International updates: Tax news and other global updates for Q2 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 directive on digital processes, Canada’s federal budget, China’s guidelines of personal information protection and data export, Japan’s updated regulations from its proposed tax reform, and Mexico’s jurisprudence on value-added tax (VAT) offsetting transactions, 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)
• Canada
• China
• Japan
• Mexico
• United Kingdom (UK)

European Union (EU)

EU directive on digital processes

European Commission adopted a proposal for a directive, making it easier for companies to expand the use of digital tools and processes in EU company law. The proposal aims to facilitate cross-border companies’ operations and to increase business transparency and trust by making more information about companies publicly available at EU level. It will also cut red tape for cross-border businesses, saving around €‎437 million of administrative burden per year, thanks to an EU Company Certificate or the application of the “once-only principle.” The proposal will contribute to further digitalization of the single market and help companies — particularly small- and medium-sized ones — to conduct business in the EU.

Cutting red tape and administrative burden

To cut red tape and alleviate the administrative burden for cross-border business, the proposed rules include:

• Application of the “once-only principle” so that companies don’t need to resubmit information when setting up a branch or a company in another member state. The relevant information can be exchanged through the Business Registers Interconnection System (BRIS).
• An EU Company Certificate, containing a basic set of information about companies, which will be available free of charge in all EU languages.
• A multilingual standard model for a digital EU power of attorney, which will authorize a person to represent the company in another member state.
• Removing formalities such as the need for an apostille or certified translations for company documents.

Organization for Economic Cooperation and Development (OECD)

United States House Bill on OECD Pillar II

On May 25, 2023, House Republicans introduced proposed legislation called Defending American Jobs and Investment Act, which seems to target foreign taxes imposed by OECD member countries in alignment with the OECD’s Pillars I and II. The legislation proposes to increase income tax and withhold tax rates by 5% initially and increase up to 20% on certain foreign persons of any country identified in a report that would be produced by the Treasury Department for imposing extraterritorial and discriminatory taxes of foreign countries. A single extraterritorial or discriminatory tax imposed by a foreign country would be enough for them to be listed in the report. Based on the definitions of a discriminatory and extraterritorial tax in the proposed legislation, any country that imposes a digital services tax (DST) in accordance with Pillar I or the undertaxed profits rule (UTPR) piece of the global minimum tax rules in Pillar II will likely be included in that report.

Canada

Canada’s federal budget was released on March 28, 2023

• The budget contained no proposed changes to personal or corporate income tax rates or capital gain inclusion rates.
• The budget announced that the digital services tax (DST) could be imposed starting Jan. 1, 2024, if Pillar I of the OECD Inclusive Framework is not in force by that date.
• The budget restated the government’s intention to implement Pillar II of the OECD Inclusive Framework by introducing the income inclusion rule (IIR) and a domestic minimum top-up tax, which will apply to Canadian entities of multinational enterprises (MNEs). The IIR and domestic minimum top-up tax will be effective for fiscal years of MNEs that begin on or after Dec. 31, 2023. The government also intends to introduce the undertaxed profits rule (UTPR) effective for fiscal years of MNEs that begin on or after Dec. 31, 2024.
• The budget announced or updated numerous clean energy investment tax credits, including the Clean Electricity Investment Tax Credit; Clean Technology Investment Tax Credit; Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS); and the Clean Technology Manufacturing Investment Tax Credit.

Underused Housing Tax (UHT) update

The deadline for filing the UHT form, paying the UHT, or claiming exemption from the UHT was extended to Oct. 31, 2023, for the 2022 tax year. Please refer to our Q4 2022 and Q1 2023 newsletters for details on who must file and the calculation of the UHT. There can be significant penalties for noncompliance, with minimum penalties of $5,000/year for individuals per filing and $10,000/year for corporations per filing.

China

China issues guidelines of Personal Information Protection and Data Export

With the issuance of the Cybersecurity Law in November 2016, the Data Security Law in June 2021, and the Personal Information Protection Law in August 2021, China has set clear requirements for the supervision of personal information outbound transfer activities, which must follow one of the three approaches to secure the compliance of personal information (PI) transfer:

1. Security assessment. This is mandatory for the data exporters of key information (e.g., sensitive national security data), IT infrastructure operators and data processors who process PI of more than 1 million people and transfer PI overseas, or data processors who transfer PI of over 100,000 people or sensitive PI of 10,000 people overseas accumulatively from Jan. 1, 2021, to Sept. 1, 2022.
2. PI protection certification. For PI processers not subject to a mandatory security assessment, they can choose either the certification approach or the Standard Contract filing approach (refer to item No. 3, below). Although the certification approach has been piloted since Nov. 4, 2022, in practice, this approach is less preferable because the rules are still under development, and there is a lack of precedent guidelines for reference, plus the certification application could be quite time-consuming and costly for many companies with limited PI outbound transfer activities.
3. Standard Contract (SCC) filing. The China SCC approach is more practical for the majority of companies involved in PI cross-border transfer who are not subject to the security assessment requirement. Standard contractual clauses are a globally common and feasible method for data compliance and may be incorporated as a part of the global data compliance policies of international corporations.

China’s regulations for the SCC filing officially become effective on June 1, 2023

The Measures for the Standard Contract for Outbound Transfer of Personal Information became effective on June 1, 2023, along with the Guidelines for SCC Filing issued on May 30, 2023, to provide the detailed implementation procedures and formalities required to make the filings.

It’s important for multinationals doing business in China to understand and comply with the data protection requirement in China.

Who is eligible for the China SCC approach?

PI processers located within China are eligible to adopt the China SCC approach if they are not subject to a mandatory security assessment.

How do I prepare for China SCC filings? 

When evaluating whether a company is eligible for the China SCC approach, business operators may consider the PI data volume of their employees, business contacts, vendors, and customers, which are generally involved in global operations, as well as the sensitivity of their PI. Companies may also need support from professional service providers to conduct data mapping and PI protection impact assessment, and prepare the China SCC filing documentation and process at local government authorities.

Please talk to our China team if you need more information or have any questions about this topic.

Japan

Updated regulations from 2023 tax reform

On Dec. 16, 2022, the Japanese government released its proposed 2023 tax reform package. The package included both changes to existing laws and the introduction of new laws. After deliberation in the Diet, the package was passed into law by the National Diet on March 28, 2023.

Although the package included reforms to various types of taxes — including corporate tax, taxes on high-income individuals, tax administration, and excise taxes — a significant area of reform relates to international tax rules and the implementation of the OECD-led Pillar I regime. The Japanese National Tax Agency posted regulations under Law No. 3/2023 implementing the Pillar II 15% minimum tax for multinational enterprises and applies to fiscal years beginning on or after April 1, 2024.

The regulation includes the following measures:

1. Identifies scope of the tax for specified domestic (Japanese) corporations.
2. Excludes public corporations.
3. Implements the income inclusion rule.
4. Establishes an information reporting system.
5. Implements transition tax rates related to the simplified effective tax rate.

The bill also includes various measures to support higher government spending in the 2027 government budget, including a 4–4.5% surtax on the amount of corporation tax (expected to be implemented in or after 2023), updating the limitations on R&D credit incentives, and proposing incentives for startup investments.

Mexico

Jurisprudence on value-added tax (VAT) offsetting transactions

On March 15, 2023, the Supreme Court of Justice of the Nation (SCJN) issued a final binding jurisprudence confirming that the offsetting figure applicable to civil law doesn’t represent a valid payment extinction option for Mexican tax purposes, particularly for VAT. This could result in VAT ultimately deemed as noncreditable.

While it remains to be seen, the Mexican tax authorities (SAT) could look for retroactive effects on this change. We recommend completing a detailed analysis to confirm if your Mexican operations have implemented any sort of offsetting transaction (e.g., cash pooling). This could have a significant impact on items such as VAT cash refunds.

BEPS MLI (multilateral instrument)

The multilateral instrument operates as a protocol to interpret the tax treaties implementing a series of measures to update international tax rules and lessen the opportunity for tax avoidance. It operates by pretending to offer solutions for governments to close gaps in existing international tax rules and implementing agreed standards to counter treaty abuse.

The effective date is July 1, 2023, with fiscal effects starting Jan. 1, 2024. In the agreement, two dispositions stand out: the purpose and the treaty abuse. However, the rules stated on the MLI will be applied to the transactions in which both countries related to those transactions have signed the agreement.

Dispositions stated in tax treaties referring to withholding taxes with the source of wealth in Mexico will be affected and will be included a new concept called “purpose test,” restricting the benefits granted on the tax treaties if the taxpayers don’t meet some requirements and their operations don’t meet certain conditions. Cases in point are: transfer of profit with lower tax burdens; tax strategies with the aim of being in scenarios of double taxation; permanent establishment avoidance; and hybrid instruments.

The MLI will affect every foreign transaction, both related parties and third parties, so it’s necessary to evaluate these effects based on Mexico and counterparties’ options and guidelines related to bilateral treaties.

NOM 37 on teleworking safety and health conditions at work

Certain changes to the NOM-037 were published in the Mexican Federal Gazette June 8, 2023. These new regulations will go into force 180 calendar days after publication (meaning December 2023).

The main purpose of such NOM (Mexican Official Norm) is to regulate the safety and health conditions related to the telework (commonly known as home office).

Please contact our fully bilingual team in Mexico if you have any questions or to help you analyze the potential impact of these changes on your Mexican operations.

United Kingdom

March 2023 budget changes are now in effect

The March 2023 Spring Budget included a number of measures that became effective as of April 1, 2023, including two major provisions related to full expensing of capital expenditures and research and development incentives. These relief measures are expected to offset the increased cost of the corporate tax rate increase to 25% and the end of the capital expenditure super-deduction policy, which previously allowed companies to deduct 130% of capital expenditures in a given year.

• Full expensing provision allows for immediate tax savings of 25% on capital investments and was designed to achieve the same result as the super-deduction under the previous corporate rate of 19% (i.e., 130% x 19% = 25%).
• R&D incentives have been reworked to target small- and medium-sized business that are heavily involved in R&D activities. The provisions include a threshold such that a company with R&D expenditures exceeding 40% of total expenditure will be considered heavily involved in R&D and will be eligible for the proposed benefits, which include an increased refundable credit.