Global Tax Policy and Controversy Watch | January 2023 edition

In the spotlight

OECD releases transitional safe harbor for Pillar Two

On 20 December 2022, the Organisation for Economic Co-operation and Development (OECD) published guidance on safe harbors and penalty relief as approved by the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The guidance includes an agreed transitional Country-by-Country (CbC) Reporting (CbCR) safe harbor, as well as the framework for the development of permanent safe harbors based on simplified calculations and a common understanding as to a transitional penalty relief regime. The Inclusive Framework will continue to explore whether other safe harbors and simplifications can be developed at a future time.

See Global Tax Alert, OECD/G20 Inclusive Framework releases document on safe harbors and penalty relief under Pillar Two GloBE rules, dated 21 December 2022.

EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules

On 15 December 2022, European Union (EU) Member States unanimously adopted the Minimum Tax Directive. Member States have until 31 December 2023 to transpose the Directive into national legislation. The Income Inclusion Rule will be applicable in EU Member States for fiscal years starting on or after 31 December 2023. The Directive provides for the Undertaxed Profit Rule to apply for fiscal years starting on or after 31 December 2024.

See Global Tax Alert, EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules, dated 15 December 2022.

Korea enacts BEPS 2.0 Pillar Two rules

On 31 December 2022, Korea enacted new global minimum tax rules to align with Pillar Two, effective for fiscal years beginning on or after 1 January 2024. Enforcement decrees providing more specific guidance on the laws are expected to come during 2023. Enactment was part of a broader tax reform bill that reduced the corporate tax rate by one percentage point, increased the annual deductibility limit for net operating losses and made other changes.

See Global Tax Alert, Korea enacts new global minimum tax rules to align with OECD BEPS 2.0 Pillar Two, dated 11 January 2023.

Provisional agreement reached on EU CBAM and EU ETS reform

On 13 December 2022, the European Parliament reached a provisional agreement with the Council of the EU to implement an EU Carbon Border Adjustment Mechanism (CBAM), covering product categories of iron and steel, aluminum, fertilizers, hydrogen, and electricity, effective from 1 October 2023. On 18 December 2022, the European Parliament and the Council reached a provisional agreement on EU Emission Trading System (ETS) reform and phasing out of free allowances, starting in 2026 and ending by 2034. Businesses would therefore be required to purchase CBAM certificates for covered imports from 2027.

See Global Tax Alert, European Parliament and Council reach provisional agreement on EU Emission Trading System reform with implications for EU Carbon Border Adjustment Mechanism, dated 21 December 2022.

UK transfer pricing adjustments — is the underlying rule being followed?

As transfer pricing controversy increases, taxpayers should consider looking to the legislation underpinning tax administrations’ challenges.

See the latest Global Tax Controversy monthly flash news article, EY Global Tax Controversy Flash Newsletter (Issue 52) | Gaining control: the growing need for good governance in tax, dated 13 December 2022.

Key highlights

OECD releases two public consultation documents on Pillar Two

On 20 December 2022, the OECD released a consultation document on tax certainty for the Pillar Two Global Anti-Base Erosion (GloBE) rules, which provides a summary of options to be explored by the Inclusive Framework on possible mechanisms for dispute prevention and dispute resolution with respect to differences that may arise in the interpretation of the GloBE rules between two or more jurisdictions.

On the same date, the OECD released a consultation document on the development of a standardized GloBE Information Return. The document includes data points that multinational enterprises (MNEs) are expected to need for Pillar Two compliance (including the calculation of their GloBE tax liability) as well as accompanying explanations.

Written comments from stakeholders on each document are requested by 3 February 2023. EY will make global comment submissions.

See Global Tax Alerts, OECD releases consultation document on tax certainty for the Pillar Two GloBE rules, dated 22 December 2022 and OECD releases consultation document on Pillar Two GloBE Information Return, dated 21 December 2022.

OECD releases two public consultation documents on Pillar One

On 8 December 2022, the OECD released a consultation document that outlines the main design elements of Amount B, focusing on the scope, the pricing methodology, and the current status of discussions concerning an appropriate implementation framework. Written comments from stakeholders are requested by 25 January 2023. EY will make a global comment submission.

On 20 December 2022, the OECD released a consultation document on Amount A and Digital Services Taxes (DSTs) and other relevant similar measure, focusing on the requirement for the withdrawal of certain existing DSTs and other measures that are to be listed in the Pillar One multilateral convention (MLC) and the elimination of Amount A allocations for jurisdictions that impose a DST or other measure as defined in the MLC (or that fail to withdraw an existing measure that is listed in the MLC). Written comments from stakeholders are requested by 20 January 2023. EY will make a global comment submission.

See Global Tax Alerts, OECD releases public consultation document on Amount B of Pillar One on baseline marketing and distribution functions dated 15 December 2022 and  OECD releases public consultation document on Pillar One Amount A and Digital Services Taxes, dated 23 December 2022.

Italy issues 2023 Budget Law

The Law is generally effective from 1 January 2023 and provides for several tax measures that may be of interest to MNEs with Italian operations, including: (i) limited deduction of costs incurred with black-listed jurisdictions; (ii) transition tax on undistributed profits from low-tax subsidiaries; (iii) tax treatment of nonresidents' capital gains on indirect transfers of Italian real estate; (iv) step-up of Italian participations held by nonresident entities; (v) permanent establishment exemption for investment management activities; (vi) a one-off energy windfall tax for 2023; and (v) tax amnesty measures.

See Global Tax Alert, Italy issues 2023 Budget Law, dated 10 January 2023.

Swiss Parliament approves domestic BEPS 2.0 Pillar Two implementation

The Swiss Parliament has approved the constitutional amendment to implement the Pillar Two rules into Swiss domestic law. This amendment is now subject to a public vote on 18 June 2023, where a majority of citizens as well as a majority of the Cantons (based on the popular vote by Canton) must approve the change to the Constitution. If approved, Switzerland would be able to legally implement the Pillar Two rules as of 1 January 2024.

See Global Tax Alert, Swiss Parliament approves domestic BEPS 2.0 Pillar Two implementation | Constitutional amendment now subject to public vote, dated 16 December 2022.

Spain to implement EU CbCR Directive as of 22 June 2024

The Spanish Government published legislation to implement the EU Public CbCR Directive in the Official Gazette on 22 December 2022. The rules will enter into force in Spain on 22 June 2024. Publication will be required in Spain within six months from the date of the balance sheet of the financial year in question, earlier than the maximum 12-month deadline included in the Directive.

See Global Tax Alert, Spain implements EU Country-by-Country Reporting Directive applicable as of 22 June 2024, dated 22 December 2022.

News items

Brazil and UAE adopt arm's-length principle

Brazil published new transfer pricing rules that seek to adopt the arm's-length principle for all cross-border intercompany transactions and avoid double taxation and double non-taxation outcomes. The rules come into effect on 1 January 2024 but can optionally be adopted as early as 2023. The United Arab Emirates (UAE) introduced transfer pricing rules as part of the Corporate Tax Law, effective from 1 June 2023. The transfer pricing provisions are broadly aligned with OECD principles and require that transactions and arrangements between related parties and connected persons should meet the arm’s-length standard.

See Global Tax Alerts, Brazilian Government publishes Provisional Measure adopting arm’s-length principle, dated 30 December 2022 and UAE introduces transfer pricing rules as part of Corporate Tax Law, dated 16 December 2022.

Argentina implements new mandatory disclosure regime for international transactions

The new informational regime requires that certain international transactions be reported by Argentine legal entities up to the due date for filing the annual corporate income tax return.

See Global Tax Alert, Argentina implements new mandatory disclosure regime for international transactions, dated 4 January 2023.

Bulgaria amends VAT legislation

The amendments to the Value-Added Tax (VAT) Act introduce requirements of European legislation and bring the national legislation into line with the case law of the Court of Justice of the EU, as well as addressing some practical issues.

See Global Tax Alert, Bulgaria amends VAT legislation, dated 5 January 2023.

China releases 2021 annual report on Advance Pricing Arrangements

China’s State Taxation Administration released the 2021 annual Advance Pricing Arrangement (APA) report on 21 November 2022, which is the 13th edition of this annual report. The 2021 report discusses the implementation procedure for China’s APA program, practical developments, and statistics on APA applications concluded from 2005 to 2021.

See Global Tax Alert, China releases 2021 annual report on Advance Pricing Arrangements, dated 15 December 2022.

French Parliament approves Finance Bill for 2023

The bill includes progressive repeal of the Business Contribution on the Added Value, easing of the holding period requirements to benefit from the specific ruling applicable to certain French spin-off transactions and transposition of the temporary solidarity contribution on the excess profits generated by activities within the oil, gas, coal, and refining sectors. The bill is final except for review by the French Constitutional Council.

See Global Tax Alert, French Parliament approves Finance Bill for 2023, dated 19 December 2022.

Hong Kong passes bill on refined foreign-source income exemption regime

Refinement of the regime is effective from 1 January 2023. The Hong Kong Government further clarified certain provisions during the legislative process, including the determination of income qualifying as “received in Hong Kong,” qualification of a “pure equity-holding entity” and the applicable tax rate for the “subject to tax” test.

See Global Tax Alert, Hong Kong passes bill on refined foreign-sourced income exemption regime, dated 16 December 2022.

Japan releases tax reform outline

The outline includes the Introduction of Pillar Two global minimum tax rules, revision of the foreign subsidiary income inclusion tax rules, revision of research and development tax incentives, revision of the tax incentive to promote open innovation and changes to individual income taxation, asset taxation and consumption taxation. Provisions may be revised, deleted or added during Diet deliberations regarding the reform bill.

See Global Tax Alert, Japan releases tax reform outline, dated 23 December 2022.

Luxembourg Budget Law 2023 enacts clarification to Reverse Hybrid Entity Rule

The Law clarifies that the Reverse Hybrid Entity Rule only applies where the non-taxation of net income results from a difference of classification and that only the share of the net income attributable to associated enterprises triggering the application of the Reverse Hybrid Entity Rule is subject to corporate tax at the level of the Luxembourg entity or arrangement.

See Global Tax Alert, Luxembourg Budget Law 2023 enacts clarification to Reverse Hybrid Entity Rule, dated 19 December 2022.

Peruvian Tax Authority rules that reverse merger between nonresident entities triggers indirect transfer of Peruvian shares

On 5 December 2022, the Peruvian tax authority published Ruling 000087-2022, confirming that a reverse merger performed between nonresident entities where the absorbing entity is a direct shareholder of a Peruvian entity triggers an indirect transfer of Peruvian shares.

See Global Tax Alert, Peruvian Tax Authority rules that reverse merger between nonresident entities triggers indirect transfer of Peruvian shares, dated 19 December 2022.

Spain implements temporary bank levy

The temporary levy applies to financial institutions and financial credit establishments in 2023 and 2024. The levy is 4.8% of the sum of the net margin on interest and commissions for the immediately preceding year, due in September of the year, with an advance payment due in February, of 2023 and 2024.

See Global Tax Alert, Spain implements temporary bank levy, dated 5 January 2023.

Thailand introduces mergers as another method of business combination

The Civil and Commercial Code was amended to recognize mergers as another method of business combination effective on 7 February 2023. Those planning a merger should monitor for the issuance of relevant guidance by the Thai Revenue Department to confirm whether the merger will be qualified for a concession tax regime similar to an amalgamation.

See Global Tax Alert, Thailand amends provisions of Civil and Commercial Code related to business combinations, dated 16 December 2022.

Uruguay enacts law to modify income source criteria

Uruguay has enacted changes to the traditional source criteria for corporate income tax effective for tax years beginning on 1 January 2023.

See Global Tax Alert, Uruguay’s Government enacts law to modify Uruguayan CIT source criteria, dated 14 December 2022.

Uruguay Government proposes tax incentives to attract IT professionals

To attract qualified professionals, the proposal would allow IT professionals who migrate to Uruguay to elect to be subject to nonresidents income tax at a flat rate of 12%, instead of personal income tax at progressive rates.

See Global Tax Alert, Uruguay Government proposes tax incentives to attract IT professionals, dated 3 January 2023.

UK issues updated technical note and draft legislation on Electricity Generator Levy

The United Kingdom (UK) is continuing with proposals for a new temporary Electricity Generator Levy that will apply from 1 January 2023. This levy is separate from the Energy Profits Levy that applies for the oil and gas sector. The UK Government has now published draft legislation and issued an updated technical note on the proposals, introducing some changes and providing some new details as to how the Levy will operate.

See Global Tax Alert, UK issues updated technical note and draft legislation on Electricity Generator Levy, dated 22 December 2022.

 

For additional information with respect to this Alert, please contact the following:

• Matt Andrew, Asia-Pacific Tax Policy Leader, Auckland

• Barbara M. Angus, Global Tax Policy Leader, Washington, DC

• Julie Byrne, Global Tax Policy, Washington, DC

• Jorge Libreros Calderon, Latin America North Tax Controversy Leader, Panama City

• Martin Caplice, Asia-Pacific Tax Controversy Leader, Sydney

• Bryon Christensen, United States Tax Controversy Leader, Seattle

• Luis Coronado, Global Tax Controversy Leader, Singapore

• Cathy Koch, Americas Tax Policy Leader, Washington, DC

• Jean-Pierre Lieb, EMEIA Tax Policy and Controversy Leader, Paris

• Paul Mulvihill, Canada Tax Controversy Leader, Ottawa

• Rodrigo Munhoz, Latin America South Tax Controversy Leader, São Paulo

• Gilad Shoval, Israel Tax Controversy Leader, Tel Aviv

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.