International updates: Tax news and other global updates for Q1 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. This quarter, we discuss the EU’s proposed series of measures regarding the VAT system, Canada’s underused housing tax deadline, Germany and the U.S.’ shared agreement for transfer pricing reports, and the U.K.’s uncertain tax treatment disclosures, 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
• Organization for Economic Cooperation and Development (OECD) general updates
• Canada
• China
• Germany
• India
• Japan
• Mexico
• United Kingdom

European Union

• The European Commission proposed a series of measures to modernize and make the EU’s value-added tax (VAT) system work better for businesses and more resilient to fraud by embracing and promoting digitalization.
  • Member states lost €93 billion in VAT revenues in 2020, according to the latest VAT Gap figures also published today. Conservative estimates suggest that one-quarter of the missing revenues can be attributed directly to VAT fraud linked to intra-EU trade. These losses are clearly detrimental to overall public finances at a time when member states are adjusting budgets to deal with the social and economic effects of recent energy price spikes and Russia's war of aggression against Ukraine. In addition, VAT arrangements in the EU can still be burdensome for businesses, especially for SMEs, and other companies who operate or are looking to scale-up cross-border.
  • Key actions proposed today will help member states collect up to €18 billion more in VAT revenues annually while helping businesses, including SMEs, to grow:
    • A move to real-time digital reporting based on e-invoicing for businesses that operate cross-border in the EU.
    • Updated VAT rules for passenger transport and short-term accommodation platforms.
    • Introduction of a single VAT registration across the EU.

Organization for Economic Cooperation and Development (OECD) general updates

• International double taxation may result where two jurisdictions seek to tax the same transactions or activities. While tax treaties directly resolve most such cases, international double taxation may remain where two jurisdictions disagree on the interpretation or application of a treaty provision. The mutual agreement procedure (MAP) article of a tax treaty accordingly provides a mechanism to resolve these cross-border tax disputes.
  • In line with the Forum on Tax Administration’s (FTA) tax certainty agenda, the OECD has published a Manual on the Handling of Multilateral Mutual Agreement Procedures (MAPs) and Advance Pricing Arrangements (APAs), intended to be abbreviated as the MoMA.
  • It’s widely acknowledged that multilateral MAPs and APAs offer greater tax certainty to both taxpayers and tax administrations where different parts of the same transaction or arrangement involving a multinational enterprise are covered by multiple bilateral tax treaties. However, most jurisdictions have limited experience in coordinating bilateral MAP and APA cases to offer multilateral certainty. Accordingly, the MoMA is intended as a guide to multilateral MAP and APA processes from both a legal and procedural perspective and suggests different approaches based on the practices of jurisdictions, without imposing a set of binding rules.
  • The MoMA allows tax administrations to explore whether implementation of these procedures is appropriate considering the circumstances of their own MAP and APA programs and to consider whether the guidance therein may be incorporated in their domestic guidance on MAP or APA processes to provide additional clarity. The MoMA also outlines the actions and cooperation expected from taxpayers to allow tax administrations to consider MAP and APA cases multilaterally. The MoMA is the result of the work done within the FTA MAP Forum.

Canada

• Action required by April 30, 2023, for owners of Canadian residential real estate — As a reminder from our Q4 2022 newsletter, beginning in 2022, the Canadian government introduced the Underused Housing Tax (UHT). The first filings and taxes are due on April 30, 2023. The UHT imposes a 1% annual tax on the value of residential real estate considered to be vacant or underused that’s owned on December 31 of each year. Canadian citizens, with certain exceptions, are excluded from liabilities and filing requirements under the UHT. Exemptions may be available for vacation homes meeting certain requirements, but it should be noted that the exemption doesn’t remove the requirement to file a UHT return. Failure to file may subject affected owners to significant penalties: $5,000 for individuals and $10,000 for corporations. More information can be found on the Government of Canada website.
• Draft legislation: Reportable transactions reporting — This draft legislation would widen the eligibility of the reportable transaction disclosures to only require one of three generic hallmarks be present to require disclosure (contingent fee arrangements and confidential or contractual protections).
• Draft legislation: Notifiable transaction reporting — This draft legislation introduced new reporting obligations to provide the Canada Revenue Agency with pertinent information relating to tax avoidance transactions and other transactions of interest on a timely basis. The types of notifiable transactions are designated by the Minister of Finance.
• Draft legislation: Uncertain tax positions reporting — This draft legislation requires reporting when there’s an uncertain tax treatment used or planned to be used in an entity’s income tax filings. Generally, this only applies to corporations with at least $50 million in assets and the corporation (and a consolidated group of which the corporation is a member) has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies (e.g., U.S. GAAP).
• Draft legislation: Excessive interest and financing expenses limitation (EIFEL) — This draft legislation proposes to restrict the interest and financing expenses to a proportion of EBITDA unless certain exemptions are met for tax years that begin on or after Oct. 1, 2023.

China

• Value added tax (VAT) exemption and reduction
  • From Jan. 1, 2023, to Dec. 31, 2023:
    • Small-size VAT taxpayers with sales revenue not exceeding 100,000 RMB/month or 300,000 RMB/quarter will enjoy VAT tax exemption.
    • For small-size VAT taxpayers with sales revenue exceeding the above criteria, they will enjoy a reduced VAT rate of 1% (originally 3%). 
  • Small-size taxpayers are taxpayers with taxable sales amount in the previous 12 months of less than or equal to RMB 5 million.
• China pushes fully digital VAT invoicing program across the country
  • Background of China’s tax invoice system:
    • VAT tax invoice, or fapiao, is the official legal proof of goods or services transaction in China. Traditionally, businesses need to apply to local tax authorities to obtain paper-based tax invoices. Businesses also need to use tax control devices and UKey to access the tax platform and issue fapiao.
    • In 2021, aiming to promote digital transformation of China’s tax collection and administration, China further launched the fully digital e-invoicing pilot programs among selected taxpayers in key cities such as Beijing, Shanghai, and Guangzhou.
    • Starting from January 2023, e-invoicing pilot programs have been widely expanded across the country.
  • What is fully digital e-fapiao?
    • The fully digital e-fapiao is completely different from the previous fapiao in terms of fapiao format, application, and issuance process. A national e-invoicing platform will provide taxpayers with online service to issue digital e-fapiao. Tax control equipment and UKeys are no longer needed.
  • What is the impact for your businesses in China?
    • On one hand, the fully digital e-fapiao will greatly reduce the workload of companies’ financial staff and increase the convenience and efficiency of fapiao issuance and daily management.
    • However, with the centralized digital tax administrative system, the tax authority can monitor and identify any noncompliant tax activities more easily. Businesses could have greater tax compliance requirement/obligation and face additional inquiry from tax authorities.
    • The fully digital e-fapiao program will bring far-reaching changes to the daily operations and existing procedures of businesses. To prepare for the digital transition, taxpayers must ensure they have strong internal controls around invoicing and related tax compliance and should contact their tax advisor.

Germany

• On Feb. 9, 2023, a German court upheld a decision to restrict a benefit related to the valuation of rental property owned by a German resident. German law allows for residential property to be valued at 90 % of its stated value for inheritance tax purposes. However, property located outside of Germany but owned by German residents was deemed to be ineligible for this benefit. This decision was made despite Article 63 of the Treaty on the Functioning of the European Union, which disallows restrictions on the movement of capital of EU residents of member states. Under this provision, EU states generally can’t discriminate based on the location of an asset owned by a resident of a member state. However, in this case the restriction was upheld as acceptable social policy based on Germany’s enactment of the rule to increase the availability of affordable housing.
• In an effort to increase international tax transparency and improve access to information provided to taxing authorities, the United States and Germany have signed a sharing agreement for country-by-country transfer pricing reports. The agreement will become effective on March 31, 2023. This agreement allows for the sharing of country-by-country transfer pricing reports for U.S.-based multinational entities with subsidiaries located in Germany between the U.S. Internal Revenue Service and German Federal Central Tax Office. Before this agreement became effective, German subsidiaries of U.S.-based parent companies were required to submit the country-by-country transfer pricing reporting directly to the German Federal Central Tax Office. Under the new agreement, country-by-country reports will be automatically exchanged between the tax authorities, dramatically increasing the amount of information each government has on multinational enterprises activities.
• The tax court of Niedersachsen ruled on Jan. 16, 2023, that if a parent entity of a German tax group is a flow-through entity owned by individuals, the group is ineligible for the tax-free treatment of dividends within the group under the European Union parent-subsidiary directive. The taxpayer argued that because the direct owner receiving the dividends was a fully taxable corporation, the directive should apply, and the dividends should be eligible for the exemption. The appeals court disagreed and ruled that the treatment of the dividends is subject to the treatment that applies to the group’s ultimate parent. This ruling may have wide-ranging impacts on German groups with a partnership as the ultimate parent entity.

India

• On Feb. 1, 2023, the Indian government presented a 45 trillion rupee (estimated $549.14 billion) spending budget for the next fiscal year starting in April 2023. This is a 7.5% increase compared to the budget for fiscal year ending March 31, 2023. While presenting the budget, the government announced proposed reduced surcharge rates and increased rebate limits for individual taxpayers, along with increased budget allocation for railways and capital expenditure.

Japan

• On Dec. 16, 2022, the 2023 Tax Reform Proposals (the proposals) were announced. The proposals include both changes to existing laws and the introduction of new laws. Here’s a brief overview of some of the major revisions contained in the proposals:
  • R&D: The proposals will increase incentives for investing in R&D by revising the deduction rate curve applicable to R&D expenses.
  • Open innovation: The proposals expand the definition of “specified stock” to include the acquisition of stock in an existing company. The goal is to increase incentives to invest in open innovation by increasing the amount of taxpayers qualifying for special tax measures allowed to startup companies.
  • Global Minimum Tax (Pillar 2): The Income Inclusion Rule (IIR) is included in the proposals and would be effective for tax years beginning on or after April 1, 2024, for Japanese-headquartered multinational corporations and to subsidiaries of foreign-headquartered multinational corporations. The Japanese Controlled Foreign Corporation (CFC) rules would also be amended.
  • Investment Promotion Incentive: Small and medium-sized enterprises (SMEs) may be able to take a tax credit or accelerated depreciation for certain qualified assets. The proposals revise the scope of qualified assets and extend the applicable period by two years.
  • The special reduced tax rate for SMEs will be extended by two years.
  • e-Storage Act: The e-Storage Act is set to come into force on Jan. 1, 2024, and requires taxpayers to maintain books and documents digitally. To encourage the scanning and storage of physical documents, the proposals relax the requirements for maintaining digital copies as required under the Act.
  • Defense spending: New measures will be taken to raise revenue for defense spending at an “appropriate time” after 2024. The new measures include, in part, a surcharge on the amount of corporate income tax payable for large enterprises and changes to the tobacco tax.

Mexico

• Significant changes to vacation periods enacted by the Mexican government
  • Rules relating to Mexican vacation periods have finally been reformed after much discussion. Starting on Jan. 1, 2023, the minimum allowed vacation days granted to employees will change from six to at least 12 days. The minimum days granted will be required to increase by two days every year, until 20 days are reached. Subsequently, vacation days will increase by two years every five years.
  • The regulations indicate that the minimum vacation days will be required for employees who have worked at a company for more than one year. The vacation days can be used by the employees at their discretion.
  • This change would also increase the vacation premium, the calculation for which is based on vacation days. The premium is set at a minimum of 25% per Mexican regulations.
    • Additional items to consider include potential increases on required severance payments.
• Legitimation of collective bargain agreements
  • Looking to avoid simulation in collective bargaining agreements in Mexico, the latest major labor reform established the obligation to legitimate existing collective bargain agreements before May 1, 2023.
  • Voting by employees is required (30% or more for ratification)
  • It’s also important to understand roles and responsibilities between the employees, labor unions, and company.
    • Employees
      • Attend meetings with union
      • Vote for ratification
    • Labor union
      • Negotiate
      • Respond to employees’ questions and concerns
    • Company
      • Facilitate conversation between employees and union
      • Coordinate meetings and voting

United Kingdom

• Inflation
  • Inflation continues to be a topic of conversation and concern for the U.K. economy. Inflation hit a 41-year high of 11.1% in October but eased to 10.1% in January. There are indications that inflation will continue to ease.
  • The increase in costs and interest rates has put pressure on households to make ends meet due to the rising cost of living. This, in turn, has led to strikes across many sectors, including health, transport, and education.
• Uncertain tax treatment disclosures
  • From April 1, 2022, businesses with U.K. revenue in excess of 200M GBP or U.K. balance sheet assets over 2 billion GBP must provide information to HMRC of any “uncertain amounts” that are part of the U.K. tax return (including corporate tax, VAT, and payroll) where the tax advantage is over 5 million GBP.
  • Uncertain treatments are those where a provision has been made in the financial accounts for the uncertainty or where a position taken by the business is contrary to the known interpretation by HMRC (via a statement in the public domain or in dealings with HMRC).
• Spring budget was delivered on March 15
  
  • While much of the content was as anticipated and consistent with the Autumn Statement, there were some changes. Major changes for businesses include: 
    • Keeping the previously announced increase in corporate income tax from 19% to 25%.
    • The ability to fully expense the entire cost of qualifying new plant and machinery purchases in the year of purchase and expense 50% of certain other plant and machinery costs.
      • This replaces the expiring 130% “super-deduction.”
    • Changes to the research and development tax relief
      • Restriction on the ability to claim R&D for work performed outside of the U.K. (implementation delayed to April 2024).
      • R&D deduction for small and medium enterprises (SMEs) will decrease from 130% to 86%, and the credit available to claim will reduce from 14.5% to 10%.
      • R&D expenditure credit, available to large companies, will increase from 13% to 20%.
      • There is a general movement to combine the two different approaches to R&D into one R&D system no matter the size of a business. It’s expected that future changes to the R&D tax benefits will continue to move in this direction.
    • Creation of investment zones across the U.K. with several types of taxes reduced in order to encourage investment in certain locations associated with universities and research institutes.
      • Focus is on investment in green industries, tech companies, life sciences, creative industries, and certain advanced manufacturing.
    • Adoption of Pillar 2 into U.K. tax legislation, implementing the 15% minimum tax on multinational groups with global revenues exceeding EUR 750M 
  • Changes for individuals included the following:
    • Increase in annual amounts that can be contributed to pension savings. 
    • Abolishment of the lifetime pension allowance (previously set at GBP 1M).
    • Increase in government funding for childcare.