This week in tax: Ecofin expands EU blacklist, Canada tax gap balloons


The Economic and Financial Affairs Council has added three more countries to its EU blacklist of non-cooperative tax jurisdictions in a move to raise the pressure on governments to comply with international tax standards.

While the directive on pillar two was not on the Ecofin meeting held on Tuesday, October 4, ministers still made advances on bloc-wide international tax policy matters.

The Czech Council presidency added Anguilla, The Bahamas and Turks and Caicos Islands to its list of non-cooperative tax jurisdictions for tax purposes. The list includes countries that have not engaged with the EU on tax governance, or failed to deliver on required international tax reforms.

The list now consists of 12 jurisdictions: American Samoa, Anguilla, The Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands and Vanuatu.

Countries undergoing tax reforms should meet good governance criteria in the EU to be removed from the list. Criteria include tax transparency and implementation of international anti-BEPS standards.

At the same meeting, the Czech-led Council of the EU set its agenda on climate finance for the 2022 UN Climate Change Conference, including plans to join the G7’s climate club of countries.

That climate club is an intergovernmental forum to support the Paris Agreement by accelerating climate action, emissions reductions, and energy transition.

The Council highlighted its initiative to reduce carbon emissions by raising the cost of fossil fuel, including the Emissions Trading System and the Carbon Border Adjustment Mechanism.

EU leaders stressed the need for additional carbon pricing efforts with other countries to shift financial flows to climate-neutral investments too.

The next Ecofin meeting will be held on November 8, but it is unlikely to address minimum taxation because of heightened political disagreement on corporate tax matters.

Canada’s corporate tax gap balloons

The Canadian corporate tax gap has more than doubled from a three-year average of C$13.5 billion ($9.9 billion) before the pandemic to C$30 billion in 2021, according to a report by Canadians for Tax Fairness on Tuesday, October 4.

This comes despite a 60% increase in the pre-tax profits of 123 of the country’s biggest corporations with a market capitalisation of at least C$2 billion.

The report found that companies used tax avoidance schemes to lower their effective corporate tax rate to 15% from the statutory rate of 26.5%.

“Corporate tax avoidance has significant consequences for government finances and the Canadian economy. It also undermines people’s confidence in our tax system,” noted the report.

The C4TF document has called for a windfall tax on profits to address rising inflation given that corporate revenues and profit margins have soared during the worsening cost-of-living crisis.

Norway plans 2023 tax increase on oil and gas firms

Meanwhile, the Norwegian government says it plans to increase taxes on oil and gas companies by 2 billion kr ($186.5 million) in 2023 and to reduce pandemic-era special tax deductions.

These measures will see a cut to the uplift rate – a special tax deduction – from 17.7% to 12.4%. This is part of an initiative to fight soaring inflation and to boost tax revenues from businesses that rely on the Nordic nation’s natural resources.

The government anticipates oil and gas profits to rise by 18% next year to a record of 1.38 trillion kr ($131 billion). European gas prices have surged following the war in Ukraine since Russia cut energy supply to the continent.

Investors move to tax-loss harvesting after stock fall

Following the September stock market turmoil, a growing number of US banks are helping wealthy clients adopt a tax-loss harvesting strategy whereby they sell investments at a loss to reduce their tax burden.

US banks JPMorgan Chase, BlackRock and Morgan Stanley are offering automated products to help investors reap the tax benefits of loss-making deals since stocks and bond prices dramatically dropped in September.

Rising interest rates worldwide have hit the bond market hard and stock markets have seen the value of shares slide. With the S&P 500 stock index down 21% in 2022, many investors have opted to sell for the sake of a reduced tax bill only to repurchase later.

This period of economic turmoil may be an opportunity for investors to turn losses into tax benefits.

CAE report calls for French tax reform to increase productivity

In other news, the government advisory group Conseil d’Analyse Economique recommended on Wednesday, October 5, that the French government should reform the tax system as part of proposals for increasing productivity in the economy.

The French government should reform its innovation tax credit scheme to benefit a greater number of companies to increase the number of patents filed in the country, according to the CAE.

France should increase the tax credit rates from 30% to 42% and reduce the tax credit threshold from €100 million ($97.9 million) to €20 million. Research and development incentives “disproportionately benefit large companies” and this holds back innovation, the report claims.

Productivity has declined in the French economy since 2004 and the drop represents a shortfall of €140 billion ($137 billion) in GDP growth. France lost €65 billion compared to Germany between 2006 and 2019, according to the CAE report.

OECD invites public consultation on progress report of Amount A

The OECD on Wednesday, October 6, invited a second round of public comments on the progress report on pillar one and Amount A, following the 14th plenary meeting of the Inclusive Framework on BEPS.

The first progress report for public consultation was released in July, including key details about Amount A under pillar one. The two reports will enable policymakers to design a final draft of the pillar one rules for corporations within scope.

The OECD reached a global agreement on pillar one and two rules in October 2021, but criticism on pillar one has meant more work needs to be done to achieve a global consensus.

Stakeholders will have until November 11 to submit their commentaries as the IF aims to finalise the multilateral convention of pillar one by mid-2023. The aim is to implement the reforms in 2024.

Shell CEO warns of potential tax on energy firms

Elsewhere, CEO of oil company Shell, Ben van Beurden, said at the Energy Intelligence Forum in London on Wednesday, October 5, that governments will have to tax energy corporations to mitigate the impact of rising bills on consumers.

Van Beurden said the energy industry has to accept that higher taxes are inevitable to “protect the poorest” given the cost-of-living crisis.

Many governments from around the world have taken initiatives to combat soaring energy and oil prices, and this could be the next one.Governments across the world are expected to amend taxation rules as the winter period fast approaches.

ITR speaks to tax experts about the OECD’s two-pillar solution following concerns from multinational companies about its scope and fears of double taxation. Meanwhile, taxpayers face a mountain of data compliance requirements as part of pillar one.

At the same time, ITR will be covering the UN convention on aggressive tax planning with proposals to either design a substitute for pillar two or better align the OECD plan with the needs of developing countries.

Brazil is facing a second round in its presidential election with historic implications for the country’s tax system. Transfer pricing reform in Brazil could spell the end of formulary apportionment and a return to the arm’s-length principle.

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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