International Tax Developments
Law & Tax News Editorial
17 September, 2014
Predictably, since US lawmakers returned from the summer holidays earlier this month, the corporate inversion debate has dominated the tax agenda States-side again, although time is running out for the Democrats to force through a legislative or other solution to this problem before November's congressional elections. This month's report also features tax and legal developments in Australia, the United Kingdom, Canada and the Asia Pacific region.
United States: Rush To Fix Inversion 'Loophole'; Congress Stalls On Internet Tax Moratorium
To briefly recap, corporate inversions are transactions the result of which US multinationals are able to shift their tax residence abroad during a foreign takeover to move away from America's high 35 percent income tax rate while retaining much of their management in the United States. In doing so, companies are usually able to lower their overall tax rate. According to the Congressional Research Service, 76 US companies have either inverted or planned to do so since 1983. More than half of these inversions, about 47, have occurred over the last decade. That's an average of just fewer five per year. However, in 2014 the inversion rate has roughly doubled, and there is still more than three months to go until the end of the year. However, it is not just the numbers that have made this subject so newsworthy in recent weeks and months. The presence of the mid-terms looming large on the horizon is serving to amplify the debate.
When it comes to ideas to tackle the inversions issue, there are two schools of thought: the stick and the carrot. While Senate Democrats continue to examine specific legislative proposals to deter US multinationals from using corporate inversions to move their tax residence abroad, Republicans remain insistent that any specific anti-inversion legislation should be explicitly linked to comprehensive tax reform.
A new bill has been put forward by Charles Schumer (D New York) and Richard Durbin (D Illinois), which would seek to restrict "earnings stripping." Proposals from Democrat lawmakers, up to now, would put the minimum foreign shareholding to be held by the foreign company's shareholders after a merger at 50 percent, rather than the present 20 percent, and add a provision to prohibit federal contracts from going to corporations that have reincorporated overseas.
However, during a speech to the US Chamber of Commerce, Finance Committee Ranking Member Orrin Hatch (R Utah) reiterated his support for an immediate overhaul of the tax code and said the specific anti-inversion legislative proposals made so far are "punitive and retroactive."
In addition to the other legislative proposals offered by Democratic member of Congress, the administration of President Barack Obama is continuing to consider ways in which this so-called "loophole" can be closed without recourse to new laws.
Heeding the call for eventual comprehensive tax reform that would lower the high United States corporate tax rate, Treasury Secretary Jack Lew has urged immediate action from Congress to halt the flow of US multinationals undertaking corporate inversions. However, he also acknowledged that with Congress not likely to move quickly on this issue, the Treasury "is completing an evaluation of what [it] can do to make these deals less economically appealing."
Outside the rarefied air of the Capitol, the inversion debate has divided opinion. Some academics, including the Economic Policy Institute's Thomas Hungerford, have warned the Government that it stands to lose a substantial chunk of its tax base unless an immediate fix is made to the tax code. On the other side of the coin, business groups like the US Chamber of Commerce are insisting that comprehensive tax reform is the only viable solution.
The GOP's legislative agenda for September, outlining its plans to pass a series of further bills, including tax proposals, prior to the November elections, was outlined in a memorandum sent to all United States House of Representatives Republicans by Majority Leader Kevin McCarthy (R California). However, if Congress's current fractured state continues after the elections, the prospects for tax reform in the near future are low.
Congress is also running out of time to pass other important pieces of legislation, including extending the moratorium on internet access taxes. With the United States House of Representatives having already passed the Permanent Internet Tax Freedom Act (PITFA), which would permanently extend the moratorium, a coalition of 42 state and national organizations has come together to urge the Senate to pass equivalent legislation as soon as possible.
In a letter to all senators, the coalition's members say that failure by the Senate to act before November 1 this year, when the present moratorium expires, will lead to increased taxes for internet consumers, who are currently protected "from increased costs when accessing and using the internet, and from the discriminatory or duplicative taxation of e-commerce."
Broadband for America and the ITFA Coalition have also issued statements urging Congress to make the legislation permanent. "Impeding the extension's passage would endanger affordable access to the internet for millions of Americans."
Originally passed in 1998 and extended three times since with broad bipartisan support, the ITFA's future depends on bills presently in the House and the Senate, which, too, have enjoyed broad bipartisan co-sponsorship.
However, the prospect of a "clean" permanent ITFA extension being passed in the Senate was complicated prior to the summer recess by certain lawmakers in the Senate, including its Majority Leader, Harry Reid (D Nevada), who looked to link it to the more controversial Marketplace Fairness Act (MFA), which would allow states to impose sales taxes on online purchases.
It is now expected that Reid will shortly introduce a bill in the Senate that would provide simply for a short-term ITFA extension possibly until end-December to allow more time for the possible combination of the MFA with a longer-term extension to ITFA.
Australia: Scraps Mining Tax; Axes Company Tax Concessions
There have been some significant legislative developments in Australia on the tax front recently. Last month, the Senate finally came together to repeal the carbon tax, and earlier this month legislation repealing the mineral resources rent tax (MRRT) cleared the legislature.
The mining tax entered into force in July 2012. It applied to the mining of iron ore and coal in Australia at an effective rate of 22.5 percent, after taking into account the extraction allowance. Miners with MRRT assessable profits of less than AUD75m per annum were not liable. The Coalition's repeal package received Royal Assent on September 5, 2014 and it has since been announced that taxpayers' final MRRT year of assessment will end on September 30, 2014.
The MRRT funded a series of tax breaks that will now be abolished or the benefits of such reduced. The Government has now confirmed the effective dates for these changes.
The company loss carry-back scheme will be abolished retroactively from July 1, 2013. The scheme enabled small firms to "carry-back" up to AUD1m (USD925,040) in losses and offset them against past profits.
The amount that can be written off under the instant asset write-off concession will be reduced, effective from January 1, 2014. Under the old rules, assets costing up to AUD6,500 could be instantly written off. The threshold is now AUD1,000.
Previously, businesses were also able to claim up to AUD5,000 as an immediate deduction for motor vehicles costing AUD6,500 or more from the 2012-13 income year. A deduction of 15 percent of the remaining value could be claimed in the first year, and 30 percent the year after. As of January 1, 2014, vehicles will only be immediately deductible if they cost less than AUD1,000.
Last, geothermal energy exploration and prospecting expenditure will no longer be immediately deductible. If a geothermal exploration right is exchanged for a geothermal extraction right relating to the same or a similar area then a capital gains tax (CGT) rollover will apply to defer the liability until the sale of the extraction right. These amendments apply retrospectively, from July 1, 2014.
However, small companies affected by the abolition of loss carry-back and asset write-off concessions will not be charged penalties or interest by the Australian Taxation Office if they comply with their new obligations satisfactorily.
United Kingdom: HMRC's Controversial New Powers; Real Time Payment Fines and Concession For Offshore Bookies
In the United Kingdom, recent developments in the area of tax law have been concerned with new powers for HM Revenue and Customs (HMRC) to tackle aggressive tax avoidance and evasion, including the proposed new strict liability criminal offence for those who fail to declare taxable offshore income and gains, a measure which is currently the subject of a public consultation. Under the plans, magistrates could be given the power to impose an unlimited financial penalty and a custodial sentence of up to six months.
In future, HMRC would only need to demonstrate that the income was taxable and undeclared, rather than that tax was deliberately evaded, as under the current rules. The use of strict liability in criminal law is controversial; in some cases, persons have been found liable even when they are not directly at fault, or have taken reasonable care to ensure compliance with the law.
Some are questioning whether HMRC really needs such sweeping new powers given that the department secured record compliance revenues of GBP23.9bn (USD39bn) last year.
Plans to allow HMRC to raid people's bank accounts to recover unpaid tax are especially controversial.
The Association of Chartered Certified Accountants for instance has warned that the proposal is deeply concerning because HMRC would effectively be able to bypass the courts. At present, the measures HMRC uses to recover tax debts require court approval.
The British Bankers' Association has also expressed concern over the apparent lack of judicial oversight provided for in plans.
We also learned earlier in the month that companies will face penalties for late payments under HMRC's new real-time pay-as-you-earn tax withholding system.
However, HMRC has at least decided to spare businesses based in Gibraltar and the Isle of Man the burden of appointing a tax representative in the UK when the new tax regime for offshore bookmakers come into force on December 1, 2014.
Canada: CRA "Silences" Charities; Consults on Budget Amendments and Cosies Up To HMRC
The Internal Revenue Service's treatment of certain charitable and other tax-exempt organisations linked to conservative causes has been a hugely controversial issue in the United States. And it seems to have spread north.
Earlier this month, more than 400 academics accused the Canada Revenue Agency (CRA) of auditing a think tank to "intimidate and silence" its criticism of government policies. The claim is made in an open letter to Revenue Minister Kerry-Lynne D. Findlay concerning the CRA's treatment of the Canadian Centre for Policy Alternatives (CCPA). The signatories claim that the CCPA is being audited "on the grounds that it allegedly engages in politically partisan, biased, and one-sided research activity."
In 2012, the Government allocated CAD8m (USD7.2m) to the CRA to create a special team of auditors to monitor the political work of charities. Only ten percent of a charity's resources may go towards activities that must be exclusively politically non-partisan.
Somewhat less controversially, in late August the Federal Government announced the launch of a consultation on draft legislative proposals that would implement personal, business, and international tax measures included in the Economic Action Plan 2014. The Plan includes modest tax cuts for individuals and businesses, but also tightens anti-avoidance legislation. For example, Canada's foreign accrual property income rules will be adjusted in order to address offshore insurance swap transactions, and back-to-back loan arrangements involving an intermediary will be addressed with a new specific anti-avoidance rules.
In a separate development, the Federal Government has also announced that the tax authorities of the United Kingdom and Canada are to deepen cooperation to establish a stronger mutually beneficial relationship, which will primarily be used to tackle incidences of international tax evasion and aggressive tax avoidance.
Asia Pacific: Towards A Common Market, But Much Work to Be Done
On August 25, 2014, the Association of Southeast Asian Nations Capital Markets Forum (ASEAN) announced the launch of its Framework for cross-border offerings of collective investment schemes (CIS), which is now operational in Malaysia, Singapore and Thailand, three of its member jurisdictions.
This Framework allows fund managers operating in a member jurisdiction to offer CIS, such as unit trust funds, constituted and authorized in that jurisdiction to retail investors in other member jurisdictions, under a streamlined authorization process. A set of common ASEAN standards has been established to ensure that participating fund managers have the necessary experience and track record in managing retail funds offered under the Framework.
Therefore, for example, qualified fund managers in Malaysia now have the opportunity to offer their products directly to investors in Singapore and Thailand. Correspondingly, Malaysian investors would also benefit from a wider range of investment products.
However, according to the Investment Company Institute, harmonized tax policies must be introduced in the region if the Asia Region Funds Passport is going to be a long-term success.
The launch of the Framework preceded confirmation of the 2015 deadline for the creation of the proposed Regional Comprehensive Economic Partnership (RCEP), between ASEAN and its free trade agreement (FTA) partners China, South Korea, India, Japan, Australia and New Zealand at the second meeting of participating countries in Myanmar on August 27.
Staying on the regional trade theme, a recent meeting of its senior officials was assured that Asia-Pacific Economic Cooperation (APEC) member countries are continuing their work to ensure the realization of their commitment to boost free trade in environmental goods, while also laying a foundation for the opening of this sector with other World Trade Organization members.
Global trade in so-called "green goods" totals nearly USD1 trillion annually. However, some countries apply tariffs as high as 35 percent, adding unnecessary costs to environmental technologies. APEC is working to reduce import tariffs to five percent or less on a list of 54 green goods by 2015. That list of goods, agreed by all the APEC members in 2012, could grow as more products that promote energy efficiency, such as solar panels, are identified.
On the other hand, there is evidence that the region's network of FTAs is not working as intended, with substantial numbers of businesses failing to take advantage of trade agreements as a result of being unaware of the existence of FTAs in the first place, or through a lack of understanding of their terms.
This was confirmed by a survey conducted by The Economist Intelligence Unit and sponsored by HSBC, which elicited businesses' views on FTAs in the Asia-Pacific region and found that only seven percent of export businesses made use of all the trade treaties they knew about.
While more than 85 percent of respondents across the Asia-Pacific region reported that their exports to the markets concerned increased as a result of the FTAs that they used, the complexity of the agreements themselves was cited as a major barrier to their use by 45 percent of companies.
This is clearly something that the leadership of ASEAN, APEC and other regional institutions will have to work on if their free trade initiatives are to boost trade volumes levels of economic growth.
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