This week in tax: EU officials consider loopholes to minimum tax
This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The European Commission may not need to impose qualified majority voting to secure an agreement on the global minimum corporate tax rate thanks to legal loopholes, according to Commission officials.
Paolo Gentiloni, commissioner for the economy, stressed the importance of reaching a full agreement not to leave the interests of smaller countries behind at the Parliament’s Subcommittee on Tax Matters' (FISC) meeting on June 27.
“When working on a problem, it is not wise to address a potential plan B,” said Gentiloni, regarding the use of the EU’s legal provisions to force a majority vote and limit veto power in the Council.
Yet Gentiloni suggested two articles of the Treaty on the Functioning of the European Union could be used as legal alternatives to forcing a majority among EU member states. These protocols include Article 116, to address aggressive tax planning, and Article 329, to allow for enhanced cooperation.
These options would allow the European Commission to move the EU towards a global minimum tax rate without the unanimous support of member states, though the Commission would need backing from the Council of the EU and the European Parliament to pursue either legal route.
French Finance Minister Bruno Le Maire said he was working with Gentiloni and MEPs on these alternative solutions to implement the minimum tax since Hungary rejected the draft.
The OECD’s pillar two minimum tax rate is unlikely to remain a viable global solution without pillar one’s profit reallocation mechanism. Gentiloni noted that if pillar one’s rules are not implemented then unilateral measures will be back on the agenda.
Many EU countries introduced digital services tax (DST) regimes and this wave of DSTs resulted in trade tensions with the US. The OECD tried to resolve this by pursuing a multilateral solution through the Inclusive Framework.
In the meantime, the European Council presidency is changing hands. The Czech Republic takes over today, July 1, but Commission officials still hope that the Council will be able to secure an agreement on the minimum tax rate.
However, the Council’s deliberations have delayed the minimum corporate tax several times and Hungary’s veto in June has tabled the issue again. So the Commission may have to opt for its plan B.
Shareholders pressure Cisco Systems and Microsoft to improve tax transparency
US technology companies Cisco Systems and Microsoft are facing pressure from investors to adopt the Global Reporting Initiative and make their country-by-country reporting publicly available.
Cisco and Microsoft may have to hold votes on whether to adopt the GRI standard after some of their shareholders issued demands for greater tax transparency on Tuesday, June 28.
“Shareholders request that the board of directors issue a tax transparency report to shareholders at reasonable expense and excluding confidential information,” said the resolution issued to Microsoft.
Investors managing more than $350 billion in assets are demanding Microsoft publish more transparent tax information. Nordea Bank, AkademikerPension and Greater Manchester Pension Fund have backed the shareholder resolution.
Cisco provides a global tax strategy document to its shareholders, yet the group of investors backing the resolution argue this document gives insufficient information from a risk perspective. This group includes Etica Funds and the Missionary Oblates.
The GRI standard is a voluntary reporting framework that discloses a company’s tax receipts to shareholders in every country where that company operates. This would effectively take CbCR public on a voluntary basis.
Companies that have implemented the GRI standard include Allianz, BP, Ørsted, Philips and Newmont. The list is growing, but some of the biggest companies in the world have yet to sign up.
Earlier this year, Amazon faced the very same demand from a group of shareholders managing $3.6 trillion in assets. Nevertheless, the shareholder resolution failed to win enough support at the company’s annual general meeting on May 25.
Although the resolution was defeated, 21% of independent shareholders voted for the proposal for public CbCR. It was the first time such a resolution got this much traction with investors. As a result, this precedent has emboldened others who want greater transparency.
While it’s unclear whether Cisco and Microsoft will reject the proposals, it’s likely more companies will face such demands in the near future.
Brazil’s tax authority unveils game-changing TP plan
As ITR reported this week, Brazil’s tax administration unveiled a transfer pricing regime proposal on June 29, aimed at aligning with OECD standards to attract further foreign investment, increase tax certainty, and prevent double taxation.
“The Brazilian TP model is not based on the arm’s-length principle (ALP), it’s based on fixed margins,” said Victor Kampel, tax partner at law firm Campos Mello Advogados (in cooperation with DLA Piper), based in São Paulo.
The new regime will allow the use of comparability analysis to assess an arm’s-length price within transactions. This is a major change for the country’s TP system, which previously relied on fixed margin rates.
Corporations operating in Brazil and tax authorities will undergo a significant mindset change as comparability becomes the cornerstone of the country’s TP regime.
Further changes are also proposed within the new system, including functional analysis, TP methodologies, and documentation requirements.
The tax administration’s alignment with global standards is an essential step to attract foreign investment, as well as future tax treaties with the US.
Cristiane Drumond, international tax consultant at Drumond Vitae in São Paulo, warned that potential hurdles could appear during the initial period of implementation.
“The alignment with the OECD standard, which is more sophisticated and encompasses a much broader diversity of cross-border transactions, is expected to – at least during the initial stages – increase the complexity and costs of tax conformity of taxpayers and auditing of tax authorities," she says.
Extensive training will be required for tax professionals to avoid potential litigation.
Despite some expected difficulties, the proposals outlined by the tax administration are expected to benefit Brazil in the long run, which could be good timing for the country’s weak economic outlook.
E-invoicing compliance demands company attention: tax experts
Also in ITR news this week, tax professionals have urged companies to urgently take action to meet e-invoicing compliance targets and avoid costly errors and fines.
Tax directors voiced concerns over the lack of progress by businesses in meeting implementation targets for e-invoicing. This is part of a global drive by tax authorities to digitise VAT reporting and close the VAT gap.
Richard Asquith, CEO of VAT Calc, an international VAT/GST reporting and calculations firm in the UK, said that businesses are in a terrible state when it comes to e-invoicing compliance.
He said that he worries companies might not be giving themselves enough time to prepare for the EU’s planned e-invoicing legislation, which is expected in 2024.
“It’s two years away, but the cycle [of compliance] for these, because it’s such a [big] investment, is 18 months,” said Asquith.
There is also concern among multinational firms that EU member states could be undermining the bloc’s push to harmonise e-invoicing standards by introducing their own country-specific requirements.
This lack of harmonisation makes it difficult for businesses to find synergies and investment in scalable technology solutions.
While the European Commission consults on the best way forward on the matter, businesses are urged not to sit by idly. They are encouraged to speak to peers and potential vendors about the most appropriate solutions for their firms to avoid costly errors and fines for non-compliance.
Other ITR headlines this week include:
Next week in ITR
Following the Microsoft shareholder resolution, ITR will be looking at the rise of investor activism in tax and what advantages businesses may secure from adopting the GRI standard.
In other news, ITR will focus on how businesses are approaching the in-house versus outsourced tax management challenge. We will speak to tax directors about what strategies they’re using to achieve efficiencies and improve business performance.
ITR will also be analysing China's TP updates following collaboration between the Shenzhen customs and tax authorities.
The team will be covering the German Finance Ministry’s plans to remove withholding tax (WHT) on intellectual property registered in the country. This is because the WHT’s hallmarks overlap with digital services tax regimes.
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.