Issue 3 2018 – Brussels, 30 March 2018
OECD Interim Report on Tax Challenges Arising from Digitalisation
The OECD has published its Interim Report on Tax Challenges Arising from Digitalisation, which concludes that no agreement can presently be reached among the Inclusive Framework countries on either the implementation of short-term interim measures to tax the digital economy, or long term measures of identifying characteristics of digital businesses, and the extent to which those features contribute to value creation and should therefore be subject to a digital tax.
However, OECD Inclusive Framework members have agreed to undertake a review of the nexus and profit allocation rules concerning allocation of taxing rights between jurisdictions, and the impact of digitalisation on the economy. To that end, and in order to improve international taxation rules to be better fit for purpose concerning the taxation of the digital economy, the OECD aims to produce a final report in 2020.
EU Commission Proposals for Taxation of the Digital Economy
The European Commission has now published draft directives concerning taxation of the digital economy.
- Interim Measure/Directive on DST: Tax on gross revenue
The draft interim measure, the Directive on Digital Services Tax (“DST”) proposes to implement a short term interim turnover tax on digital businesses operating in the Single Market, on the aggregated gross revenue of digital businesses at 3%. The levy would apply to digital firms with global revenue above €750 million, and annual EU revenue of €50 million or more, with no deduction of costs, to apply to revenue made from targeted advertising based on user data collection and digital intermediation services of making available digital marketplaces. Revenue contemplated to be within the scope of the proposed tax includes services of data collection for the sale of targeted advertising, and intermediation services of making available digital marketplaces. The tax would require self-reporting of the relevant data for calculating revenue and place of supply. The tax is proposed to be collected making use of a “one-stop-shop” model.
- Long Term Measures/Digital PE: Revision of International Corporate Tax Concepts
The long term measure proposes revision of corporate taxation concepts of permanent establishment and profit allocation to account for digital activities. The directive proposes that the definition of permanent establishment should include a “significant digital presence”. A digital PE will be established when a platform either exceeds an annual turnover of €7 million, or has more than 100,000 users in a Member State in a taxable year, or has over 3,000 contracts for the provision of digital services in a taxable year, that would amount to a Digital PE.
- Recommendations relating to Double Tax Treaties: The third proposal in the EU digital taxation package sets out recommendations to Member states to renegotiate and adapt their double tax treaties with 3rd countries (non-EU) by way of extending the scope of the PE concept to include significant digital presence (digital PE) through which the business of an enterprise is wholly or partly carried out.
The US recently set out its position that it does not believe digital business is so inherently different such that it warrants separate treatment by way of the creation of a special tax regime and the lack of agreement at OECD level.
US Impose Import Tariffs
In early March, US President Donald Trump announced plans to impose a 25% tariff on steel imports, and a 10% tariff on aluminium, in a move to protect and revive the American steel industry. After indications by Canada and the EU, among other countries, that retaliatory measures would be considered, with the EU also making public a list of products upon which tariffs may be imposed, the US have since announced that Canada, Mexico, Europe, Australia, Argentina, Brazil and South Korea will be temporarily exempt from the tariffs. Following the initial announcement of the steel tariff, China announced its own range of tariffs to be imposed on over $3 billion worth of US goods, including fresh fruit, wine and pork. The US has now announced a list of additional tariffs to be imposed on over $60 billion worth of Chinese imports, sparking fears of a so-called “trade war”. Temporary exemptions granted to some countries were conditional on their implementing measures that would assist the US address its trade deficit by 1 May. Negotiations concerning the detail of the measures are ongoing.
EU “Blacklist” of Non-Cooperative Jurisdictions
In March, three countries were removed and a further three countries added to the EU’s list of non-cooperative jurisdictions in taxation matters aimed at promoting tax good governance and minimising tax avoidance. Nine countries now remain on the list: American Samoa, Bahamas, Guam, Namibia, Palau, Samoa, Saint Kitts and Nevis, Trinidad and Tobago and the US Virgin Islands.
On 21 March, the Commission also published guidelines identifying countermeasures for the movement of EU funds through countries identified as non-cooperative tax jurisdictions. The guidelines detail the relevant legislation concerning transfers of EU monies in relation to non-cooperative jurisdictions, and provides a framework for assessing the risks of tax avoidance in projects involving entities in these jurisdictions. The legislation requires that EU funds do not support projects that contribute to tax avoidance, and that funding is routing according to good governance taxation standards.
In a significant milestone for the BEPS project, the OECD announced that the BEPS multilateral tax treaty instrument (“MLI”) will enter into force on 1 July 2018. This follows from the deposit of the fifth instrument of ratification by Slovenia. The other ratifying countries are Austria, the Isle of Man, Jersey and Poland. The multilateral tax treaty allows jurisdictions to update their existing double tax treaties and transpose measures agreed in the BEPS project without further need for bilateral negotiations.
Following on from BEPS Action 7 and the changes made to Article 5 of the OECD Model Tax Convention, the OECD has also published a report setting out guidance on how profit attribution rules should apply to permanent establishments. The guidance establishes high-level general principles concerning structures for sale of goods, online advertising and procurement, as well as guidance concerning permanent establishment and attributions of profits arising from anti-fragmentation rules.
Also in March, the OECD published Stage 1 Peer Review Reports assessing tax dispute resolution practices in Czech Republic, Denmark, Finland, Korean, Norway, Poland, Singapore and Spain. The reports examine compliance with best practice standards established in Action 14 of the BEPS plan concerning resolution of taxation disputes. The OECD has also now called for submissions concerning the 5th round of peer reviews relating to Estonia, Greece, Hungary, Iceland, Romania, Slovak Republic, Slovenia and Turkey, to be provided via completion of a taxpayer input questionnaire, with a deadline of 9 April 2018.
The selection of the remitted material has been prepared by
Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia
Issue 2 2018 – Brussels, 28 February 2018
US – Digital Economy Does Not Warrant Special Tax Regime
Chip Harter, Deputy Assistant Secretary (International Tax Affairs) at the US Department of the Treasury, set out the US position concerning proposals to tax the digital economy at a Tax Council Policy Institute conference held in Washington over 15 to 16 February. Mr Harter stated that the US does not believe digital business is so inherently different such that it warrants separate treatment by way of the creation of a special tax regime.
Harter stated the US is open to discussions as to whether benchmarks concerning permanent establishment and profit attribution should be revised on a broader basis, but not as part of a special regime which is specific only to digital business.
These comments come ahead of the interim report concerning the implications of digital taxation that the Task Force on the Digital Economy (TFDE), a subsidiary of the CFA, is preparing to deliver to G20 Finance Ministers at the April 2018 meeting. Harter indicated that a consensus cannot be reached and that this will be reflected in the report.
On 8 February the OECD issued additional guidance concerning the implementation of country-by-country reporting (CbCR) in accordance with Action 13 of the BEPS Project. The guidance states that total consolidated group revenue should be calculated on the basis of the same accounting standards used to identify the existence of a group for the purposes of CbCR. In addition, the guidance includes clarification concerning situations in which the non-compliance of a jurisdiction with the conditions of confidentiality, appropriate use or consistency with respect to CbCR may be considered a systemic failure of the jurisdiction to fulfil its obligations under an international agreement for the automatic exchange of CbCR.
The Global Tax Advisers’ Cooperation Forum submitted an opinion statement in January concerning the OECD consultation draft regarding proposed Mandatory Disclosure Rules requiring disclosure of avoidance arrangements and offshore structures.
Additionally, the OECD announced this month that Serbia has joined the Inclusive Framework on BEPS, bringing the total number of countries who have committed to work together to prevent multinational group tax avoidance and improve cross-border tax disputes to 112.
Nigeria, having ratified the Multilateral Component Authority Agreement on the Exchange of Country-by-Country Reporting Reports (CbC MCAA) in August 2016, has this month enacted Income Tax (Country-by-Country) Reporting Regulations 2018. These Regulations indicate compliance with Action 13 of the implementation plan of the OECD Base Erosion and Profit Shifting (BEPS) project.
Australia Proposes Draft Legislation Extending Multinational Anti-Avoidance Law
The Australian government has issued draft legislation which proposes to extend current anti-avoidance law, by preventing taxpayers from using foreign trusts or partnerships in corporate structures to evade the current legislative application.
The current legislation was enacted in 2016, and was designed to prevent multinational entities with annual global income of AUD $1 billion or more, or that are a part of a group of entities that have annual global income of AUD $1 billion or more, from avoiding paying tax within Australia by constructing artificial arrangements with the aim of avoiding having a taxable presence in Australia.
The Australian Government in its explanatory memorandum indicated that the proposed legislation would ensure the current anti-avoidance legislation operates as intended.
Revision of the UK Intangible Fixed Assets Regime
The UK regime on corporate intangible fixed assets (IFA regime) is being revisited. The scope of the regime includes assets such as copyright, patents and trademarks as well as goodwill. It was first established in 2002 to equate tax and accounting treatment of such assets. In essence, it introduced relief for amortisation or impairment of the aforementioned assets. The revision is aimed at enhancing the efficiency and attractiveness of the regime. Concrete proposals concerning the revisions are expected in late 2018.
Digital Services Tax & Carbon Tax Introduced in Singapore’s 2018 Budget
In its 2018 budget, the Singapore government has announced that a goods and services tax will be imposed on digital services from 2020 onwards, with plans to raise the current rate of the GST to 9%, a 2% increase, between 2021 and 2025. This announcement reflects current ongoing international dialogue concerning using destination principles for the taxation of digital services. B2B services are to be taxed by a reverse charge mechanism, with B2C services to be taxed via overseas vendor registration, which will be compulsory for overseas suppliers of digital services to Singapore.
The government also announced a new carbon tax in the budget for those entities producing 25,000 tonnes or above of greenhouse gases annually, to apply from 2019. The proposed tax rate is S$5 per tonne of emissions, to increase to S$10 or S$15 per tonne by 2030. The tax will take the form of a fixed-price credits-based mechanism.
The budget did not introduce any proposed changes for Singapore’s corporate income tax rates.
The selection of the remitted material has been prepared by
Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia
EU removes eight countries from the tax ‘blacklist’
The Council of the European Union removed eight jurisdictions from the EU list of non-cooperative jurisdictions for tax purposes at the ECOFIN meeting of 23 January. Following commitments made at high political level to remedy the EU concerns, the EU finance ministers agreed to move these countries to a separate list, where they will be subjected to close monitoring: Barbados, Grenada, Republic of Korea, Macao SAR, Mongolia, Panama, Tunisia and the United Arab Emirates. The decision leaves 9 countries on the list of 5 December 2017, initially comprising 17 jurisdictions.
EU Commissioner Moscovici urged the Member states to publish the content of the commitment letters sent to the EU by the jurisdictions that are now on the grey list. Moscovici stated that these letters must be made public, so that everyone can judge these commitments. It was further submitted by the Commissioner that the credibility of this process depends on such transparency, with the Member states bearing the onus of this responsibility.
Thailand releases second draft of proposed e-commerce law along with public consultation
The redraft of the proposed e-commerce tax, notably, removes the proposal for a withholding tax or corporate income tax but rather focuses on bringing service providers of e-commerce transactions within the scope of VAT. The new proposals include requiring foreign companies providing services via electronic media to a non-VAT registered person in Thailand to register for VAT if their income exceeds a certain threshold. The foreign VAT registered service provider will be subject to certain specific conditions. In addition, a non-VAT registered person who is subject to the service fee of the foreign company will not be required to self-assess for the VAT.
South Korea to tax cryptocurrency
The Ministry of Finance in South Korea has indicated its intention to introduce a tax on cryptocurrency exchanges such as the Bitcoin exchange. It is reported that the tax will be in the region of 22% corporate income tax and 2.2% local income taxes on the previous year’s earnings. The tax will be imposed if the annual income of the exchange exceeds the threshold of $18.8 during 2016.
In addition, it was indicated by the Finance Ministry that the exchange would be required to share transaction data with banks, in an effort to increase tax compliance.
Hong Kong introduces two-tiered profits tax regime
Hong Kong is set to introduce a new corporate tax regime targeted at encouraging growth of SMEs in 2018. Under the proposed new rules a lower rate of corporation tax of 8.25% will be introduced on the first $2 million of profits with the balance taxable at the standard rate of 16.5%.
New measures will also be introduced aimed at encouraging investment in research and development. The first $2 million of expenditure will be eligible for a 300% tax deduction with the remained expenditure subject to a 200% tax deduction.
Panama signs OECD Common Reporting Standard Multilateral Competent Authority Agreement
Panama has become the 98th jurisdiction to become a signatory. Signatories affirm their commitment to the automatic exchange of financial account information under the OECD/G20 Common Reporting Standard. The first set of exchanges are due to commence in September 2018. By becoming a signatory Panama will be in a position to activate bilateral exchange relationships with the other signatories.
CFE’s Global Tax Top 5 is edited by Piergiorgio Valente
The selection of the remitted material is prepared by
Aleksandar Ivanovski/ Filipa Correia / Piergiorgio Valente/
Stella Raventós-Calvo / Wim Gohres