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This week in tax: DAC7, DAC8 and Cairn’s tax dispute

This week has been a celebration of women in tax at ITR, but there have also been some significant tax developments across the world.

To mark International Women’s Day 2021, ITR showcased some of the best talent across the global tax sector through articles, podcasts, and events published on a special hub page. At the same time, several articles were released to mark the occasion and highlight the conversations that took place during ITR’s East Coast Women in Tax Forum.

Key stories included:

In other developments covered by ITR this week, the conversations were focused on several disputes happening across the world and the impact of recent UK government proposals. For example, tax professionals are split over how the case concerning Maryland’s digital advertising tax will be resolved. Though many US tax professionals accept that the outcome will set the tone for future state-levied taxes.

In the UK, the 130% super-deduction, which is one of the largest corporate tax giveaways ever in the UK, is not a measure that the Dutch government welcomes. The UK’s proposal is likely to lure foreign direct investment away from the Netherlands.

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More disputes in India

Tax disputes are once again at the forefront of discussions in India. In the case of Cairn Energy, the efforts of Cairn CEO Simon Thomson to avoid further litigation in its long-running dispute with the Indian tax authorities appear to have failed.

News reports emerged on March 11 quoting a government official who confirmed that India will file an appeal against the Cairn arbitration award, although it will still consider resolving the dispute through the existing legal framework.

“Top government sources have said that the process of filing an appeal against the international arbitration panel has begun,” reported India Today.

In an article by Amit Agarwal and Rama Gupta, the two tax professionals assess how the Indian Supreme Court’s decision on taxing software licensing fees could result in the distribution and use of computer software being taxed in alternative ways in the future.

Separately, the India tax authorities have published a circular on residency rules. The circular relaxes the residency rules for financial year (FY) 2019-20 because of the COVID-19 pandemic. It also covers the tax treatment of individuals stuck in India in 2020-21 and how this interacts with tax treaties and dual residency rules. In general, individuals stranded in India will not face double taxation.

However, Rajesh Gandhi, partner at Deloitte India, said the circular does not touch upon on the permanent establishments (PE) risks.

“A PE could be constituted in the form of a fixed place PE or agency PE or a service PE depending upon the functions performed by the employee when in India and the duration of their stay in India,” explained Gandhi. “Companies should maintain proper documentation and records of their activities in India, the presence of their employees in India such as travel history, to substantiate the position that they opt for in connection with creation of a PE in India in FY 2020-21.”

DAC7 doesn’t do enough, says EU Parliament

Members of the European Parliament (MEPs) have called on EU member states to establish better cooperation on how they deal with the taxation of digital trading while discussing amendments to the Directive on Administrative Cooperation (DAC7).

At the same time, the European Commission has opened a consultation on its proposals for DAC8. Starbucks, PayPal and IBM are among the companies that may face more reporting obligations under the proposals that extend the exchange of tax information to include digital assets.

On DAC7, at a plenary session on March 10, MEPs said EU tax authorities need to share data more quickly, harmonise the sanctions imposed on non-compliant digital platforms and require all non-EU platforms to register in the EU state where they have substantial economic activity.

As part of it proposed changes to the Directive, the EU Parliament also said no new bilateral or multilateral advance pricing arrangements should be agreed by member states with third countries from January 1 2022 if the non-EU country does not allow their disclosures to be shared with the tax authorities of other member states.

MEP Sven Giegold said: “Extending the directive to cover digital platforms will close one loophole, but others remain wide open. Exchange of information will only be effective once all types of income and assets are consistently included under this directive.”

“Unfortunately, the Council has already decided its position without waiting for the European Parliament's proposals and has decided to postpone implementing improvements by one year to January 2023,” said Giegold.

“It is irresponsible to forego urgently needed tax revenues in this time of crisis,” he continued. “The EU Commission must take its responsibility in a time of public deficit seriously and propose a strong review of the directive.”

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Meanwhile, the Tax Justice Network (TJN) released its Corporate Tax Haven Index 2021 on March 8, which found that OECD countries and their dependencies are responsible for 68% of the world’s corporate tax abuse risks.

The index ranks jurisdictions enabling multinational corporations to underpay corporate income tax. The top 10 jurisdictions included four British Overseas Territories, the Netherlands, Switzerland, Luxembourg, Hong Kong SAR, Singapore and the United Arab Emirates.

The release of the index intends to push countries towards developing international tax standards at the UN, rather than the OECD, to ensure it is a more inclusive process.

Dr Dereje Alemayehu, executive coordinator of the Nobel Peace Prize-nominated Global Alliance for Tax Justice, was quoted by the TJN for saying that the OECD cannot be trusted to establish a fair international tax policy. “To trust the OECD in light of the index’s findings… is like trusting a pack of wolves to build a fence around your chicken coop,” said Alemayehu.

In other news:

  • A March 11 VAT groupings judgment by the Court of Justice of the European Union (CJEU) in a dispute between Danske Bank and the Danish tax authority has decided that the head office is part of a Danish VAT group while the Swedish branch office is part of the Swedish VAT group and therefore the two are separate taxable entities.
  • Finland has launched a tax incentive offering companies a 150% tax deduction on the cost of joint research and development (R&D) projects during 2021-2025 when carried out in collaboration with universities and research institutes.
  • In the UK, the Confederation of British Industry (CBI) has called on the government to use its March 23 ‘tax day’, when numerous tax consultations will be published, to work closely with businesses to lay out a tax and regulation system that can accelerate the reduction of carbon emissions and hit the country’s climate target by 2050. The CBI has suggested nine guiding principles to achieve its net zero carbon target.
  • Italy has extended its deadlines for filing the digital services tax (DST) return. A statement issued by the Ministry of Economy on March 9 said the new deadlines for the payment and filing obligations will also apply to the first application of the DST, in place of those recently extended. The new dates are May 16 and June 30 of the calendar year following the one in which taxable revenues are generated.

Next week in ITR

Next week, ITR will be releasing more articles to help tax professionals climb the career ladder as it continues promoting women in tax.

In addition, we will be looking at how India could use proposed amendments to its equalisation levy (EL) to tax software licensing fees charged by foreign suppliers to get around the Supreme Court’s March 2 ruling.

Meanwhile, in the US, taxpayers are using the final US Treasury regulations on the Tax Cuts and Jobs Act to reduce the negative impact of several provisions. This includes the impact of the base erosion and anti-abuse tax (BEAT) and the global intangible low-taxed income (GILTI) rules, while the foreign-derived intangible income (FDII) measures have become simpler simple for businesses to apply.

There will also be coverage of the US administration’s renewed participation in the OECD digital tax talks that suggest there will be better regime coordination in “grandfathering” the GILTI rules so there can be agreement on a global minimum tax regime.

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