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This week in tax: Higher US taxes possible as Democrats take Senate

The first week of January has been busy for businesses trying to get to grips with the new UK-EU trade agreement, while the Georgia election result potentially clears the way for the Biden tax plan.

In the US, President-elect Joe Biden is preparing to take office on January 20 with a slim majority in Congress. This week, Democratic wins in Georgia means Biden can govern will a slight congressional majority in the House of Representatives and Senate. However, this will not make it easy for the 46th US President to pass the tax changes he wants.

Biden had proposed a number of tax changes during his election campaign, including a rise in the corporate tax rate from 21% to 28% and increasing the minimum tax rate under the global intangible low-taxed income (GILTI) rules from 10.5% to 21%.

Although one CNBC survey found that most corporate CFOs do not think a rate rise to 28% is likely, there is still considerable debate on what may be enacted in 2021.

Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, doesn’t expect any of Biden’s ambitious tax policies to be enacted this year. “Razor-thin majorities in the Senate and House and limited, if any, GOP support mean Biden will have to satisfy a small group of Democratic moderates to pass bills. And that suggests some of his most ambitious ideas likely will fall by the wayside,” wrote Gleckman in a blog post.

KPMG suggested in a report that if tax rises are enacted in 2021, although far from certain, some of the increases could be effective retroactively to the beginning of 2021.

Nevertheless, there appears to be agreement that 2021 will be focused on securing the COVID-19 recovery, pushing other objectives further down Biden’s agenda. If tax changes are forthcoming, this is likely to come via the House Ways and Means Committee and Senate Finance Committee chaired by Richard Neal and Senator Ron Wyden, respectively. Gleckman describes the two men as “centre-left lawmakers whose instincts are to seek bipartisan agreement, especially on tax bills”.

In the meantime, businesses should be aware of the new beneficial ownership requirements included in the Corporate Transparency Act, approved by the Senate this year, designed to eliminate shell companies.

“The Act requires the Treasury Department to issue regulations within one year which will require certain entities (both new and existing) to file a report with the US federal government which discloses information regarding certain beneficial owners of the entity,” explained Alvarez and Marsal in a tax alert.

“While the Act deals with beneficial ownership of US corporations and limited liability companies (LLCs), it also requires reporting by foreign entities that register to do business in the United States.”

Brexit

In the UK, Brexit has happened. The EU and the UK reached a last-minute free trade agreement in late December, but it has left many businesses scrambling to understand it in the absence of guidance from HM Revenue and Customs (HMRC).

Confusion surrounding the Brexit deal “rule of origin” clause has led some UK businesses to suspend sales to consumers in the EU, according to UHY Hacker Young. The provision states that goods produced, or containing components made, outside the UK or the EU and resold by UK businesses are now subject to VAT and import duties when sold to the EU.

“It is clear that many UK businesses exporting to the EU are going to be hit by tariffs,” said Michelle Dale, senior manager at UHY Hacker Young. “Businesses have also been completely blindsided by the ‘rule of origin’ part of the deal, which leaves them at a major competitive disadvantage when selling in the EU. Unfortunately, not enough was done to prepare them for this.”

“It takes years to build an effective supply chain and using non-EU suppliers is often the best option both in terms of cost and quality,” added Dale.

In a slight silver lining on other tax matters, however, HMRC has removed many EU mandatory disclosure requirements ahead of the January 30 filing deadline, and announced plans to adopt the OECD’s mandatory disclosure rules to replace the European Council Directive (EU) 2018/822 (DAC6).

Although, a number of rules will still apply for now, with tax practitioners describing it as a “mixed blessing”.

OECD consultation on digital tax

As the first week of January comes to an end, many taxpayers will be turning their attention to the OECD’s public consultation on the digital tax proposals on January 14 and 15. The Paris-based organisation received numerous responses to its latest blueprints and next week’s consultation will allow these views to be expressed in more detail.

For example, Procter & Gamble, GlaxoSmithKline, Unilever and 46 other companies want the OECD to clarify how the global anti-base erosion (GloBE) proposal under pillar two will interact with the US GILTI rules.

As part of the October-December 2020 consultation, Tim McDonald, senior vice president of finance and accounting at Procter & Gamble (P&G), stressed that the GILTI regime “should be considered as an equivalent to the income inclusion rule” in the OECD’s GloBE proposal.

The next few months may be pivotal in amending the blueprints into a final agreement. Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, told ITR in an interview about the issues the organisation is trying to address, as well as its other areas of focus for 2021. He admits that a partial resolution is possible on digital tax in 2021, but it will not be an easy journey.

Another difficult area in 2021 will be indirect tax regimes. Taxpayers should prepare for a wave of indirect tax policy changes in 2021. Governments will focus on unwinding crisis relief measures, removing tax exemptions, and introducing digital and environmental taxes.

Oman goes ahead with VAT

Meanwhile, Oman’s VAT system will come into effect on April 16 2021. The system will include 94 items that will be zero-rated, including meat, fish, poultry, dairy products and their derivatives, fresh eggs, vegetables, fruits and coffee, among others.

Businesses must register for VAT if they meet the annual threshold of OMR 38,500 ($100,000) worth of taxable supplies. Businesses with total annual supplies valued at OMR 19,250 or more can voluntarily register. The authority has set the following registration deadlines:

  • Companies whose annual supplies exceed OMR 1 million must register between February 1 2021 and March 15 2021, with the registration being effective from April 16 2021;
  • Companies whose annual supplies are between OMR 500,000 and OMR 1 million must register between April 1 2021 and May 31 2021, with the effective date of registration being July 1 2021; and
  • All other companies will be able to register from February 1 2021.

Oman is one of the last GCC states to implement VAT. Observers are expecting the GCC to gradually move towards corporate tax systems in the future. COVID-19 may hasten this change.

US investigation describes DSTs as ‘discriminatory’ and unfair; French tariffs on hold

While Kenya’s DST entered into force on January 1, at a rate of 1.5% on gross transaction values, the US investigation into the digital services taxes has continued after being initiated in June 2020.

On January 6, the Office of the US Trade Representative (USTR) issued findings into its DSTs adopted by India, Italy, and Turkey. It said that “each of the DSTs discriminates against US companies, is inconsistent with prevailing principles of international taxation, and burden or restricts US commerce”. 

One report stated that India’s DST, also known as the equalisation levy, is discriminatory because of the “selection of covered services and its applicability only to non-resident companies”. It is also described as “unreasonable” because it is inconsistent with the principles of international taxation, especially because of its application to revenue rather than income, extraterritorial application, and failure to provide tax certainty. Similar reasons were given in the report focused on Italy and its assessment of Turkey’s rules.

Despite the views expressed in the reports, the USTR said it is not taking any specific actions in connection with the findings, although it will “continue to evaluate all available options”. 

In addition, the USTR said on January 7 that it will suspend the tariff action against France’s DST, which were due to enter into force on January 6 2021. The department is instead planning a “coordinated response” against France and the 10 other jurisdictions it is investigating.

India, however, will be defending its e-commerce, trade and digital tax policies during a World Trade Organisation (WTO) review. The WTO’s Trade Policy Review Body is holding a formal meeting between January 6 and 8 to assess Indian policies, which may also include scrutiny of the country’s goods and services tax and intellectual property rights laws.

In other news this week:

  • Singapore released a summary on January 4 of an advance ruling, which clarifies when a company is considered a related party within the meaning of sections 34D and 13(16) of the Income Tax Act;
  • Taiwan’s National Taxation Bureau of the Southern Area and Ministry of Finance have confirmed in a statement that a foreign profit-seeking enterprise that does not have a fixed place of business or a business agent in the Republic of China may “apply for the adoption of net profit ratio and onshore profit contribution ratio to the competent authority before receiving the payment of remuneration for services or business profit to calculate its taxable income”; and
  • Japan signed a customs mutual assistance agreement with Uruguay on January 7. It will enter into force after it is ratified.

Next week in ITR

The OECD is due to hold its public consultation meetings on the pillar one and pillar two proposals on January 14 and 15. ITR will be reporting on this event, as well as looking at how the OECD could simplify pillar two.

As part of a preview into the 10th edition of ITR’s Global Tax 50, Piet Battiau, head of the consumption taxes unit at the OECD, tells ITR about how he has dealt with the challenges of the past year and what his department will be focusing on in 2021.

In addition, as DSTs continue to be trending among countries, ITR will be highlighting the views of MNEs on how Spain’s DST is placing difficult compliance burdens on them, as well as much more.

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