Direct Tax

Tax policy evolving from crisis management towards long-term fiscal priorities

Excerpts from oecd.org dated 30 September 2024

A trend of decreased taxes on businesses and individuals during the pandemic and the subsequent inflationary period is now showing signs of deceleration and reversal, according to a new report by the Organisation for Economic Co-operation and Development (OECD).

The Tax Policy Reforms 2024 report describes the tax reforms implemented in 2023 across 90 jurisdictions, including all OECD countries. It also identifies longer-term reform trends, highlighting how governments have used tax policy to respond to consecutive crises, high levels of inflation, and long-term structural challenges.

The report outlines the evolving tax policy landscape as governments strive to balance the need for additional domestic resources with measures to alleviate the cost-of-living crisis affecting households and businesses. It shows a shift from the tax-decreasing reforms introduced during the COVID-19 pandemic and the subsequent period of high inflation to more balanced approaches involving rate increases and base broadening initiatives.

Mathias Cormann, the Secretary-General of OECD says that tax reforms have been one of the key policy tools used by governments to protect households and businesses from decade-high inflation levels and the economic impact of the COVID-19 pandemic. We are now seeing the policy focus shift, and it should continue shifting, towards creating the fiscal space needed to respond to future shocks and support the longterm structural transformations of our economies and societies are facing, including digitalisation and AI, evolving patterns of trade, climate change, population aging.

The new OECD report highlights data suggesting that the trend of decreasing Corporate Income Tax (CIT) rates observed since the Global Financial Crisis is reversing, with more jurisdictions implementing CIT rate increases than decreases in 2023. With CIT rates at historic lows, countries and jurisdictions seeking favourable CIT treatment have opted for basenarrowing measures instead of rate decreases. Furthermore, significant progress has been made towards implementing the Global Minimum Tax (GMT), which establishes a worldwide 15% floor for the effective tax rates of large multinational enterprises.

As of April 2024, 60 jurisdictions had announced that they are considering or taking steps towards implementing the GMT, with 36 jurisdictions taking steps towards an application of the GMT starting in 2024, and some expect to implement legislation taking effect from 2025.

While personal income tax (PIT) cuts continued to support economic recovery and household incomes, there is an emerging trend towards increasing social security contributions (SSCs) to address demographic shifts, rising healthcare costs, and social protection needs. In particular, the share of the population aged 65 and over across OECD countries has doubled in recent decades and is projected to increase further, along with associated spending needs such as for long-term care. PIT reforms have focused on supporting low- and middle-income households, with a few countries increasing their top PIT rates.

Following significant value-added tax (VAT) relief measures on energy products to counter rising energy costs and inflation, the pace of VAT cuts is now slowing, and some jurisdictions are scaling back VAT relief. Six jurisdictions increased their standard VAT rate in 2023.

The use of reduced VAT to promote lower-carbon economies, through reduced rates for electric vehicles or zero rates for solar panels, is increasingly common. Several countries also extended tax incentives for electric vehicles at the time of purchase. Concurrently, a number of countries increased their carbon taxes to support the transition to a low-carbon economy.

In order to stimulate healthy lifestyles and improve public health, several highand upper-middle-income countries strengthened health-related excise taxes on tobacco, alcoholic beverages, sugar-sweetened beverages, and gambling.

Transfer Pricing

Guidelines for Compliance issued by HMRC outlines best practices and risk reduction recommendations for transfer pricing compliances

Her Majesty's Revenue and Customs (HMRC) on 10 September 2024 published the ‘Guidelines for Compliance’ (GfC) with the purpose of :

  • outlining HMRC’s expectations for United Kingdom (UK) businesses while managing transfer pricing compliance risk;
  • highlighting areas of higher risk of scrutiny and best practices;
  • recommending information/ records to be maintained;
  • creating awareness for scoping, preparation, analysis and retention of documentation; and
  • highlighting risks in designing and selecting transfer pricing policies;

to be read alongside the existing transfer pricing guidelines set in their International Manual.

Transfer pricing (TP) documentation plays a pivotal role in supporting transfer pricing positions during TP compliances. In the GfC, HMRC outlines the best practices and casts responsibilities on multinationals to mitigate risks while formulating TP policies.

The GfC primarily is divided into 3 parts:

  1. Managing compliance risks: This section aims at reducing risks of non-compliance, primarily risks of enquiry and penalties, frequency and materiality of errors which includes:
    • approach to timing and scoping of compliance work;
    • common business change or trigger events; and
    • importance of involvement of UK risk leads in compliance process (for groups which typically engage independent TP specialists or have specialist work conducted by non-UK group and therefore are at risk of not being sufficiently involved in the planning and scoping of UK TP compliance work).
  2. Common compliance risks: This section recommends best practices while:
    • setting transfer pricing policies;
    • defining the scope of transfer pricing compliance work;
    • performing transfer pricing analysis; and
    • preparing transfer pricing documentation.
      Further, it also addresses common issues and risks arising out of functional analysis, comparability analysis, calculations, and adjustments, and documentation. The guideline includes best practice suggestions to reduce resulting compliance risk.
  3. indicators of transfer pricing policy design risk: This section is aimed at in-house tax and external TP specialists that are involved in setting transfer pricing policies and/ or reviewing for risks in relation to existing transfer pricing policy approaches. This section focuses on areas pertaining to:
    • setting transfer pricing policies; and
    • reviewing risks in existing transfer pricing policy approaches. Specific areas discussed in this section include the following:
    • Ownership and exploitation of intangible assets;
    • Above market intra-group services for UK group entities;
    • Target margin models when TP policy approaches are used to deliver fixed return to UK businesses without commensurate changes to the UK functions, assets, and risks;
    • Cost-based reward and salesbased rewards for services; and
    • Franchise fees and similar singlefee arrangements.

These compliance guidelines also provide an indicative list of details and documents that could be maintained by the UK businesses to align their transfer pricing positions.

HMRC through these guidelines has primarily focused on creating awareness amongst the TP specialist which could reduce the risk of exposure to adjustments and potential penalties under enquiry.

It is pertinent to note that there is no specific guidance on various complex and non-routine transactions like profit split arrangements, group financing arrangements and Cost Contributions Arrangements etc. The guideline primarily lays down the importance of having a TP policy and TP documentation which reflects UK specific facts and circumstances.

Indirect Tax

Peru establishes a registration procedure for collection of VAT on B2C digital services

Excerpts from various sources

Peru’s Tax Administration (SUNAT) has notified the procedure for nondomiciled suppliers to register for VAT when supplying B2C digital services w.e.f. 1 September 2024, as required by Legislative Decree No. 1623. The Superintendency Resolution No. 000173-2024/SUNAT provides that such suppliers should register through the virtual Tax Authority reception desk (SUNAT Virtual, MPV), while the information required for said registration includes identification data of the supplier, address, economic activity, legal representative data, and contact person data.

Finnish Government announces VAT revenue increment measures in Budget 2025

Excerpts from various sources

The Finnish Government on 3 September 2024 announced the Budget for 2025. Some of the key VAT related changes are listed below:

  • The standard VAT rate and the rate of tax on certain insurance premiums has been raised from 24% to 25.5% w.e.f. 1 September 2024
  • VAT rate for sweets has been raised from 14% to the new standard VAT rate of 25.5% in 2025
  • In addition, as decided in the Government Programme, commodities currently subject to a reduced VAT rate of 10% will be moved to a 14% VAT rate with the exception of newspapers and periodicals
  • The VAT rate for the compensation that the Finnish Broadcasting Company receives from the State Television and Radio Fund is still being discussed by the parliamentary working group for the Finnish Broadcasting Company
  • The VAT rate for incontinence pads, menstruation pads, and children's nappies, on the other hand, will be reduced to 14% in line with the Government Programme
  • Tax revenue is also expected to grow because the minimum threshold for relief in VAT will be abolished. On the other hand, the minimum threshold for value added taxation of smallscale business will be raised from EUR 15,000 to EUR 20,000.

Poland proposes various VAT amendments

Excerpts from orbitax.com

Poland’s Ministry of Finance has proposed several amendments to the VAT Act. Some of the key proposals include:

  • Applying a VAT zero-rate to rescue vessels and lifeboats that are used at sea and are not seagoing ships and boats;
  • Maintaining 8% VAT for medical devices admitted to trading on the basis of the previously applicable Act on Medical Devices;
  • Abolishing the reduced VAT rate for live horses, donkeys, mules, and hinnies;
  • Including the supply of hemp products (Cannabis sativa) for smoking or for inhalation without combustion within the scope of the standard VAT rate; and
  • Reducing the VAT rate on the supply of menstrual cups from 23% to 5%.

The Ministry has also proposed the extension of reverse charge mechanism with respect to gas, electricity, and services related to the transfer of greenhouse gas emission allowances, which is currently scheduled to expire after 28 February 2025.

Tax Street September 2024