Taxing digital advertising revenue has caused some controversy this week in various countries around the world. In the US, Maryland became the first state to introduce a tax on digital advertising revenue, which enters into effect from the 2021 tax year. It targets technology companies such as Google, Facebook and Amazon that make more than $100 million from advertising revenue.
The rate of tax will range from 2.5% to 10% depending on the amount of annual gross revenues earned by a company. This tax could have a similar ripple effect as the Wayfair case, emboldening other US states to introduce a similar tax measure.
Although, a lawsuit was launched on February 18 against the tax. NetChoice, an internet association with members that include Amazon, Facebook and Alphabet, said Maryland’s law faces multiple constitutional hurdles, including a discriminatory approach that is likely to be overturned by the court.
“The Internet Tax Freedom Act was created to prohibit precisely what Maryland is doing here by imposing discriminatory charges only for online forms of advertising,” said Steve DelBianco, president and CEO of NetChoice.
“This law is like a toll booth that collects only from new cars and no one else, so any state following Maryland’s awful example will have to refund all those tolls when a court rules that it’s illegal discrimination,” added DelBianco.
Nevertheless, US technology companies, including Amazon and Netflix, are increasing their US cash reserves as they prepare for a higher tax burden under President Joe Biden’s administration. Many companies are doing the same for their global operations as digital services taxes, such as in Kenya, suggest more taxes are on the horizon for big businesses.
In Poland, the government has been forced to revise its plan to introduce a digital advertising tax after backlash from companies and politicians. Media companies argued that the tax threatens the freedom of the press given the dependence of traditional media on advertising and subscriptions.
The Polish government said its intention is to tax global companies and not domestic businesses to fund the healthcare costs created by the pandemic.
Using a less controversial approach, Singapore has amended its advertising tax laws in this week’s budget proposals. The zero-rating of supplies of media sales and online advertising will be amended as of January 1 2022. So, the tax liability will depend on where the contractual customer and direct beneficiary of the service resides.
From 2022, sales of online advertising will be zero-rated under two conditions: if the customer of the service resides outside of Singapore and the direct beneficiary is either abroad or GST-registered in Singapore. However, if the customer belongs in Singapore, the sales will be charged at the standard rate.
Cases stop, start and continue
The Canadian Cameco transfer pricing case has finally come to an end. On February 18, the Canadian Supreme Court denied the revenue authority’s application to appeal the Federal Court of Appeal’s June 2020 decision.
The Supreme Court did not give any reasons for rejecting the appeal request, but law firm Osler said in a tax alert that the decision “seals Cameco’s success in this precedent-setting transfer pricing case”.
Many companies were watching the outcome of this case which could have changed the scope and interpretation of the “recharacterisation” branch in section 247 of the Income Tax Act. Businesses will be relieved that their transfer pricing arrangements cannot be reassessed by the Canada Revenue Agency under the methodology it put forward in the case.
Meanwhile, in the EU, Ryanair is challenging the use of state aid schemes in France and Sweden that support a narrow range of airlines.
The Irish airline company is appealing the General Court of the European Union’s February 17 judgment that said state aid schemes in France and Sweden allowing domestic airlines to defer taxes are in line with EU law. Ryanair claims the schemes could distort competition among EU airlines for decades to come.
In India, taxpayers are watching what happens in the Cairn case. Cairn CEO Simon Thomson held meetings with Indian ministers to discuss his company’s long-running TP dispute with the Income Tax Department to end the matter and claim a $1.4 billion arbitration award.
In another case, Starbucks became the latest company to be fined for profiting from the country’s goods and services tax (GST). This is a part of a trend in India. Procter & Gamble was ordered to pay back taxes it allegedly made by unfairly profiteering from the GST in November 2020.
The Delhi High Court ruled in favour of the National Anti-profiteering Authority (NAA) in the Starbucks case, requiring the US coffee company to pay of fine of INR 10.4 million ($138,000) for not passing on tax savings to consumers, according to local news reports.
However, the constitutional validity of the NAA has been called into question and a ruling is pending from the Delhi High Court on this matter. Around 50 companies have filed petitions against the anti-profiteering regulations including Johnson & Johnson, Whirlpool, Nestle, Hindustan Unilever, Philips and Subway.
In the UK, ride-hailing app Uber lost its appeal over the worker status and rights of its drivers. Uber faces the prospect of higher employer tax bills after the Supreme Court ruled on February 19 that drivers should be classified as workers.
UN and OECD progress on tax matters
Companies dealing with tax disputes could benefit from developments at the OECD. The Paris-based organisation has released its long-awaited handbook to support the international compliance assurance programme (ICAP) and promote its use among multinational enterprises (MNEs) looking to mitigate transfer pricing (TP) risks.
Separately, the final batch of the stage 1 peer review reports for BEPS Action 14 on dispute resolution mechanisms have been released.
At the UN, the Tax Committee has published a discussion draft on possible amendments to the Model Tax Convention by including software payments in the definition of royalties. Comments on the document can be submitted until March 16.
The committee is seeking feedback on whether the description of software is consistent with business practices, whether the wording adequately distinguishes between different types of software, and if changes to the commentary on Article 12 are fair.
The UN has also published the comments of the IMF and World Bank on the proposed inclusion of Article 12B in the UN Model Tax Convention, covering automated digital services.
In other news
The EU was due to make some progress on updating its tax blacklist this week, but the topic was taken off the agenda at the last minute before the Economic and Financial Affairs Council meeting on February 16. The revision of the blacklist is expected to be adopted on February 22 at the Foreign Affairs Council, if it takes place physically, an EU spokesperson told ITR.
However, it did not stop tax justice campaigners and politicians taking to social media to debate the need for an updated list, with many arguing that Turkey needs to be added. The country has been given until June 30 2021 to adopt the automatic exchange of tax information (AEOI).
“Turkey belongs on the European list of tax havens,” argued Sven Giegold, a member of the European Parliament. “The deferral for Turkey is an invitation to evade taxes. With every day that Turkey does not have to transmit tax data, the tax damage for Europe becomes greater. The decision is weakening the already toothless EU tax haven list by giving Turkey this gratuitous extension.”
In other news:
Thailand’s VAT rules for foreign e-businesses and digital services will have effect from September 1 2021 after the rules were published in the Official Gazette on February 10;
Japan’s double tax treaty with Spain will enter into force on May 1 2021;
Ireland’s headline rate of VAT will return to 23% from March 2021, after it was temporarily reduced to 21% in response to the COVID-19 pandemic;
Russia will be implementing a tax on cryptocurrencies after the State Duma approved the proposed law on taxing cryptocurrency. The law would treat cryptocurrency as property for tax purposes and there would be a declaration threshold. A similar may soon be proposed in India; and
Israel will soon publish a tax circular that will clarify how to apply the profit split method for R&D centres, according to an EY tax alert.
Next week in ITR
ITR will be taking a closer look at the European Commission’s inquiry into dividend taxation in France and Sweden. The two countries were issued letters of formal notice to amend their tax rules on the distribution of dividends to companies in other EU member states. The investigation could lead to legislative changes based on Article 63 of the Treaty of the Functioning of the European Union (TFEU).
Meanwhile, institutional investors are turning to tax transparent funds to manage withholding tax challenges. The trend is also affecting how investors are adapting to post-Brexit transactions in the UK and EU.
In addition, the South African government will release its annual budget statement next week. Although tax advisors do not expect many taxes to be raised, there will be measures to support a post-COVID economic recovery. This is a trend which is apparent in many budget announcements throughout 2021.
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