This week in tax: EU plans to announce its DST in 2021

On September 12, the European Commission (EC) confirmed that it will go ahead with its own digital tax early next year if the OECD does not reach a global agreement.

Val-dis Dom-brov-skis, executive vice president of the EC, said the Commission “will present an Action Plan on business taxation for the 21st century this autumn”. He added that the Commission “will move ahead with a digital tax proposal in the first half of next year” if work at the OECD level on an international corporate tax framework fails. The comments followed an informal meeting of the Economic and Financial Affairs Council that involved talks about tax fairness.

Separately, the EC said it expects the COVID-19 crisis to widen the VAT gap to exceed €164 billion ($195 billion), driven by falling GDP growth and large dents in government finances across the EU. The COVID-19 pandemic is likely to mean that the VAT gap will worsen before it gets better.

Across the EU member states, the first tax on instant messaging services was announced in Spain.

The Spanish government intends to tax companies providing calls and instant messaging service providers, such as WhatsApp, which have an annual turnover of more than €1 million ($1.2 million), according to Reuters.

However, the proposed law, published on September 11 for public consultation, states that the tax will not exceed €1 per day for every €1,000 of gross revenue. The government claims the tax will realign competition in the telecommunications market because the way people consume communications services has changed.

Similar laws have been implemented in other jurisdictions in the past few years. For example, in Uganda, the social media tax was introduced in July 2018 as a revenue-raising measure. However, it led to protests and significantly reduced the use of internet services defined as over-the-top (OTT), affecting the ability of both individuals and the businesses that serve them to network and undertake financial transactions.

The tax failed to generate the revenue forecast and it is technology and financial companies that have felt the brunt of the tax through lost revenues and users. With Spain implementing a digital services tax, an additional telecommunications tax of this type could be damaging for businesses, especially during a pandemic.

In Brazil, indirect tax measures are continuing to cause controversy as it goes through a tax reform. Multinational enterprises (MNEs) do not believe Brazil’s proposed DST will meaningfully improve the taxpayer experience. Tax directors speaking at ITR’s Brazil Tax Forum said other issues are more pressing and require government attention.

One aspect is the move towards OECD standards on transfer pricing (TP). Companies in Brazil have seen their tense relationship with the Federal Revenue of Brazil (RFB) improve over recent years thanks to top-down reforms in the country, which is partly down to Brazil’s move to align its TP regime with international standards.

In addition, global tax directors who are backing the tax reform in Brazil, despite short-term uncertainties, say that tax harmonisation with OECD countries will bring in more investment from large businesses and see tax reform as an overall positive move.

In other news covered by ITR this week, businesses should note a possible trend emerging in the Asia Pacific region of countries looking to combine local indirect taxes with DSTs, potentially hitting transactions twice.

In the Netherlands, the government announced its 2021 tax plan that specifically targets multinational companies and introduces a carbon tax.

“It’s precisely in times of crisis that we need to set our sights firmly on the future,” said State Secretary for Finance Hans Vijlbrief. “That’s why this tax plan looks not only to the present but also to the future, so that we can emerge from the crisis with a fairer and greener tax system. For instance, multinationals are going to shoulder a fairer share of the tax burden.”

The plans state that the standard rate of corporation tax will not be cut, remaining at 25%. However, the low corporation tax rate will still be reduced from 16.5% to 15% as planned. Additional reductions for small and medium-sized enterprises will also go ahead.

The main measures affecting multinationals include those to prevent companies offsetting excessive losses and curtailing informal capital structures that were recommended by the Ter Haar Advisory Committee on the taxation of multinationals.

The details on these measures have not been released yet, but the press statement on the tax plan said that reducing the amount of losses a company can offset from 2021 will mean that “businesses will pay a more constant amount of corporation tax, and that fewer businesses will pay no tax at all in a particular year”. A bill on the liquidation and termination of loss release has also been tabled in the House of Representatives to prevent businesses from deducting certain losses without limit in the Netherlands as of 2021 when the company ceases activities in a foreign country.

In addition, the document states that the government will tackle informal capital structures from 2022. “These arrangements enable companies within a group to avoid taxation by exploiting the differences between tax systems. This undesirable practice will be curtailed,” the government said.

The government is also looking to tighten the general interest limitation rule (earnings stripping measure) because it believes companies that borrow capital currently enjoy a tax advantage. The Dutch government wants to tackle this through an equity allowance.

Both the Netherlands and Sweden have unveiled plans for climate taxes.

The Netherlands plans to charge a CO₂ tax on companies that do not “sufficiently” reduce their carbon emissions. At present, companies that fail to achieve the agreed reduction in CO₂ emissions risk paying €125 ($148) in 2030 for each excess tonne of CO₂ emitted. However, research by the Netherlands Environmental Assessment Agency (PBL) may lead to a change in this rate.

In Sweden, the government has proposed investments of SEK 9.7 billion ($1.1 billion) in green recovery initiatives in the Budget Bill for 2021. The measures cover a range of initiatives intended to create jobs, reduce emissions and strengthen competitiveness.

In other news, Bulgaria and the Netherlands signed a new agreement on the avoidance of double taxation on September 14, replacing the previous treaty between the two countries.

Last week, on September 9, the Indonesia Taxation Directorate General also announced that a memorandum of understanding had been signed with Australia in August, allowing the two countries to exchange tax data automatically from August 19.

While exchange of information agreements are normal, the fact that an aggressive tax jurisdiction such as Indonesia will have access to more taxpayer data, coupled with a strict country like Australia, may be a concern for some businesses.

Next week, ITR will publish its follow-up coverage to the Women in Tax Forums that took place in the US and Europe this week and we will return to Brazil for the opinions of a judge on why the country’s judicial tax procedures are failing to focus on the rule of law.

On transfer pricing, we will be talking to tax directors about how ending temporary tax guidance on permanent establishment (PE) issues is adding to ongoing uncertainty, and how companies can prepare for real-time reporting across the Asia Pacific region.

ITR will also be hosting its popular Digital Economy Summit, diving deep into pillar one and pillar two, as well as how to manage the growing number of DSTs.