As the UK government faced a crisis over its leadership, new UK Chancellor Nadhim Zahawi hinted at reviewing government plans to raise corporation tax from 19% to 25% for April 2023.
“I will look at everything. There’s nothing off the table. I want to be one of the most competitive countries in the world for investment,” Zahawi told Sky News.
“I know that boards around the world, when they make investment decisions, they’re long-term, and the one tax they can compare globally is corporation tax,” he added. “I want to make sure that we are as competitive as we can be whilst maintaining fiscal discipline.”
Zahawi succeeded Rishi Sunak as chancellor on Tuesday, July 5. Sunak put in place the plan to raise corporation tax to make up for emergency spending during the COVID-19 pandemic. However, Sunak resigned this week calling for Prime Minister Boris Johnson to step down.
More than 50 ministers soon followed, and the prime minister decided to resign as Conservative leader. Johnson announced his resignation in a public statement yesterday, July 7.
“I’ve agreed with Sir Graham Brady, the chairman of our backbench MPs, that the process of choosing that new leader should begin now,” he said.
The Conservative Party is set to hold a leadership election, while Johnson plans to stay on as a caretaker prime minister until October. In the meantime, UK tax policy could face an overhaul.
In the 2020 budget, the UK government announced the corporation tax would remain at 19% for the financial years 2020 to 2022. The rate was set to increase to 25% for the financial year 2023. This is now in doubt.
This could spark debate in the UK as economic and fiscal pressure brought on by Brexit, COVID-19, and Russia’s invasion of Ukraine could require tax rises or spending cuts.
On July 7, the Office for Budget Responsibility (OBR) said the UK was entering an “unsustainable” level of public debt. The average fiscal cost of recessions could push public debt to above 320% of the country’s GDP, according to the OBR report.
Taxpayers in the UK can expect more announcements in next week, but a new Conservative leader may not be elected until September.
Hungary in talks with GOP to block pillar two
The Hungarian government have said that it is working with US Republican lawmakers to find ways to resist the implementation of an EU directive to impose a global minimum tax rate on multinational corporations, according to The Washington Post.
Hungarian Foreign Minister Péter Szijjártó said he was taking advice from senior Republican officials on the steps the country could take to block the measure.
This also follows Republican opposition to the global tax initiative, which has been held up in the Congress, for fears it will make the US less competitive.
The OECD agreement was negotiated by 137 countries in October 2021 and it aims to revise international taxing rights and impose a global minimum effective tax rate. This minimum rate would be set at 15%.
In June, the EU failed to agree to a directive to impose the minimum tax rate in the block after Budapest withdrew its previous support for the measure at a meeting of EU finance ministers in Luxembourg.
This was a blow to the EU, which had hoped to unanimously agree its position on the pillar two directive after it had overcome resistance from Poland.
Pillar two had faced objections from Poland in its dispute with the European Commission over concerns about the rule of law in the Eastern European nation. This resulted in EU delays in approving a €36 billion ($37.9 billion) COVID-19 economic recovery package for the country.
Some observers believe that Hungary could be using the OECD agreement as a bargaining chip to secure more EU financial support But the Hungarian government disputes this citing broader economic concerns as reasons for its reluctance to support the EU plan.
French Finance Minister Bruno Le Maire has suggested that the EU could consider bypassing Hungary to find an alternative solution. This could be achieved via enhanced cooperation.
Enhanced cooperation would need just nine EU member states to support the proposal, and the minimum rate has most member states backing it. This may be one way that the minimum rate could become a reality in the EU.
Pillar one mandates multinational companies to declare and pay taxes on digital profits in the countries where they operate. However, the details of new taxing rights are highly contested. Nevertheless, the OECD aimed to secure a consensus on the details of pillar one and implement the plan in 2023.
But delays at both the international and EU-level have pushed back the effective date to 2024.
Japan set to reap benefits of tax windfall
As ITR reported, Japan reported a windfall from all types of taxes on June 4 after the government revised its stimulus package. This could lead to greater corporate tax incentives for businesses.
The Japanese government reported a record estimate of ¥67 trillion ($496.2 billion) in revenue from fiscal year 2021/2022 despite calls from the International Monetary Fund in January 2022 to cut spending and raise taxes following the COVID-19 pandemic.
Tax professionals said this will likely spur more spending on incentives in future budgets too. They expect more government spending on incentives, such as patent box benefits or targeted tax cuts that will drive growth in future years.
This marks a record for the second consecutive year, with the largest income coming from sales tax, corporate tax, and personal income tax. All tax revenue estimates have been revised up from earlier calculations, based on reporting from Reuters.
Shareholders slam MNEs with GRI transparency proposals
In other news, Amazon, Cisco, and Microsoft’s largest investors are lobbying for the GRI tax transparency standard, but this could be the start of a trend in shareholder activism.
At least thirty companies could adopt the Global Reporting Initiative tax standard in coming months as a growing number of public companies face pressure from investors to release information in country-by-country reports.
Katie Hepworth, responsible tax lead at Pensions & Investment Research Consultants in Sydney, said she expects to see more shareholders demand companies to adopt higher tax transparency standards.
“PIRC is currently engaging with over 30 companies about their tax reporting, and our decision to support further proposals will depend on the outcomes of our engagements,” said Hepworth.
The GRI tax standard is a voluntary reporting framework that would disclose tax receipts to shareholders in every country where the company operates. This would effectively take CbCR public on a voluntary basis, but lasting changes may only come in the form of law.
Other ITR headlines this week include:
Cyprus increases tax certainty with TP legislation
Businesses still waiting for CRA guidance after Cameco case
MNEs failure to register for South African VAT risks hefty fines
Companies need strong tax risk management for outsourcing
EU tax advice rules may narrow scope of DAC6 disclosures
Next week in ITR
The ITR team will be covering Germany’s slow repeal of Section 49 of the German Withholding Tax Act. The act removes WHT on royalty income for non-resident companies with transactions that have any type of exposure to intellectual property registered in Germany.
In other news, ITR looks at why online marketplaces and e-commerce businesses are urged to review their Canadian sales tax obligations across the country’s jurisdictions to ensure compliance.
ITR will be analysing China’s updates to transfer pricing rules following collaboration between the Shenzhen customs and tax authorities.
Meanwhile, ITR will also be looking at trends in tax risk insurance as the global economy faces supply chain problems and inflation following the COVID-19 pandemic.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.
