EY Tax Monthly News Update - November 2022

UK Chancellor sets out steps on taxation and spending during his Autumn Statement

In his Autumn Statement delivered on 17 November, the UK Chancellor has set out steps on taxation and spending, with a view that each should contribute in a broadly balanced way to repairing the UK’s public finances.

From a business perspective, the Chancellor announced a new Electricity Generator Levy, changes to the Energy Profits Levy and a rebalancing of innovation tax reliefs while reaffirming the commitment to implement the OECD’s BEPS Pillar Two.

Tax rises for individuals and employers came in the form of a lower threshold at which the UK’s 45% additional rate starts to apply and further freezing of other tax thresholds until April 2028

For more details see the EY Global Tax Alert here.

Australia proposes changes to their thin capitalisation regime

Australia’s October 2022-23 Budget measure following the Labor Government’s election plan to tax multinationals, proposes changes to Australia’s thin capitalisation regime. From 1 July 2023, Labor intends to limit net interest expense deductions to 30% of EBITDA (EBITDA approach) with the potential for further deductions if firms can substantiate their deductions under the arm’s length debt test or worldwide gearing ratio test.

The changes will apply to most multinational businesses operating in Australia currently subject to thin capitalisation with at least $2 million in debt deductions on an associate inclusive basis.

The Australian government’s proposed changes align with the OECD’s best practice approach in relation to limiting base erosion involving interest deductions and other financial payments (BEPS action 4).

For more information see the ATO website here.

Hong Kong introduces the Inland Revenue (Amendment) (Taxation on Specified Foreign-Sourced Income) Bill 2022.

MNEs should review their Hong Kong holding, financing and intellectual property structures to assess the tax implications following the Hong Kong Government introducing the Inland Revenue (Amendment) (Taxation on Specified Foreign-Sourced Income) Bill 2022 on 2 November 2022 and subsequently submitting committee stage amendments on 10 November 2022 in response to the European Union’s latest comments to the FSIE regime (collectively the Bill).

The Bill contains proposed amendments to the tax exemption of certain foreign-sourced passive income which will be subject to additional economic substance, participation, and nexus requirements. The Bill is currently under review by the Hong Kong Legislative Council and is expected to take effect from 1 January 2023.

For more information see the EY Global Tax News Alert here.

Multinational tax avoidance risks highlighted by OECD data

Continuing base erosion and profit shifting (“BEPS”) risks and the need to implement the 2-pillar solution to ensure large multinational enterprises (“MNEs”) pay a fair share of tax wherever they operate and earn their profits was highlighted by new data released by the OECD.

The OECD’s annual Corporate Tax Statistics, covering over 160 countries and jurisdictions, includes new aggregate country-by-country data on the activities of almost 7,000 MNEs, representing a major boost in tax transparency efforts.

According to the data, corporate income tax (“CIT”) remains an important source of revenue for most countries, especially for developing and emerging market economies.

After decades of cuts to statutory CIT rates, the new data points to a stabilisation of CIT rates in 2022 with some narrowing tax bases in 2021, as countries sought to strike a balance between raising revenue and incentivising investment. The stabilisation of CIT rates may also be a response to the fiscal challenges faced by governments in the wake of the COVID-19 pandemic. The average combined (central and sub-central government) statutory tax rate for all jurisdictions covered in the dataset was 20% in 2022, compared to 20% in 2021 and 28% in 2000.

The data also suggests an increase in generosity of R&D tax provisions in 2020 and 2021 in a number of OECD countries and EU member states following the outbreak of the COVID-19 crisis.

For more details see the OECD website here.