This week in tax: EU concerns over pillar two vote
European Commissioner for the Economy Paolo Gentiloni elaborated on tax reform in Parliament this week, including plans to enact the OECD’s two-pillar solution by “any means necessary”.
Members of European Parliament at the Committee on Economic and Monetary Affairs meeting with Gentiloni on September 26 voiced concerns over the unanimity requirements to enact pillar two.
“We have to overcome this veto,” said Gentiloni, regarding Hungary’s hold out on agreeing to the compromised text in the directive on minimum taxation in July.
“We have to do this with all the legal and political means that we have at our disposal… We are not lagging behind at a global level because we were very fast in making the proposal,” he said.
“We are in the lead and to remain in the lead we must overcome this veto, and I repeat with all the political and legal means we have at our disposal,” he added.
The European Commission does have some tools at its disposal to enact tax policy via a qualified majority in Council through the Passerelle Clause under Article 47(7) of the Treaty of the Functioning of the EU (TFEU), Article 116 of the TFEU, and enhanced cooperation in Article 326-334 of the TFEU.
ITR reported earlier this week that political support for qualified majority voting is at a peak as unanimity rules continue to block the European Council from passing a directive on pillar two.
The Czech Minister of Finance Zbyněk Stanjura told the ECON committee in July that his Council presidency will aim for agreement on the pillar two directive by end of October. However, MEPs at the committee meeting now suggest the Economic and Financial Affairs (Ecofin) Council is wasting political momentum for taxation.
“The Parliament and Commission should be more vocal in pushing the Ecofin to unblock all those issues we need to deliver in just over a year,” said MEP Ernest Uratsun from Spain.
While there is high interest in using a qualified majority to enact pillar two, the next Ecofin Council meeting in October does not have the directive on its agenda.
Protests break out against Colombian tax reform
President Petro Gustavo is facing protests against his plans to reform the tax system, including higher rates and new levies, to pay for his social programmes.
Thousands of people marched through Bogotá against the Colombian government’s plans to raise taxes on Monday, September 26. Demonstrations were also held in Cali and Medellín, as well as smaller cities.
The Gustavo plan will eliminate corporate tax exemptions to raise revenue, extend VAT to company income derived from digital sales and raise the capital gains tax rate from 10% to 30%.
Other plans include a wealth tax on any net worth of more than COP$3.3 billion ($750,000). Taxes on occasional taxable profits – covering everything from inheritance and life insurance to lottery wins – would be raised from 10% to up to 35%.
However, the indirect tax measures may be what is driving the protests. The plan will introduce a surcharge of COP$200 per gallon of gasoline just as a starting point – the tax will rise over time.
The Gustavo government wants to implement special taxes on sugary drinks, processed foods and single-use plastics to discourage their use. These taxes would be proportionate to the percentage of sugar and the weight of plastic.
It’s not the first time this has happened. Gustavo’s predecessor President Iván Duque faced protests that turned into civil unrest over his tax reform. Duque was trying to claw back billions in revenue lost to tax exemptions, particularly loopholes in the VAT regime.
The big difference was Duque’s reforms were seen as very regressive compared to Gustavo’s plan. This could be history repeating itself, but the protests against these reforms are much smaller.
Global TP Forum Europe: Tax leaders demand ‘simplified’ pillar one
In other news, the OECD’s pillar one has been criticised for its complexity and scope by tax professionals including a European Commission TP specialist at ITR’s Global TP Forum Europe on September 28.
Speakers said that the pillar one-related rules on transfer pricing were too complex and called for their scope to be expanded.
“We think it’s really important to have a simplification of the TP rules,” said Mauro Faggion, TP expert at the European Commission.
These views were shared by other panellists. They explained that that a failure to address the complexity of the rules risked jeopardising the success of the OECD project, particularly if multinationals continued to show such strong reluctance.
Tax directors urged policymakers to widen the net to capture a more extensive mix of corporations.
“Neutrality is also about ensuring that the system applies as broadly as possible,” said Vikram Chand, professor of law at the University of Lausanne in Switzerland.
“From that point of view, you may say that a lot of multinational enterprises are not caught by these rules.”
But not everyone was convinced, some were wary that digital taxes already target businesses that are not fully technology driven. Increasing the scope of the rules could create more risk of double taxation.
Managing Tax Disputes Summit: Mismatches in global TP audits laid bare
Taxpayers still face lengthy TP audits by aggressive tax authorities despite having strong transfer pricing documentation in place, as ITR reported from the Managing Tax Disputes Forum in Amsterdam on September 27.
Speakers voiced concerns about prolonged audits, with Spain coming in for criticism for taking an average of 27 months to complete investigations.
“It’s common, especially in TP, that they [tax authorities] open for three years and close for adjustment,” said Carolina del Campo, partner in TP and tax governance at law firm Cuatrecasas in Madrid.
Spanish law requires taxpayers to prepare TP documentation including the master and local file. Meanwhile larger groups must also follow country-by-country reporting requirements.
Challenges were also highlighted about the aggressive approach of the Canada Revenue Agency’s (CRA) towards corporations’ TP documentation.
Brad Rolph, partner and national leader of TP at consulting firm Grant Thornton in Canada, said that Canadian TP laws lacked specific regulations.
While the CRA recognised OECD guidelines, the laws did not specifically incorporate the guidance.
Unlike the CRA, a lack of adequate resources at the US Internal Revenue Service to go after smaller firms over TP audits has meant that businesses within this scope were less likely to be targeted.
Other ITR headlines this week include:
ITR speaks to tax experts in New Zealand about the Inland Revenue’s more stringent focus on tax governance compliance and the uncertainty this has caused some businesses.
The tax team will also cover the financial fallout from the UK government’s ‘mini-budget’, particularly the loss of IR35 regulations after companies invested in costly compliance tools and legal advice.
ITR will be looking at the tax impact of the Brazilian presidential election, especially the implications for transfer pricing reform in the country. It looks like tax reform will be on the cards no matter who wins.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.