US tax policy may be in gridlock for the next two years following the November 8 midterm elections, the final results of which are still pending.
The OECD’s pillar two plan is secure in US tax law, but the election results are bad news for wider reform under pillar one.
At the time of publication, the Democrats are neck-and-neck with the Republicans at 48 to 49 Senate seats, while the Republican Party has won more than 200 seats in the House of Representatives.
This split means US President Joe Biden will have very little room for manoeuvre on tax legislation.
International taxing rights are set to be reformed under pillar one to complement pillar two’s minimum effective corporate rate. The OECD’s hopes of the US shoring global support for pillar one may be dashed.
The Biden administration has secured the 15% minimum corporate rate with the Inflation Reduction Act. This legislation was passed in Congress after months of wrangling over the details with Senators Joe Manchin and Krysten Senima.
However, the Biden administration is unlikely to be able to work with the Republicans on tax reform if the results mean a split Congress or a Republican majority in both houses.
Dutch and Italian authorities cooperate in Booking.com investigation
The Dutch tax authority announced it will cooperate with Italian prosecutors yesterday, November 10, as part of an investigation that was launched in 2018 against online travel agency Booking.com for alleged tax evasion.
Booking.com is accused of evading €153 million ($153 million) in VAT from 2013 to 2019 through the taxation of properties booked. Booking.com claimed it was hotel owners’ responsibility to collect and pay VAT.
Two former finance chiefs will be questioned. Italian prosecutors aim to conclude the case with the help of the Dutch tax authority as Booking.com is based in the Netherlands. The company confirmed its cooperation with the two tax authorities. Prosecutors will meet in January 2023.
Twenty-eight countries sign AEOI agreement
Almost 30 countries signed an international tax agreement yesterday, November 10, to implement the automatic exchange of information at a meeting held in Spain.
The international agreement is a part of the OECD model rules for AEOI. Tax information can be automatically shared between jurisdictions, including to transactions carried out by online platforms.
Under the deal, countries expect to ensure the efficient taxation of such income.
Another agreement, on competent authorities, was signed by 15 jurisdictions as part of the meeting. The deal, signed on Wednesday, November 9, will enable the automatic exchange of information collected from intermediaries.
This agreement is aimed at tackling structures that hide the assets of beneficial owners abroad and ensuring that they pay their fair share of tax.
EU will revisit DST if global tax reform fails
The EU will go back to drafting a European digital services tax if the OECD’s global deal is not successful, the Czech finance minister warned on Tuesday, November 8.
Zbyněk Stanjura, whose country holds the EU presidency, warned that some EU member states fear that the US will not fully implement the global agreement agreed in 2021.
“I really am not able to say whether we are going to wait for six more months or nine more months, but I believe the longer these negotiations will take, the less of a chance of actually reaching an agreement,” said Stanjura in the Financial Times.
“If we are not able to reach an agreement mid or long term, then Europe will go back to talks about digital tax,” he added.
The European Commission drafted an EU-wide DST in response to the rise of similar measures in different European countries, but this proposal was shelved when the OECD released pillar one and pillar two. Pillar one has not been finalised, while pillar two is expected to go ahead in the US and the EU.
Pillar one would mean the overhaul of international taxing rights to reallocate profits to market jurisdictions, while pillar two would impose a 15% minimum effective corporate rate.
Japan shelves carbon tax and warns US over EV tax credits
Japan shelved plans to introduce a carbon tax on Tuesday, November 8, but the government has also warned the US against introducing electric vehicle tax credits.
Prime Minister Fumio Kishida is reluctant to go ahead with a carbon tax in April 2023 because Japan is facing an energy crisis as a result of the Russia-Ukraine war. Lawmakers fear a carbon tax would hit businesses hard, though there are other options on the table.
The Kishida government is considering an electricity surcharge and trialling an emissions trading scheme. A surcharge would not necessarily be as burdensome for individuals and businesses as a carbon tax.
In the meantime, the government will issue green transformation bonds to raise around ¥20 trillion ($136 billion) alongside a carbon-pricing programme. These funds will go towards the country’s green transition.
The Japanese government sent a letter to the US Treasury Department on Saturday, November 5, warning that the EV tax credits in the Inflation Reduction Act could restrict Japanese investment in EV production.
“It would be possible that Japanese automakers hesitate to make further investments towards electrification of vehicles,” the government said. “This could cause negative impacts on the expansion of investment and employment in the US.”
The US introduced tax credits to boost EV production, but Japanese car manufacturers fear these tax credits will put them at a disadvantage in the American market.
German industry body calls for delay to pillar two
Industry body the Federation of German Industries (BDI) called for at least a one-year delay to the implementation of the global corporate minimum tax deal on Monday, November 7.
The BDI, which is Germany’s leading industry body, said that postponing pillar two from 2024 to 2025 would give firms time to prepare for the complex set of regulations.
“The ambitious timetable of applying the minimum tax as early as 2024 is not realistic against the background of the enormous complexity of the associated new regulations,” said the BDI.
The organisation expressed reservations about how time and resource-consuming compliance with the rules would be, including the preparation of IT procedures. It urged authorities to simplify the process, to consider applying transitional arrangements and to delaying these measures until at least 2025, according to Reuters.
Pillar two aims to introduce a global corporate minimum tax rate of 15% and was agreed by 137 countries in October 2021.
The OECD’s two-pillar solution has stalled in the EU due to strong opposition from Hungary and Poland, which has since dropped its objections. The BDI has rejected suggestions from the German government that it could go it alone without unanimous EU agreement on the tax measures.
The industry body said it was wary that unilateral action could damage the country’s competitiveness and raise costs for companies based in Germany.
Australian corporate tax receipts surge to record high
The Australian Taxation Office said on Monday, November 7, that the country’s large corporations paid AU$68.6 billion ($44.7 billion) in tax in the financial year 2020-21, the highest amount since records began.
The ATO figures show there has been an AU$11.4 billion, or 19.8%, jump in receipts on the previous year from a total of 2,468 business entities. The bumper tax revenues were driven by a global surge in commodity prices.
ATO deputy commissioner Rebecca Saint praised large businesses for their high levels of tax compliance. Australia is among the world leaders in tax compliance with almost all companies paying tax according to the ATO’s compliance standards; 93% of tax collected is paid voluntarily.
The Australian government also announced that it would provide an extra AU$200 million per year to expand the activities of the Tax Avoidance Taskforce and to support its efforts to ensure firms pay the right amount of tax.
ITR will examine the transfer pricing consequences for multinational companies of changes to distribution channels, including locations and supply chains.
We will also continue to follow the tax implications of the US midterm elections, and will be reporting on the UK budget statement expected on Thursday, November 17.
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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