This week in tax: DSTs dominate budgets and disputes

The tussle between France and the US continued this week after French Finance Minister Bruno Le Maire decided to push ahead with the country’s DST despite US threats of retaliation. Le Maire said France would immediately seek European Union retaliation if the US implements planned trade sanctions in January 2021 over the French DST, according to Thomson Reuters.

However, France’s plan to retaliate through the EU appears to conflict with the European Commission’s plan to strengthen ties with the US to agree digital tax reforms announced this week.

The EC is set to propose two summits with the US in 2021 to discuss trade issues and help resolve tensions over digital tax, according to its EU-US agenda. The Commission has already sent an invite to President-elect Joe Biden.

At the same time, the EU Council will be expanding the Directive on Administrative Cooperation (DAC) to include information relating to digital platforms (DAC7).

The Council of the European Union approved a legislative proposal on December 1 that will enable member states to automatically exchange information about revenues generated by sellers on digital platforms, regardless of whether the platform is located in the EU or not, from 2023. At the latest, the framework will be operational in all member states from 2024.

“The Council is expected to adopt the directive in the coming weeks, once the opinions of the European Parliament and of the European Economic and Social Committee have been received and the legal-linguistic revision has taken place,” said Olaf Scholz, German vice chancellor and finance minister.

Meanwhile, Advocate General Juliane Kokott said the Court of Justice of the European Union (CJEU) should aside the General Court’s judgment that the Belgian excess profit tax regime does not constitute illegal state aid.

In her December 3 opinion, Kokott said the European Commission was right to find that the Belgian tax authorities had granted illegal state aid to Magnetrol International and 54 other resident companies. However, the CJEU does not need to follow the AG’s advice in its decision on the case.

Other developments covered by ITR this week include:

• Multinational companies (MNEs) are moving more of their transfer pricing (TP) documentation work in-house, but each business appears to have a different approach. Tax directors tell ITR about their strategies.

• Indian MNEs claim that goods and services tax (GST) legislation to prevent profiteering from rate changes is unreasonable and leads to unnecessary litigation. The comments follow a National Anti-Profiteering Authority (NAA) decision against Procter & Gamble.

• Tax directors have warned that low data quality and inconsistency in reporting requirements across jurisdictions means public country-by-country reporting (CbCR) should not be made compulsory, following a Tax Justice Network report that reignited the debate.

• The Danish government’s bill to change controlled foreign corporation (CFC) rules is facing criticism from the EU and business leaders for overreaching on EU Anti-Tax Avoidance Directive (ATAD) by excluding an important substance test.

In Canada’s Fall Economic Statement, announced on November 30, Chrystia Freeland, deputy prime minister and minister of finance, announced a number of changes affecting MNEs providing digital goods and services in Canada. Companies such as Amazon, Airbnb and many others will have to deal with a higher tax cost and compliance burden.

Freeland said the government will introduce a DST from January 1 2022 if there is no international agreement on taxing the digitalisation of the economy in 2021.

“Canada will act unilaterally, if necessary… to apply a tax on large multinational digital corporations, so they pay their fair share just like any other company operating in Canada,” said Freeland.

However, from July 1 2021, foreign-based vendors with no physical presence in Canada, or those using fulfilment warehouses in Canada, will be subject to the country’s GST or harmonised sales tax (HST) to level the playing field between domestic and foreign businesses supplying goods and services.

“Canadians want a tax system that is fair, where everyone pays their fair share, so the government has the resources it needs to invest in people and keep our economy strong. That is why we are moving ahead with implementing GST/HST on multinational digital giants, and limiting stock option deductions in the largest companies,” Freeland told Parliament in her economic statement speech.

Digital marketplace platforms will have to register for the GST/HST under a planned simplified regime and collect and remit the tax on the sale of digital products or services.

In addition, to ensure both domestic and foreign sellers pay GST/HST on the final price paid for their goods when using fulfilment warehouses, the GST/HST rules will be extended to foreign-based vendors from July 2021.

For companies like Airbnb, providing short-term accommodation services, the government will require such services providers or the property owner to collect and remit GST/HST on supplied accommodation from July 1 2021.

In additional tax changes, the finance minister announced the employee stock options will be amended to avoid wealthy individuals in well-established businesses from unfairly benefitting. The Canadian Revenue Authority (CRA) will also receive an additional C$606 million ($468.5 million) over five years, starting in 2021-22, to fund new initiatives and extend existing programmes targeting international tax evasion and aggressive tax avoidance.

Canada’s general anti-avoidance rule (GAAR) will also be modernised and a consultation will be launched in the coming months. The CRA will “hire additional offshore-focused auditors” to focus on individuals who avoid taxes by hiding income and assets offshore and “enhance the audit function targeting higher-risk tax filings”, the government said in its budget statement.

While Canada is taking numerous domestic tax actions, it has also filed at objection to the OECD against Denmark’sreservation on arbitration to the BEPS Multilateral Instrument (MLI). The document, deposited on October 8, states that Denmark’s decision to apply Part VI of the MLI only when the chair of the arbitration panel is a judge, and which allows Denmark to publish abstracts of the decisions made by the arbitration panel, “exceeds the scope of cases for which a reservation may be made under that provision”.

In other developments this week, HMRC published a policy paper, proposing to repeal the Double Taxation Dispute Resolution (EU) Regulations 2020, which implement Council Directive (EU) 2017/1852 of October 10 2017 on tax dispute resolution mechanisms in the European Union. The changes, as a result of Brexit, would no longer apply after the transition period ends.

Once the Double Taxation Dispute Resolution (EU) (Revocation) (EU Exit) Regulations 2020 enter into effect, intra-EU agreements will no longer apply to the UK, meaning the tax authority, HMRC, will not consider any new requests submitted to access the EU convention where the UK is a party to the dispute after the end of the transition period. However, any requests received before the end of the transition period will be worked on to reach a conclusion.  

In other news:

• The India Supreme Court ruled on December 3 that the GST should be charged on the sale of lotteries, betting and gambling;

• The MLI will apply to the tax treaty between Japan and Indonesia from 2021, according to a Japan Ministry of Finance announcement;

• Canada’s International Trade Minister Mary Ng has been unable to confirm when a bill on a new Canada-UK trade agreement will be presented to Parliament, despite the UK’s International Trade Secretary Liz Truss saying on November 21 that a trade agreement had been secured;

• A case is about to start in the Delhi High Court over the constitution validity of India’s GST anti-profiteering provisions;

• The UK’s HMRC has published research where it conducted 900 quantitative interviews followed by 30 in-depth qualitative interviews with wealth managers, UK goods importers and freight forwarders to assess the motivations behind tax evasion and avoidance by enablers and facilitators;

• A CNBC survey found that CFOs do not think US President-elect Joe Biden will increase the corporate tax rate from 21% to 28% when he takes office and expect him to be neutral on business matters; and

• The UN has published a report on its 20^th session of the Committee of Experts on International Cooperation in Tax Matters.

Next week in ITR, tax directors will be sharing how country-by-country reporting (CbCR) data has helped them solve problems identified with their transfer pricing strategies.

Tax advisors will also be explaining why companies should not make hasty changes to their TP policies because of COVID-19, which could have significant ramifications.

Indirect tax managers from across Europe will be sharing their experience of transitioning to digital processes and how their corporate tax colleagues are trying to replicate their successes of gaining budget and buy-in from the IT department.

Direct tax teams are looking at how their indirect tax colleagues have digitalised their processes to apply the same lessons to corporate tax, but indirect tax managers warn that technological transitions are not easy.