January Global Tax-News Update

This edition of the Tax-News monthly feature takes in noteworthy events in the international tax arena, including attempts to inject new life into the campaign for comprehensive tax reform in the United States, and developments in the areas of free trade, indirect taxation, BEPS and tax transparency and compliance.

US Tax Reform

Despite their best efforts, and a consensus that an overhaul of the US tax code is long overdue, the chairmen of the congressional tax-writing committees failed to bring tax reform legislation to the floor of Congress that members could agree during the 113th Congress.

Now it is the turn of the 114th Congress under the leadership of the Republican Party, and on January 15, 2015, US Senate Finance Committee Chairman Orrin Hatch (R – Utah) and its Ranking Member Ron Wyden (D – Oregon) announced the launch of five bipartisan Finance Committee Tax Working Groups, with the intention of boosting congressional comprehensive tax reform efforts.

Each group will analyse current tax law and examine policy trade-offs and available reform options within its designated topic area – individual income tax; business income tax; savings and investment; international tax; or community development and infrastructure. Each group will be co-chaired by one Republican and one Democrat member.

In addition, each of the bipartisan groups will work directly with the nonpartisan Joint Committee on Taxation to produce an in-depth analysis of options and potential legislative solutions within its assigned area.

The goal is to have a final comprehensive report, featuring recommendations from each of the five categories, by the end of May this year. It is intended that the report’s recommendations will then serve as a foundation for the development of bipartisan tax reform legislation.

According to the National Association of Manufacturers (NAM), there is no time to lose, as a further delay by Congress in undertaking pro-growth tax reform would lose the United States more than USD12 trillion over the ten years to 2024.

NAM said: “Political gridlock on pro-growth tax reform imposes a cost on all businesses and leads to considerable uncertainty throughout the economy. Compounding this general uncertainty is the fact that many important business tax provisions are temporary and require regular renewal by Congress, which often leads to delays and retroactive extensions.”

“At the same time, the US business tax system has become increasingly out of sync with tax regimes in virtually all other developed economies.

However, the chances that Democrats, including President Obama, and Republicans can work together to bring about tax reform were drastically reduced when, in his State of the Union address on January 20, the President outlined a plan to impose higher taxes on the nation’s wealthiest individuals and on financial institutions, and to use the revenue to provide tax benefits for families, in direct opposition to Republican calls for taxes to be cut, not raised.

Obama said the changes would impact the wealthiest top one percent “almost exclusively,” and said there would be protections for middle-class families and small businesses. The President proposed to raise the top rate of tax on capital gains and dividends (for couples with incomes over USD500,000) to 28 percent from 23.8 percent, while also making changes to ensure that the heirs of large estates would have to pay capital gains tax on assets they inherit.

Free Trade

Japan features prominently in the list of recent developments in the area of free trade, with the landmark free trade agreement between Australia and Japan having entered into force on January 15, 2015. When it is fully implemented, more than 97 percent of Australian exports will receive preferential or duty-free access to Japan.

The Japan-Australia Economic Partnership Agreement (JAEPA) was signed in July 2014. According to a joint statement issued by the Australian Prime Minister Tony Abbott and his Japanese counterpart Shinzo Abe, the deal “lays the foundation for the next phase of bilateral economic relations, and will strengthen ‘the special strategic partnership’ between Japan and Australia.”

Under the terms of the agreement, 99.7 percent of Australia’s exports of resource, energy, and manufacturing goods will now enter Japan duty-free.

Meanwhile, the recent sixth round of trilateral free trade agreement negotiations between Japan, China, and South Korea featured intensive discussions on market access for goods and services and on investment.

Tripartite FTA negotiations were launched in November 2012, and from the outset the challenge of lowering tariffs on sensitive goods and services (particularly agricultural products for South Korea and Japan, and manufactured goods for China) was acknowledged by all three countries.

In the Americas, Chile and the Dominican Republic expect to formally start negotiations towards a free trade agreement in April this year, Chile’s General Director of International Economic Relations, Andrés Rebolledo said.

A Chilean delegation led by Rebolledo travelled to the Dominican Republic on January 12, 2015, to lay down the foundation for FTA talks.

However, US business associations have been ramping up their lobbying efforts to secure renewal of Trade Promotion Authority (TPA), to expedite the conclusion of ongoing free trade talks by the US.

Renewing the TPA, which last expired in 2007, would require the White House to consult extensively with Congress during trade treaty negotiations with the objective of providing US trading partners with an assurance that concluded agreements would be fast-tracked through Congress.

In a recent letter, the Business Roundtable, an association of CEOs from leading US companies, wrote to leading lawmakers in both the House of Representatives and Senate “urging passage of bipartisan TPA legislation as soon as possible to advance the current ambitious US trade agenda.”

It is believed that TPA will be essential if major trade negotiations including the Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact are to be ratified by the United States.

Oil

The plunge in the global oil price has also thrust the taxation of the sector into the limelight as oil firms struggle to make a profit and Governments see revenues from the hydrocarbon sector dwindle.

In the United Kingdom, Chancellor George Osborne has hinted that his next Budget will include tax measures to help the North Sea industry mitigate the impact of the global drop in oil prices.

Osborne was quizzed on his position during a Treasury Committee hearing on fiscal devolution in Scotland. He stressed that the oil industry is important for the whole of the UK, not just for Scotland, and pointed out that he “took decisions in the Autumn Statement to reduce the taxes on North Sea oil, anticipating the pressures that the fall in oil price would have.”

Osborne added that he is sure the Government will have to take further steps in March’s Budget to help the industry.

Osborne’s comments follow the decision to task the UK’s new Oil and Gas Authority (OGA) to undertake an urgent review of conditions for energy companies undertaking investments in the North Sea, prompting the industry to again call for radical tax reform.

UK Energy and Climate Change Secretary Edward Davey has asked Andy Samuel, CEO-designate of the OGA, to identify key risks to oil and gas production in the UK Continental Shelf (UKCS) and to determine what measures might be taken by the Government and industry to mitigate them.

Across the Atlantic, while Canada’s federal Government expects to be largely unaffected by lower oil prices, Canadian provinces will see their economies slow and tax revenues decline as a result of lower oil prices, according to the Conference Board of Canada, a think tank.

In a new report, Regional Shakeup: The Impact of Lower Oil Prices on Canada’s Economy, the Conference Board warns that Canada’s economy will suffer from the shock of tumbling oil prices and, in particular, from a considerable reduction in energy sector investment. The report estimates that these factors will hit growth by as much as 0.4 percent of gross domestic product (GDP) in 2015. Oil revenue losses are expected to be partially offset by lower transport costs and higher consumer spending.

VAT/GST

In its recent Global Economic Prospects report, published this month, the World Bank has called on countries in South Asia to broaden the scope of their consumption tax regimes, including by removing tax breaks and raising rates.

The World Bank report begins by pointing out that average deficits in the region grew by some two percent in 2013. Compared with pre-crisis levels, deficits were as much as six percent higher in some countries in 2013. The report, therefore, says that countries need to identify new revenue streams, to expand their “extremely low” tax-to-gross domestic product (GDP) ratios.

Among countries in South Asia, India has implemented the most successful reforms, mainly in the area of direct tax, owing in part to concurrent administrative reforms, the report says. However, India’s revenue from consumption taxes has fallen over the past decade. The same is true in particular for Sri Lanka and Pakistan, it continues.

India is in fact in the process of introducing a dual central/state GST, partly to raise its tax-to-GSP ratio and partly to clean up its fragmented and disparate indirect tax system, and at its meeting on December 17, India’s Cabinet approved the Constitutional Amendment Bill that would allow for the introduction of a GST in India.

India’s Finance Minister, Arun Jaitley, has been holding intensive meetings with States in an attempt to secure support for the GST, which was first proposed in 2009 and was originally intended to be in place by April 2010.

Another South Asian country which has finally decided to apply a goods and services tax after much delay is Malaysia, which has released a comprehensive list of goods that will be either subject to GST or exempt from April 1, 2015.

Malaysia is to introduce GST at a rate of six percent, the lowest rate among the Association of Southeast Asian Nations countries. The GST will replace the sales and services taxes, and was originally supposed to have been in place by 2007.

The list, published on January 15, sets out the rates on basic commodities, food and drink, cosmetics, medicines, household items, hardware, kitchenware, clothes, books and stationery, and recreational items. According to the guidance, the six percent rate will be applied very broadly, with exemptions mainly for purchases of fruit and vegetables.

In Europe, the Association of Greek Tourism Enterprises has released a new study, prepared by professional services firm Ernst & Young (EY), that warns the Government that doubling the value-added tax (VAT) rate on accommodation, from 6.5 percent to 13 percent, would cause significant harm to the economy.

The study says that, for a revenue benefit of about EUR200m (USD231m) a year, industry activity would decline by about EUR415m. It says the longer term impact could be more severe, with forecasts that industry activity could decline by as much as EUR1bn to EUR1.7bn over the longer term.

Greece is also under pressure to raise the rate of VAT on food, although the European Commission has also been is not leaning on Greece to do so, according to the European Commissioner for Economic and Financial Affairs, Taxation, and Customs, Pierre Moscovici.

Two questions were posed to the European Commission by Greek Member of the European Parliament (MEP) Kostas Chrysogonos, who drew attention to the rise in poverty levels in Greece, which he attributed in part to the deeply unpopular fiscal reforms that Greece has undertaken since requiring a financial assistance package from the troika of international lenders – the European Commission, the European Central Bank, and the International Monetary Fund.

More recently, the troika has called for Greece to significantly simplify its VAT regime, in particular by limiting the scope of reduced rates and reining in exemptions.

With 28 member states levying around 70 different rates of VAT, on January 13, 2015, the EU Taxation and Customs Union Directorate-General released an updated report that comprehensively charts the headline rates, concessionary rates, super-reduced rates (below five percent), and exceptional value-added tax (VAT) rates in place across the European Union’s member states on all goods and services categories, current to January 1, 2015.

The document, “VAT Rates Applied in the Member States of the European Union,” provides a thorough overview of the differing VAT regimes across the EU.

BEPS

As the OECD released another flurry of response documents as part of its wide-ranging base erosion and profit shifting project, businesses have once again warned of the consequences of a an inconsistent response to the Organisation’s recommendations.

The International Chamber of Commerce has called for a coordinated and consistent approach to tax law changes under the BEPS plan to prevent disparate rules and double taxation. The ICC said: “It will be crucial for both OECD member states and non-members to reach agreement on the [BEPS] project’s outcomes to avoid inconsistencies and conflicts between the national tax legislation of different countries and to reduce double taxation. ICC encourages the OECD to engage with non-OECD members to obtain further commitment on a common approach in order to not stifle cross-border trade and economic growth.”

The ICC condemned the UK Government’s plans to introduce a 25 percent Diverted Profits Tax (DPT) from April 2015 to tackle “artificial” profit shifting arrangements, a move also criticised by Members of Parliament in January 2015.

Not part of the BEPS work, but no doubt inspired by it, is the European Commission’s interest in a series of tax rulings or “comfort letters” given to certain multinational firms by EU tax authorities, and on January 16, 2015, the European Commission published the non-confidential version of its decision to open an investigation into a tax ruling for online retailer Amazon in Luxembourg.

The Commission’s decision was handed down on October 7, 2014. As the Luxembourg Finance Ministry has pointed out, the January 2015 publication “is a mere formal step in the procedure,” and the text published “contains no new elements.”

The Commission’s investigation concerns a 2003 tax ruling relating to Amazon’s operations in Luxembourg. The decision notes that Amazon EU Sàrl, a Luxembourg commercial company, functions as the head office of Amazon for Europe and is the principal operator of the retail and business services offered through Amazon’s European websites.

In a surprise announcement in December 2014, the Commission announced that its ongoing inquiry into advance tax rulings will be expanded to cover all European Union member states.

Tax Compliance

A chaotic 2015 United States tax filing looks to have been averted despite the long delay by Congress in renewing dozens of temporary tax provisions at the last minute before the Christmas holidays.

On January 15, much to the relief of taxpayers, the Internal Revenue Service (IRS) announced the on-time opening of the United States 2015 filing season and highlighted a growing array of online services, including help for taxpayers to understand how the Affordable Care Act (ACA) will affect them and the availability of the Free File program.

The IRS began accepting and processing all tax returns on January 20, and taxpayers will have until April 15, 2015, to file their 2014 tax returns and pay any tax due. The IRS expects to receive about 150m individual income tax returns this year, with more than four out of five returns being filed electronically.

The IRS confirmed that, although 2014 tax returns will include new questions to incorporate provisions of the ACA, the majority of taxpayers – more than three out of four – will simply need to check a box to verify they have health insurance coverage. For the minority of taxpayers who will have to do more, its website features useful information and tips regarding the premium tax credit, the individual shared responsibility requirement, and other tax features of the ACA.

Nevertheless, with the agency expected to more with fewer resources, IRS Commissioner John Koskinen has warned that the further reduction in the agency’s budget for 2015 may mean that the agency will have to shut down for a couple of days during the fiscal year.

The IRS had already expressed concern that its work during 2015 would be deleteriously affected by the USD345m cut in its budget to USD10.9bn, due to the additional administrative complications, this year in particular, of administering the new tax provisions in the ACA.

Koskinen had previously said that the budget reduction would mean a hiring freeze and the cancellation of overtime payments for agency employees.

Koskinen’s warning comes as the 2014 report of National Taxpayer Advocate Nina Olson to Congress expresses concern that taxpayers this year are likely to receive lower levels of taxpayer service from the IRS as a result of budget cuts.

Olson emphasized that the IRS budget environment of the last five years has brought about a “devastating erosion of taxpayer service, harming taxpayers individually and collectively,” but that “this downward slide can be addressed if Congress makes an investment in the IRS and holds it accountable for how it applies that investment.”

The report added that the combination of the IRS’s increasing workload, the erosion of public trust occasioned by the IRS’s screening applicants for tax-exempt status, and the sharp reduction in funding have created a “perfect storm” of trouble for tax administration and therefore for taxpayers.

The report expects that the agency is unlikely to answer even half of the (more than 100m) telephone calls it receives, and levels of service may average as low as 43 percent. In addition, taxpayers who manage to get through are expected to wait on hold for 30 minutes on average, rather than the average 2.5 minutes in FY2004.

The report suggested that comprehensive tax reform would ease burdens on taxpayers and the IRS alike, and can’t come soon enough. Just how soon though remains to be seen.