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Global Tax Topical Feature

By Editorial
May 8, 2014

In this feature, we round up some of the latest tax developments of note reported by in key jurisdictions and at multilateral level.

United States

FATCA and Tax Extenders

On May 2, the United States Internal Revenue Service (IRS) announced that calendar years 2014 and 2015 would be regarded as an enforcement and administration “transitional period” with respect to the implementation and enforcement of the Foreign Account Tax Compliance Act (FATCA).

FATCA, enacted by the US Congress in 2010, is intended to ensure that the US obtains information on accounts held at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.

It is still intended that FATCA will go into operation on July 1 this year, but, with regard to its reporting, due diligence and withholding provisions, and so as to "facilitate an orderly transition," the IRS will refrain from rigorously enforcing many of its requirements this year and next, as long as FFIs are making a good-faith effort to achieve compliance.

It is estimated that the financial industry has spent in the region of USD7bn in order to become compliant with FATCA, and in a statement, Kenneth Bentsen, President and CEO of the Securities Industry and Financial Markets Association (SIFMA), welcomed the introduction of the transition period as allowing FFIs "to comply more effectively while minimizing unnecessary cost burdens and reducing potential harm to the US economy in the long-run."

Meanwhile, the Treasury is forging ahead with expanding its network of intergovernmental agreements (IGAs) which will enable FFIs to transmit information to the IRS without breaching national data protection and privacy laws. On May 6, it was announced that the United States and Singapore have substantially concluded discussions on, and have initialled the text of a Model 1 IGA under which Singapore-based financial institutions will report information on financial accounts held by US persons to the Inland Revenue Authority of Singapore (IRAS), which will then exchange the information with the IRS. In recent days, the Treasury has concluded FATCA IGAs with Israel and Belgium, and signed an IGA with Australia.

As of May 5, the Treasury had signed IGAs with 31 foreign jurisdictions and had reached agreements in substance with a further 31 jurisdictions.

However, the diplomatic stand-off between the US and Russia over Ukraine has led to calls for the Treasury to abandon attempts to reach a FATCA IGA with Moscow. On April 29, the Chairman of the Senate Permanent Subcommittee on Investigations, Carl Levin, (D – Michigan) and its Ranking Member, John McCain (R – Arizona), wrote to Treasury Secretary Jack Lew urging the United States Administration to refrain from restarting FATCA negotiations with Russia. "We should not be negotiating with the Russians to help them avoid FATCA's sanctions at a time when Russian forces are threatening and continuing to destabilize Ukraine," they wrote.

Meanwhile, on the domestic front, limited progress has been made towards extending dozens of temporary individual and business tax breaks that expired at the end of 2013. On April 29, House of Representatives Ways and Means Committee Chairman Dave Camp (R – Michigan) held a hearing on marking up bills to extend permanently six of these tax breaks. More than 50 tax relief provisions expired at the end of last year, and at the beginning of April 2014, the Democrat-led Senate Finance Committee proposed a renewal of virtually all of the tax provisions for the next two years (covering 2014 and 2015) by adding their overall USD85bn annual cost to the US federal fiscal deficit. However, the Finance Committee's Chairman Ron Wyden (D-Oregon) had emphasized at the time that any such extension would be the final bill that would temporarily renew the tax extenders, and that by the end of next year it would have to be agreed to cancel or renew them permanently within a comprehensive tax reform framework.

European Union

The Financial Transactions Tax

There have been a couple of set-backs recently for those hoping to stop 11 EU member states from imposing a financial transactions tax (FTT).

The Mayor of London Boris Johnson expressed disappointment at the European Court of Justice's decision to reject the UK's legal challenge against the proposed FTT. Reacting to the ruling, issued on April 30, Johnson said: "With London's economy buoyant once more and driving the national recovery, the last thing that we need is a barmy tax that will stamp on growth and potentially drive businesses to financial centers outside the European Union (EU). Finance is a global game and our rivals in the US and Asia will be licking their lips in sheer delight."

The UK launched its legal challenge in April 2013, when it requested that the Court annul a European Council decision authorizing the use by 11 EU member states of the enhanced cooperation procedure to implement a tax on financial transactions. At the heart of the UK's argument was that it would have extraterritorial effects and impose costs on non-participating member states. The Court concluded that the two arguments put forward by the UK Government are directed at elements of a potential FTT, rather than at the authorization of enhanced cooperation itself. The UK's action was accordingly dismissed. The ruling does, however, pave the way for future challenges to the FTT implementing measure.

The ECJ’s decision followed a warning by French and German business representatives that the FTT as proposed will have a negative impact on the European economy, at a moment when economic recovery in the Eurozone remains fragile.

In a joint communiqué, Medef, BDI, and Paris Europlace said that the EU FTT would severely hurt non-financial corporations by worsening their financing terms and this precisely at a time where bank loans are constrained by Basel III rules as well as European banking regulations."

In the meantime, European Tax Commissioner Algirdas Šemeta has said that he hopes to achieve a political agreement on the proposed FTT, although information on the current scope of the plans remains vague in spite of their discussion at the latest meeting of the Economic and Financial Affairs Council (ECOFIN) on May 6, 2014.

The Council exchanged views on a Presidency note on the current "state of play" of the intended FTT Directive and a joint statement signed by ten of the original "EU11" group of member states. Slovenia was the only jurisdiction out of those to have previously indicated their desire to proceed with an FTT by means of the enhanced cooperation procedure not to have put its name to the statement. At least nine member states must be willing to be involved in enhanced cooperation for the process to be allowed to go ahead.

The statement makes clear the intention of participating countries to work on a progressive implementation of an FTT, focusing initially on the taxation of shares and some derivatives. If a deal was reached, these measures would enter into force by January 1 2016 at the latest.

Member State Tax Developments

Spain: Tax Reform Adopted

Spain's Council of Ministers has approved the nation's Stability and National Reform Programs, which aim to strengthen economic recovery, increase growth, and boost job creation, through a reform of taxation and the introduction of measures to support the financing of the economy.

The Government wants to overhaul the tax system and to fund cuts to direct taxes and social contributions through a reduction in tax expenditures and environmental and indirect tax hikes. Specifically, it is considering reducing the number of personal income tax brackets, lowering the rate and threshold of the top tax rate, and progressively cutting corporation tax to around 20 percent.

France: Medium-Term Tax Strategy Presented

French Finance Minister Michel Sapin and Budget Minister Christian Eckert have unveiled details of the Government's medium-term economic plan, aimed at accelerating economic recovery and boosting job creation through corporate and personal income tax cuts, and through reductions in public spending.

The Government's strategy, set out in the 2014-2017 Stability Program, hinges on implementation of the Responsibility and Solidarity Pact, combined with efforts to reduce spending by EUR50bn (USD69.3bn) by 2017. The measures are designed to enable the nation to meet its public deficit target of 3 percent of gross domestic product in 2015.

Italy: Productivity Tax Incentive Extended, But ‘Token’ Tax Break Snubbed

A recently gazetted decree in Italy has confirmed an extension, into 2014, for the reduced income tax rate for employees' earnings arising out of work arrangements that improve corporate productivity.

The reduced 10 percent individual income tax, which was originally introduced in July 2008 to stimulate increased productivity in the private corporate sector, was amended and extended into 2014 by this year's Italian Budget.

However, Centro Studi CAN, the national federation of Italian artisans and small and medium-sized enterprises, has said the decision by Premier Matteo Renzi's Government to reduce the regional tax on production by 10 percent will merely provide an "aspirin" to its members.

CAN has calculated that the reduction in the basic rate of IRAP from 3.9 percent to 3.5 percent will reduce the annual Italian total tax rate on small firms by only 0.6 percent – from 63.8 percent to 63.2 percent.

Other European Tax Developments

Switzerland: Corporate Tax Reform Agreed

The Swiss cantons have expressed their support for plans to reform and improve the nation's corporate tax system.

The corporate tax reform is designed to develop the Swiss tax system further, and to strengthen its competitiveness, while at the same time taking international developments into account. The Federal Council said it wants Switzerland to remain attractive by providing legal certainty, which it said can only be achieved through an internationally accepted tax system.

The Swiss Federal Department of Finance (FDF) explained that: "Switzerland's attractive tax environment for companies has made a significant contribution to the country's prosperity in recent years.”

However, the FDF added that: "International developments, particularly [from] the Organisation for Economic Co-operation and Development (OECD), have led to a situation whereby certain provisions of existing Swiss legislation are no longer compatible with international standards. The aim of the latest corporate tax reform is to consolidate international acceptance.

Ukraine: Economic Reforms Agreed

Ukraine has unveiled a comprehensive program of economic reforms, backed by a USD17.01bn International Monetary Fund (IMF) loan which was approved on April 30.

The program aims to restore macroeconomic stability, promote sustainable growth, and strengthen economic governance and transparency. One of its key goals is to meet near-term fiscal obligations and gradually reduce the fiscal deficit, Reza Moghadam, director of the IMF's European Department, said. Authorities aim to stabilize budget revenue and embark on a medium-term fiscal adjustment path that distributes the burden of adjustment equitably.

Moghadam said that the program involves reforming tax administration to help reduce corruption and improving the business climate, to thereby achieve high and sustainable growth.

Asia Pacific Tax Developments

Australia: Government ‘Won’t Rest’ Until Carbon Tax Gone, But Income Tax May Rise

Australian Prime Minister Tony Abbott has said that his Government will not rest until the carbon and mining taxes have been abolished.

Speaking in Sydney on April 29, Abbott said that everyone would benefit from the planned repeal of the carbon tax. He added that the levy damages the economy without helping the environment, and costs the average household AUD550 (USD511) a year.

Last month, the Australian Government released a White Paper that sets out the final design for an incentives-based Emissions Reduction Fund (ERF), which would replace the carbon tax it is attempting to repeal. The document was published by Environment Minister Greg Hunt, who said that it offers "a cost effective, practical and simple approach to reduce [Australia's] emissions without a multi-billion dollar carbon tax."

The Government failed in its first attempt to repeal the carbon tax, after the Labor and Green contingents in the Senate cooperated to defeat the legislation. The Government will reintroduce its repeal package, but continues to face stiff opposition.

However, having inherited something of a fiscal mess from the outgoing Labor Government last year, Abbott has said that high earners should bear "a significant quantum of the burden when it comes to sorting out our problems". But he failed to confirm whether a so-called deficit reduction levy will feature in the upcoming Budget.

During a round of interviews at the start of the week, Abbott made clear that "AUD123bn (USD114bn) worth of deficits and AUD667bn worth of debt" cannot be ignored. He told Radio 3AW that the Coalition is assessing a range of options that would enable it to sort out what he described as Labour's "debt mess," but said he wanted to ensure that no one section of society was disproportionately affected.

China: Employment-Boosting Tax Breaks Extended

The Chinese Ministry of Finance and the State Administration of Taxation have announced the extension and upgrade of employment-boosting tax breaks that expired at the end of 2013.

The tax breaks are given to companies that create jobs and to individuals starting their own companies. Extended to December 31, 2016, the measures will now also be unrestricted to include all sectors of the economy and all categories of workers.

Japan: Consumption Tax Plunge Taken, But Corporate Tax Cut Planned

After the three percent consumption tax hike on April 1, the Japanese Government is confident that the economy is continuing to recover and inflation is being contained.

Japan's consumption tax rate rose to eight percent, from five percent, on April 1, 2014 – the first such increase to the nation's sales tax rate since 1997, with a further hike to 10 percent planned for November next year.

There have been fears that the increased rate would stymie domestic consumption, and cause a repeat of the deep recession prompted by the last 1997 increase to the rate from three percent to five percent. The Government, however, put its hopes on a substantial JPY5 trillion (USD48.7bn) fiscal stimulus, favouring both consumers and business investment, to keep the Japanese economy growing.

The Government plans to announce further expansionary measures both this year and next, and according to Deputy Economy Minister Yasutoshi Nishimura by April 2015, the Japanese Government will begin to make significant cuts to Japan's high corporate tax rate.

The Government's Tax Commission, which is looking at future corporate tax reform, has recently indicated that Japan's effective corporate tax rate should eventually be reduced to 25 percent from its present level of around 36 percent. However, since there could be a substantial fall in tax revenue if the Government were to make such a large rate reduction immediately, it is expected that the study group will finally conclude that only a smaller rate cut, of between two to three percent, could be made next year.

International Developments

Automatic Information Exchange Deadline Set, BEPS Project Rumbles On

The Group of Five (G5) nations (France, Germany, Italy, Spain and the UK) has agreed to formally ink a new deal on a global standard for the automatic exchange of tax information in October, together with other jurisdictions committed to early adoption.

To date 44 jurisdictions have joined the initiative launched by the G5 finance ministers last year. They have jointly announced that they will begin to automatically exchange information with each other in 2017, with respect to data collected from December 31, 2015. Parties to the new standard will provide signatures at the October Global Forum meeting in Berlin.

Meanwhile, the Declaration on Automatic Exchange of Information in Tax Matters has been endorsed by all 34 Organisation for Economic Cooperation and Development (OECD) member countries, along with Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa, the OECD said on May 6, 2014.

The Declaration commits countries to implement a new single global standard on automatic exchange of information. The standard, which was developed at the OECD and endorsed by G20 finance ministers last February, obliges countries and jurisdictions to obtain all financial information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis.

The OECD will deliver a detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.

Back in February, the Group of Twenty nations (G20) said that automatic exchange of information is expected to begin among G20 members by the end of 2015, and a communique reiterated its collective commitment to a global response to Base Erosion and Profit Shifting (BEPS), which it said should be "based on sound tax policy principles."

At their meeting in Sydney, G20 finance ministers and central bank governors agreed that profits should be taxed where economic activities deriving the profits are performed, and where value is created. They voiced their continued support for the BEPS Action Plan drawn up by the OECD, and said they intend to "start to deliver effective, practical and sustainable measures to counter BEPS across all industries" in time for a leaders' summit in November.

However, the BEPS project, which is seeking to transform the international tax landscape by the end of 2015, has come in for significant criticism from businesses and tax experts. For instance, On April 16, 2014, the OECD published comments received from various stakeholders concerning its discussion draft on BEPS Action 1: Address the Tax Challenges of the Digital Economy. In the main, many commentators warned that the proposals would likely be detrimental to the interests of multinationals, and warned that the changes would mark a substantial shift from the current international tax system. On the OECD's proposal of establishing a new nexus based on 'significant digital presence,' the Chartered Institute of Taxation (CIOT) said: "A direct tax on profit attribution based on sales, which is what the 'New Nexus based on Significant Digital Presence' represents, goes against principles that value is created where a product is created not simply by a market for that product; it would be a fundamental - and, in our view, inappropriate - shift in the international tax system."

Whether the OECD will be able to achieve its aims in the next 18 months remains to be seen, although many commentators doubt it. What is clear is that the tax landscape, at both international and jurisdictional level won’t be dull!


Tags: tax | Tax | FATCA | Australia | Japan | Europe | G20 | business | Finance | Russia | Singapore | Ukraine | Italy | Spain | carbon tax | tax reform | China | France | United States | Economy | tax breaks



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