Festive Break? Not so much...
Kitty Miv, Editor
09 January, 2020
Well, I hope you're all rested after a nice uneventful festive break. No? Well, at least nothing much has been happening in the tax world. Also no?
Looks like we've got a lot to discuss this week, in that case, even leaving aside the domestic and international political situation in the United States and the UK!
At a multilateral level, the OECD has been busy over the last few weeks on the base erosion and profit shifting front, and on December 23 released new tools for tax administrations to gauge how they are performing in the area of tax debt management and the reduction of compliance burdens.
It announced that it has developed new "maturity models," featuring performance benchmarks against which tax agencies can better self-assess how their processes are performing against best standards and their peers.
Tom Boelaert, the Administrator General of the Belgian Debt Management Agency, which led the work on this model, explained that: "Tax debt management plays a crucial role in ensuring the effective and fair operation of the tax system. We should therefore always challenge ourselves to do better. Within my own agency, this new maturity model has facilitated frank and in-depth conversations about our future direction. From comments we received from other administrations as we developed this maturity model, I am sure that it will be a useful new tool for all tax administrations."
The OECD said it expects further models on other aspects of tax administration will be published over the coming years. These models will complement existing tools such as the International Monetary Fund's Tax Administration Diagnostic Assessment Tool (TADAT).
Somewhat later in the month, it was revealed that additional interpretative guidance to give greater certainty to tax administrations and MNE Groups on the implementation and operation of Country-by-Country (CbC) Reporting (BEPS Action 13) had been published.
The new guidance makes clear that, under the BEPS Action 13 minimum standard, the automatic exchange of CbC reports filed under local filing rules is not intended.
In an EU context, meanwhile, it was reported that the provisions of the EU's second Anti-Tax Avoidance Directive (ATAD 2) would become effective in all member states from January 1, 2020.
ATAD 2 includes provisions to ensure that hybrid mismatches of all types cannot be used to avoid tax in the EU, even where the arrangements involve third countries. The Directive addresses hybrid mismatches with regard to non-EU countries, given that intra-EU disparities are already covered by the first ATAD, adopted in July 2016 and implemented across the EU from January 1, 2019.
Anti-hybrid rules are designed to prevent multinationals from accessing unfair advantages by using hybrid mismatch arrangements to exploit differences in the tax treatment of an entity or financial instrument under the income tax laws of two or more countries.
The EU has also announced the introduction of a new exit tax from January 1, 2020, which is intended to eliminate tax advantages for companies that develop intangible assets in the EU but move them to low or no tax territories before they generate taxable income. The new exit tax is intended to enable that member state to tax the value of the product before the intellectual property is shifted elsewhere. It was included in the first ATAD but member states were allowed until January 1, 2020, to introduce it.
There was also movement on the tax reform front, particularly in Spain, where the process has been politically stalled. It emerged early in the year that the Spanish Socialist Party and the Podemos movement, which will form the next governing coalition, have now released a policy document, which includes plans for a corporate minimum tax, among other tax measures.
The main tax measures in the coalition agreement are as follows:
- Changes to corporate tax to ensure large corporations pay no less than 15 percent, with financial institutions and companies in the hydrocarbon sector to pay an 18 percent minimum tax.
- A reduction in corporate tax for small companies with turnover up to EUR1m (USD1.1m) from 25 to 23 percent.
- A commitment to introduce a digital services tax in line with proposals set out by the European Commission.
- A commitment to introduce a tax on financial transactions, which will apply to the purchase of shares in Spanish companies.
- A reduction in value-added tax on veterinary services and feminine hygiene products.
- A two percentage point increase in personal income tax for those with incomes in excess of EUR130,000, and a four percentage point increase for those with incomes in excess of EUR300,000. Currently, the top rate of personal income tax is 45 percent on income in excess of EUR60,000.
- A four percentage point increase in capital gains tax for those with incomes above EUR140,000, from 23 to 27 percent.
- Changes to the taxation of real estate holding companies (SOCIMIS), with a 15 percent tax to be imposed on undistributed benefits.
- A review of the tax regime relating to cooperatives and labor societies.
The agreement also includes commitments to study the taxation of wealth with the intention of making the tax system more "fair and progressive," and to promote within the EU a carbon offset mechanism for imports. The coalition will also make changes to the participation exemption, covering payments of dividends and capital gains between related parties.
Furthermore, both parties have pledged to take a leading role at international level in the fight against cross-border tax avoidance.
Switzerland also revealed its new corporate tax regime, designed to take effect from the beginning of 2020.
The reform was included in the Federal Act on Tax Reform and AHV Financing (TRAF). The TRAF will abolish special arrangements for cantonal status companies and introduce a mandatory patent box regime for all cantons, with additional optional deductions for research and development expenditure.
The TRAF will also set a minimum level of taxation for dividends from qualified participations, introduce additional depreciation measures for companies relocating to Switzerland, and extend the application of the flat-rate tax credit.
The Swiss Government has said the TRAF will introduce internationally competitive tax measures that will enable Switzerland to remain an attractive business location, as the tax regimes it will replace are no longer in line with international standards.
Switzerland was obligated to change its corporate tax regime after long-standing pressure from the European Union, which led to the country accepting the EU Code of Conduct on Business Taxation in June 2014. Jurisdictions recognizing the Code must, among other things, roll back tax measures deemed "harmful" and commit not to introduce new ones.
Consequently, tax reform proposals were drawn up to abolish special tax arrangements at cantonal level, namely holding, domiciliary, and mixed company formats, which allow foreign companies to pay little or no corporate tax. These regimes have long been criticized by the EU for facilitating the shifting of profits.
Meanwhile, Irish Prime Minister, Leo Varadkar has indicated that his party will seek to cut income taxes if it wins next year's election, according to reports.
The Irish Times reported that Varadkar said that the Fine Gael manifesto will contain proposals to make sure fewer people pay the highest rate of tax. He added that the party wants to "do a lot more for all those people that get up early in the morning, all those people that work really hard and pay a lot of tax."
According to the Irish Times, this involves "reducing income tax and USC [Universal Social Charge]."
Finally though, and for a bit of normality, it emerged that Japan's newly approved Budget for 2020 included no tax surprises, with the Government setting out plans for record-high spending funded by the recently hiked consumption tax and economic growth.
Japan's sales tax rose from eight to 10 percent on October 1, 2019, following two previous delays to the hike. The rate was last increased in April 2014, from five percent to eight percent, and caused the economy and consumption to contract heavily.
This time around, Japan is to buoy the economy with heavy spending, including the area of education, healthcare, and welfare, and provide some targeted tax relief, to cushion the economy from the impact of the sales tax hike.
The Government is depending heavily on an increase in tax receipts in 2020, and growth of about 1.4 percent of GDP, to deliver on its plans to reduce the country's long-term debt to 197 percent of GDP, from the current 200 percent.
Under the economic stimulus package, Japan has introduced a reduced eight percent rate of sales tax on the supply of foods and drinks – with the exception of liquors and restaurant services – and on subscription newspapers issued twice or more a week.
Further, the Government is also offering increased cash payments for home buyers, again to cushion the impact of the sales tax hike, of up to JPY500,000 (USD4,572), depending on household income.
Until next week!
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