Direct Tax

138 countries and jurisdictions agree on historic milestone to implement global tax deal

Excerpts from OECD.org dated 12 July 2023

138 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) - representing over 90% of global GDP - agreed on an Outcome Statement recognizing the significant progress made and allowing countries and jurisdictions to move forward with historic, major reform of the international tax system. The Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy will ensure a fairer distribution of profits and taxing rights among countries and jurisdictions with respect to the world's largest Multinational Enterprises (MNEs).

The Outcome Statement agreed at the 15th Meeting of the Inclusive Framework follows 20 months of intense technical negotiations by delegates to continue the work to implement the Two Pillar Solution. It reflects collaboration and compromise among all jurisdictions - small and large, developing and developed - during negotiations by Inclusive Framework members since October 2021.

The Outcome Statement summarises the package of deliverables developed by the Inclusive Framework to address the remaining elements of the Two‐Pillar Solution:

  • A text of a Multilateral Convention (MLC) developed by the Inclusive Framework, allows jurisdictions to reallocate and exercise a domestic taxing right over a portion of MNE residual profits (Amount A of Pillar One). The Inclusive Framework will publish the text of the MLC once it has been prepared for signature upon resolution of a small number of specific items, as a few jurisdictions have expressed concerns with some specific items in the MLC;
  • A proposed framework for the simplified and streamlined application of the arm's length principle to in-country baseline marketing and distribution activities (Amount B of Pillar One); where input from stakeholders is requested on certain aspects prior to finalization;
  • The Subject-to-Tax Rule (STTR), with its implementation framework, will enable developing countries to update bilateral tax treaties to "tax back" income on certain intra-group income where such income is subject to low or nominal taxation in the other jurisdiction. The OECD will prepare a comprehensive action plan to support the swift and coordinated implementation of the Two-Pillar Solution, coordinating with regional and international organizations.
  • In a significant development since October 2021, 138 countries and jurisdictions have also agreed in the Outcome Statement to refrain from imposing newly enacted digital services taxes or relevant similar measures on any company before 31 December 2024, or the entry into force of the MLC if earlier, provided the signature of the MLC has made sufficient progress by the end of the year. This commitment is made in recognition of the progress made to date and the need to prevent disruption or delay of the ratification of the MLC.

"The Two-Pillar Solution will provide stability for the international tax system, making it fairer and work better in an increasingly digitalized and globalized world economy," OECD Secretary- General Mathias Cormann said. "We have all been working intensively on the technical details and on the implementation arrangements that are necessary to make the Two-Pillar Solution a reality. The agreement reached yesterday proves that despite the challenges and compromises along the way, multilateral dialogue works and can deliver results to tackle shared challenges requiring shared solutions. This work is critical to governments and our economies – ultimately, to be able to raise the necessary revenue to fund the essential public goods and services for their citizens."

Transfer Pricing

OECD: Report on BEPS 2.0 – New guidance on Pillar Two rules4

The "OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors" was published in July 2023. Therein, members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) have delivered a package to further implement the Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. This package comprises of four parts:

  • Part I – Multilateral Convention on Amount A of Pillar One: The parties to the Multilateral Convention will be allowed to exercise domestic taxing rights over a defined portion of a multinational enterprise's residual profits that meet certain revenue and profitability thresholds and that have a defined nexus to the markets of these Parties.
  • Part II – Amount B of Pillar One: It was decided that further consultations will be made on the simplified and streamlined application of TP Rules to certain marketing and distribution activities with a view to agreeing to a final Amount B report by year-end and incorporating key content into the OECD TP Guidelines by January 2024. Inputs from stakeholders are invited by 1 September 2023.
  • Part III - Subject to Tax Rule (STTR) under Pillar Two: STTR applies to intra-group interest, Royalties and a defined set of other intragroup payments. It was decided to facilitate the implementation of the STTR, which will enable developing countries to update bilateral tax treaties to "tax back" in respect of certain intra-group income where such income is subject to low or no nominal taxation in the other jurisdiction.
  • Part IV - Implementation Support: Prepare a comprehensive action plan to support the swift and coordinated implementation of the Two-Pillar Solution. In particular, the plan should offer additional support and technical assistance to enhance the capacity necessary for the implementation of the Two-Pillar Solution by developing countries. The OECD should coordinate with relevant regional and international organizations in this regard.

United Kingdom (UK): TP Updates5

His Majesty's Revenue and Customs issued a consultation document on 19 June 2023 and invited businesses to share views on topics like TP, permanent establishments, and Diverted Profits Tax. The consultation is wide-ranging, with HMRC seeking feedback on improving certainty with respect to the application of the three key entry conditions:

  • The 'provision';
  • The definition of connectedness (the 'participation condition'); and
  • The tax advantage rule (the 'one-way street').

The existing TP legislation provides that it should be consistent with the OECD TP Guidelines and Article 9 of the OECD Model Treaty, but the UK legislation hasn't been aligned with developments in the OECD TP Guidelines, especially pertaining to financial transactions. The aim is to:

  • Permit account to be taken of implicit support from the wider group when determining the amount and terms of debt available at arm's length;
  • Permit guarantees that reduce the arm's length cost of borrowing to be taken into account when determining the terms of debt available at arm's length, and therefore facilitate the pricing of such guarantees where appropriate;
  • Provide a clearer and more certain alternative to the current compensating adjustment mechanism to enable excess capacity in other UK entities to be utilized.

Permanent establishments in the UK

The UK Government intends to update its domestic legislation on PEs) to ensure that it remains aligned with the developing international framework around the prevention of double taxation. The government has identified two potential options, which are as follows:

  • To define a UK PE and determine the profits attributable to it by direct reference in legislation to the PE and business profits articles in the relevant double taxation treaty.
  • To define a UK PE and determine the profits attributable to it by reference to the current OECD model, which would be subject to relevant double taxation treaty.

Diverted Profits Tax

The government is also considering removing Diverted Profits Tax's status as a separate tax and bringing it into Corporation Tax. This would clarify the relationship between Diverted Profit Tax and TP. It would provide access to treaty benefits while maintaining key features of the regime.

4. OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors (India, July 2023)

5. Reform of UK law in relation to TP, permanent establishment and Diverted Profits Tax - GOV.UK (www.gov.uk)

Indirect Tax

Legislative Update – Global

Turkey hikes VAT and consumer loan tax rates by 2 percentage points

Excerpts from various sources

To control the budget deficit, Turkish authorities have announced a VAT rate increase from 18% to 20% for goods and services, while basic goods like toilet papers, diapers, detergents, etc., would now be taxed at 10% (from 8%). Furthermore, the Bank Insurance and Transaction Tax (BSMV) on consumer loans has been raised from 10% to 15%.

Brazil proposes consolidation of five VAT systems into a dual VAT structure

Excerpts from various sources

To simplify its web of federal tax systems and aim for a VAT-like system, Brazilian government has proposed to replace five different types of VAT by creating two new taxes – the Contribution over Goods and Services (CBS), and the Tax on Goods and Services (IBS). The former shall subsume - (i) Tax on Industrialized Products (IPI), (ii) the Social Integration Program (PIS), and (iii) Contribution for the Financing of Social Security (Cofins), while the latter will replace - (i) Tax on the Circulation of Goods and Services (ICMS), and (ii) Tax on Services (ISS).

CBS will be implemented after a 10-year transition period, while IBS will come into force over a transition period of 50 years.

Costa Rica announces 13% VAT on tourism services

Excerpts from various sources

Taxpayers providing tourism services and who are duly registered with the Costa Rican Tourism Institute must charge 13% VAT instead of 8% w.e.f. 1 July 2023.

Tax Street July 2023