International tax news and other global updates for Q3 2022
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
- United Kingdom (UK)
European Union (EU)
- State aid: Commission approves modifications to Polish scheme, including €5.1 billion budget increase, to support companies in context of Russia’s invasion of Ukraine.
- The European Commission has approved modifications, including a budget increase of €5.1 billion (PLN 24.5 billion), to an existing Polish scheme to support companies across sectors in the context of Russia’s invasion of Ukraine.
Organization for Economic Cooperation and Development (OECD) general updates
- OECD report shows loans to small and medium-sized enterprises (SMEs) hit new heights during the pandemic, as small firms face renewed pressures during the recovery.
- In most economies covered by the Scoreboard, unprecedented support measures helped avoid a wave of insolvencies: In median terms, bankruptcies fell by 11.7% in Scoreboard countries in 2020. As countries phase out support measures — and firms see increased pressure from energy costs — bankruptcies and insolvencies are expected to increase going forward.
- The report says it’s vital that government recovery packages continue to provide targeted support to viable SMEs and entrepreneurs in need. The war in Ukraine, and the resulting humanitarian and economic crisis, reinforce the importance of support and access to financing for SMEs and entrepreneurs.
- SMEs account for the majority of employment and output across OECD economies. They will need to thrive if we’re to succeed in securing a recovery that’s strong, sustainable, and resilient. However, SMEs have received relatively less attention in national recovery packages than during the crisis. According to OECD analysis, SME support through debt, grants, and deferral instruments amounted to $32 billion (or 4.5% of total support) in recovery packages, compared to more than $3.14 billion (40% of total support) in previous measures taken to support SME’s weather the immediate effects of the pandemic.
- Budget 2022 — On Aug. 9, 2022, the Canadian federal government published draft legislation to implement various tax measures, including initiatives supporting affordable housing, tax incentives for small businesses, measures addressing tax avoidance, various international tax measures, and expansion of mandatory disclosure rules for certain reportable “tax avoidance” transactions. The Department of Finance’s news release accompanied the Proposal. The federal government also opened a consultation on potential changes to Canada’s General Anti-Avoidance Rule (GAAR).
- Anti-hybrid legislation — Canada’s anti-hybrid rules, released in draft on April 29, 2022, are now presumptively applicable to any payments made on or after July 1, 2022. The proposed rules primarily target hybrid arrangements that give rise to deduction/noninclusion mismatch situations. The legislation specifically targets hybrid debit/equity arrangements that permit a notional interest expense on a debt in a foreign country for which there is no corresponding income inclusion (or an offsetting deduction) in Canada.
- Interest rate on taxes — CRA prescribed interest rate increased from 1 to 2% on July 1. This rate impacts interest rates on underpaid and overpaid taxes, as well as the amount of interest that must be paid on certain related-party “prescribed rate loans.”
- Dormant company policy in China — COVID-19-related challenges over the last three years have caused more companies to go dormant, which allows a company to temporarily suspend operations rather than permanently close their doors. The Chinese government is now accepting applications for dormant status.
- Effective date: In March 2021, China started to pilot the dormant business policy in some areas in Shenzhen. In March 2022, the dormant policy was officially expanded nationwide.
- Expiration: Upon filing, a company can retain the dormant status for up to three years. A company can apply for dormancy repeatedly, and there’s no limitation on the number of applications.
- Compliance requirements:
- Dormant companies still need to follow business and tax compliance rules as required by relevant authorities. However, the compliance workload is relatively lower than usual without any business activities.
- The dormant policy provides companies the opportunity to save time and money in the following ways:
- The application process is relatively fast and easy — it takes less than 20 days to complete.
- Ongoing costs such as compliance cost, labor, rent, and office expenses can be significantly reduced.
- The cost of dormancy application is much lower than the cost of winding down and reopening the business.
- Shanghai post-lockdown economic recovery action plan — On June 1, 2022, the Shanghai government announced the following incentives to support businesses recovering from the lockdown:
- Tax incentives related to VAT and CIT released in March 2022 are still effective.
- Taxpayers having difficulty paying property tax and urban land use taxes for self-used properties can apply for reduction or exemption for the 2022 second and third quarter tax payment period.
- Subsidies for business operations:
- Businesses are eligible for subsidies of utilities, professional training, employee recruitment, etc.
- Rent reduction and subsidies for micro and small-sized enterprises
- Financial support for MSEs
- The government encourages financial institutions to provide loans to MSEs and to extend the period for overdue interest and principal payments to the end of 2022.
- China export tax refund policy and process updates — Recently, China has improved the export tax refund policy for value-added tax (VAT) and consumption tax. There are some changes in documentation requirements, including:
- Optimized administration of record-filing documents for the export tax refund:
- Businesses are no longer required to manage the shipping orders of export goods as filing documents.
- Previously, businesses needed to keep filing records in paper form. Now, businesses can flexibly choose digital, video, or paper methods to retain export tax refund filing documentation.
- Improved administration of foreign exchange collection for the export tax refund:
- In general, the export businesses aren’t required to submit foreign exchange collection materials to the tax authorities. They only need to keep the material for record and potential future inspection.
- Previously, if foreign exchange wasn’t collected within the stipulated period (April 30 of the following year), the businesses need to declare the uncollected foreign exchange to the tax bureau to qualify for the export tax refund. The new policy cancelled this requirement, allowing businesses to qualify for the export tax refund even if they don’t declare the uncollected foreign exchange within the stipulated period.
- Optimized administration of record-filing documents for the export tax refund:
- Expansion of individual tax brackets — On Aug. 20, 2022, the German Ministry of Finance proposed various measures to adjust the individual tax brackets in order to offset inflation. The measures include:
- The annual tax-free allowance proposed to be raised €285 and €300, effective Jan. 1, 2023, and 2024, respectively.
- The upper limit of the individual tax bracket that ranges from 14–42% would be raised to €61,972 for 2023 and €63,515 for 2024.
- Extraterritorial tax on intangible property (IP) — The German Ministry of Finance has proposed legislation that includes measures to eliminate withholding and capital gains tax on IP/royalty transaction on entities that don’t have a permanent establishment in Germany but do have IP registered in Germany. The German tax authorities began enforcing this provision that subjected payments between two non-German entities to German taxation. The proposed measures include the retroactive abolishment of the taxes for transactions between unrelated parties and a prospective abolishment of the taxes for related parties beginning on Jan. 1, 2023. Companies that deemed to be a resident in a country that’s on the EU’s list of noncooperative jurisdictions, that sell or license German IP, will still be subject to the withholding and capital gains taxes. Taxpayers who have incurred this tax may have the ability to claim a refund after the legislation is enacted.
- German dividend tax changes — On June 16, 2022, the Court of Justice of the European Union (CJEU) interpreted that a German law related to the reimbursement of tax on nonresident capital movements was discriminatory and violated free capital movements in the European Union. The case considered the additional documentation requirements imposed on German nonresident companies, which aren’t imposed on German resident companies seeking the same tax reimbursements. The ruling stated that this increased requirement may deter companies from investing in the Member State and therefore violates the free movement of capital.
- Expatriation tax on share transfers to the United States — On May 27, 2022, the German Supreme Tax Court upheld a ruling that the deemed gain on a transfer of shares held in a German real estate organization to a United States resident are subject to the German expatriation tax. The court ruled that even in situations where Germany has a tax treaty preserving future taxation rights, these transfers are subject to expatriation tax at the time they are transferred to a nonresident of Germany.
- German gas levy set — The German gas surcharge for winter months was set at 2.4-euro cents per kilowatt hour in August 2022. This rate will come into effect in October 2022 for German residents and corporations.
- On July 15, 2022, the U.S. Department of the Treasury announced that the United States-Hungarian income tax treaty will be terminated. The termination is effective Jan. 8, 2023, with certain provisions, including those on withholding taxes, terminating on Jan. 1, 2024.
On March 22, 2022, Japan’s 2022 tax reform bill (the Bill) was enacted following the passage of the Bill by the Japanese Diet. The Bill was promulgated on March 31, 2022, along with the relevant tax law enforcement order and mostly follows the 2022 tax reform outline announced by Japan’s coalition leading parties in December 2021. The amendments generally apply to taxable years beginning on or after April 1 ,2022, unless otherwise specified. Some of the more notable changes are outlined below.
- Earnings stripping rules — The earnings stripping rules have been expanded to all Japan-source income of a foreign company, regardless of whether a permanent establishment in Japan exists. This could lead to additional taxable income for foreign companies with large interest expenses in Japan.
- Wage tax credit increase — Currently, if the compensation paid to newly hired employees in the current year increases by 2% or more as compared to the previous year, the compensation paid in the current year is eligible for a 15 to 20% tax credit subject to certain conditions. The tax reform bill has amended this so that if the total compensation paid to newly hired employees in the current year beginning between April 1, 2022 and March 31, 2024, increases by 3% or more as compared to the previous year, the excess of current year compensation over prior year compensation is eligible for a 15 to 30% tax credit (capped at 20% of corporate income tax payable).
- Conditions to qualify for certain tax incentives — Companies (except for certain SMEs) must satisfy either of the following conditions to claim certain tax incentives such as the research and development (R&D) tax credit, (unless the current year’s taxable income is less than the previous year’s taxable income):
- Total compensation paid to specified employees in the current year is more than that in the previous year.
- Domestic investment in depreciable assets is more than 30% of depreciation expense.
- The threshold for large companies to qualify for R&D benefits and credits has increased. One requirement is that wages paid to continuous employees must have increased at least 0.5% (up from anything over a 0% increase. This only applies to companies with stated capital of JPY 1 billion or more and 1,000 full-time employees or more, and who also have positive taxable income in the prior year.
- Low-value depreciable assets — Depreciable assets with an acquisition cost below JPY100,000 can be expensed upon acquisition. The tax reform bill excludes assets that are used for rental purposes (unless rental activity is part of the primary business of the company) and requires that these assets be depreciated over their useful life.
- Dividend withholding rule changes — Dividends paid to Japanese companies from either a wholly owned Japanese subsidiary, or from Japanese affiliated companies in which a greater than one-third direct ownership relationship exists, will no longer be subject to withholding tax. This is effective for dividends paid on or after Oct. 1, 2023.
- Open innovation tax incentive — The existing open innovation tax incentive, which allows for a deduction of 25% of the eligible investment in qualified investment companies, is still available but has been amended for the following items:
- The expected investment period condition is now three years instead of five years.
- The venture company must have been in existence for less than 15 years if it’s a loss company and R&D expenditures are 10% or more of its gross revenue. Previously, this was 10 years.
On July 21, 2022, Korea’s Ministry of Economy and Finance announced 2022 tax reform proposals. Unless noted otherwise, the proposals are effective for fiscal years beginning on or after Jan. 1, 2023. The 2022 Proposals, in part, are summarized as follows:
- Changes to the corporate income tax rate — The headline corporate income tax rate would be decreased from 25 to 22%. Additionally, qualified SMEs would receive a special corporate income tax rate of 10% on taxable income up to KRW 500 million. Note that local income tax would still apply in addition to the rates noted above.
- Repeal of accumulated earnings tax regime — The accumulated earnings tax regime is set to expire as of Dec. 31, 2022 with a sunset clause. The 2022 Proposals repeal the accumulated earnings regime after the expiration of the sunset clause.
- Net operating losses (NOLs) — The 2022 Proposals would increase the annual deductibility limit for NOLs from 60% of taxable income to 80% for domestic corporations. The limit for SMEs would remain the same.
- Chinese manufacturers heading to Mexico — Chinese manufacturing companies are looking into Mexico as an export hub to the United States. This situation has resulted in substantial levels of investment. Some interesting indicators are shown as follows:
- Chinese investment in Mexico reached a record high of approximately $606.3 million (about 80 billion yen) in 2021.
- The total number of Chinese companies with direct investment in Mexico reached 1,289 as of 2022, and according to the Mexican Ministry of Economy, China has become Mexico’s second largest import partner after the United States.
- It has been noted that manufacturing investment is mainly concentrated in the northern part of the country near the United States. A clear example of the Chinese expansion into Mexico is the partial Chinese-owned Hofusan Industrial Park located outside of Monterrey, Mexico, approximately 200 km south of the U.S. border.
- Factors such as Mexico’s location, portfolio of FTA (free trade agreements), competitive manufacturing costs, abundant and skilled workforce, among others, appear to have played a significant role on the recent Chinese investments.
- Ultimate beneficial owner (UBO) — As an effort to prevent and fight money laundering by companies and other legal entities in Mexico, the Tax Administration Service (SAT) included as part of the 2022 tax reform the obligation for all legal entities incorporated under the laws of Mexico to identify, gather, and maintain, as part of their accounting records, information about their UBO. Mexican federal tax code defines as UBO as any individual or group of individuals that:
- Directly or indirectly receives benefits of their participation in a legal entity or trust; or ultimately, exercises the rights of use, enjoyment or disposal of an asset or service.
- Directly or indirectly has control of a legal entity, trust, or legal vehicle.
Failure to provide this information may result in economic penalties in addition to other possible administrative sanctions.
United Kingdom (UK)
- September “mini” budget — The new UK prime minister, Elizabeth Truss, presented a mini budget with some significant tax changes.
- The previously announced increase in the corporate tax rate from 19 to 25% due to go into effect April 2023 has been cancelled.
- The annual investment allowance will remain at 1 million pounds per year on a permanent basis for 100% write-off on investment in plant and machinery.
- VAT-free shopping will be available to non-UK visitors via a refund process that’s set to be modernized and digitized. There will also be a freeze on alcohol duties starting Feb. 1, 2023.
- For individuals, the basic rate of tax will be reduced to 19% starting in April 2023. The recent rise in the National Insurance rate will be rolled back as of November 6.
- Recent changes to the disguised employment rules have been repealed allowing for workers to use personal service companies and determine their own employment status and related employment taxes.
- There were also changes announced on investment zones, energy rate freezes, banker bonuses, and stamp duty land tax.
- Digital platform reporting — The UK Tax Authority, Her Majesty’s Revenue and Customs (HMRC) has issued an update on the UK’s reporting rules for digital platforms.
- Rent immovable property (e.g., short-term accommodation)
- Provide personal services (e.g., on-demand household/professional services)
- Rent transport
- Sell goods
- Sellers who utilize platforms to provide in-scope activities.
Following a recent consultation on the implementation of the OECD’s Model “Reporting rules for digital platforms,” the UK government has decided that the new rules will start from Jan. 1, 2024. This new date is intended to give platforms and their advisors time to prepare for the implementation of the new rules, with collection of information starting from Jan. 1, 2024, and submission of the first reports due by the end of January 2025.
Further, HMRC has said that it’s currently considering the many comments and issues that have been raised by the consultation respondents. HMRC is aiming to publish the government's response to the consultation, draft regulations giving details of the new rules, and an update on interactions with European Union (EU) rules in this area (referred to as DAC7) this summer. HMRC has said that it will also be engaging with platforms and their advisors before the new rules come into effect.
New rules being introduced in the EU and the UK will require digital platforms to report income earned by sellers using their systems to the respective tax authorities. Enhanced platform reporting is also being introduced in the United States starting in 2022 (1099-K).
The EU/UK rules will impact digital platforms that allow sellers to:
While the announcement that the UK reporting is delayed may be generally welcomed by platforms as an opportunity to have more time to adapt to new rules, the deferral may not be beneficial to all platforms based in the UK. Platforms that deal with sellers in the EU will now be required to report in an EU country in 2024 rather than reporting in the UK, as a result of extraterritorial provisions in DAC7.