This content is from: Direct Tax

This week in tax: 130 countries agree on minimum tax rate plan

Most countries participating in the Inclusive Framework (IF) signed an agreement supporting a global minimum corporate tax rate this week. This could spell the end of the race to the bottom in corporate tax rates.

All of the G20 nations supported the agreement after lobbying from the US, while just nine countries refused to sign up – such as Ireland and Hungary. The global minimum tax rate will set limits on tax competition, but key issues have yet to be agreed upon.

“For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response,” said US Treasury Secretary Janet Yellen.

“The result was a global race to the bottom: Who could lower their corporate rate further and faster? No nation has won this race,” she continued. “The race to the bottom is one step closer to coming to an end.”

The Biden administration tipped the balance in favour of a global minimum rate since many countries have moved to implement unilateral measures against the technology industry, including many US companies.

There can be no doubt that US support for a global minimum rate has helped secure this agreement. However, it was not all down to the US and support from countries such as China will be crucial moving forward.

“This package does not eliminate tax competition, but it does set multilaterally agreed limitations on it,” said Mathias Cormann, secretary-general of the OECD.

“It accommodates various interests, including those of small economies and developing jurisdictions,” said Cormann. “It is in everyone’s interest that we reach a final agreement among all IF members later this year.”

A detailed implementation plan is expected to be finalised by October 2021. If successful, the OECD hopes the plans will be implemented in 2023.

The next steps will be taken at the G20 meeting in Venice on July 9-10. For more detail, check out ITR’s latest coverage of the IF agreement and the issues that countries are grappling with:

130 countries sign up to BEPS 2.0 framework, but holdouts persist

Developing countries fear a low global minimum rate could be costly

Other headlines from this week:

Businesses embrace technology and regional partnerships when managing TP controversy

Tax teams are overlooked for career development

Authenticity key to successful leadership in world of tax

ICAP offers fast track to multilateral APAs

Favourable outcome letters from the International Compliance Assurance Programme (ICAP) helped Barilla and other multinational enterprises (MNEs) secure multilateral advance pricing agreements (APAs), despite an increased risk of audits.

The ICAP programme has helped MNEs to improve the extent and speed of their access to tax certainty tools such as APAs, although tax directors told ITR that entering the ICAP programme could also lead to an increased risk of audits. For most tax professionals, the benefits of the ICAP outweigh the risks.

While the ICAP does not give legal tax certainty, an outcome letter is used as evidence of compliance because it signals approval from multiple tax authorities on the business’s tax control framework, transfer pricing (TP) transactions, and permanent establishment (PE) risks. In some cases, a favourable outcome letter has led to a shorter timeline for signing a multilateral APA.

"We had a fast track to open a bilateral APA between the US and Italy," said Gianluca Tagliavini, group VP of tax at Barilla, regarding his participation in ICAP’s pilot programme. "Normally it can take longer than a year to even have the first discussion.”

The ICAP outcome letters are issued within 24 to 28 weeks following delivery of the main documentation package, which is the tax data that MNEs share with relevant tax authorities. Favourable outcome letters have facilitated easier negotiations on tax certainty matters between the taxpayer and tax authorities, including legally binding documents such as the APA.

“We had the opportunity in a few months to have the first preliminary understanding between the US tax authority and the Italian tax authority,” added Tagliavini. “This is a very important aspect to speed up the processes in order to reach tax certainty."

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Data sharing is crucial for tax tech innovation

Acquiring investment for tax technology is a key concern for tax directors as cash-strapped multinational enterprises (MNEs) tighten their budgets. Data visualisation tools can help make the case to senior decision-makers.

Tax technology can ease the increasing workload on tax teams due to the COVID-19 pandemic and rapid changes in legislation. Yet the pandemic has also made it more difficult to acquire a budget for technology.

Tax professionals at an exclusive roundtable on June 29 by ITR and Thomson Reuters said that strong messaging and data analytics are key to gathering support for investing in tax technology.

“You’ve really got to be able to drive home and communicate what will happen if you don’t do this,” said one senior manager of tax.

During the past year, tax teams have faced an increasing workload due to the effects of COVID-19 on their businesses. Lockdowns, temporary deadline extensions, and rate changes have added even more weight to the compliance burden.

The pandemic hit when the compliance burden was already on the rise due to tax transparency measures such as the EU’s Directive on Administrative Cooperation (DAC6) and country-by-country reporting (CbCR). Rapid legislative developments including the introduction of digital services taxes (DSTs) and changes in US tax policy added to the pressure.

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Next week in ITR

ITR will continue to follow and analyse the OECD-brokered deal next week, particularly in the run up to the G20 meeting in Venice on July 9-10. The world may be about to see the biggest changes to the international tax system since the 1920s.

At the same time, ITR will not be losing sight of the issues that matter to taxpayers day-to-day. For example, the rise of digital services taxes (DSTs) has created difficulties for in-house tax departments. Corporate tax and indirect tax teams are splitting the DST workload to try and manage the burden.

Meanwhile, Argentina has set out to simplify its transfer pricing regime and yet the results may fall short of those hopes. ITR will be covering the impact for businesses. Readers can expect these stories and plenty more.

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