Governments Get Back to Tax Brass Tacks
Kitty Miv, Editor
10 July, 2020
In last week's column, we looked mostly at the leisure and recreation pursuits that governments around the world are looking to encourage their populations to undertake; this week, we're getting straight back down to business, with the news that in the area of digital taxation, the European Union is looking to compromise with the United States, which has strongly objected to digital service tax proposals on a number of different fronts in recent years.
The finance ministers of France, Italy, Spain, and the United Kingdom have reportedly sent a letter to the US Treasury Secretary, Steven Mnuchin, proposing that new international tax rules for digital companies could be gradually phased in.
The ministers suggest in the letter, seen by Bloomberg News, that tax rules for providers of digital services could initially be restricted to those companies providing "automated" digital services and later could be applied more widely.
By offering such a compromise, the European countries are hoping to persuade the US to re-join negotiations towards the creation of an internationally-agreed framework of tax rules for digital companies. They reportedly suggested that an agreement that includes the US could be reached by the end of 2020 if a phased approach to the introduction of these rules was on the table.
Sticking with the United States for the moment, and a bill was recently introduced in Congress which aims to prevent "inverted" companies from claiming financial assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The American Assistance for American Companies Act, introduced in the House of Representatives by Lloyd Doggett (D-TX) and in the Senate by Dick Durbin (D-IL), is intended to prevent companies which have merged with a foreign competitor to shift their tax residence to the foreign jurisdiction while retaining headquarters and management operations in the US from accessing certain tax breaks and emergency lending programs in the CARES Act. These tax measures include:
- The five-year unrestricted carry back facility for net operating losses that occurred in tax years beginning in 2018, 2019, and 2020; and
- The temporary increase in the amount of interest expenses that businesses are allowed to deduct on their tax returns from 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA) to 50 percent of taxable income (with adjustments) for 2019 and 2020.
Under the bill, a "combined foreign corporation" would be considered as an inverted domestic corporation if the shareholders of the former US corporation own more than 50 percent of the new combined foreign corporation; or the affiliated group that includes the combined foreign corporation is managed and controlled in the United States and engages in significant business activities in the US.
The bill would allow an inverted domestic corporation to qualify for the CARES Act assistance if it retroactively elects to be treated as a domestic corporation beginning in 2017, with payment of back taxes or penalties due in 2021.
Meanwhile, north of the border, it emerged that the Canadian province of Alberta has cut its corporate tax rate from 10 to eight percent, as of July 1. The rate cut is part of the Government's Recovery Plan, which aims to help the province address the short-term and long-term challenges arising from the COVID-19 pandemic and the crash in oil prices.
In Australia, also, reductions in the company tax rate for certain small businesses entered into force at the start of this month.
As of July 1, 2020, the company tax rate for incorporated small and family businesses with a turnover of less than AUD50m (USD35.6m) was reduced from 27.5 percent to 26 percent. The unincorporated tax offset has increased from eight percent to 13 percent, to ensure that sole traders benefit from the company tax cut.
And finally, whilst other countries have opted to tinker with their indirect taxes, adjusting rates by a percentage or two here, announcing a temporary suspension there, Saudi Arabia has forged ahead with an – expected, but still somewhat surprising – increase in its VAT rate, from five percent to 15%, as of July 1.
The increase, announced in May 2020, represents something of a departure from the Gulf Cooperation Council's plans for a harmonized value-added tax framework, with Bahrain, Saudi Arabia, Qatar, Oman, the United Arab Emirates, and Kuwait having agreed to introduce value-added tax as a group, and levy the same rate of VAT. (Although things haven't quite panned out that way, with only Saudi Arabia, the UAE and Bahrain having introduced the tax as yet...)
Saudi Arabia's decision to hike the value-added tax rate, and to repeal the cost of living allowance, is intended to buoy the country's finances amid a slump in revenues and record-low oil prices. The United Arab Emirates Government, however, responded to the tax hike by stating that it would not be following suit.
Until next week!
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