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News Round Up

By Editorial
December 29, 2014

Currently, there is a tendency among those who take an interest in international tax developments to look to the future and try to guess how the international tax landscape will look in, say, three of four years, once countries begin to implement the OECD’s base erosion and profit shifting (BEPS) recommendations in earnest. Back in the present however, there are some major tax developments unfolding in many parts of the world, some inspired by the OECD’s BEPS work, as this round-up of major Tax-News stories will show.

UK To Tax “Diverted” Profits

Arguably the most interesting development to have taken place in the past few weeks was the proposal by the Government of the United Kingdom to introduce a “diverted profits tax,” which is designed to discourage multinational companies from “artificially” shifting profits from the UK to take advantage lower taxes elsewhere.

While a politically astute move in the run-up to the 2015 general election with public anger at multinational tax avoidance still running high, business groups and tax advisers are warning that economically, the DPT could be bad news for the UK.

Responding to the Government's announcement, Chas Roy-Chowdhury, Head of Taxation at the ACCA, said that the DPT is a "highly aggressive piece of legislation."

"While we welcome the measure in principle, we need to ensure [that the] legislation does not drive away global companies from doing business and from making tax contributions to the UK Exchequer through the basket of taxes they already pay," he warned.

The United States Council for International Business (USCIB) has cautioned that the diverted profits tax would, if implemented, have a major impact on US-based multinational companies. As the proposal would override existing tax treaties, USCIB Vice President and International Tax Counsel Carol Doran Klein said the measure would "increase the likelihood of double taxation on companies, which will have a negative effect on cross-border trade and investment."

As Chowdhury, Klein and many other commentators have noted, the DPT also pre-empts the conclusions of the OECD’s final BEPS recommendation, which aren’t due for publication until December 2015, undermining the multilateral approach to base erosion and profiting shifting that the OECD has repeatedly called for. Indeed, Pascal Saint Amans, the Director of the Center for Tax Policy and Administration at the OECD, said during a webcast on December 15 that the UK’s plans for a diverted profits tax are interesting but should only be undertaken at a multilateral level.

The UK Government published draft DPT legislation on December 10, and is consulting on the measure until February 4, 2015.

European Commission Widens Tax Ruling Probe

Another unfolding development piggy-backing on the OECD’s BEPS work is the European Commission’s investigation of advance tax rulings granted to certain multinational companies by some member states. On December 15, the Commission announced the inquiry into tax ruling practice will be expanded to cover all European Union member states.

Since June 2013, the Commission has been investigating, under state aid rules, the tax ruling practices of seven member states. To date, the Commission has requested an overview of tax rulings provided by Cyprus, Ireland, Luxembourg, Malta, the Netherlands, Belgium, and the United Kingdom. The EU is also reviewing Gibraltar's rulings regime separately.

State aid rules are there to ensure that member states do not distort competition in the EU by granting individual companies a “selective advantage,” for example, by giving them more favourable tax treatment. The Commission is therefore attempting to ascertain whether these so-called “comfort letters” gave the companies in question a selective advantage. However, the investigations are also in tune with BEPS, with the Commission concerned that these tax rulings may have eroded the tax bases of other jurisdictions.

Speaking at the American Chamber of Commerce EU's 31st Annual Competition Policy Conference in Brussels on October 14, 2014, Joaquín Almunia, the European Commission's Vice President in charge of competition policy said: "I am not trying to modify tax legal systems. What I want is to avoid that through their interpretation, national authorities will grant selective advantages to a few companies at the expense of all the others present in the same jurisdiction."

However, there is also a danger that the EU tax environment could become very uncertain if companies can no longer rely on official tax rulings, which could have a detrimental effect on investment.

EU Delays Financial Transactions Tax – Again

While the EU’s campaign against aggressive tax avoidance progresses apace, momentum on one of its most important tax files, the financial transactions tax (FTT) has dissipated after a group of 11 member states failed to reach an agreement on a proposed tax before a self-imposed deadline.

The FTT is based on a proposal adopted by the European Commission in September 2011. Under the draft FTT directive, the tax will be imposed on all transactions in financial instruments, with the exchange of shares and bonds taxed at a rate of 0.1 percent and derivative contracts at a rate of 0.01 percent. 

Because most member states opposed the introduction of an EU FTT, it is to apply in only 11 countries on the basis of "enhanced cooperation," a legislative mechanism used in the EU when unanimity on new proposals cannot be reached in the Council. The 11 countries are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

However, the participating member states are reported to be at loggerheads over crucial aspects of the proposed tax, including its scope – whether or not the tax should apply to derivatives is said to be one of the largest stumbling blocks – the rates of the tax, how the tax should be collected and how the revenues should be distributed. Indeed, Slovenia refused to sign a declaration of support for the FTT in May 2014 citing the high costs of applying the tax and its growing complexity.

Originally, the FTT was supposed to be in place by 2014, but this was put back to 2016 as discussions over the shape of the tax persisted. However, even a 2016 introduction is looking highly optimistic with member states no nearer to an agreement on the tax.

Russia To Stabilise Tax Regime

With the Russian economic outlook seemingly worsening by the day as a result of the plunging value of the rouble and falling oil prices – the Government relies heavily on the hydrocarbon sector for revenue – tax increases would appear inevitable as the non-oil budget deficit continues to widen. Indeed, speaking at an August Government meeting to plan for the next three years, Prime Minister Dmitry Medvedev said that the budget for 2015 needs to be "realistic" and could therefore contain tax hikes.

This year, the Government moved to prevent tax leakage by enacting a new controlled foreign company regime in November 2014, designed to prevent the use of offshore structures to mitigate tax liability in Russia.

However, aware of the damaging uncertainty surrounding Russia’s tax regime and its economy in general, President Putin overruled his Prime Minister earlier this month by pledging that tax legislation should remain unchanged for the next four years.

Addressing the Federal Assembly, Putin said that there is a need for stable legislation and predictable rules, which is why he supports a four-year freeze on "existing tax parameters."

Four years is, however, a long time with events moving fast in Russia, and time will tell if Putin is able to stick to his promise if pressure on the Government’s budget continues to intensify.

India’s GST: On The Final Straight?

An unstable tax regime has been one of the factors responsible for India’s slow pace of development and this is linked to the Government’s inability to pass crucial reforms such as the proposed goods and services tax (GST) as much as it is about ad hoc tax law-making.

The GST has been several years in the making, and was supposed to be in place by April 2010. Under the GST system, the various elements of the existing indirect tax regime will be replaced by a comprehensive dual GST system, with Central GST and State GST to be levied concurrently by the Centre (federal government) and the States. However, the reform has been dogged by delays, mainly due to objections by state governments which fear losing out in revenue terms.

Following the election of the BJP Party earlier in 2014, Finance Minister Arun Jaitley said introducing the GST would be one of his highest priorities, and at its meeting on December 17, India's Cabinet approved the Constitutional Amendment Bill that would allow for the introduction of the tax. The Bill will now be tabled before Parliament.

Providing the Bill gets approval, India would introduce a dual GST regime from April 2016, although given India’s recent track record on tax reform, this is by no means guaranteed!

Japan To Cut Corporate Tax

Another country which has been slow to use the fiscal lever, both to address its stagnating economy and growing public debt, is Japan. However, following his Government's significant parliamentary majority after the recent election in Japan, Prime Minister Shinzo Abe's Government is finalizing its tax reform plans, including a corporate tax rate cut, by the end of this year.

Earlier this year, the Government took a decision to reduce the country's corporate income tax rate by at least 2.5 percent in the Budget for the next fiscal year, which begins on April 1, 2015. It was to represent a first step towards lowering the current high corporate tax rate of more than 35 percent to below 30 percent over the next few years, as part of Abe's promised growth strategies.

Following the election, discussions have already begun to agree the actual level of the planned corporate tax cut in 2015, and it is expected that the final proposal will commit the Government to a 2.5 percent reduction, with further rate cuts expected for succeeding fiscal years.

US Tax Reform Frozen

Should Japan’s proposed corporate tax take place, the United States would be left high and dry as the highest corporate income taxer in the OECD. Yet attempts to address America’s increasingly uncompetitive tax code continue to be frustrated by partisan divisions in Congress.

On December 11, the outgoing Ways and Means Committee Chairman Dave Camp (R – Michigan) officially introduced his draft comprehensive tax reform legislation into the House of Representatives, while Orrin Hatch (R – Utah), Ranking Member of the Senate Finance Committee (and expected to be its next Chairman), published an in-depth analysis, entitled "Comprehensive Tax Reform for 2015 and Beyond."

In the first of the two efforts to carry the United States comprehensive tax reform debate into the next Congress in 2015, Camp's Bill formalizes the tax reform discussion draft he released on February 26, 2014, without modifications. In fact, in an accompanying statement, he hoped that "the formal introduction of this proposal in the House will help spur further action on this critical issue in the 114th Congress."

Hatch also confirmed his hope is that, in the future, "a path toward real bipartisan tax reform will begin to take shape."

Of his seven-point approach, the first three principles – economic growth, entailing cuts in tax rates; fairness, through broadening the tax base; and a simpler tax code to reduce compliance costs – were set out by President Reagan the last time there was tax reform in 1986.

He then added four more principles "to address the needs of today." They included permanence, to avoid the large number of tax provisions that expire regularly; competitiveness, by reducing the high tax rates on businesses and reforming the US international tax system; and the promotion of savings and investment.

However, his final principle of "revenue neutrality," the same one as he also insisted on earlier this year regarding any legislative proposals to counter corporate tax inversions, is contrary to the ideas of many lawmakers, particularly Democrats and President Barack Obama, who want tax reform to raise more revenue to pay down the federal budget deficit.

The Republicans will have a majority in Congress next year, but they are unlikely to have enough votes in the Senate to force through their preferred vision of a tax reform bill. It is questionable also, whether President Obama sees tax reform as a priority anyway, with other domestic and foreign considerations likely to occupy his thoughts.


Tags: tax | Tax | Russia | tax reform | India | Japan | legislation | Europe | budget | European Commission | interest | investment | business | United States | law | tax avoidance | tax rates | Belgium | Finance | Slovenia | Economy



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