2023

Hong Kong Financial Secretary Paul Chan said on February 22 that Hong Kong will implement the 15% minimum corporate tax rate in 2025 in accordance with the OECD-led agreement. The change is expected to raise HK$15 billion ($1.9 billion) in tax revenue annually.

After the European Union agreed in late 2022 on a directive requiring all its member countries to adopt the Pillar Two rules by the end of 2023, a wave of other countries have begun to follow. Switzerland, the United Kingdom, and other jurisdictions are moving forward with legislation. Danish Mehboob and Isabel Gottlieb summarize steps taken in the European Union, the United States, South Korea, Switzerland, the United Kingdom, Japan, Singapore, the United Arab Emirates, and South Africa.

The OECD is calling for support from the G-20 finance ministers to conclude negotiations on part of the global tax deal by mid-2023. Several aspects of Pillar One's implementation are still being negotiated, such as Pillar One's Amount A and Amount B. Countries are trying to reach a compromise in time to sign an STTR multilateral treaty instrument by mid-2023.

Tayo Ogungbenro and Israel Ajayi explain Nigeria's position on the OECD's Pillar One and Pillar Two solution. Nigeria withheld its agreement to the global agreement after the chairman of the Nigeria Revenue Authority stated in May 2022 that the solution would negatively impact the country's fiscal revenue. Nigeria has instead designed a home-grown alternative to protect its tax base that has been shown to improve the country's tax-to-GDP ratio.

U.S. state and local governments have agreed to give out at least $1 billion in subsidies in 2022. The subsidies went to companies in return for opening factories within those jurisdictions. A primary reason for the incentives is that there are more projects under way as manufacturers are looking to move factories to the United States and producers of electric vehicles, batteries, computer chips, and solar panels are racing to find U.S. sites to meet demand and receive federal subsidies.

The Inflation Reduction Act provided $50 billion in tax credits to entice Americans to buy electric vehicles assembled in North America. To qualify for the subsidies, a portion of the materials used to make the batteries must come from nations that have free trade agreements with the United States. European and Asian countries have complained that the subsidies are protectionist actions that will lead to a global subsidy war. To ease these concerns with U.S. allies, Treasury Secretary Janet L. Yellen said on February 24 that a possible solution could be new agreements that would allow these countries to qualify as a free trade partner.

Against the background of existing US international tax rules on the operation of Controlled Foreign Corporations, Prof Repetti considers two tax regulations which in his view have created significant tax incentives for MNEs to move manufacturing outside the U.S. Prof. Repetti argues that the CTB regulations and the Subpart F manufacturing exception have contributed to the loss of 5 million manufacturing jobs, the closure of more than 91,000 plants since 1997 and posits that the job losses increased racial and economic inequality and stressed our political system. He makes a case for the amendment of the regulations to reduce or eliminate the tax incentives for offshoring by preventing the use of foreign contract manufacturers and disallowing MNEs from disregarding their wholly owned foreign entities.

Avi-Yonah in this piece reviews the international tax regime in the aftermath of the 1923 Report on Double Taxation after a century. Avi-Yonah notes that while on the surface the changes brought about by the BEPS project seem radical enough to consider them an “international tax revolution”, the principles developed in the Report are still influential a hundred years later.

Ajmera and Nemane explore the potential role of the tax in moulding climate change in line with the commitments assumed by countries under the 2015 Paris Agreement. The writers interrogate the issue of whether the imposition of carbon tax or restructuring tax rates can have a significant impact in regulating carbon emissions by rationally pushing consumers, investors, and producers, towards an environmentally sound direction. In response, Ajmera and Nemane in their paper, review three carbon-tax implementation case studies, to wit: British Columbia, South Africa, and the revision of European Union Energy Taxation Directive in the context of aviation, in order to explore the scope of contributing factors – from adequate tax rate determination to optimum tax revenue use – in successfully curbing carbon-based emissions. Ajmera and Nemane propose a suggestive policy model of carbon-tax in the wake of COVID-19 pandemic, as the way forward in ensuring global carbon-neutrality.

Concerns are growing among EU officials that the various issues surrounding the energy taxation directive (ETD) review could lead to a less ambitious text or jeopardize its adoption, with countries having different priorities and sectors they wish to protect.

The US Treasury has expressed concerns to Australia's Treasury over the ATO draft ruling TR2021/D4, which could create an imbalance in the benefits provided by the Australia-US tax treaty and potentially impose Australian royalty withholding tax on software re-seller arrangements.

The High Court of Karnataka's decision in The Director of Income Tax (International Taxation) v. IBM India Pvt. Ltd. relieves multinational companies in similar circumstances, recognizing the tax principles under the double taxation avoidance agreement between India and the Philippines.

The OECD is revising the MNE guidelines, a set of soft-law standards governing multinational corporate behavior, and is also working on a legally binding standard for due diligence for MNEs, focusing on binding regulations and coordination to ensure companies respect guidelines for responsible business conduct.

A Spanish court has ruled that a €250,000 minimum threshold for documenting low-value related-party transactions did not absolve Ingersoll-Rand's Spanish subsidiary from performing and recording an arm's-length test for an intercompany loan while also upholding the tax authorities' disallowance of the loss from the sale of Hussmann Koxka to a third party.

The United Nations is seeking feedback, which it will collect through March 10, on what will come out of a resolution calling for increased international tax cooperation. The feedback will be used in informal briefings and consultations for the preparation of the secretary-general’s report, which is expected in September.

New guidance on the book-income minimum tax (Notice 2023-20), issued on February 17, aimed at preventing “significant distortions” that could hurt the insurance industry. The guidance addresses situations in which the interplay of financial accounting rules and the new corporate alternative minimum tax could have harmful consequences for insurers. This is the second attempt by Treasury and the IRS to provide guidance on determining and implementing the new book tax. Comments on the guidance in the notice are due by April 3.

Demand for online shopping has added pressure on developing countries to enhance their value-added tax systems. The OECD noted that this trend is expected to continue to at least 2025. However, VAT is not collected in many countries under eixsting rules. To help, the OECD published the VAT Digital Toolkit for Africa on February 15, the third in a series of toolkits that cover all types of e-commerce activities for Africa, Asia-Pacific, and Latin America.

Witnesses at a hearing told the IRS and the Treasury Department that there is still more that needs to be done with the much-debated foreign tax credit regulations. Cost recovery and foreign royalty withholding taxes need more changes beyond those made in November’s proposed regulations. Specifically, calls are being made to define the scope of a new proposed test indicating that recovery of “substantially all” of certain costs is sufficient to qualify for the credit and for more clarity in the attribution requirement for royalties.

On February 15, the OECD said that annual tax revenue under the two-pillar global tax deal could reach $200 billion. This is twice the original forecast. Pierce O’Reilly, head of the Business and International Taxes Unit at the OECD, said that changes in the design of the proposed plan, as well as better data and modeling, contributed to the increase in projected tax revenue.

Panelists at a 2023 OECD Tax and Development Days event on February 16 said that resource-rich developing countries need to reconsider tax incentives for international mining companies in light of Pillar II. The incentives could result in a transfer of tax from the producing country to the country where the parent company is located. This would occur through top-up tax that would be charged by the jurisdiction of the mining company’s ultimate parent, in the event of producing countries not taxing heavily enough.

The Tax Foundation has published a summary of country-level revenue estimates for Pillar II. Seven countries have produced individual estimates of corporate tax revenue increases resulting from the international agreement. These estimates range from 2% in the Netherlands to 12% in France. The OECD previously estimated that the Pillar II rules will raise corporate tax revenue by 9% and the International Monetary Fund (IMF) estimated that it would be closer to 5.7%.

Kuzniacki in this paper attempts to demonstrate that the introduction of a legal definition of aggressive tax planning (ATP) together with anti-ATP rules by the European Commission under Securing the Activity Framework of Enablers (SAFE) initiative is an example of legislative inflation of anti-tax avoidance rules. The objective of the article is to show that the legal use of Aggressive Tax Planning (ATP) would add another factor for further disorder in interpretating and applying existing concepts and anti-abusive rules in the EU law as well as triggers risk of over-reaction. The paper also considers the possibility of a new specific anti-avoidance rules based on economic substance.

Noonan and Plekhanova in this paper address the Two Pillar approach as a response to the tax challenges of the digital economy. The authors note specifically that the two-pillar solution is a complex package which foresees new binding and non-binding international instruments, amendments to hundreds of existing tax treaties, and enactment of new national tax laws. In view of concerns about the implementation, coherence, and fairness of the rules of the two-pillar solution, this article suggests that a fuller understanding of the likely impact of the two pillar solution requires looking beyond the four walls of the TPS documentation. The writers argue that following an evaluation of the likely impact, and a contemplation of the legal basis of the components for implementation of the Two Pillar Solution, the enthusiasm of states to endorse the October 2021 Statement on the Two Pillar Solution may not carry through to its implementation and compliance. The authors opine that there are reasons to doubt both broad and high levels of implementation and compliance and ultimately the sustainability of the Two Pillar Solution in the longer-term.

Magalhaes and Christians examine the myths of international tax law and demonstrate that each purported impediment to its operation is either conceptually under-theorized or exaggerated in legal impact or both. They note that the minimum tax initiative as it has progressed is flawed and argue that the mythical international law norms offered by critics do nothing toward achieving improvements but only seek to undermine the underlying goals of the initiative as a whole. They opine that to the extent curbing base erosion and profit shifting by the largest corporations would bring about a more stable and mutually acceptable world order, the use of mythological international law to forestall reform should be abandoned in favor of cooperative problem-solving.

Rep. Jason Smith (R., Mo.), the chairman of the House Ways and Means Committee, said that the international agreement to raise minimum taxes on corporations will not be accepted by Republicans in Congress. Mr. Smith warned that House Republicans will pursue tax and trade countermeasures. A spokesperson for the OECD said that a response would be offered to Mr. Smith’s letter.

This piece reviews the relationship between international taxation and foreign direct investment (‘FDI’). Relying on micro-level data on inbound FDI relations in Germany, it concludes that a higher tax burden on income earned in a corporate subsidiary increases the probability that a multinational corporation conducts foreign investment through a non-corporate flow-through. It also examines potential real effects of organizational form choices and documents that affiliates established as flow-throughs exhibit a lower loss propensity and are less profitable than affiliates established as corporate subsidiaries.

Marisa Ouro considers the impact of tax rules on the activities of digital nomads in moving from country to country whilst remaining an employee. The paper interrogates the constraints and incentives for this geographical freedom from three perspectives, namely: (x) Corporate Income Taxation (CIT), and (y) Personal Income Taxation, both analyzed under Portuguese domestic law and the OECD Model Convention as well as the relationship between States, addressing both tax competition and cooperation between States.

This paper considers the variety of climate policies applicable across countries, with some countries imposing stringent emissions policies and others doing very little. The writers posit that the variance in approaches creates incentive leakages and proceeds to consider solutions to the leakage problem based on its tax analytical model.

Yonah and Wells consider the new corporate alternative minimum tax regime in the United States and argues that the corporate alternative minimum tax enacted as part of the Inflation Reduction Act of 2022 puts the United States in a better position than current law, and arguably even better than would a tax reform package that included a conforming global intangible low-taxed income regime but no book-based corporate minimum tax.

Following the work of the OECD/G20 Inclusive Framework and the release of its Pillar II administrative guidance, Wardell-Burrus considers this administrative guidance specifically as it relates to the GILTI regime as a CFC tax Regime; the QDMTT which applies before CFC taxes; and the new allocation mechanism of GILTI as a blended CFC Tax. He concludes that the fact that the QDMTT applies before CFC Regimes means that there can be a competitive downside to adopting a QDMTT.

The US Tax Court ruled in favor of the IRS, allowing them to reallocate income from 3M's Brazilian subsidiary to the US parent company for tax purposes, potentially impacting other multinational companies.

World leaders at the OECD's Inclusive Forum on Carbon Mitigation Approaches agreed on the importance of using a variety of policy levers, such as carbon pricing and emissions trading systems, to address emissions mitigation, while avoiding adverse unintended consequences and considering the implications on national budgets.

House Ways and Means Committee Chair Jason Smith has criticized the Biden administration and the OECD for their proposed undertaxed payments rule, which he believes will target important U.S. tax incentives and benefit Chinese companies, while shifting the tax burden to U.S. workers.

EU leaders have agreed to a narrow easing of state aid rules and the promise of more flexible use of existing funding to counteract the U.S. Inflation Reduction Act (IRA), while Italy has requested a review of the economic governance framework and a European sovereignty fund to support investment in strategic sectors.

The IRS has announced its intent to issue proposed regulations identifying additional listed transactions in the near future, according to Erika Nijenhuis of the Treasury Office of Tax Policy.

Trevor Bowler expands on his previous Whirlpool article, diving again into the interplay of foreign base company sales income code sections and regs in light of the U.S. government’s Supreme Court briefing in the litigation, and the Court’s subsequent denial of cert.

Members of the European Parliament want a levy to be imposed on the financial sector to help finance the EU budget, but what kind of instrument should be introduced is open to discussion.

In Universal Pictures International Spain v. Administración, the Spanish National Court said the tax authorities incorrectly applied the comparable uncontrolled price method instead of the transactional net margin method in a transfer pricing case involving Universal Pictures’ Spanish subsidiary.

The European Commission is asking member states for input on a draft proposal to transform the state aid temporary crisis framework to speed up Europe's green transition and maintain competitiveness with the United States.

The European Commission is planning a consultation regarding the introduction of a digital levy or dedicated fund to ensure that digital content providers do their share to cover the costs of infrastructure and public goods.

The OECD has released much-anticipated administrative guidance addressing key issues under a new global minimum taxation framework, including an allocation formula for U.S. global intangible low-taxed income taxes, domestic minimum tax design, and rule order.

The OECD has published a manual for countries interested in adopting multilateral approaches to mutual agreement procedures and advance pricing agreements, in a bid to improve certainty for taxpayers and tax administrations alike.

Economiesuisse is voting to have Switzerland implement global minimum taxation rules under the OECD-brokered, two-pillar plan for modernizing the international corporation tax architecture for the 21st century. Switzerland is currently debating whether to adopt global minimum tax rules, but the referendum will take place in June.

Austria collected 43 million euros from the tax in 2020 and 80 million in 2021. The government predicts the tax will bring in 120 million euros in 2023, the statement said. Austria's tax went into effect in 2020 and is meant to be "an interim solution until a global consensus is reached," the statement said

The EU is preparing to issue a document on a temporary crisis and transition framework in response to the Green Energy Tax Credits in the IRA. The European Commission will issue a proposal to make the framework "broader and more comprehensive" or to simply "convert" it into a crisis and transition framework. The EU wants to increase the thresholds of their regulation to allow member states more leeway in designing aid that fits their national needs, like, a temporary response to the IRA to boost the sectors of the green transition which are at risk of relocating, in order to lure and retain companies.

On February 2, 2023, the Organisation for Economic Co-operation and Development (OECD) described how the U.S. tax system will interact with the minimum taxes being implemented in other countries. These rules provide U.S. companies with a partial reprieve through 2025. This new guidance spelled out how the existing 10.5% minimum tax on U.S. companies' foreign income interacts with other countries' new taxes. However, other countries will only be so tolerant of the U.S.'s delayed implementation. In addition, U.S. lawmakers are increasingly hesitant about a coordinated global corporate tax increase because of the possibility that such an increase will primarily affect U.S. companies. The United States will need to figure out what can be done to alleviate these concerns before 2025.

The Inflation Reduction Act, signed into law in August 2022, provided tax credits and other support for clean-energy projects. Concerned that these subsidies will draw investment away from Europe, the European Union (EU) wants to provide tax breaks and other aid to clean-tech companies. The EU's proposed response said that state-aid rules could be loosened to make it easier for governments to back new investment in clean-tech production facilities, including through tax breaks.

This Editorial considers the current approach of keeping the unanimity rule for the making of tax legislation in Europe, while at the same time consistently exploring alternative pathways to circumvent it. It argues that this approach is a reflection of the trade-off between (perceived) national tax sovereignty on one hand, and tax efficiency and fairness on the other hand.

The article analyzes strategies that low-income countries and high-income countries might undertake in response to the GloBE rules on the assumption that are indeed implemented by a critical mass of countries.