This week in tax: UK PM resigns, Pernod Ricard faces India case
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This week in tax: UK PM resigns, Pernod Ricard faces India case


UK Prime Minister Liz Truss resigned after weeks of economic turmoil over her tax policies, while Pernod Ricard faces a court battle in India over import taxes.

UK Prime Minister Liz Truss resigned yesterday, October 20, just days after Chancellor Jeremy Hunt repealed almost all the tax cuts set out in Truss’s controversial ‘mini-budget’.

Some important policy changes include keeping the IR35 off-payroll working reforms and increasing the corporation tax from 19% to 25%, both of which Truss had sought to overturn. Meanwhile, the plan to abolish the top rate of 45% income tax has been ditched.

Hasan Hashmi, tax director at accounting firm MHA in Manchester, said that the move to keep IR35 confirms that the off-payroll working rules will continue to require a top-down approach from businesses.

“The government’s U-turn will not ease the administrative burden and businesses should keep the rules on the agenda, as determining employment status is a difficult area to navigate,” he said.

“Whatever else you might want to say about Kwasi Kwarteng’s [former chancellor] mini-budget, it did contain some useful reforms that would have helped UK businesses during this difficult time,” he added.

This U-turn means an extra £32 billion ($35.5 billion) in tax revenue raised per annum by 2026-2027.

The policies that are still unclear are whether the Office of Tax Simplification will be abolished and whether development of low-tax investment zones will go ahead.

The Centre for Policy Studies in the UK published research on Wednesday, October 19, finding that the budget U-turns would make the UK the least competitive OECD country on corporate tax policy.

Pernod Ricard faces court battle over India tax demand

French wine and spirits company Pernod Ricard is facing a court battle in Mumbai over its bid to block the Indian customs authority’s claim to $244 million in back taxes.

The authority asked the Bombay High Court to throw out Pernod Ricard’s case on Wednesday, October 19. Another hearing was held yesterday, October 20, but there has yet to be a published decision in the case.

Pernod Ricard allegedly undervalued its liquor concentrate imports from 2009 to 2021. Import duties on liquor concentrates are set at 150% in India to price out foreign alcohol. The French company claims federal and state taxes in India cost it 79% of its 2021 revenue in the country.

The Indian customs authority accuses the company of trying to “defraud” the government. Pernod Ricard and its Indian subsidiary deny any wrongdoing. The case continues.

Spanish bank windfall tax sets up clash with European Central Bank

The Spanish government’s proposed €3 billion windfall tax on banks threatens to trigger a rift between the country and the European Central Bank.

The levy has been championed by Prime Minister Pedro Sánchez as a key piece of legislation for his left-wing coalition. It aims to help households and businesses to cushion the blow from the impact of soaring energy prices following the Russia-Ukraine war.

Luis de Guindos, vice-president of the ECB, said that the central bank is preparing to publish an opinion on the levy, the Financial Times reported yesterday, October 20.

However, the Sánchez government is pushing to impose the windfall tax as it argues that lenders have made “extraordinary” profits at a time of rising interest rates.

The proposal has been met with resistance from bankers, who say the initiative both weakens the industry and goes against EU rules.

It is expected that the measure will hit 10 banks, including the BBVA and Santander – two of the country’s biggest lenders. The levy is intended to last for two years and is set to come into effect at the beginning of 2023.

BoE avoids raising UK interest rates to 5%

The Bank of England announced yesterday, October 20, that it would not raise interest rates to 5% due to fears that doing so could hit the UK economy hard at a time of political uncertainty.

“Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen,” said Ben Broadbent, a deputy governor at the BoE, while speaking at Imperial College London.

The interest rate in the UK is at 2.25%, due to the BoE’s aim to bring down inflation, but the soaring price of energy and other resources could lead to another rate increase in the future.

Businesses have had to adjust their transfer pricing policies to adapt to the higher rates.

Germany and France call for strong Inflation Reduction Act response

Germany and France have called for a strong response from the EU to counter the US government’s Inflation Reduction Act.

German economy minister Robert Habeck said on Wednesday, October 19, that the US measure should not destroy the level playing field between their economies.

The German government is also particularly concerned about the potential negative impact of US legislation on its automotive sector. The US act aims to introduce tax credits to boost the domestic electric vehicle industry.

“We can’t go in a trade war in times like this, we are partners even across the Atlantic,” said Habeck, according to US financial magazine Barron’s.

These comments were echoed by French Finance Minister Bruno Le Maire, who tried to rally support for a robust European response following a meeting with his German counterpart.

However, Le Maire’s comments fell short of calling for a trade war when he said, “We are not talking about a tit for tat,” according to Associated Press.

Japan weighs up corporate tax hike

The Japanese government is not ruling out a corporate tax increase ahead of its 2023 defence budget, as it is committed to higher public spending.

The ruling Liberal Democratic Party (LDP) is weighing up its options to raise defence spending without taking on more debt. Japan’s debt-to-GDP ratio is at 231%, so the government has to cut spending or raise taxes.

Japan’s government wants to keep up with military spending in the region, but this could be difficult.

Yoichi Miyazawa, chairman of the LDP’s tax commission, said on Monday, October 17, that raising income and corporate tax rates must be considered.

Japan has a dual corporate tax regime – 23.2% for companies making over ¥8 million ($53,360) and 15% for businesses making less than ¥4 million.

Prime Minister Fumio Kishida promised to rejuvenate the Japanese economy partly with research and development tax incentives, but a corporate tax increase would be moving in the opposite direction.

German authorities raid Deutsche Bank in cum-ex investigation

Prosecutors searched the headquarters of Deutsche Bank in Frankfurt in connection to an investigation on the tax fraud scheme known as the ‘cum-ex’ scandal, on Tuesday, October 18.

Germany's largest lender Deutsche Bank is one of many banks that prosecutors have searched in connection with the dividend stripping scandal, which goes back more than a decade.

In dividend stripping, investors trade shares of companies near their dividend pay days to blur stock ownership and allow multiple investors to reclaim more than the allowed credits for taxes on dividends.

The prosecutor’s office in Cologne confirmed it had conducted a raid on the bank with 100 investigators.

The cum-ex scandal, which defrauded EU financial hubs of billions of euros, has shattered the level of trust between intermediaries and tax authorities.

It may still exist in other forms across Europe.

Next week in ITR

The ITR team will review some of the policy considerations from the 25th session of the UN Tax Committee of Experts, which started on Tuesday, October 18.

We will also cover industry reactions to the EU’s consultation on Business in Europe: Framework for Income Taxation. The framework would unify the bloc’s corporate tax systems following the European Commission’s previous failed attempts to introduce a single corporate tax base in the EU.

ITR will be analysing the transfer pricing impact of carbon taxation ahead of the 2022 United Nations Climate Change Conference in Cairo. The conference will run from November 6 to November 18 and businesses should be keeping an eye out for tax policies pitched by policymakers.

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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