record of taking the OECD’s plans and making them work across the economic bloc. Just days after the OECD deal on digital tax, Benjamin Angel, director of taxation and tax coordination at the European Commission, suggested the EU could fast-track the OECD-brokered agreement.
Angel stressed that this would complement the transparency agenda. “The content of the directive will be extremely simple. The effective tax rate, that you have to calculate per jurisdiction – make it public,” said Angel.
European Commissioner for the Economy Paolo Gentiloni called the minimum tax plan “nothing less than a tax revolution”.
“The green and digital transition can only happen if it is based on fairness. So this reset of global corporate taxation is a fundamental part of the change we need to see: everyone must pay their fair share,” said Gentiloni in a public statement.
The OECD has managed to broker a consensus between 136 countries on a multilateral agreement. However, world powers such as the US and the EU will play the key roles when it comes to implementation.
Meanwhile, the European Commission has made it clear its position is to support a minimum corporate rate of 15%. This was partly why the Irish government reluctantly accepted the minimum tax plan.
Yet over in the US, the Biden administration hopes to secure a 21% minimum rate domestically. The result could create a misalignment between US and EU policy, which could mark the start of some serious problems.
One possibility is that the EU could end up with 15% and the US with 21%. Another plausible outcome is that, if the US government cannot secure a minimum rate increase, the international rate of 15% could be undercut by the US tax regime keeping the 10.5% rate.
No doubt there are plenty of EU policymakers who would like to go further than 15% but, much like their US counterparts, they face an uphill struggle towards making their ambitions a reality.
OECD brokers “landmark” tax deal
The OECD has secured a multilateral agreement on pillars one and two. The accord signed by 136 countries will impose a 15% floor on corporate tax rates and reallocate $125 billion of profits.
Multinational enterprises (MNEs) will be subject to a minimum corporate tax rate of 15% from 2023, although technical details remain to be settled. Nevertheless, the agreement between 136 countries participating in the Inclusive Framework lays the groundwork for international reform.
The global minimum tax rate is a key feature of the deal, but it is a part of a package. The agreement will also reallocate taxing rights from around 100 of the world’s most profitable companies to the countries where they operate and generate profits.
“[The agreement] will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy.”
The agreement, characterised as “landmark” by the OECD, was greeted with relief by many tax policymakers. However, tax professionals warned that there will be an increase in the compliance burden for MNE tax teams.
“The biggest challenge with BEPS 2.0 lies ahead with implementation by business,” said Lachlan Wolfers, global head of data for tax and legal at KPMG. “The more advanced businesses have recognised this already.”
Following years of negotiations, 136 countries signed the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy on October 8 2021. The solution will be delivered to the G20 Finance Ministers meeting October 13 and to the G20 Leaders’ Summit at the end of October.
The top transfer pricing cases of Q3 2021
Companies like Nike are locked into court battles over their transfer pricing (TP) arrangements. Here ITR examines some of the most important TP court rulings from around the world.
The third quarter of 2021 saw a series of TP cases ranging from Nike’s battle with the European Commission to Molinos Río de la Plata’s dispute with the Argentinian Supreme Court. With intra-group rates continuously contested, the usage of conduit companies to cut tax bills comes as no surprise following this year’s biggest data leak of offshore accounts.
Such court cases have led to significant scrutiny over the past years, with the Pandora Papers scandal reinforcing the public pressure for governments to combat tax avoidance.
With mounting pressure to collect revenue following the COVID-19 pandemic, multinationals could expect less tolerant governments in the future. In the meantime, TP continues to be a highly litigious area.
Malaysia vs Ensco Gerudi Malaysia
On July 1 2021, the High Court of Malaya granted Orders in regards to Ensco Gerudi’s appeal application following the tax authority’s audits for the financial years (FY) from 2015 to 2017, which claimed the Malaysian company failed to follow the arm’s-length principle (ALP) when working with a third-party contractor.
The case WA-25-233-08-2020 involves Ensco Gerudi, a private limited company in Malaysia that provides offshore-drilling services to a petroleum company. In 2006, Ensco reached an agreement with Ensco Labuan Limited (ELL), a third-party contractor which Ensco would pay for the leasing of its drilling rigs. Under the agreement, Ensco paid ELL a percentage of the applicable day rate from its earnings of the drilling contracts.
In October 2018, Malaysian tax authorities audited Ensco for the years of assessment from 2015 to 2017. A year later, it found that the pricing of the leasing transactions between Ensco and ELL failed to follow the ALP and suggested the third-party contractor’s profit should remain with Ensco while “reducing the cost of the leasing asset by 20% or equivalent to the margin obtained by ELL”, according to court documents.
Ensco contested the assessment made by the tax authorities and required the case to be taken to court.
In June 2020, the tax authorities disclosed another audit letter, which demanded a 5% increase be applied to the leasing fees. In addition, the authorities refused the company’s usage of the transactional net margin method (TNMM) when conducting its TP, suggesting it should use the profit split method instead. Ensco yet reiterated that TNMM was the most suitable.
The next month, the court granted orders in terms of Ensco Gerudi’s application.
Next week in ITR
The autumn edition of ITR will be published, including its cover story on taxing the digital economy. Senior Reporter Danish Mehboob ran a survey on digital tax focusing on in-house tax professionals at some of the biggest companies in the world. The results will be out soon.
ITR will be continuing its focus on the most important transfer pricing trends of 2021 in a series of articles. Topics include the TP implications of COVID-19, particularly how multinational companies should prepare for the transition to a post-pandemic economy.
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.