This week in tax: Microsoft and Unilever raise Amount A concerns
Microsoft and Unilever raise concerns in the OECD consultation on pillar one, while the Brazilian government is set to table a bill on transfer pricing reform.
Multinational companies Microsoft and Unilever have argued that Amount A under pillar one should be designed to ensure taxpayers don’t face double taxation from withholding taxes and other levies.
Microsoft and Unilever are just two of many businesses to submit comments to the OECD’s public consultation on pillar one. These statements, published yesterday, August 25, were drafted in July and August to prepare for the September 12 meeting on the reform proposal.
Thomas Roesser, tax policy counsel at Microsoft, wrote: “Amount A should be reduced or eliminated to the extent jurisdictions are already taxing residual profits via transfer pricing, withholding taxes, or other taxes.
“The rules should not incentivise countries to impose new withholding taxes or make aggressive transfer pricing adjustments where Amount A already provides an internationally agreed allocation of residual profits,” he added.
Janine Juggins, global head of tax and treasury at Unilever, argued that withholding taxes “will need to be considered in the context of the application of Amount A”.
Withholding tax may affect the amount of tax paid (under Amount A) to the jurisdiction in question.
“This is, in effect, already a source taxation in the market jurisdiction to which Amount A may be allocated,” explained Juggins. “In other words: double taxation and double counting may easily arise.”
Pillar one would impose a three-tier profit allocation mechanism – Amounts A, B and C, each with implications for how profits are distributed between jurisdictions.
The OECD originally defined Amount A as a share of deemed residual profits that would be allocated to the market jurisdiction in question. This would require a formulaic approach, i.e. new taxing rights, to profits rather than the arm’s-length principle.
In short, this would be a fundamental break with traditional transfer pricing. Inevitably, there will be winners and losers from such a dramatic change in global tax policy.
Many governments of developing countries fear losing taxing rights on certain income, while businesses continue to worry about the threat of unilateral measures. This is why the reform debate is far from settled.
Brazil set to submit TP draft bill to Congress
The Brazilian government will submit a draft bill on its transfer pricing reform to Congress before the end of August, according to a top official in the Brazilian Federal Revenue Agency.
The government is still aiming to reform the tax system ahead of the October presidential election, as TP reform is crucial to its bid to join the OECD.
Sandro de Vargas Serpa, deputy special secretary of the Brazilian Federal Revenue Agency, told the audience of an August 22 event organised by the Brazilian Association of Financial Law that the specific format of the regime had not yet been agreed but that a draft bill was underway.
The Brazilian tax system does not apply the arms-length principle, in which tax administrations compare taxpayers’ transactions between entities with unrelated parties. Instead, the Brazilian TP regime relies on fixed margins using formulary apportionment to tax profits wherever the company has a physical presence or sales.
However, the mismatch between the country’s policy and other jurisdictions has led to documentation difficulties and has increased the risks of double taxation. The draft bill aims to re-align Brazil’s system with the OECD to solve these problems.
Corporations can expect further announcements this month as policymakers finalise the TP draft bill. This reform is bound to be a significant shift in the country’s tax policy but it could also bring considerable relief for businesses.
Automation crucial to managing indirect tax lifecycle
Businesses need to radically increase the use of technology and automation to avoid failing international audits for indirect tax compliance, ITR reported on Wednesday, August 24.
These calls follow increased digitalisation requirements on companies as part of global efforts by tax authorities to improve tax compliance.
Nora Bafrouri, assistant director for EMEA indirect tax at manufacturing company Trane Technologies in Brussels, said she anticipates that indirect tax will become fully digitalised in the near future.
These views are shared by other tax professionals who see technology as a high priority for businesses. Companies have also been urged to automate the complete indirect tax lifecycle including advisory and planning, tax determination, and compliance.
Businesses may have to invest in technologies such as research tools to help notify tax teams of upcoming changes in regulations as well as real-time reporting and invoicing solutions.
However, there is a divide between large multinationals with deep pockets and their less well-resourced counterparts. This has enabled some businesses to race ahead to fully automate their tax functions while others have been left to implement a patchwork of systems across their operations.
BIAC and OECD divided over pillar two model rules
In other news, OECD tax policymakers rejected a call for changes to the pillar two model rules by Will Morris, vice chair of the Business and Industry Advisory Committee to the OECD.
Morris called for another round of changes to the rules, but the OECD’s top tax officials opposed his argument in an August 19 article.
Tax professionals are calling the OECD’s response less than favourable to the stability of the international tax agreement, which involves almost 140 countries. Less than 20 have issued draft legislation so far.
“It is a slightly stingy opinion,” said one head of international tax at a retail company based in London, about the article from the OECD’s tax leaders.
“Content aside, the fact they feel the need to respond in this way is not a good sign,” he added.
Tax authorities watching the discussions closely, including the Danish tax administration Skattestyrelsen, have said that requests from BIAC to rewrite pillar two have come too late.
“Will Morris raises valid points but should know very well that what he is asking for is a non-starter,” said one senior revenue officer at Skattestyrelsen in Copenhagen.
The OECD’s officials Pascal Saint-Amans, Achim Pross, and John Peterson wrote the Bloomberg opinion article on August 19, taking issue with BIAC’s reasons to change pillar two as countries have already started drafting legislation.
But although the G20/OECD implementation deadline is still the end of December 2023, some countries have postponed their plans until at least January 2024.
Other ITR headlines this week include:
Businesses turn to tax insurance amid global uncertainty
Spike in India TP audits boosts ADR usage
Spanish tax heads watch Brazil-Spain treaty developments
Next week in ITR
ITR will assess the disadvantages of Brazil’s fixed-margin TP method as the country aims to align with OECD standards. This follows ITR’s Brazil Tax Forum held on August 24 and August 25.
Elsewhere, ITR will be speaking to tax directors about how their companies have responded to the challenge of integrating different tax operations following M&A deals.
In other news, ITR will look at why some companies are bucking the trend of outsourcing and bringing tax functions back in-house. These businesses are not just building up teams but expanding certain roles as well.
The team will also cover insights from in-house leaders who attended ITR’s Asia Tax Forum on how pillar two considerations are evolving across the Asia-Pacific region.
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.