In the ever-evolving landscape of global taxation, the European Union (EU) has taken a significant stride in enforcing tax transparency on digital platforms.
The recent extension of EU tax transparency rules to digital platforms has introduced new obligations on platform operators, shaking up the way information is collected, verified, and reported for sellers engaging in what are termed as “Relevant Activities.”
While initially an EU initiative, these rules have far-reaching implications for platform operators beyond the EU, especially those established in non-EU countries like the United States.
In this article, we delve into the intricacies of these rules, their impact, and what platform operators need to know.
On January 1, 2023, the EU’s regulations implementing the OECD’s Model Reporting Rules for Digital Platforms, known as DAC7, officially came into effect.
With a deadline of December 31, 2022, EU Member States were mandated to incorporate DAC7 into their national legislation.
The overarching aim of these regulations is to ensure tax compliance among participants in the digital economy and level the playing field between online and traditional businesses.
While the UK’s regulations implementing these rules are still in draft form, they are slated to take effect from January 1, 2024, with the first reports expected in 2025.
The UK’s implementation of these rules will be closely aligned with EU regulations to streamline reporting obligations and reduce duplication.
The crux of DAC7 lies in its broad-ranging requirements for platform operators. In essence, platform operators falling under the scope of these rules must:
DAC7’s focus centers on platform operators.
The term “platform operator” encompasses entities that provide software connecting sellers with users to perform Relevant Activities.
Compliance requirements kick in for platform operators that are either residents of a Member State for tax purposes or fulfill specific conditions like being incorporated under Member State laws, having their management based in a Member State, or having a permanent establishment in a Member State without a jurisdictional information exchange agreement.
Central to DAC7 are the “Relevant Activities,” encompassing activities like renting immovable property, personal services facilitated through the platform, sale of tangible goods, and rental of transport modes.
Platform operators in scope of DAC7 are required to conduct due diligence to collect seller information.
However, exceptions are provided for sellers falling under certain thresholds. Notably, sellers with fewer than 30 sales or a consideration of less than 2,000 euros, governmental entities, listed entities, and certain lessors of immovable property fall outside the due diligence scope.
The collected information includes a range of details such as names, addresses, tax IDs, VAT registration numbers, and more. Verification of this data’s accuracy is paramount, and operators are encouraged to utilize electronic interfaces provided by Member States or the EU for authentication purposes.
For sellers identified through due diligence, platform operators must collect and report a host of transaction-related information. This includes financial account numbers, consideration amounts, activity volumes, fees, commissions, and taxes withheld.
DAC7 outlines measures platform operators must take against non-cooperative sellers. If sellers fail to provide requested information after two reminders, operators can close their accounts or withhold payments until compliance is achieved.
Compliance timelines are well-defined: due diligence and verification by December 31 of the reporting year and information reporting by January 31 of the subsequent year.
Fines for non-compliance should be “effective, proportionate, and dissuasive,” although exact penalties vary by Member State.
The extension of EU tax transparency rules transcends geographical boundaries, impacting non-EU platform operators with ties to the EU.
For instance, US-based operators accommodating EU-based sellers or property rentals in the EU now need to adapt their operations to comply with DAC7.
In a digitally connected world, tax transparency is evolving rapidly. As platform operators, it’s crucial to remain informed about regulations like DAC7 that impact your business operations.
From information collection and verification to reporting and compliance, understanding the nuances is essential for a smooth transition.
As the tax landscape continues to reshape, being proactive in embracing change and adapting to new norms will set the stage for sustainable growth and compliance in an ever-evolving global marketplace.
If you have any queries about this article on the EU tax rules for digital platforms or any other international tax matters, then please do get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article..
The wheels of international tax reform continue to turn as Canada takes significant strides to implement the OECD’s Pillar Two global minimum tax (GMT) recommendations.
On August 4, 2023, the Department of Finance unveiled draft legislation outlining the implementation of two pivotal elements of Pillar Two: the income inclusion rule (IIR) and a qualified domestic minimum top-up tax (QDMTT).
The aim is to align Canada’s tax landscape with the evolving international consensus on curbing tax base erosion and profit shifting.
Let’s have a look at the key aspects of this draft legislation, along with insights into the broader implications it holds.
The draft legislation holds particular importance for multinational enterprises (MNEs) as it focuses on two crucial aspects of the GMT framework:
These provisions are designed to ensure that MNEs pay a minimum level of tax on their global income, irrespective of their jurisdiction of operation
The IIR, closely aligned with the OECD’s model rules and the accompanying commentary, obliges a qualifying MNE group to include a top-up amount in its income.
This amount is determined by evaluating the group’s effective tax rate against the stipulated minimum rate of 15%.
Notably, the draft legislation incorporates mechanisms for calculating this top-up amount, encompassing factors such as excess profits, substance-based income exclusions, and adjusted covered taxes.
The goal is to prevent instances where MNEs might be subject to lower tax rates in certain jurisdictions.
The QDMTT, on the other hand, allows jurisdictions to implement a domestic top-up tax to align with the principles of Pillar Two.
This is aimed at domestic entities within the scope of Pillar Two, counterbalancing the global minimum tax liability.
The intricacies of the QDMTT provision, including computations and adjustments, are outlined in the draft legislation to ensure an encompassing and fair application.
To effectively implement the Global Minimum Tax Act (GMTA), the draft legislation covers a spectrum of administrative facets.
These include provisions for assessments, appeals, enforcement, audit, collection, penalties, and other vital components to ensure the smooth functioning of the new tax regime.
As part of compliance measures, the legislation introduces the requirement of filing a GloBE information return (GIR) within 15 months of the fiscal year’s end, with potential penalties for non-compliance.
It’s important to note that the legislation doesn’t shy away from significant penalties for non-compliance.
Failure to file the required GIR within the stipulated timeframe could result in penalties of up to $1 million. Moreover, penalties may also be imposed as a percentage of taxes owed under the GMTA for not filing Part II or Part IV returns, adding a layer of urgency to adhere to these provisions.
One of the central themes that emerge from the draft legislation is the intricate interplay between the GMTA and Canada’s existing tax framework.
While the legislation attempts to bridge these two domains, certain aspects remain to be ironed out.
Notably, the interaction between the GMTA and provisions within the Income Tax Act (ITA) raises questions about the allocation of losses or tax attributions under the ITA to offset taxes owing under the GMTA.
Additionally, the draft legislation is deliberately silent on the specifics of this interaction, particularly concerning issues like Canadian foreign affiliate and foreign accrual property regimes.
As businesses and professionals delve into the consultation process, these areas of ambiguity are likely to be focal points of discussion, aiming to ensure a harmonious alignment between the new regime and the existing tax landscape.
The consultation process for the draft legislation is underway, with the Department of Finance welcoming feedback until September 29, 2023.
During this period, stakeholders, including businesses, tax professionals, and policymakers, have the opportunity to contribute insights and perspectives to shape the final legislation.
The complex and evolving nature of international taxation underscores the importance of robust consultation, as the new rules have far-reaching implications for cross-border businesses.
Canada’s proactive approach to aligning its tax laws with the global consensus on minimum taxation is a significant stride.
As the draft legislation undergoes scrutiny and refinement, it’s essential to recognize its implications not only for multinational enterprises but also for the broader tax landscape.
The interplay between the GMTA and the existing tax regime will be closely watched, highlighting the intricate path of international tax reform and the commitment of nations to creating a fair and balanced tax environment.
If you have any queries about this article on Canada and Global Minimum Tax, or Canadian tax matters in general, then please get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article..
In a significant move, the Swiss electorate and cantons have voted in favor of implementing the Organisation for Economic Co-operation and Development (OECD) global minimum tax of 15% for large multinational enterprises operating in Switzerland.
This constitutional amendment was supported by an overwhelming majority, with 78.45% of voters and all cantons endorsing the proposal.
The implementation of the OECD minimum tax aims to safeguard Switzerland’s tax receipts and maintain its position as a stable business location.
The global minimum tax initiative has been developed by the OECD and the Group of 20 countries to establish a uniform minimum tax rate worldwide.
Under this framework, multinational companies with a global annual turnover exceeding €750 million will be subject to a minimum tax rate of 15% in each country they operate in.
Numerous countries, particularly in the European Union, plan to introduce the OECD minimum tax on 1 January 2024.
In Switzerland, 21 out of the 26 cantons currently have tax rates below the required 15%. Failure to meet the minimum tax rate would result in the imposition of a supplementary tax to make up the shortfall.
By implementing the minimum tax, Switzerland ensures that its tax receipts remain within the country rather than being shifted to other jurisdictions.
It’s important to note that the OECD minimum tax will only affect large multinational groups with an annual turnover of at least €750 million.
Small and medium-sized enterprises will not be affected by this amendment.
In Switzerland, approximately 200 internationally active groups headquartered in the country and 2,000 Swiss subsidiaries of foreign groups will be subject to the minimum tax.
As a result, around 99% of companies in Switzerland will continue to be taxed under the existing regulations.
The constitutional amendment to introduce the OECD minimum tax is in Switzerland’s best interest.
Without such a provision, jurisdictions in which Swiss multinational groups operate would be entitled to impose a subsequent tax to compensate for the difference in tax burdens, thereby impacting Switzerland’s tax revenues. Implementing the minimum tax rate ensures tax stability for Switzerland and provides legal certainty for companies affected by the new international tax rules.
However, it is worth considering the potential impact on tax competition within Switzerland.
High-tax cantons may become more attractive compared to those with lower taxes, as the introduction of the minimum tax limits the extent to which lower tax rates can be used to offset geographical disadvantages.
Switzerland’s embrace of the OECD global minimum tax represents a proactive step to secure tax revenues and maintain its status as an internationally stable business location.
By implementing the minimum tax, Switzerland ensures that tax receipts remain within the country and avoids the risk of revenue shifting to other jurisdictions.
While this decision may have implications for tax competition within Switzerland, the overall objective is to create a robust and equitable international tax framework.
The introduction of the OECD minimum tax paves the way for a more uniform global tax system, providing a level playing field for multinational enterprises across different countries.
If you have any queries about this article, or Swiss tax matters in general, then please get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Yesterday, Guernsey, Jersey, and the Isle of Man announced their intention to implement the OECD’s Pillar Two global minimum tax initiative.
The three Crown Dependencies have said that they will implement an “income inclusion rule” and a domestic minimum tax to ensure that large multinational enterprises (MNEs) pay a minimum effective tax rate of 15% from 2025.
Pillar Two is a new set of international tax rules that seek to address the problem of base erosion and profit shifting (BEPS).
BEPS is a practice by which MNEs use complex structures to shift profits to low-tax jurisdictions, thereby avoiding paying taxes in high-tax jurisdictions where the profits are generated.
The income inclusion rule is one of the two main components of Pillar Two. The income inclusion rule requires MNEs to pay a top-up tax in high-tax jurisdictions where their effective tax rate is below the 15% minimum.
The domestic minimum tax is the other main component of Pillar Two. The domestic minimum tax requires MNEs to pay a minimum tax in each jurisdiction where they operate, regardless of their effective tax rate.
The implementation of Pillar Two is a significant development in the global fight against BEPS. The rules are expected to raise billions of dollars in additional tax revenue for governments around the world. The rules are also expected to make it more difficult for MNEs to avoid paying taxes.
The announcement by Guernsey, Jersey, and the Isle of Man to implement Pillar Two is a positive development.
The three Crown Dependencies have a reputation for being tax-efficient jurisdictions. However, they have also been criticized for being used as tax havens by MNEs.
The implementation of Pillar Two will help to ensure that MNEs pay their fair share of taxes in the jurisdictions where they operate.
The implementation of Pillar Two will have a number of implications for MNEs. MNEs will need to review their global tax structures to ensure that they are compliant with the new rules.
MNEs may also need to increase their tax payments in high-tax jurisdictions.
The implementation of Pillar Two is a significant development for the global tax landscape. It will be interesting to see how MNEs respond to the new rules.
The rules will help to ensure that MNEs pay their fair share of taxes in the jurisdictions where they operate.
However, it is important to note that the rules are complex and will require careful implementation.
If you have any queries relating to the three Crown Dependencies’ implementation of Pillar Two, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
The UK’s Digital Services Tax (DST), which imposes a 2% tax on the revenues of search engines, social media platforms and online marketplaces, is set to be withdrawn as part of the Organisation for Economic Co-operation and Development’s (OECD) two-pillar plan to reform international corporate taxation.
The plan, announced on 1 July 2021, will see the UK commit to a 15% minimum level of global tax on large businesses under Pillar Two, in exchange for being able to tax a portion of the profits of the world’s largest businesses that are attributable to consumption in the UK under Pillar One.
The DST was introduced in 2020 as a temporary measure to address the challenges posed by the digital economy to international corporate taxation. The tax has been effective in raising £358m from large digital businesses in the 2020/21 tax year, 30% more than originally forecast.
However, the DST has faced significant international opposition, with the US arguing that digital services taxes unfairly target American firms and are discriminatory.
The compromise agreed with the US covers the interim period between January 2022 and either 31 December 2023 or the date Pillar One is implemented, whichever is earlier.
Under this compromise, the UK is able to keep its existing DSTs in place until the implementation of Pillar One, but US corporations subject to DSTs may receive tax credits against future tax liabilities.
As a compromise, the US has agreed to terminate proposed trade action and refrain from imposing any future trade actions against the UK.
The OECD’s two-pillar plan aims to reform international corporate taxation and make it fit for the digital age.
Pillar One will enable countries to tax a portion of the profits of the world’s largest businesses that are attributable to consumption in their jurisdictions, including the profits of the world’s largest digital businesses.
Pillar Two will introduce a global minimum tax rate of 15% on large businesses to prevent them from shifting profits to low-tax jurisdictions.
The UK has committed to ending its DST by the deadline of 31 December 2023 in order to adopt the OECD’s Pillar One model rules from 2024.
The UK government anticipates that it will introduce a domestic minimum tax in the UK to complement Pillar Two, likely to come into effect from 1 April 2024 at the earliest.
The withdrawal of the DST will have implications for digital companies operating in the UK. Businesses that have not yet been found liable for DST but consider that they may be in scope should revisit their DST exposure analysis.
The UK government’s commitment to introducing a domestic minimum tax may also have an impact on the tax liabilities of digital companies operating in the UK.
If you have any queries relating to UK Withdraws Digital Services Tax or tax matters in the UK more generally, then please do not hesitate to get in touch with a UK specalist Native!
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Eventually, after a number of failed attempts, the EU has reached agreement on the Minimum Taxation Agreement.
The 27 European Union Member States reached agreement on the 12 December 2022.
The agreement clears the way for the implementation of a minimum level of taxation for the largest companies. These reforms are also known as the Pillar Two or Minimum Taxation Directive.
The Directive has to be transposed into Member States’ national law by the end of 2023.
Broadly, the agreed Directive reflects the global OECD agreement with some adjustments.
The new agreement will apply to any large group of companies whether domestic or international. The rules will apply to such organisations with aggregate revenues of over €750 million a year. As such, it will only apply to the biggest companies around the globe.
It should be noted that it is necessary for either the parent company or a subsidiary of the group to be situated within the EU.
The effective tax rate is established for a location by dividing the taxes paid by the entities in the jurisdiction by their income.
Where this calculation results in a rate of tax below 15% then the group must ‘top-up’ the tax paid such that the overall rate is 15%.
The development means that the EU will be a pioneer around Pillar Two. However, it seems highly likely that other jurisdictions (I.e non-EU) will follow suit.
Further, by the end of this month (Jan 2023), it is expected that the OECD will publish its own guidelines for Pillar Two. Again, these should act as a catalyst for wider adoption of Pillar Two internationally.
In addition, it is expected that they will shed some light on some of the key outstanding issues around how the US rules (such as US GILTI rules) will conform with Pillar Two.
If you have any queries about the EU agreement on Pillar Two, or international tax matters generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article
The Irish Finance Bill 2022 provides for changes to:
Both changes are to reflect the OECD’s Pillar Two model rules and the EU’s draft Pillar Two Directive.
Ireland has an attractive R&D tax credit for qualifying expenditure on R&D activities. This includes certain expenditure on plant and machinery and buildings.
The credit is currently 25% of the allowable expenditure.
The mechanics of the regime are that the tax credit can be offset against the claiming company’s current and prior year corporation tax liability. In addition, any excess credit may be:
The OECD Pillar Two model rules and the EU draft Pillar Two Directive introduce the concept of a “qualified refundable tax credit” (QRTC).
Going forward, the R&D tax credit regime in Ireland will need to be consistent with QRTC requirements.
In order to qualify as a QRTC require, the tax credit to be paid as cash (or available as cash equivalents) within four years of the date on which the taxpayer is first entitled to it.
A tax credit that qualifies as a QRTC will be treated as income and not as a reduction in taxes paid. This is important when it comes to calculating the relevant effective rate of tax rate for the purposes of the global minimum corporate tax rate.
The Finance Bill proposals seek to revise the R&D tax credit so that it is consistent with the QRTC criteria. This will include providing that the credit is fully payable in cash or cash equivalents.
The new proposals under the Finance Bill measures provide that the first instalment of the R&D tax credit should be equal to the greater of:
The cap on payable credits linked to the corporation tax/payroll tax payments will no longer apply.
A consequence of the change is that companies that could have obtained the full value of the credit in a current year versus their corporation tax liabilities, will now instead see that benefit spread over three years.
In addition, to ensure alignment with the Pillar Two rules, the R&D credit should be paid within the four-year period. This includes where there is an open investigation by the tax authority.
The Finance Bill also provides for Pillar Two related changes to Ireland’s KDB.
The KDB is a form of patent box regime and provides for a 50% reduction of qualifying income. This results in an effective tax rate of 6.25% for the taxpayer in respect of the qualifying income.
However, the requirements are relatively strict and it is understood that uptake has been limited
The Finance Bill measures provide that the KDB trading expense deduction is reduced from 50% to 20% of qualifying income. This results in a new effective rate of 10% as opposed to the existing 6.25% on qualifying income.
If you have any queries about the Irish Finance Bill 2022, or Irish tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article