The US presidential election campaign race is heating up with the Democrats officially announcing Joe Biden as their presidential candidate. Biden has released 27 preliminary tax proposals giving us a flavour of the Democrats’ tax plans. In Russia, the Federal Tax Services has clarified the assessment of intra-group service cost deductions for the purpose of tax audits conducted by local authorities signalling a new unified approach. Meanwhile, the OECD published a toolkit for the convention of Mutual Administrative Assistance which seeks to aid countries who wish to participate. In Europe more countries, including Portugal and Bulgaria, have now officially confirmed the adoption of the six-month deferral for DAC 6, and Ireland issued draft legislation for the next phase of its stimulus package addressing the economic impact of Covid-19. In the absence of a global solution to taxation of the digital economy, Ecuador, the Philippines and Spain are moving ahead with unilateral solutions. Finally, India announced a new plan for ‘transparent taxation’.
The US 2020 presidential election campaigns have been gaining momentum ahead of November’s vote, with the Democratic Party officially announcing Joe Biden as its presidential candidate on 19 August, during the virtual Democratic National Convention. This followed on from the Democrats’ nomination of Senator Kamala Harris as their vice-presidential candidate just a few days earlier on 12 August. How does this particular duo, if successful in its presidential campaign, plan to reshape America’s tax landscape?
Recently, Biden released 27 high-level preliminary tax proposals which in part, appear to be seeking to address wealth disparity. The key individual tax proposals consist of a restoration of the top individual tax rate from 37% to 39.6%, taxing capital gains as ordinary income for taxpayers with over $1m income and capping the tax benefits of itemised deductions at 28% of value.
Biden’s major corporate tax proposals consist of:
Proposed tax rises are not unexpected in the context of the economic disruption caused by Covid-19. This raises the question of whether the Democrats would seek to further reverse the tax cuts brought in by Trump’s Tax Cuts and Jobs Act, which temporarily reduced the income tax rate across all income tiers and is set to expire in 2025.
Across the Bering Strait, the Russian Federal Tax Service published guidance on 6 August, addressing local Russian tax authorities on the key principles to follow when conducting tax audits on intercompany services provided to Russian entities by foreign related companies. Specifically, the guidance outlines how to verify expenses deducted in relation to intra-group services along with the economic justification and the sufficiency of supporting documentation. This is a welcome publication for multinational groups with Russian subsidiaries as, until now, the Russian tax authorities have not had a unified approach with regard to these matters.
In particular, there have historically been inconsistencies in the following areas:
The guidance confirms that taxpayers are to be allowed to submit transfer pricing documentation (or certain components of such documentation) to satisfy an enquiry. In addition, this information may be obtained from the master file of the MNE group. In connection with this, taxpayers need to verify not only the existence of a transparent methodology used to form the cost of services but also the consistency of its description in both the master file and local file. The importance of functional analysis, in particular, is highlighted. The guidance also notes a number of key ‘tests’ that the Russian tax authorities will consider when auditing transactions including ensuring that service prices are derived from a transparent methodology and are consistently applied throughout the group.
Overall the guidance is useful and may give taxpayers hope that the methods for verifying cross-border intra-group services charges and the approaches to challenge them will become less formal and more justified. However, multi-national groups will still need detailed supporting documentation, and it may be advisable for groups to conduct a thorough review of service contracts to ensure no discrepancies exist to improve the prospect of receiving a positive result in the event of a tax audit. In addition, it may be prudent to conduct and include a benefits test in the transfer pricing documentation; to justify the services remuneration structure; to prove the absence of allocation of the shareholders’ costs; to prepare employees and former employees for potential interviews regarding the services; and if the expenses are challenged, to consider a mutual agreement procedure (MAP) process available under an applicable income tax treaty.
Globally, the OECD further pushed its agenda for cooperative tax information exchanges and assistance, with the Global Forum Secretariat publishing a new toolkit to help countries become party to the convention on Mutual Administrative Assistance in tax matters (MAAC) on 29 July.
The MAAC, originally introduced in 1988 and then amended by the 2010 Protocol, is a multilateral treaty aimed at assisting countries to better enforce their tax laws by providing an international legal framework for exchanging information and co‑operating in tax matters, with a view to countering international tax evasion and avoidance. The MAAC currently has 137 participating countries.
The new toolkit provides a detailed step-by-step guide on how to become a party to the MAAC, specifically targeting countries that wish to join. It highlights the key provisions of the MAAC, the procedure to become a party and the critical role it plays in the implementation of the common reporting standard (CRS) for the automatic exchange of financial account information and the base erosion and profit shifting (BEPS) actions relating to tax transparency, particularly country by country reporting.
As governments around the world continue to grapple with supporting economies in the face of the Covid-19 crisis, Ireland presented draft legislation on 24 July outlining a job stimulus package which included a mixture of tax and grant-based provisions aimed at helping businesses return to an even keel.
Specifically, the tax measures will facilitate tax refunds for those businesses that were profitable in 2019 and to provide relief for businesses that are struggling to pay their tax liabilities in 2020. These include offering waivers on commercial rates till the end of September 2020 and permitting the early carryback of losses to the prior period, whilst reducing the interest rate on all tax debts to 3%.
Maintaining employment in addition to implementing several measures to support individuals who have lost their jobs as a result of the pandemic is central to the latest announcements.
New measures adopted by other governments in response to Covid-19 include Belgium temporarily increasing the rate of a one-time ‘bonus’ deduction for eligible investments made by small companies, self-employed persons or individuals in certain professions to 25% for the period between 12 March 2020 and 31 December 2020 and, in Thailand, an additional 150% deduction is available for certain investments made in new machinery and hotel renovations made in 2020.
As I reported last month, an optional six month deferral to the initial reporting deadlines under the EU mandatory disclosures rules (DAC 6) was agreed by the Council of the European Union on 24 June and most EU member states quickly confirmed they would opt for the delay with just Austria, Germany and Finland deciding to keep the original deadlines. Since my previous article, Cyprus, Italy, Portugal and Bulgaria have also confirmed they will adopt the six-month deferral.
In the absence of a global solution to taxation of the digital economy more countries are taking unilateral action. Ecuador has confirmed that it will bring in a 12% digital services tax (DST) effective from 16 September 2020. The Philippines have also introduced proposed legislation for a 12% DST. At the time of writing Spain’s draft legislation for a 3% DST, is pending approval in the Senate. As soon as the Senate approves the draft legislation, the legislation will become enacted in Spain. Notably Spain’s DST regime is one of those under investigation by the US, along with the UK’s DST and several other territories.
The UK’s DST has applied since 1 April 2020. HMRC recently updated its DST guidance with details of similar foreign taxes on which cross-border relief can be claimed. Where a transaction is cross-border this means the revenues may be linked to both a UK user and a non-UK user. In this situation, all the revenues from the transaction could be subject to DST in both the UK and in another jurisdiction. Under the UK DST rules, cross-border relief applies when transaction revenues are (or would be) subject to a similar DST imposed in a foreign country. Where a valid claim for cross-border relief has been made by a taxpayer in its group DST return, the UK digital services revenues from the qualifying cross-border transactions for an accounting period will be reduced by 50%. A similar 50% adjustment is made for those entities using the alternative charge calculation of the UK DST and making a valid cross-border relief claim. The applicable countries list of territories applying similar DSTs to the UK will be available on the HMRC website, and currently includes France, Italy, Malaysia, and Turkey.
Finally, on 13 August, India’s Prime Minister Narendra Modi launched a new platform for 'transparent taxation' which aims to ease compliance and expedite refunds for ‘honest’ taxpayers. Three main features of the platform are faceless assessment, faceless appeal and a taxpayers' charter.
Faceless appeals and assessments will be driven by a new technology interface with taxpayers. Data analytics and artificial intelligence will be at the core of the new system which it is hoped will bring greater certainty and fairness in selecting taxpayers for review, while reducing physical interaction between taxpayers and the tax authorities. The new taxpayers’ charter is much simpler than those which have gone before. While previous editions were largely administrative the new charter focuses on taxpayers’ expectations and the commitments of the tax authority.
The commitments made in the new taxpayers’ charter are particularly welcome as they give taxpayers a number of assurances, including the right to privacy, a commitment that enquiries will not be more intrusive than necessary and a right for the taxpayer to be given accurate information to support their compliance. It is hoped this will help boost the trust of taxpayers towards the Indian Tax Authority, and it will be interesting to see how this evolves, particularly with the rollout of the new technology platform.
The US presidential election campaign race is heating up with the Democrats officially announcing Joe Biden as their presidential candidate. Biden has released 27 preliminary tax proposals giving us a flavour of the Democrats’ tax plans. In Russia, the Federal Tax Services has clarified the assessment of intra-group service cost deductions for the purpose of tax audits conducted by local authorities signalling a new unified approach. Meanwhile, the OECD published a toolkit for the convention of Mutual Administrative Assistance which seeks to aid countries who wish to participate. In Europe more countries, including Portugal and Bulgaria, have now officially confirmed the adoption of the six-month deferral for DAC 6, and Ireland issued draft legislation for the next phase of its stimulus package addressing the economic impact of Covid-19. In the absence of a global solution to taxation of the digital economy, Ecuador, the Philippines and Spain are moving ahead with unilateral solutions. Finally, India announced a new plan for ‘transparent taxation’.
The US 2020 presidential election campaigns have been gaining momentum ahead of November’s vote, with the Democratic Party officially announcing Joe Biden as its presidential candidate on 19 August, during the virtual Democratic National Convention. This followed on from the Democrats’ nomination of Senator Kamala Harris as their vice-presidential candidate just a few days earlier on 12 August. How does this particular duo, if successful in its presidential campaign, plan to reshape America’s tax landscape?
Recently, Biden released 27 high-level preliminary tax proposals which in part, appear to be seeking to address wealth disparity. The key individual tax proposals consist of a restoration of the top individual tax rate from 37% to 39.6%, taxing capital gains as ordinary income for taxpayers with over $1m income and capping the tax benefits of itemised deductions at 28% of value.
Biden’s major corporate tax proposals consist of:
Proposed tax rises are not unexpected in the context of the economic disruption caused by Covid-19. This raises the question of whether the Democrats would seek to further reverse the tax cuts brought in by Trump’s Tax Cuts and Jobs Act, which temporarily reduced the income tax rate across all income tiers and is set to expire in 2025.
Across the Bering Strait, the Russian Federal Tax Service published guidance on 6 August, addressing local Russian tax authorities on the key principles to follow when conducting tax audits on intercompany services provided to Russian entities by foreign related companies. Specifically, the guidance outlines how to verify expenses deducted in relation to intra-group services along with the economic justification and the sufficiency of supporting documentation. This is a welcome publication for multinational groups with Russian subsidiaries as, until now, the Russian tax authorities have not had a unified approach with regard to these matters.
In particular, there have historically been inconsistencies in the following areas:
The guidance confirms that taxpayers are to be allowed to submit transfer pricing documentation (or certain components of such documentation) to satisfy an enquiry. In addition, this information may be obtained from the master file of the MNE group. In connection with this, taxpayers need to verify not only the existence of a transparent methodology used to form the cost of services but also the consistency of its description in both the master file and local file. The importance of functional analysis, in particular, is highlighted. The guidance also notes a number of key ‘tests’ that the Russian tax authorities will consider when auditing transactions including ensuring that service prices are derived from a transparent methodology and are consistently applied throughout the group.
Overall the guidance is useful and may give taxpayers hope that the methods for verifying cross-border intra-group services charges and the approaches to challenge them will become less formal and more justified. However, multi-national groups will still need detailed supporting documentation, and it may be advisable for groups to conduct a thorough review of service contracts to ensure no discrepancies exist to improve the prospect of receiving a positive result in the event of a tax audit. In addition, it may be prudent to conduct and include a benefits test in the transfer pricing documentation; to justify the services remuneration structure; to prove the absence of allocation of the shareholders’ costs; to prepare employees and former employees for potential interviews regarding the services; and if the expenses are challenged, to consider a mutual agreement procedure (MAP) process available under an applicable income tax treaty.
Globally, the OECD further pushed its agenda for cooperative tax information exchanges and assistance, with the Global Forum Secretariat publishing a new toolkit to help countries become party to the convention on Mutual Administrative Assistance in tax matters (MAAC) on 29 July.
The MAAC, originally introduced in 1988 and then amended by the 2010 Protocol, is a multilateral treaty aimed at assisting countries to better enforce their tax laws by providing an international legal framework for exchanging information and co‑operating in tax matters, with a view to countering international tax evasion and avoidance. The MAAC currently has 137 participating countries.
The new toolkit provides a detailed step-by-step guide on how to become a party to the MAAC, specifically targeting countries that wish to join. It highlights the key provisions of the MAAC, the procedure to become a party and the critical role it plays in the implementation of the common reporting standard (CRS) for the automatic exchange of financial account information and the base erosion and profit shifting (BEPS) actions relating to tax transparency, particularly country by country reporting.
As governments around the world continue to grapple with supporting economies in the face of the Covid-19 crisis, Ireland presented draft legislation on 24 July outlining a job stimulus package which included a mixture of tax and grant-based provisions aimed at helping businesses return to an even keel.
Specifically, the tax measures will facilitate tax refunds for those businesses that were profitable in 2019 and to provide relief for businesses that are struggling to pay their tax liabilities in 2020. These include offering waivers on commercial rates till the end of September 2020 and permitting the early carryback of losses to the prior period, whilst reducing the interest rate on all tax debts to 3%.
Maintaining employment in addition to implementing several measures to support individuals who have lost their jobs as a result of the pandemic is central to the latest announcements.
New measures adopted by other governments in response to Covid-19 include Belgium temporarily increasing the rate of a one-time ‘bonus’ deduction for eligible investments made by small companies, self-employed persons or individuals in certain professions to 25% for the period between 12 March 2020 and 31 December 2020 and, in Thailand, an additional 150% deduction is available for certain investments made in new machinery and hotel renovations made in 2020.
As I reported last month, an optional six month deferral to the initial reporting deadlines under the EU mandatory disclosures rules (DAC 6) was agreed by the Council of the European Union on 24 June and most EU member states quickly confirmed they would opt for the delay with just Austria, Germany and Finland deciding to keep the original deadlines. Since my previous article, Cyprus, Italy, Portugal and Bulgaria have also confirmed they will adopt the six-month deferral.
In the absence of a global solution to taxation of the digital economy more countries are taking unilateral action. Ecuador has confirmed that it will bring in a 12% digital services tax (DST) effective from 16 September 2020. The Philippines have also introduced proposed legislation for a 12% DST. At the time of writing Spain’s draft legislation for a 3% DST, is pending approval in the Senate. As soon as the Senate approves the draft legislation, the legislation will become enacted in Spain. Notably Spain’s DST regime is one of those under investigation by the US, along with the UK’s DST and several other territories.
The UK’s DST has applied since 1 April 2020. HMRC recently updated its DST guidance with details of similar foreign taxes on which cross-border relief can be claimed. Where a transaction is cross-border this means the revenues may be linked to both a UK user and a non-UK user. In this situation, all the revenues from the transaction could be subject to DST in both the UK and in another jurisdiction. Under the UK DST rules, cross-border relief applies when transaction revenues are (or would be) subject to a similar DST imposed in a foreign country. Where a valid claim for cross-border relief has been made by a taxpayer in its group DST return, the UK digital services revenues from the qualifying cross-border transactions for an accounting period will be reduced by 50%. A similar 50% adjustment is made for those entities using the alternative charge calculation of the UK DST and making a valid cross-border relief claim. The applicable countries list of territories applying similar DSTs to the UK will be available on the HMRC website, and currently includes France, Italy, Malaysia, and Turkey.
Finally, on 13 August, India’s Prime Minister Narendra Modi launched a new platform for 'transparent taxation' which aims to ease compliance and expedite refunds for ‘honest’ taxpayers. Three main features of the platform are faceless assessment, faceless appeal and a taxpayers' charter.
Faceless appeals and assessments will be driven by a new technology interface with taxpayers. Data analytics and artificial intelligence will be at the core of the new system which it is hoped will bring greater certainty and fairness in selecting taxpayers for review, while reducing physical interaction between taxpayers and the tax authorities. The new taxpayers’ charter is much simpler than those which have gone before. While previous editions were largely administrative the new charter focuses on taxpayers’ expectations and the commitments of the tax authority.
The commitments made in the new taxpayers’ charter are particularly welcome as they give taxpayers a number of assurances, including the right to privacy, a commitment that enquiries will not be more intrusive than necessary and a right for the taxpayer to be given accurate information to support their compliance. It is hoped this will help boost the trust of taxpayers towards the Indian Tax Authority, and it will be interesting to see how this evolves, particularly with the rollout of the new technology platform.
