Global Tax Policy and Controversy Watch | September 2023 edition

In the spotlight

US IRS enforcement efforts will focus on large partnerships, high-income earners

The United States Internal Revenue Service (IRS) announced that it will focus its attention on "high-income earners, partnerships, large corporations and promoters abusing the nation's tax laws" and gave specific numbers on how many taxpayers it plans to contact. The IRS said more details will be announced in the weeks and months ahead.

See EY Global Tax Alert, IRS enforcement efforts will focus on large partnerships, high-income earners, dated 12 September 2023.

Key highlights

Developments on the EU Carbon Border Adjustment Mechanism

The European Commission has adopted the Implementing Regulation providing the rules for the transitional phase of the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM). The Polish government has announced that it is asking the General Court of the Court of Justice of the European Union to annul the EU Regulation establishing the CBAM.

See EY Global Tax Alerts, European Commission adopts final Implementing Regulation for transitional phase of CBAM, dated 18 August 2023 and Polish Government seeks annulment of CBAM regulation in European Court of Justice, dated 15 August 2023.

Canada's Global Minimum Tax Act released for public comment

On 4 August 2023, the Canadian Department of Finance released for public comment several packages of draft legislative proposals, including new draft legislative proposals relating to the implementation of a global minimum tax under BEPS 2.0 Pillar Two. The draft Global Minimum Tax Act is intended to implement the Income Inclusion Rule (IIR), Qualified Domestic Minimum Top-up Tax (QDMTT) rules and Undertaxed Payment Rule (UTPR) that form part of the Model Rules for the Global Minimum Tax, but detailed rules are included only on the IIR and QDMTT.

See EY Global Tax Alert, Canada's Global Minimum Tax Act released for public comment, dated 28 August 2023.

Canada moves ahead with its own digital services tax, releasing draft legislation

It is anticipated that Canada's digital services tax (DST) will be enacted by 1 January 2024, with retroactive effect from 1 January 2022. The new rules may result in a filing obligation and tax liability for any entity — Canadian or otherwise — that as a corporate group has global consolidated revenues of €750 million or more and earns Canadian digital services revenue from providing online marketplace services, online advertising and social media services or monetizing user data in excess of CA$20 million.

See EY Global Tax Alert, Canada moves ahead with its own digital services tax, releasing draft legislation, dated 5 September 2023.

Italy approves framework for major tax reform, including Pillar Two principles

The Italian Parliament has approved a law that includes a set of general principles and criteria enabling the Government to implement a full reform of the Italian tax system (Enabling Law). The Enabling Law is aimed at reducing the tax burden of corporations and individuals, increasing the degree of legal certainty, reducing litigation, improving the relationship between tax authorities and taxpayers, aligning domestic rules to international tax principles (including BEPS 2.0 Pillar Two provisions), and ultimately outlining a system capable of attracting foreign capital. The Enabling Law also makes value-added tax (VAT) changes.

See EY Global Tax Alerts, Italy approves framework for major tax reform, including BEPS Pillar Two principles, dated 25 August 2023 and Italy's Enabling Law 2023 makes VAT changes, dated 28 August 2023.

Luxembourg publishes draft legislation on implementation of the EU Minimum Tax Directive

The Luxembourg government has sent to Parliament a legislative proposal that transposes into domestic law the European Union (EU) Pillar Two Directive including the IIR and UTPR, introduces a QDMTT and contains Transitional Safe Harbor rules. The IIR and QDMTT will be applicable for fiscal years beginning on or after 31 December 2023, while the UTPR generally applies for fiscal years beginning from 31 December 2024.

See EY Global Tax Alert, Luxembourg publishes draft legislation on implementation of the EU Minimum Tax Directive, dated 11 August 2023.

New Zealand introduces draft Digital Services Tax legislation

A new bill introduced by the New Zealand government would impose a 3% digital services tax on New Zealand users of digital services. The proposed effective date of 1 January 2025 could be extended. The "go-live" date will depend on whether the Government considers sufficient progress is being made in the Pillar One discussions on instituting a multilateral solution at the global level.

See EY Global Tax Alert, New Zealand introduces draft Digital Services Tax legislation, dated 7 September 2023.

Companies should begin Pillar Two preparations to prevent double taxation, tax disputes

As more jurisdictions implement Pillar Two rules, programs and tools to manage and resolve potential disputes lag behind. Local implementation of Pillar Two will be here before we know it. The time to act is now.

Read the latest EY Global Tax Controversy monthly flash news article, EY Global Tax Controversy Flash Newsletter (Issue 61) | Companies should begin Pillar Two preparations to prevent double taxation, tax disputes, dated 11 August 2023.

News items

Australia considers CBAM to address carbon leakage

The Australian Government has announced a review on whether to introduce a CBAM in Australia. The CBAM would apply a "carbon tariff" to imports from overseas, in certain circumstances. An evaluation of policy options and the feasibility of an Australian CBAM is likely to be finalized by October 2024.

See EY Global Tax Alert, Australia considers CBAM to address carbon leakage, dated 21 August 2023.

Brazil modifies how investment funds will be taxed

The Brazilian Government published Provisional Measure 1,184/23, which makes changes to how certain investment funds in Brazil will be taxed. The provisional measure also establishes a new withholding tax mechanism for unrealized gains.

See EY Global Tax Alert, Brazil modifies how investment funds will be taxed, dated 5 September 2023.

Brazil proposes multiple changes affecting taxation of investment

If passed, Bill No. 4,173 would require foreign investments by Brazilian residents to be reported annually and at tax rates ranging from 0% to 22.5% based on annual income, starting from 1 January 2024. Profits of entities controlled by Brazilians abroad would be taxed annually, starting from 1 January 2024, regardless of distribution. A second bill proposes to eliminate the deductibility of interest on net equity as of 1 January 2024.

See EY Global Tax Alerts, Brazil introduces individual income tax bill affecting taxation of foreign investment income, dated 11 September 2023 and Brazilian Government proposes the elimination of interest on net equity deduction, dated 6 September 2023.

Chilean Government announces content of 'Fiscal Pact'

The Chilean President revealed the main guidelines that will be part of the so-called Fiscal Pact, which the government seeks to promote after Congress unexpectedly rejected the tax-reform project in March 2023. The initiative is comprised of two separate bills: one on addressing tax evasion and avoidance, and the second on tax reforms aimed at increasing revenue.

See EY Global Tax Alert, Chilean Government announces content of 'Fiscal Pact', dated 8 August 2023.

Costa Rican Congress approves bill to achieve exclusion from the EU's list of non-cooperative jurisdictions

Among other provisions, the bill includes a tax on certain foreign-source passive income obtained by entities that belong to a multinational group and lack adequate economic substance. The bill aims to introduce the necessary amendments to achieve Costa Rica's exclusion from the EU's list of non-cooperative jurisdictions in tax matters.

See EY Global Tax Alert, Costa Rican Congress approves bill to achieve exclusion from the European Union's list of non-cooperative jurisdictions in tax matters, dated 12 September 2023.

Costa Rica's Tax Authority issues resolution on declaring income from movable and immovable capital under the corporate income tax regime

Costa Rica's Tax Authority published a resolution establishing the requirements for declaring income from movable and immovable capital under the corporate income tax regime. To have movable and immovable capital taxed under the corporate income tax regime, taxpayers must have at least one employee that meets certain conditions. If a taxpayer no longer has an employee that meets the conditions, the taxpayer must register for the tax on capital income regime.

See EY Global Tax Alert, Costa Rica's Tax Authority issues resolution on declaring income from movable and immovable capital under the corporate income tax regime, dated 21 August 2023.

El Salvador's Congress approves bills to reform International Services Law and Free Trade Zones Law

El Salvador's Congress approved bills to reform the International Services Law and the Free Trade Zones Law. The bills would make substantial modifications to the two main free-trade regimes for goods and services.

See EY Global Tax Alert, El Salvador's Congress approves bills to reform International Services Law and Free Trade Zones Law, dated 22 August 2023.

German government issues revised draft Growth Opportunities Act bill on corporate tax reform

Compared to the initial draft, the revised bill reflects modifications in the proposed changes to climate-protection investments, tax-loss utilization, interest-deduction limitation, accelerated depreciation, and claw-back provisions within tax-neutral demergers.

See EY Global Tax Alert, German government issues revised draft Growth Opportunities Act bill on corporate tax reform, dated 6 September 2023.

Hong Kong tax authority updates proposed asset disposal gain regimes

Several enhancements have been made to the proposed safe harbor rules for onshore equity disposal gains. The revised foreign-sourced income exemption regime on disposal gains may introduce carve-outs for traders and intra-group relief to defer tax charged, subject to certain safeguards.

See EY Global Tax Alert, Hong Kong tax authority updates proposed asset disposal gain regimes, dated 24 August 2023.

Italy announces proposed one-time windfall tax for banks

The Italian windfall tax is a one-off tax, solely for fiscal year 2023, to be levied at a 40% rate on the increase in interest margin realized by banks over a monitoring period of one or two financial years, subject to a 5% and 10% floor, respectively. The Italian windfall tax is capped at 0.1% of the value of the assets reported in the financial statements of the reporting year preceding the one pending as of 1 January 2023. The Italian windfall tax will not be deductible against the Italian direct taxes.

See EY Global Tax Alert, Italy announces proposed one-time windfall tax for banks, dated 9 August 2023.

Kenya proposes revamping transfer pricing rules

The new draft transfer pricing rules introduced in Kenya reflect recent changes in the income tax law and will eventually replace rules introduced in 2006. The new rules are generally modeled after the OECD Transfer Pricing Guidelines. Although the new rules will increase compliance obligations for multinational enterprises, they also provide needed clarity.

See EY Global Tax Alert, Kenya revamps Transfer Pricing rules, dated 12 September 2023.

Saudi Arabia announces eighth wave of Phase 2 e-invoicing integration

Saudi Arabia's Zakat, Tax and Customs Authority has announced that taxpayers resident in Saudi Arabia, with a taxable turnover above SAR40m during calendar year 2021 or 2022, should comply with the Phase 2 e-invoicing requirements that are effective from 1 March 2024.

See EY Global Tax Alert, Saudi Arabia announces eighth wave of Phase 2 e-invoicing integration, dated 24 August 2023.

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
  
  
• Julie Byrne, Global Tax Policy, Washington
  
  
• Martin Caplice, Asia-Pacific Tax Controversy Leader, Sydney
  
  
• Luis Coronado, Global Tax Controversy Leader, Singapore
  
  
• Cathy Koch, Americas Tax Policy Leader, Washington
  
  
• Jean-Pierre Lieb, EMEIA Tax Policy and Controversy Leader, Paris
  
  
• Kiara Rankin, Americas Tax Controversy Leader, Houston
   

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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