This week in tax: OECD and UN digital tax proposals released

In the week that has been dominated by developments at the OECD, and the UN’s release of its digital tax proposals ahead of a vote next week. trade tensions involving the US have increased, Ireland announced its 2021 budget, there were new developments in several state aid cases and Oman confirmed it would join its neighbours in implementing a VAT system next year.

The OECD released its long-awaited report on its digital tax plans on October 12, but the COVID-19 pandemic impeded communication across stakeholders, delaying a political consensus on pillar one and two to 2021. Meanwhile, a public consultation is underway on the latest pillar one and pillar two developments.

During the G20 meeting this week, the Paris-based organisation said it acknowledges the impact COVID-19 has had on negotiations, but ministers “remain committed” to further progress on both pillars with the intention of reaching an agreement next year.

However, many stakeholders still find the approach too complicated, while alternative tax proposals risk trade wars and multiple taxation for large businesses ahead of a global consensus-based approach.

The G20 finance ministers also said they are continuing their support to developing countries in strengthening their tax capacity to build sustainable tax revenue bases. However, ministers may not have been aware of that the UN released its draft digital tax proposal this week when making that statement.

The UN proposes to introduce a new Article 12B (income from automated digital services) into the UN model tax treaty with commentary to deal with certain aspects of taxation in an increasingly digitalised economy, which offers taxing rights to developing countries.

Article 12B allows a contracting state to tax income from certain digital services paid to a resident of the other contracting state on a gross basis at the rate negotiated bilaterally, but recommends having a “modest” rate of 3% or 4% to prevent excessive or double taxation.

The article does not require any threshold, such as a permanent establishment, fixed base, or minimum period of presence in a contracting state as a condition to tax income from automated digital services.

However, to deal with double taxation risks, the provision states that Article 23 also enables this risk to be reduced or eliminated in regards to payments made in consideration of automated digital services. Moreover, Article 12B does not apply to income from automated digital services where such income is also regarded as “royalty” or as “fee for technical services” falling under the existing Article 12 or 12A.

In addition, the non-resident provider of automated digital services can also require that taxation takes place on a net basis by following the global profitability ratio of the beneficial owner or the multinational group to which it belongs to.

The UN’s proposal will be discussed and voted upon at the 21^st session of the Committee of Experts on International Cooperation in Tax Matters held between October 20 and 29.

While political differences delay progress at the OECD level, the conflicts over digital tax are expediting trade tensions.

French Finance Minister Bruno Le Maire said on October 14 that he will stick to his plans to introduce a digital services tax (DST) from December 2019 because he does not believe the outcome of the US elections on November 3 will have a material effect on OECD level talks for an international standard on taxing the digital economy.

Le Maire also believes a new US government is likely to be less aggressive with trade retaliation, suggesting US President Donald Trump may not succeed in winning a second term.

However, Le Maire’s confidence may be short lived if the US react negatively to the World Trade Organisation’s (WTO) decision in the Boeing case. The WTO awarded the EU the right to impose tariffs on US goods in retaliation against subsidies for aerospace multinational Boeing, threatening to escalate transatlantic trade tensions between the US and EU.

In cash-strapped Oman, Sultan Haitham Bin Tarik issued Royal Decree No. 121/2020 to implement VAT from April 1 2021 at a rate of 5%.

The gulf state joins the United Arab Emirates, Saudi Arabia and Bahrain which have all implemented a VAT law since the Gulf Cooperation Council of six member states agreed to the revenue-raising measure.

The decree is expected to be published in the Official Gazette on October 18 and will enter into force 180 days later.

“The business sector is required to register for VAT,” the Oman News Agency stated in a government statement. “To meet the target, its establishments have to operate a competent system of accountancy and billing, besides maintaining accurate accounting registers.”

The Gulf country also enacted a separate Royal Decree to introduce the automatic exchange of tax information, with the first reporting deadline set as October 31 2020.

Across the EU and its member states, businesses are still facing uncertainty over their tax arrangements due to ongoing disputes over everything from state aid to intangible assets.

This week, Advocate General Kokott issued opinions on state aid cases concerning tax measures in Poland and Hungary.

Kokott said the Polish tax on the retail sector (cases T-836/16 and T-624/17) and the Hungarian advertisement tax (case T-20/17) do not infringe EU state aid rules.

The European Commission (EC) decided that Poland’s tax on the retail sector, which entered into force on September 1 2016, and Hungary’s advertising tax, which has applied since 2014, were incompatible with the common market because they “grant smaller undertakings”, which are “taxed at too low a level”, creating an impermissible advantage and therefore constitute state aid.

The EC lost is case at the European General Court in 2019 after the two countries appealed the decisions. Not satisfied with the outcome, the EC decided to take its case to the Court of Justice of the European Union (CJEU).

In her opinion, Kokott said she agreed with the General Court’s view and has proposed that the CJEU dismiss the Commission’s appeals and uphold the General Court’s judgments.

Meanwhile, Advocate General Pitruzzella issued an opinion this week in the state aid case concerning Barcelona Football Club. Pitruzzella said the Commission’s appeal should be upheld.

Finance Minister Paschal Donohoe presented the 2021 budget to the Irish Parliament on October 13, with a few changes affecting businesses that mainly focused technical amendments and extended tax reliefs.

In a welcome move, Donohoe extended the knowledge development box incentive by two years to December 31 2022, supporting companies that retain or exploit certain intellectual property (IP) assets developed through research and development activities carried out in Ireland.

However, the finance minister also amended capital allowances for intangible assets. As of October 14 2020, provisions relating to capital allowances on intangible assets have been changed to ensure they are in line with the scope of balancing charge rules.

“While the new rules are not expected to result in significant additional tax revenue given the current profile of claims, they will ensure that Ireland’s tax regime for intellectual property, together with the broader corporation tax regime, remains competitive, legitimate and sustainable,” the budget policy document stated.

On corporation tax, Donohoe said Ireland’s 12.5% tax rate will not change, but an update on the country’s corporation tax roadmap will outline “further areas for consideration, consultation and action over the coming months and years”.

The roadmap will also take into account the OECD’s latest pillar one and pillar to blueprints because Ireland would “see a reduction in the level of profits taxable” in the country if there is agreement on the current proposals.

As with all EU member states. Ireland will be implementing of interest limitation and anti-reverse-hybrid rules next year as per the EU Anti-Tax Avoidance Directive (ATAD).

“I will be making a technical amendment this year to our ATAD-compliant exit tax rules to clarify the operation of interest on instalment payments,” said Donohoe, adding that the measure would be effective as of October 14 through a financial resolution.

Environmental tax measures were also part of the tax agenda this year. In addition to changes to road tax and vehicle registration tax, the finance minister announced an increase in the carbon tax rate from €26 ($31) to €33.50 per tonne of CO₂. The higher rate entered into force for auto fuels on October 14 and will apply to all other fuels from May 1 2021.

For Irish and unincorporated companies, the accelerated capital allowance scheme for energy efficient equipment has been extended for three years to December 31 2023. Businesses can use the scheme to deduct the full cost of eligible energy efficient equipment from taxable profits in the year of purchase.

A number of additional tax incentives and technical amendments were also announced, including:

• Expanding the tax debt warehousing scheme expanded to include repayments of the temporary wage subsidy scheme owed by employers and preliminary tax obligations for adversely affected self-assessed taxpayers;

• Amending section 541 of the Taxes Consolidation Act 1991 to close an avoidance scheme;

• Extending the section 481 (film tax credit) regional uplift scheme by one year by inserting an additional year of uplift at the rate of 5% in 2021. The uplift will then reduce to 3% in 2022, 2% in 2023, and Nil thereafter;

• Temporarily reducing the VAT rate from 13.5% to 9% for tourism and hospitality items as of November 1 2020;

• Developing a tax credit for the digital gaming sector in 2021 that should be available from January 2022 on qualifying activity; and

• Reducing the backlog of tax appeals following the appointment of a chairperson for the Tax Appeals Commission.

Next week, ITR will be focusing on how tax authorities are now launching audits on the back of country-by-country reports, as well as publishing several articles on tax technology and how COVID-19 has accelerated the developments.

In particular, many multinational businesses are turning to transfer pricing (TP) technology to better integrate indirect tax and TP for the purposes of profit monitoring. In addition, tax directors are telling ITR that tax technology is proving indispensable as restrictions because of COVID-19 continue longer than first anticipated.