On November 18, the US Tax Court ruled that the US parent company of Coca-Cola had routed too much profit to its foreign operations in a profit split arrangement. In a significant victory for the Internal Revenue Service (IRS), the judgment closes a five-year dispute.
However, the soft drinks company will not have to pay the full £3.4 billion the IRS was seeking because the ruling reduced Coca-Cola’s tax bill by $1.8 billion.
Meanwhile, around the world companies are turning to bolt-on system solutions to manage a rise in audits after a year of unexpected transfer pricing (TP) adjustments due to the COVID-19 pandemic. The changes are occurring in response to a global shift towards tax digitalisation and a need for taxpayers to limit year-end TP adjustments and enrich internal compliance controls.
Nevertheless, while the IRS may have failed to gain the full tax bill in this case, the US is not letting off any countries in its fight against digital services taxes (DSTs).
The US will soon reveal the results of trade investigations on three countries over the introduction DSTs, likely providing the base for retaliatory tariffs. The United States Trade Representative (USTR) Robert Lighthizer initiated Section 301 investigations of DSTs on June 2 2020. The results of probes on Austria, India and Italy are expected soon, with actions against a number of other countries anticipated soon after.
At the same time, the international community is facing more difficult questions about tax avoidance. The Tax Justice Network (TJN) released a report on November 20 attacking the OECD’s work on digital tax. TJN worked on the report with the international union federation Public Services International and the Global Alliance for Tax Justice.
The report called for a United Nations-led multilateral convention in place of an OECD agreement so that developing economies are not side-lined in negotiations. The report also calls for an excess profit tax and public country-by-country reporting (CbCR). Yet it does not stop there.
The TJN report wants more accountability for EU tax havens after assessing the anonymised 2016 CbCR data published by the OECD in July that showed $427 billion in tax is lost each year to global tax havens, $245 billion of which is lost to corporate tax abuse by MNEs.
In an announcement that appears to have pre-empted the TJN report, the UK government plans to consult on further steps to tackle promoters of tax avoidance schemes. Jesse Norman, financial secretary to the UK Treasury, has backed plans to disrupt the business models of tax avoidance promoters.
The UK government will also be expanding HMRC powers to tackle secrecy and ensure promoters face financial consequences for their actions, including shutting down promoters of such tax schemes.
These proposals are being designed while consultations continue to extend the Making Tax Digital project to corporate tax, introduce a plastic packaging tax from April 1 2022, and additional measures as proposed in the Finance Bill 2020.
While negotiations continue at the OECD on pillar one and pillar two, the tax authorities of the East African Community (EAC) member states appear to have got fed up of waiting. This is yet another sign of growing unease with the lack of a solution.
Following the 48th East African Revenue Authorities Commissioners General’s (EARACGs) meeting on November 11, Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda have decided to develop a joint strategy for taxing the digital economy and tackling base erosion, profit shifting and illicit financial flows within the EAC. The six nations will address the “legal framework in terms of definitions, identification of players and the legal mechanisms”, the EAC said in a statement.
Other global developments
At the OECD, the 2019 mutual agreement procedure (MAP) statistics were released on November 18, while Japan, Belgium, Norway, India and the US received awards for their specific efforts in dealing with MAP cases.
Covering 105 jurisdictions and almost all MAP cases worldwide, the latest statistics show a continuing increase in the number of cases entering the MAP.
“Approximately seven MAP cases were started every day in 2019,” the OECD said, which breaks down as three transfer pricing cases and four other cases. The rise amounts to almost 2,700 new cases in 2019, showing a 20% increase in TP cases and 10% rise in other matters.
“This trend is likely to continue with no significant reduction in MAP activity expected despite the COVID-2019 crisis. It is driven by a number of factors, including increased globalisation as well as growing confidence in and knowledge of the MAP process,” the OECD said.
While the number of cases being closed is also increasing as well, this is happening at a slower pace. In addition, while most (785%) MAP outcomes are positive, there is still a portion where no resolution is found (2%) or the matter is denied MAP access (6%) or cases are considered unjustified (6%) or withdrawn by the taxpayer (6%).
As such, the OECD has launched a consultation alongside the release of the statistics to seek stakeholder feedback on possible improvements, which closes on December 18.
This is just as the coronavirus crisis continues to impact many countries and governments are still deciding how to respond to the economic downturn. In many countries, governments have tried to look for ways to raise consumer demand in the future.
In Saudi Arabia, the acting information minister reportedly said on November 19 that the government may review its decision, which increased the VAT rate from 5% to 15% in July, after the pandemic ends in an effort to boost the economy.
In the UAE, the finance ministry has launched the ‘MNEs Notification and Reporting System’ to organise CbCR reports submitted by multinational enterprises. MNEs must register in the new reporting system before December 31 2020.
While the UAE is organising the CbCR system, the Egyptian government introduced the first phase of its e-invoicing system on November 15 as part of the government’s vision to digitally transform Egypt by 2030.
Next week in ITR
Next week in ITR, taxpayers talk about how they are assessing the weaknesses of their advance pricing agreements (APAs) and seeking alternatives because the impact of the OECD digital tax proposals on permanent establishments (PEs) could cause problems.
Some tax directors fear the OECD-led reforms may result in businesses being exposed to new tax claims on old audits or challenged on nexus concepts despite having an APA that provides tax certainty.
One of the key architects of pillar two will also outline the four areas that companies within the financial services sector should monitor more closely as the digital tax agenda is finalised.
In the meantime, MNEs will be discussing how a collaborative approach with tax authorities could minimise the DST compliance burden for many businesses.
