International tax news and other global updates for Q2 2022

Each quarter, our international tax and global consulting experts compile updates from around the world to help you easily stay up to date on international changes. This quarter, we discuss the business tax updates in the UK stemming from the UK spring statement, the German cryptocurrency tax ruling, Mexican employee profit-sharing, and Japan’s 2022 tax reform proposal, among various other updates.

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.

• European Union (EU)
• Organization for Economic Cooperation and Development (OECD) general updates
• Canada
• China
• Germany
• Italy
• Japan
• Mexico
• United Kingdom (UK)

European Union (EU)

• In December 2021, the European Commission proposed a draft directive known as ATAD III (anti-tax avoidance directive), which targets the use of shell companies for tax evasion and avoidance in the EU. The draft directive lays out three “gateways,” which help determine whether an undertaking is “at-risk” of being a shell company. If these gateway indicators are met, the undertaking will be considered “at-risk” and subject to further reporting to determine that it meets the minimum substance requirements. Under these rules, if it’s determined to be a shell company, the EU recommends the shell company’s member state of residence denies granting a tax residency certificate to the shell company and disregards the shell company for the granting of benefits under the relevant tax treaties between EU member states and tax directives. If adopted, the current timeline laid out by the Commission aims for implementation into member states’ national laws by June 30, 2023, with an effective date of Jan. 1, 2024.
• On April 1, 2022, the EU opened public consultation on a draft directive to implement an EU-wide system for withholding taxes on dividends and interest.

Organization for Economic Cooperation and Development (OECD) general updates

• The OECD released the BEPS Pillar Two model rules in December 2021 and technical commentary in March 2022. These model rules, collectively known as Global Anti-Base Erosion Rules (GloBE), lay out a system for the implementation of the 15% global minimum effective tax rate on multinational enterprises (MNEs) with revenues above the EUR 750 million threshold. GloBE contains three different parts: the income inclusion rule (IIR), the undertaxed payments rule (UTPR), and the subject to tax rule (STTR) not yet released. The OECD’s goal is for Pillar Two to be brought into law in 2022, to be effective in 2023, with the UTPR piece to come into effect in 2024.

Canada

• Canada has agreed to implement both pillars of the OECD inclusive framework on base erosion and profit shifting. The new rules take effect in 2023.
• While Canada’s major COVID-19-related wage and rent subsidy programs are now closed, new programs for the tourism, hospitality, and other hard-hit industries were announced for periods from Oct. 24, 2021, to May 7, 2022. Information pertaining to eligibility and application deadlines can be found on the Canada Revenue Agency website.
• With many employers moving toward a remote work environment, U.S. employers must consider their Canadian federal and provincial payroll withholding obligations for their Canadian-resident employees.
• As a reminder, as of July 1, 2021, Canada’s goods and services tax and harmonized sales tax (GST/HST) rules changed. The rules changed how tax is applied to online sales from nonresident digital businesses, also known as online marketplaces.

China

• In March 2022, the Chinese State Taxation Administration (STA) announced a series of tax incentives for 2022 and for years following. Some of the incentives are extensions of last year’s COVID-19 incentives and others are further tax cut provisions to better support the businesses and individual taxpayers.
  • Corporate income tax (CIT) incentives for small and low-profit enterprises (annual taxable income less than RMB 3 million, less than 300 total employees, and total assets are less than RMB 50 million):
    • For the portion of taxable income amount not exceeding RMB 1 million, the 2.5% CIT rate is still effective until Dec. 31, 2022.
    • For the portion of taxable income amount between RMB 1 million to RMB 3 million, the CIT rate has been reduced to 5% (from 10% previously), effective until Dec. 31, 2024.
  • New R&D incentives for taxpayers meeting the criteria for a small or midsized technological enterprise. The incentives apply retrospectively for costs incurred beginning Jan. 1, 2022, with no expiration date.
  • Value-added tax (VAT) exemption from April 1 to Dec. 31, 2022, for small-size taxpayers (taxable sales amount in the previous 12 months was less than RMB 5 million).
  • The preferential individual income tax (IIT) policies on one-time bonus and foreign expatriates tax-exempt fringe benefits have been extended to Dec. 31, 2023.

Germany

• On March 30, 2022, the German Ministry of Finance lowered the annual interest rate for back taxes and tax refunds from 6 to 1.8%. The 6% rate had been in place since 1990. The rate will now be evaluated every three years based on the conditions of the existing capital markets.
• On Dec. 31, 2021, and Dec. 23, 2021, respectively, the Ireland-German Income and Capital Tax Treaty and the Denmark-German Income and Capital Tax Treaty have been entered into force.
  • Ireland: The German tax treaty protocol includes a new article on the prevention of treaty abuse, and amendments to the articles on permanent establishment, dividends, and capital gains. The new protocol also deletes a provision concerning the exchange of information from the prior agreement.
  • Denmark: The German tax treaty protocol includes amendments to several articles as well as updates to meet the BEPS minimum standards on treaties, and to reflect the international standard for information exchange. The preamble was also replaced to note the intention not to create opportunities for reduced taxation through tax evasion or avoidance.
• On Feb. 25, 2022, the German Tax Court of Cologne published ruling 14 K 1178/20, which states that profits made from the sale of cryptocurrencies are subject to German income tax as a private sale transaction, not as tax-free gambling wins. The taxpayer has appealed the ruling, with a final judgment likely not coming until 2023.
• On March 17, 2022, the German Supreme Tax Court (Bundesfinanzhof) overturned a lower court ruling related to the application of German VAT on the rental of virtual land in an online game. The determination by the Bundesfinanzhof deems that the exchange of game currency into U.S. dollars through a U.S. corporation for rent earned in virtual land in a U.S.-based online game is not subject to German VAT.

Italy

• New Italian e-invoicing requirements came into effect in January 2022, affecting all B2B cross-border transactions. Under these new rules, data related to sales made to nonresidents must be transmitted electronically to the electronic invoicing platform. The invoices must be reported through the platform within the standard deadline of 12 days from the date of the invoice. Data related to the purchase of goods and services from nonresident suppliers must also be transmitted electronically to the platform. These e-invoices must be submitted to the SDI (Sistema di Interscambio) by the 15th day of the month following the month in which the transaction took place. These electronic submissions will likely lead to inquiries into companies with significant activity in Italy that aren’t filing any tax returns.

Japan

• On Dec. 10, 2021, Japan announced its 2022 tax reform proposal, which contains numerous changes to the existing tax rules that could affect companies doing business in Japan. In addition, there were amendments to the Japanese Companies Act (JCA) in 2021 introducing a share delivery regime. These changes, in part, are outlined here:
  • Proposed change for earnings stripping rule, which could apply to a company with Japan-sourced income, even if a permanent establishment (PE) doesn’t exist in Japan. The current earnings stripping rule applies only if a company has a PE in Japan.
  • Proposed change affecting wage tax credits. This proposed change may result in an increased wage tax credit, depending on the size of the company and which qualifying conditions of the credit are met.
  • Proposed change that would increase the threshold for disallowance of R&D incentives and other tax credits for large companies (stated capital is greater than JPY 1 billion and has 1,000 or more regular employees).
  • Proposed dividend withholding rule changes for dividends received on or after Oct. 1, 2023.
  • Effective in March 2021, Japan launched a new M&A share delivery regime that allows property previously disallowed, such as shares in a parent corporation, to be delivered to shareholders of the target corporation so that a share exchange can be implemented. Previously, only shares of the surviving corporation or purchasing corporation could be used as consideration.

Mexico

Mexican employee profit-sharing: Mexican entities are required to pay a minimum of 10% of taxable profits as employee profit-sharing each year (commonly known as PTU for its Spanish acronym). The profit-sharing related to the previous year is required to be paid to the employees no later than May 31 of the following year. Mexican tax law dictates the way in which the profit-sharing payments are calculated and distributed among the employees.

Mexico’s recent labor law significantly impacted certain profit-sharing rules. While the calculation methodology remains the same, profit-sharing payments will now be limited to one of two proposed methodologies, as follows:

• Three months of the employee’s salary.
• The average of the profit-sharing paid over the last three years.

Employers will be required to utilize the method that results in the largest profit-sharing payment to the employee.

United Kingdom (UK)

• The UK spring statement was presented by Chancellor Rishi Sunak on March 23, 2022. Below are the major business tax updates:
  • Corporate tax rate for FY starting April 1, 2022 is 19%. This is set to increase to 25% starting April 1, 2023. Tax years that fall into both periods must apportion their income between the periods.
  • The increase for the annual investment allowance has been extended to March 2023, allowing for 100% tax relief of up to 1 million GBP for qualifying expenses.
    • For certain qualifying expenditures on assets incurred between April 1, 2021 and April 1, 2023, a super-deduction of 130% may be available.
  • Tax relief on R&D expenditures will be extended to certain cloud and data storage.
    • Draft legislation will be published with an anticipated effective date of April 2023.
  • Finalization of making tax digital for VAT. All VAT-registered businesses must comply starting April 1, 2022. Digital records must be kept for VAT and transmitted to HMRC using compatible software.
  • A temporary 0% VAT rate will apply to the installation of energy-saving materials effective April 2022 through April 2027.
  • There is a temporary increase in cultural tax relief for certain entertainment and cultural organizations in the UK through March 31, 2024.