This week in tax: Ukraine crisis could fuel crypto tax crackdown
Crypto exchanges resisting calls for a trading ban on Russia amid the Ukraine war could face a wider crackdown from tax authorities around the world.
Tax authorities looking to crackdown on the crypto industry may have a stronger case than ever since exchanges are resisting calls for a Russia ban. Many tax authorities have highlighted the industry as posing serious tax risks in recent years, however, the war in Ukraine may persuade governments to enact tougher measures.
Trading between Bitcoin and roubles surged by 132% in the days following the Russian invasion of Ukraine, according to analysis by data company Kaiko. The biggest crypto exchanges Binance and Coinbase are resisting calls to impose a ban on Russian users, while stressing their support for specific sanctions.
“There are a few hundred individuals that are on the international sanctions list in Russia, mostly politicians, and we follow that very, very strictly,” said Changpeng Zhao, chief executive of Binance, in a BBC interview.
“We differentiate between the Russian politicians who start wars and the normal people, many normal Russians do not agree with war,” he explained. “We are not political, we are against war, but we are here to help the people.”
Russia has the third biggest crypto market in the world and the market may offer a lifeline as sanctions hit hard. Bitcoin has a market cap of $835 billion, while the rouble has a market cap of $626 billion and its value has crashed since the Russian invasion began in February.
The crypto industry is already facing crackdowns in several countries, including India, over claims such assets can be used to evade and avoid taxes. This crisis is likely to fuel calls for tougher measures.
Transfer pricing case decisions clarify the role of the ALP
Transfer pricing continues to be the most contentious area in tax. ITR reviews three crucial transfer pricing (TP) court rulings concerning such companies as Kellogg India over the application of the arm’s-length principle (ALP).
Taxpayers are facing difficult questions about the ALP and its application to intercompany transactions. Tax authorities have taken on many companies over the years and 2022 looks set to be no different.
Landmark tax disputes set crucial precedents in 2021, including multinational companies (MNCs) such as Engie The French energy company lost its state aid case with the European Commission. There may be more to come this year with the case of Fiat Chrysler.
In the meantime, multinational groups such as Kellogg, BenQ, and Bürkert, have started 2022 with a series of TP court rulings.
EU Council starts screening Russia and Israel for blacklist
Eleven countries including Russia and Israel are on the EU’s watchlist for harmful tax practices. They must improve tax governance by October 2022 to avoid being on the list of non-cooperative tax jurisdictions (blacklist).
The EU Council added the Bahamas, Belize, Bermuda, the British Virgin Islands, Israel, Monserrat, the Russian Federation, Tunisia, Turks and Caicos Islands and Vietnam to the Annex II of the EU list of non-cooperative tax jurisdictions (grey list) on February 24. This move increased the list to 25 jurisdictions.
Countries on the grey list are monitored by the EU Code of Conduct Group (CoCG) on their commitments to comply with the bloc’s standards. It is the official EU watchlist of countries with potentially harmful tax systems. Countries could then be moved to Annex I of the EU list of non-cooperative tax jurisdictions (blacklist) if the harmful aspects of their tax systems do not change.
“If the Bahamas and other countries are added to Annex I then several sanctions will apply to entities doing business in and through those countries,” said Tomás Machado, director of international tax at KPMG in the Bahamas.
Punitive measures against blacklisted jurisdictions include denial of deductions on payments, increased withholding taxes, stricter application of controlled foreign company rules, increased taxation of dividends, and more administrative measures.
Next week in ITR
The OECD plan to establish a global minimum corporate tax rate is going ahead and countries are working on how to implement pillar two. ITR will be providing analysis of the qualified domestic minimum top-up tax (QDMTT) as an increasingly popular choice for governments.
Jurisdictions such as Hong Kong SAR, Switzerland and the UK are adopting the QDMTT as a way of maintaining a competitive tax system once the minimum rate comes into force. The QDMTT supports the 15% minimum rate for multinational companies, but not for smaller, national companies.
Taxpayers would still be able to get competitive rates, in other words. This may be an option for countries to reform their tax system and keep their tax treaties unchanged.
At the same time, ITR will be keeping an eye on the economic fallout from the Russia-Ukraine war and what it means for businesses facing a worsening supply chain crisis. Such companies may have to change their transfer pricing policies and much more to survive.
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.