International updates: Tax news and other global updates for Q3 2023
Each quarter, our international tax and global consulting experts compile updates from around the world to help you stay up to date on international changes.
Take a look at the updates below and reach out to your Plante Moran advisor if you have any questions about how these items may affect you.
Canada
Draft legislation packages published and available for commentary
The Government of Canada released draft legislation and is inviting consultations until mid- to late-September 2023. The draft legislation covers topics such as measures to grow Canada’s clean economy, measures to deliver tax relief for Canadian workers and businesses, measures to close tax loopholes, measures to ensure tax fairness along addressing sales and excise tax.
Draft Pillar Two legislation was released on August 4 and is available for commentary through September 29. In addition to addressing Pillar Two, the draft legislation provides that the Canadian anti-avoidance rules will apply to Pillar Two.
China
Preferential tax policies extension to 2027 for CIT and VAT
On Aug. 2, 2023, China’s Ministry of Finance and State Taxation Administration jointly released multiple announcements, extending the 2023 preferential tax policies for small businesses to Dec. 31, 2027, including the following:
- Corporate income tax (CIT): Small and low-profit enterprises (annual revenue under 3 million RMB) enjoy a reduced applicable tax rate of 5%.
- Value-added tax (VAT) exemptions and reductions: Small-size VAT taxpayers with revenue under 100,000 RMB/month or 300,000 RMB/quarter enjoy VAT exemption. Small-size VAT taxpayers with revenue exceeding the above criteria enjoy a reduced VAT rate of 1% (originally 3%).
- Other taxes reduction: From Jan. 1, 2023, to Dec. 31, 2027, small and low-profit enterprises and small-size VAT taxpayers enjoy a 50% reduction on stamp duties (stamp duty on stock transactions excluded), property tax, urban land use tax, resources tax (water resource tax excluded), and surcharge taxes.
Individual equity transfer tax payment reinforcement
Previously, for individual shareholders’ equity transfers, it wasn’t mandatory to authenticate their equity transfer income tax payment certificate when filing for equity change registration at the local market registration authority.
In the work requirements titled, “Tax-Oriented Approach to Taxation Risks,” issued by the State Administration of Taxation in April 2021, the taxation of high-income individual equity transfers has been included in the key regulatory focus.
As of the end of 2022, Shanghai Taxation Bureau began requiring that all taxpayers and withholders must possess tax payment certificates from tax authorities, verified by the market registration authority, to proceed with equity change registration. As of July 2023, 17 Chinese provinces have introduced regulations enforcing “Tax Payment Before Equity Change registration” for individual equity transactions.
The shareholding restructuring activities and scenarios have become increasingly complicated and diverse. Misinterpretation of Chinese legal compliance terms could lead to reclaimed tax liabilities, late fees, fines, or even judicial penalties. Foreign and domestic individual shareholders should ensure attention is given to the newly introduced regulations.
Implementation of Electronic Voucher Accounting Data Standards
Prior to 2023, Chinese company accounting data was required to be archived in the form of hard copies of paper documents. In 2023, combined with the fully digitalized E-Fapiao implementation, China’s central governmental authorities have jointly issued the Electronic Voucher Accounting Data Standards for nine types of electronic vouchers, covering the special and normal value-added tax e-invoices, comprehensive digital invoices, railway e-tickets, electronic itineraries for airfreight e-tickets, electronic fiscal vouchers, electronic nontax income general payment documents, electronic bank receipts, and electronic bank reconciliation statements. The introduction of electronic voucher accounting data standards will significantly alleviate the workload for the accounting and tax teams within the company operating in China.
Germany
Restricted Chinese investments
The German deputy chancellor, Robert Habeck, has circulated a proposal that would prohibit foreign direct investment in Germany by Chinese investors. The sectors affected by this proposed plan include critical industries, such as artificial intelligence, semiconductors, and other technologically advanced industries.
Global minimum tax legislation
On Aug. 16, 2023, the German government confirmed draft legislation approving the global minimum tax rules as agreed to with other countries in a sweeping international tax reform under OECD Pillar Two. This legislation also coincides with the European Union Council Directive that requires member states to adopt forms of global minimum tax rules. The draft bill is expected to complete the legislative process prior to Dec. 31, 2023. The passage wasn’t without some controversy, as the Bavarian Finance Minister criticized the law as overly complex and suggested German companies will be at a disadvantage in the global marketplace.
German Ministry of Finance releases record 6 billion euro tax reduction plan
The German Ministry of Finance has released a record 6 billion euro tax reduction plan. This is the largest tax break plan released by the Ministry since 2008 and includes benefits such as:
- Increasing the deductibility of research and development expenses, including expenses for contract research.
- Direct grants for investments in fixed assets that are energy-efficient.
- Comprehensive reform of the interest barrier rule, allowing for more flexible financing arrangements.
- Relaxation of restrictive loss carryforward rules, including removing loss limitations entirely for years 2024 through 2027.
German state purchases “Pandora Papers”
On June 26, 2023, the Government of the German state of Hesse released a statement indicating that it has purchased the “Pandora Papers” and will begin to coordinate investigations into tax violations in Germany and abroad. Certain Germany residents have already been notified that they have a limited time to proactively correct tax filings before investigations begin.
Taxable relocations
On June 23, 2023, a regional court ruled that assets transferred to a group company located outside of Germany without regard to the business opportunities or risks subsequent to the transfer are deemed nontaxable. Prior to this ruling, the German Foreign Tax Relations Act assessed that transfers of assets (both tangible and intangible) between group entities outside of Germany resulted in a taxable event based on profit potential being shifted outside of the jurisdiction. However, in this case, the court ruled that because the functions shifted didn’t have independent marketability, the transfer wasn’t a taxable relocation. The regional court ruling is subject to appeal in Germany’s highest tax court. If the ruling is upheld, it will help facilitate corporate group restructuring involving Germany members of multinational groups.
India
Nonresident tax benefits
On July 12, 2023, the Indian government released a tax circular that clarified that nonresident investors’ income derived from overseas investments made through an alternative investment fund (AIF) in Gujarat International Finance Tec-City (GIFT) City will be tax-free. This development is aimed to boost foreign investments in India by equalizing the tax benefits for nonresident investors who invest in alternative investment funds.
Introduction of angel tax provisions to nonresident investors
The Finance Act of 2023 allows for the taxation of nonresident investors if shares of an Indian private limited company are issued to a nonresident in excess of their fair market value. Previously, this type of share issuance was only taxable to resident investors. Tax exemptions exist for certain qualifying nonresident investors.
Increase of withholding tax on royalty and technical service payments to nonresidents
The passing of the Finance Act of 2023 has increased the withholding tax rate from 10 to 20% on royalty payments and fees for technical services performed by Indian entities to nonresident foreign enterprises, without a permanent establishment in India.
Japan
Japan’s bid to nurture startups
Japan is offering $7.2 billion in support and resource development and is easing access to visas for entrepreneurs to encourage startups after struggling with a low business entry rate. The absence of tax breaks on capital gains has disappointed investors.
Extension of wage hike tax breaks
Japan’s Ministry of Economy, Trade and Industry (METI) is looking to extend corporate tax breaks to 2030 to incentivize employers to raise wages. Tax breaks for wage increases will expire when the current fiscal year-ends in March. The government is also seeking to add additional incentives for companies to support employees raising children. The METI will include the measures when it submits its annual tax reform requests to the Finance Ministry later this year.
Economic outlook
Japan’s economy grew by an annualized rate of 6% in the second quarter of the fiscal year. This was fueled by a strong performance in the country’s export sector. Despite this, the level of domestic consumption remains weak. Experts believe that while monetary policy can remain accommodative, there needs to be preparation for the possibility that the central bank may begin a policy of increasing rates in the near future.
Mexico
Changes on Mexican import duties published Aug. 15, 2023
In recent updates, import duties were increased on 392 tariff items. The stated increases could range from 5 to 25% for products originating from countries without a free trade or tariff preferential agreement in place with Mexico. As such, products originating from countries like China, India, or South Korea could be impacted by these new tariffs.
The list of covered products includes steel, aluminum, rubber, textiles, and plastics, among other items. This presidential decree will be in effect from Aug. 16, 2023, until July 31, 2025.
United Kingdom (U.K.)
The economy
The economic slowdown in the U.K. has continued with only 0.2% GDP growth in Q2. This raises the question on whether the U.K. is headed for a recession and, if so, if it will merely be short term before growth picks back up. On the other hand, the United States has seen steady single-digit growth. This may signal that it’s a good time to invest in U.K. acquisitions.
While U.K. inflation has been falling, it continues to add pain to households while hovering at around 6.8%. While it is hoped that inflation will continue to fall, once the issues delaying the implementation of the post-Brexit border controls on food and fresh products are resolved, there will likely be another uptick in inflation due to the increase in prices on EU imports.
Travel
The EU is rolling out its version of the U.S. ESTA — the European Travel Information and Authorization System (ETIAS). This will be required for travelers to Europe who are traveling under a visa waiver. The ETIAS is intended to be required starting in January 2024. Since the U.K. is no longer a part of the EU, it’s not part of this system. However, the U.K. is working on its own version of this, the Electronic Travel Authorization. Currently, it’s required for visitors from certain countries in the Middle East, with plans to roll it out to other countries at a future date.
Travelers to the U.K. should keep an eye on the expansion of this program and be prepared to comply once it applies to travelers from the United States.
Tax
There have been proposed changes to U.K. legislation relating to transfer pricing, the diverted profits tax, and the creation of permanent establishments. The proposed changes are focused on aligning the U.K. domestic tax rules with OECD standards. Hopefully, this will help with clarity in the rules and consistency of application and enforcement.
