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This week in tax: UK and ITV lose EU state aid case

Tax authorities employ "aggressive" approach to TP documentation

This week the UK and ITV lost a legal bid to prevent an EU state order to claw back tax revenue from controlled foreign company rules offering multinationals tax breaks.

The European General Court ruled against the UK and British broadcaster ITV on Wednesday, June 8, in their appeal to prevent the EU from clawing back revenue from tax breaks that offered companies an allegedly illegal advantage.

“The Commission did not err in finding that the exemptions at issue conferred a selective advantage on the beneficiaries thereof and, consequently, all the pleas relating thereto must be rejected,” said the General Court.

The UK controlled foreign company rules grant British businesses tax breaks as an incentive for not moving operations offshore, as well as breaks for foreign businesses to move their headquarters to the UK.

Although all the beneficiaries of the scheme have not been identified, some companies have mentioned the EU investigation in their financial statements. These companies include BBA Aviation, Chemring, Diageo and Euromoney Institutional Investor.

These tax breaks became the subject of an EU state aid investigation in 2017. By April 2019, the European Commission had concluded that the scheme grants these companies an unfair advantage.

Commissioner Margrethe Vestager, who was in charge of EU competition policy at the time, made it clear that the UK scheme was against EU state aid law.

“Anti-tax avoidance rules are important to ensure that all companies pay their fair share of tax. But they must apply equally to all taxpayers,” she said.

“The UK gave certain multinationals a selective advantage by granting them an unjustified exemption from UK anti-tax avoidance rules,” she added. “This is illegal under EU state aid rules. The UK must now recover the undue tax benefits.”

Nevertheless, the UK and several of the companies appealed the Commission ruling. The June 8 decision brings this appeal to a close, but it does not mean that the UK and the businesses cannot take this case to the Court of Justice of the EU.

Companies being double taxed amid failure to apply VAT rules

At the same time, tax professionals have told ITR that businesses’ failure to apply the EU’s VAT e-commerce regulations and automated reporting is leading to them being doubled taxed and facing risks of fines for non-compliance.

The concerns come as companies and tax professionals review the impact of the VAT e-commerce package for cross-border business-to-customer (B2C) transactions ahead of its first anniversary.

Sources say that companies have either misunderstood or misinterpreted the rules with the result that they end up paying VAT twice.

It appears that double taxation is not the only cause for concern for businesses in the EU. A gulf seems to be forming between members states that have implemented automated One Stop Shop returns and those that have fallen behind, raising difficult questions about the harmonisation of tax policy.

Read the full article here

Companies brace for Australian tax reforms by 2023

In other news, as the incoming Labor government in Australia seeks to limit tax deductions at 30% of EBITDA and retain flexibility of the arm’s-length test from July 2023, tax directors told ITR that the lack of policy detail could introduce short-term uncertainty and long-term compliance costs.

The Australian Labor Party, led by Anthony Albanese, won the federal election on May 23 with several corporate tax reforms on its party’s agenda, including revisions to thin capitalisation rules.

The limit on tax deductions is expected to replace the safe harbour, which limits debt to 60% of assets in a 1.5 to 1 debt-to-assets ratio, under Australia’s thin capitalisation rules. The move could favour digital companies with higher profits instead of brick-and-mortar businesses with assets.

Australia’s change in thin capitalisation rules will require a substantial rewrite of Division 820 of the Australian Income Tax Assessment Act 1997, but this strategy to cap the use of debt at 30% of a company’s profits ensures Australia’s rules align with the OECD’s BEPS Action 4 to limit deductions.

Read the full article here

Other ITR headlines this week include:

Post-Brexit customs red tape increases UK tax complexity

WIT Forum: Tax professionals relive pandemic disruption

WIT Forum: Tax directors share struggle of hard-to-value intangibles

West Virginia governor refuses to grant tax holiday as US gas prices continue to soar

West Virginia Governor Jim Justice refused to grant taxpayers a gas tax holiday as the price of gas hit its highest this week in the US.

“It’s dead. It’s gone. That situation is over,” said the West Virginia governor on June 8.

The news comes after other states including New York implemented the tax freeze following record high of gas prices on June 1.

The Russo-Ukrainian war made prices skyrocket, with the average gas price closing at $5 a gallon in the US. Consumers are now demanding governors to bring in a tax holiday as many struggle to handle the soaring prices.

The conflict has worsened the spending cap for many, particular after the COVID-19 pandemic which sent prices of goods surging as central banks increased their interest rates.

The US demand for a gas tax holiday marks a period of difficulty for consumers whose purchasing power took a hit amid the conflict and period of economic recovery. This is a crucial time for businesses and individuals hit by inflation.

A tax holiday may well be on the horizon for other states in the US, but there is no sign of such a holiday in West Virginia. Consumers will be left to bear the rising cost of gas and other goods in the meantime.

Next week in ITR

ITR will be looking at the questions tax professionals have raised about Netflix’s settlement with the Italian Revenue Agency. The $59 million deal raises concerns about whether servers are legally permanent establishments.

Another key question is whether this is a start of a trend. The tax authorities may be starting to use country-by-country reporting (CbCR) data to determine an appropriate profit attribution. It has yet to be confirmed whether the Italian tax authority used CbCR data.

ITR will also be looking at Italy’s latest circular on transfer pricing. The latest guidance provides specific detail to taxpayers and tax authorities on the arm’s length principle, particularly around comparability analysis.

Meanwhile, the Fair Tax Foundation continues to win over companies to volunteer for public CbCR and to reorganise their tax affairs.

Elsewhere, corporate virtual landowners tell ITR that they are relieved and optimistic following the German Federal Tax Court’s ruling that land rentals in the metaverse are not subject to VAT.

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.

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