This week in tax: Probes, audits and indirect taxes dominate
Tax directors told ITR about their concerns over rising audits and the growing burden of tax compliance as governments around the world continue to pursue more tax revenue.
The rise of tax transparency continues to create more difficulties for businesses as the number of standards have proliferated. Transfer pricing directors are strained by the burden of multiple reporting standards and meeting the demand for more data.
“There are increased standards for the quality of TP documentation post-BEPS,” said Don Shackley, head of TP at Burberry. Shackley and other TP professionals told ITR Senior Reporter Leanna Reeves that the increasing demand for tax transparency and the numerous initiatives mean tax teams are expanding.
The situation is not being helped by the number or investigations and audits being carries out by tax authorities. The UK’s HM Revenue and Customs (HMRC) is carrying out 100 investigations into the tax affairs of multinational enterprises over profit-shifting arrangements.
In India, MNEs are noticing that tax officials are enquiring about minor tax matters to open a path to a wider tax investigation. Taxpayers say investigations such as these are eroding trust between taxpayers and authorities.
In the EU, Parliament voted on May 3 to extend the application period of the optional reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud (Article 199a of the VAT Directive).
It also voted in favour of extending the quick reaction mechanism as per Article 199b of the VAT Directive. This mechanism allows member states to introduce quickly, in cases of imperative urgency, a temporary reverse charge mechanism for supplies of goods and services in sectors where sudden and massive fraud has occurred and which are not listed in Article 199a.
The two provisions will now apply until December 31 2025, when the European Commission hopes to complete negotiations on a definitive VAT system based on the principle of taxation in the country of destination. If a definitive VAT system is not in place by 2025, the two provisions will be reviewed for further extension.
Meanwhile, in Canada, the government has released draft legislation for consultation on tackling hybrid mismatch arrangements in line with BEPS Action 2. The rules will apply to payments arising on or after July 1 2022.
Canadian taxpayers could also be impacted by US government plans to introduce a carbon border adjustment mechanism (CBAM) as an alternative to a carbon tax. A bipartisan group of US lawmakers are working on a CBAM that would mean higher costs for carbon-intensive imports.
For companies wanting to settle certain debts, Brazil published Public Notice 9/2022 on May 3. EY explained in a tax alert that the notice allows taxpayers to settle certain debts from the tax regime preceding Law No. 12,973/2014. Taxpayers have until July 28 2002 to settle their debts and withdraw their cases from administrative or judicial proceedings.
“Taxpayers may settle debts (regardless of whether they are registered as overdue federal tax liabilities, including suspended liabilities) that are pending in administrative adjudication or judicial litigation as of 3 May 2022,” EY said.
“The Public Notice also applies to cases involving the addition of goodwill amortization expenses to the calculation of the social contribution on net profit,” the firm added. “The settlement agreement must cover all the debts that the taxpayer has outstanding as a result of the amortization of goodwill.”
Next week, Switzerland will be holding a referendum to introduce a 4% levy on companies including Amazon, Disney, and Netflix that provide digital streamlining services. The referendum, to be held on May 15, would require affected companies to invest 4% of their local revenue in Swiss productions and ensure that at least 30% of their services comes from European productions.
In Asia, the Philippines is also preparing to tax digital service providers. House Bill 7425 will impose a 12% VAT on digital transactions covering all goods and services sold online. Local news said that a Senate committee meeting on May 2 showed there is support among government agencies and industry representative for the tax.
Next week in ITR
We will also be exploring how blockchain will benefit TP teams and help deal with the compliance burden. Tax departments could save a significant amount of time and gain further visibility on their supply chain models by adopting blockchain technology.
The tool could be used to verify each underlying step of supply chain transactions while tackling historical challenges with TP and cross border deals by providing real-time data to taxpayers.
Meanwhile, Josh White will be looking at Japan’s plans to increase the carbon tax on the shipping industry to $56 per tonne of CO2 emissions. This plan would hit the world's third-biggest shipping sector with higher costs at a time of rising inflation and a supply chain crisis.
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.