Direct Tax
OECD Releases Pillar two model rules for domestic implementation of 15% global minimum tax
[Excerpts from OECD, 20 December 2021]
The OECD published detailed rules to assist in the implementation of a landmark reform to the international tax system, which will ensure Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023. The Pillar Two model rules provide governments a precise template for taking forward the two-pillar solution to address the tax challenges arising from digitalization and globalization of the economy agreed in October 2021 by 137 countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS.
The rules define the scope and set out the mechanism for the so-called Global Anti-Base Erosion (GloBE) rules under Pillar Two, which will introduce a global minimum corporate tax rate set at 15%. The minimum tax will apply to MNEs with a revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually.
Canada advances digital service tax bill despite OECD pact
[Excerpts from MNE Tax, 15 December 2021]
On 14 December 2021, Canada introduced draft legislation to implement its planned digital services tax – with a built-in delay and contingency deferring to implementing the OECD multilateral agreement. However, if the OECD agreement under Pillar 1 is not timely implemented, Canada’s digital services tax would be imposed in 2024 with retroactive application to 2022.
Transfer Pricing
Denmark eases transfer pricing documentation requirements w.r.t. domestic controlled transactions & provides guidance of application of benchmarking
On 23 June 2021, the Danish Ministry of Taxation had proposed draft amendments, to the Danish Tax Control Act (Act) recommending relaxations in transfer pricing documentation requirements for domestic transactions. On 25 November 2021, the Danish Parliament adopted Bill No. 7 (Bill), providing relief to the taxpayers for preparing transfer pricing documentation (TPD) substantiating the arm’s length principle for domestic controlled transactions. The Bill also specifies the requirement for applying appropriate benchmarking at the time of comparability analysis, notwithstanding the materiality.
The Bill will be effective for income years starting 1 January 2021 or later.
TPD for domestic controlled transactions
Basis the erstwhile provisions of the Act, the taxpayer (i.e., company) domiciled in Denmark is required to prepare TPD (for both international and domestic controlled transactions) if the group (i) employs 250 or more employees; or (ii) has revenue exceeding DKK 250 million; and (iii) balance sheet amount exceeding DKK 125 million. Further, in light of the enactment of law (L28/2020) on 3 December 2020, the taxpayer is required to file Master File and Local File with the Danish Tax Agency within 60 days after the deadline for filing the annual corporate income tax return.
The consequences of failing to submit a timely and otherwise compliant TPD include the risk of penalties and a discretionary assessment. Failure to comply with the submission deadline and/or TPD requirements could attract a penalty of DKK 250,000 per company per year, plus 10% of any income adjustment. Additionally, the burden of proof would shift to the taxpayer in transfer pricing-related tax disputes.
As per the Bill, for transactions entered between Danish group entities (domiciled in Denmark), the need to maintain TPD ceases as the said entities are subject to ordinary company taxation regulations.
It is worthwhile to note that though domestic transactions are exempt for preparation of TPD, the arm’s length principle incorporated in the Danish Tax Assessment Act, shall continue to apply to all domestic controlled transactions. Thus, associated domestic group companies subject to ordinary company taxation will still have to ensure that their intra-group transactions are priced in accordance with the arm’s length principle.
Comparability analysis
The Bill also introduces an amendment, which specifies the Danish requirements to support intercompany transactions by benchmarking. Thus, for income years starting from 1 January 2021, all intercompany transactions entered into by the taxpayer will have to be documented and supported by a benchmark, regardless of the materiality.
Failure to document appropriate benchmarking while conducting comparability analysis shall pose a potential risk of being challenged wherein the burden of proof shifts to the taxpayer along with the probability of being fined.
Conclusion
While the Bill provides relief to the taxpayers from the preparation of TPD for domestic controlled transactions, it does not absolve them from maintaining adequate documentation (prepared written documentation, calculations, etc.) for the pricing of the controlled transactions to demonstrate that it complies with the arm’s length principle. Subsequently, during tax audits, the taxpayer may be required to reproduce the same upon request by the Danish Tax Agency.
Indirect Tax
FM Rishi Sunak plans to slash taxes
[Excerpts from Reuters.com]
UK Finance Minister Rishi Sunak is planning to cut down income tax by 2 pence to the pound or slash VAT rates before the next elections. However, it has been reported that Mr. Sunak’s preference is an income tax cut over the next three years as part of a ‘retail’ offer before 2024, when the next general election is expected. Another proposal could see the VAT cut to be at the headline rate of 20%, along with more targeted reductions to the regime. Furthermore, it is being considered that households using green energy could pay lower rates.
Collection of sales tax on internet sales
[Excerpts from Myleaderpaper. com]
Certain US cities will ask their voters in April of this year to approve sales tax collection on internet sales. If it is approved, the City of Arnold will collect its current 1.25% sales tax and the City of Pevely would collect 2.65% sales tax on internet purchases, similar to the purchasers at retail businesses in the city.