This week in tax: Dow TP case goes to Canada’s Supreme Court
Dow Chemical Canada is taking a transfer pricing dispute to the highest court, while China is reportedly marginalising the ‘big four’ auditors.
The Supreme Court of Canada granted an appeal application by Dow Chemical Canada, a subsidiary of the US chemical company, in a transfer pricing dispute yesterday, February 23.
Dow Chemical is appealing the April 2022 ruling of the Federal Court of Appeal that supported the Canada Revenue Agency’s (CRA) choice of tribunal for the TP dispute. The company wanted to secure a hearing at the Tax Court of Canada, but the appeal court ruled against it.
This question of jurisdiction affects whether Dow Chemical may be able to secure a downward TP adjustment. The case dates to 2006, when the Canadian arm made an additional $307 million through inter-company transactions with Dow Europe (DowEur), a Swiss operating company, according to the CRA.
Dow Chemical Canada served a notice of objection in response, but the CRA proposed an increase in the interest expense claimed by the Canadian subsidiary for loans received from DowEur in 2006 and 2007.
The company has been fighting the reassessments since 2013 after the Canadian government rejected its request for another assessment to reduce the income from the interest expense paid to DowEur.
Dow Chemical Canada took its case to the Tax Court arguing that the assessment was incorrect, but the Canadian government said it had to be challenged at the Federal Court. Now, the company has taken its case to the Supreme Court.
Chinese state companies told to drop ‘big four’ auditors
Chinese state-owned companies are reportedly being urged by the government to drop audit contracts with Deloitte, EY, KPMG and PwC.
The Chinese government has reportedly told state-owned companies to let contracts with the ‘big four’ accounting firms to expire, according to a Bloomberg report on Wednesday, February 22.
Approximately 60 public and private-sector companies based in China and Hong Kong SAR have changed auditors since September 2022, according to Bloomberg. However, a further 80 businesses based in Shanghai and Shenzhen have switched advisers since December.
China has been reluctant in the past to allow foreign authorities to access domestic company data owing to national security concerns. However, the Chinese government reached a deal with the US in 2022 to allow regulators to inspect Chinese company documents in Hong Kong.
Many of the contracts are going to smaller and local audit firms, though Chinese-owned subsidiaries located offshore may continue to use the big four. These smaller auditors include RSM China, Moore Global and Pan-China Certified Public Accountants.
Deloitte, EY, KPMG and PwC, which earned Y20.6 billion ($3 billion) from Chinese contracts in 2021, have not commented publicly on the news.
BT Group warns against UK corporate tax rise
Telecoms company BT Group has joined a growing number of voices calling for the UK government to cancel its planned corporate tax increase in the upcoming spring budget on March 15.
The UK is set to raise corporate tax from 19% to 25% in April and Chancellor Jeremy Hunt shows no sign of backing down ahead of the budget.
BT Group CFO Simon Lowth has warned against the corporate tax increase on the grounds that it will make the UK less competitive and this will hold back productivity.
“Productivity growth is stubbornly low and although not just a UK problem, does mean that some of our international competitors are starting to outpace us,” said Lowth in an interview in The Telegraph on Wednesday, February 22.
“Business investment has also been poor; a problem because it’s one of the key ways of helping the UK to break the cycle of low growth,” he added.
The UK government is set to introduce a minimum effective corporate rate of 15% by 2025 and this will put a floor under tax planning. As a result, UK companies will face a higher effective rate and not just a higher headline level of corporate tax.
Iberdrola launches court battle against Spanish windfall tax
Spanish energy company Iberdrola is challenging Spain’s windfall tax at the National High Court on the grounds that the levy is “discriminatory”.
Iberdrola CEO Ignacio Galán said the company had taken legal action to defend the interests of its shareholders, the FT reported on Wednesday, February 22.
The energy windfall tax applies to utility companies, as well as oil and gas groups, with revenues of more than €1 billion ($1 billion) in 2019. Iberdrola has paid €100 million in windfall tax so far in 2023, but Galán argued that this 1.2% levy does not account for profits and losses.
Iberdrola reported revenue of €54 billion in 2022, up from €39 billion in 2021. The company has seen strong growth in Brazil and the US in particular. However, Galan stressed that the company made 19% less profit in Spain in 2022 than the previous year.
The Spanish government has introduced windfall taxes on energy and finance in response to the cost-of-living crisis, particularly the rise of energy costs and inflation. Financial institutions Santander and BBVA have also decided to take on the windfall levy targeted at the financial services industry.
Next week in ITR
ITR will be following up on the Dow case with greater analysis of the implications for multinational companies doing business in Canada. We will also be exploring the reasons why China might be marginalising the big four and what this means for the accounting industry.
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