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This week in tax: Controversy beckons in India and France

Procter & Gamble may be about to enter a court battle with the Indian authorities following a National Anti-Profiteering Authority (NAA) decision, while countries including France risk reigniting trade wars to push the international digital tax agenda.

Three Procter & Gamble subsidiaries have been ordered to repay INR 24.15 billion ($32.6 million) they made by allegedly profiting from India’s goods and services tax (GST).

India’s NAA found that Procter & Gamble Home Products (PGHP), Procter & Gamble Hygiene and Healthcare (PGHH) and Gillette India Limited (GIL) had not passed on tax reduction benefits to end consumers as required by the GST laws.

According to the NAA’s November 23 decision, PGHP owes INR 1.8 billion, PGHH will have to pay back INR 20 million, while GIL has a bill of almost INR 580 million. The companies will also have to reduce the prices of their products.

However, the companies have reportedly denied any wrongdoing and are reviewing their legal options. A possible lengthy tax dispute could be on the horizon in India for another multinational group.

Pressure grows on US participation in digital tax talks

France is now re-imposing its digital services tax (DST) on US companies after a suspension. It may put pressure on President-elect Joe Biden to participate in international talks on taxing the digital economy when he takes office in January, or alternatively raise tariff sanctions. The US pulled out of OECD negotiations earlier this year, delaying progress.

Companies including Amazon and Facebook have received tax bills for the 3% rate charged on the sales of digital companies generated in France. The demand is likely to reignite the trade dispute between the two countries, which has included the introduction of high tariffs.

Trade tensions could also be heightened in Asia as Australia, India, Japan and the US increase their strategic cooperation through the Quadrilateral Security Dialogue (Quad), potentially raising trade tensions with China in the Indo-Pacific region.

Nevertheless, US participation is important in the OECD talks. Following the G20 Summit in Riyadh, Saudi Arabia, the G20 leaders welcomed on November 21 the reports on the pillar one and pillar two blueprints released by the OECD and called on the participating nations to reach an agreement by mid-2021. No agreement in 2021 could expand the number of unilateral measures countries introduce to maximise tax revenues.

In anticipation of more DSTs, taxpayers are choosing to work with tax authorities to ease the compliance burden and help policymakers understand unique digital business models.

However, taxpayers told ITR that they doubt there will be an international agreement next year. As a compromise, they want to see the OECD, at the very least, address unilateral measures, tackle double taxation risks and finalise the scope by July 2021.

In the meantime, Achim Pross, head of the international cooperation and tax administration division at the OECD, identified four remaining technical questions for tax directors working in the financial services (FS) sector to follow in discussions on the two-pillar proposals.

The role of fund managers and financial technology in the FS sector is keeping negotiations about partial inclusion on the table for the countries participating in the digital tax debate.

Additionally, all businesses should be looking at their advance pricing agreements (APAs) to identify any risks caused by the digital tax proposals.

Many taxpayers are weighing up the strengths and weaknesses of their APAs and seeking alternatives as companies worry about the impact of the OECD digital tax proposals on permanent establishments (PEs).

Some tax directors fear the OECD-led reforms may result in businesses being exposed to new tax claims on old audits or new nexus concepts despite having an APA.

Another sales tax U-turn in Malaysia?

In Asia, companies operating in Malaysia may be facing another tax struggle if the government re-introduces a goods and services tax (GST). The finance ministry has set up a committee to study various revenue-raising measures to assist the post-COVID economic recovery, according to Maybank Investment Bank (Maybank IB) Research and numerous local reports.

The committee will look at the feasibility of implementing a GST, a carbon tax and digital tax, as well as streamlining tax incentives, improving tax administration and enhancing tax audits by introducing tax identification numbers and making better use of data analytics, local reports said.

A GST regime could be introduced as early as 2021 or 2022 to aid recovery, but this will be unwelcome news for both businesses and individuals. The country’s first GST regime was hugely unpopular, resulting in an election win for Mahathir Mohamad who replaced it with a sales and services tax (SST).

Companies were caught scrambling to transition between the two regimes and will not welcome another overhaul of the country’s indirect tax system.

In other news:

  • Mauritius will sign agreements for the avoidance of double taxation (DTA) with Angola, Estonia and Lesotho after the Cabinet gave its approval to sign. The DTAs with Angola and Estonia will be new agreements, bringing the African Island’s total number of DTAs to 48 once approved. The agreement with Lesotho will replace the 1997 treaty. Six other treaties are awaiting ratification, four are due to be signed, while a further 20 are being negotiated, according to government figures.
  • The Vietnamese finance ministry is proposing to extend the 30% fuel tax cut introduced in August 2020 until December 2021 to help struggling local airlines. The reduction would mean airlines would continue to pay VND 2,100 ($0.09) per litre of fuel, rather than the standard rate of VND 3,000 per litre.
  • Brazil’s Senate has approved a bill to introduce a five-year tax exemption for smart telecommunications equipment used in the context of the Internet of Things (IoT), according to ZDNet. The bill now needs to be signed into law and will enter into force in January 2021.
  • In South Korea, the effective date of the digital currency tax law has been delayed to January 2022. The tax, which was due to enter into force in October 2021, will charge a 20% tax on profits earned from digital currency that are above KRW 2.5 million ($2,300).
  • The Court of Justice of the European Union (CJEU) ruled on November 26 (Case C‑787/18) that Sweden’s VAT deduction rules do not align with EU laws in a case involving the tax authority and a leasing firm. Sweden’s Supreme Administrative Court (Högsta förvaltningsdomstolen) had asked the CJEU to clarify whether a purchaser of a property is liable to VAT if it was the seller who initially made the input VAT adjustments or deduction. The court also asked whether the VAT liability lies with the seller when the property is sold to a purchaser who is not using it for the same purposes as the previous owner. The CJEU said the Swedish tax authority can only demand that the taxpayer, who made the VAT deductions on the immovable property, to make the required VAT adjustments upon sale.

Next week in ITR

Next week in ITR, we will be publishing details of how the OECD is seeking to improve the tax dispute resolution process before finding an agreement on its two-pillar solution in 2021.

Following the Indian NAA’s decision against Procter & Gamble, Indian MNEs will be evaluating the impact of the decision and the country’s GST anti-profiteering measure.

In addition, the debate over public country-by-country reporting is resurfacing, and MNEs will be voicing their concerns over data quality and much more.

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