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This week in tax: US drops threat of tariffs over digital tax

Following the OECD tax agreement, the US government has cut a deal with five European countries to put aside the threat of tariffs over digital tax measures. This agreement may help secure international tax reform.

The Biden administration has agreed to not impose trade tariffs against Austria, France, Italy, Spain and the UK despite these countries introducing digital services taxes (DSTs). However, there are important strings attached.

Technology companies impacted by these measures will be granted a credit to offset the cost of the DSTs. The understanding is that these countries will withdraw the DSTs by the end of 2023. This marks a shift away from unilateralism.

“We reached our agreement on DSTs [digital service taxes] in conjunction with the historic OECD global agreement that will help end the race to the bottom over multinational corporate taxation by levelling the corporate tax playing field,” said US Trade Representative Katherine Tai.

“We will work together with these governments to ensure implementation of the agreement,” she told the press.

The OECD secured a landmark agreement on October 8 with more than 136 countries to secure international tax reform. Although the US government is still trying to ensure domestic tax reform, US trade strategy is pivoting to support reform at home and abroad.

On the other hand, the US is taking a ‘carrot and stick’ approach to combat unilateral measures. The US is keeping tariffs on the table when it comes to other countries upholding DSTs. This could include countries such as India and Turkey.

Many governments have considered DSTs as a way of clawing back revenue as technology companies have managed to operate above the traditional tax system. This rising tax nationalism might finally be about to come to an end, but only at the expense of fiscal sovereignty.

There will be ‘winners’ and ‘losers’ with some countries gaining taxing rights at the expense of other countries. This is a difficult choice for many governments. The days ahead will be critical in deciding the future of international tax.

ITR headlines this week include:

Solving profit allocation is crucial to reaching a global consensus

TP technology is reaching new capabilities

The OECD tax agreement spells the end for India’s equalisation levy

OECD’s tax deal lacks certainty on pillar one profit allocation rules

TP technology is reaching new capabilities

Transfer pricing (TP) teams at multinational enterprises (MNEs) are increasingly automating complex compliance projects such as managing country-specific risks, as the technology evolves.

Businesses are increasingly relying on TP technology to carry out more comprehensive and complex processes than the simple, repetitive tasks that it has been used for until now.

This marks a step forward for MNE tax teams, although obstacles to adopting the technology remain, as in-house TP specialists at ITR’s Global Transfer Pricing Forum explained.

“We are moving away from just automating our repetitive tasks, where we were rolling forward reports or automating our benchmark searches,” said one tax director.

“Now we have started to work with bigger compliance items like managing our country-by-country risk or understanding our exposure around the world,” they added.

TP teams at MNEs are using a combination of outsourced and in-house solutions to manage tasks including day-to-day operations, tax transparency reporting, and benchmarking. This is an important exercise to improve efficiency but it is also necessitated by the demands of tax authorities.

Tax administrations around the world are becoming more sophisticated and placing a greater emphasis on data and analytics, explained a second tax director and TP specialist.

A third panellist gave an example of how using technology – in this case, from Swiss-based Optravis – helps their team to complete calculations for operational TP for tangible goods. The team use what the panellist termed a “basket approach” with the transactional net margin method (TNMM).

The profit margins for a business unit are identified and transferred into the enterprise resource planning (ERP) system – in this case, SAP – via a condition table. This allows the SAP system to refer to this profit table whenever a tangible good is sold between affiliated companies, to draw the respective profit markup.

While this can produce varying results depending on the profit contribution of individual articles, the tool is still able to calculate in total the overall profit contribution for the articles, and to deliver the target margin corridor.

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The OECD tax agreement spells the end for India’s equalisation levy

The OECD-brokered deal requires countries to revoke all digital services taxes (DST) and any equivalent measures. The deal also commits governments to not introduce such measures in the future.

An agreement reached on October 8 by 136 members of the OECD/G20 Inclusive Framework (IF) entailed that no newly enacted DSTs or similar measures would be imposed on any company from that date until either December 31 2023 or until the Multilateral Convention (MLC) comes into force.

This means that India will have to scrap its equalisation levy (EL) that targets non-resident e-commerce platforms selling goods and services in the country.

Tax lawyers said that if the equalisation levy is to be rolled back, an amendment to the Finance Act of 2016 would be necessary to impose a sunset clause on the operation of the EL provisions.

“India has always stated that the EL was a temporary measure till there was a multilateral solution. Having consented to the deal, the EL should be rolled back once pillar one comes into effect,” said Meyya Nagappan, leader of digital tax and social finance at Nishith Desai Associates.

According to the deal, countries must not introduce similar unilateral measures in the future and experts find that to be a heavy commitment.

“The first question is how this is going to be defined and what kind of a commitment can a country make in terms of taxes is won't impose in the future,” said Suranjali Tandon, assistant professor at National Institute of Public Finance and Policy in New Delhi.

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Next week in ITR

ITR will be taking a look at strategies for managing intellectual property (IP) amid the COVID-19 pandemic. Many companies onshoring IP have had to overcome unique transfer pricing problems brought about by the pandemic. Such problems may even outweigh whatever tax gains the original location offered.

At the same time, businesses are considering the possible tax outcomes of the upcoming UN Climate Change Conference (COP26). Governments are increasingly looking at tax measures to reduce carbon emissions, including carbon border regimes. The world is changing to respond to the climate crisis, and tax is a part of the answer.

Meanwhile, the UK government is preparing to release its budget and British tax policy may be about to change once again. ITR will be providing in-depth analysis of the announcement.

Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.

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