24th May 2021
With many tax developments and tax reforms being introduced around the world, there have been ongoing changes to international tax driven by the European Commission and other international bodies that are affecting member states as well as other countries around the world. From the taxation of the digital economy to cryptocurrencies and corporate tax, we round up some of the latest news that recruitment agencies placing global contractors ought to be aware of.
Digital tax issues
Although President Biden’s ‘Made in America’ Tax Plan, which aims to reform global tax and impose a global minimum 21% rate on the taxation of the foreign profits of Multinational Enterprises (MNEs), has received support from some European Union countries, not everyone is completely taken with the US Treasury’s proposals. The UK in particular is concerned that not enough is being done to tax the digital economy and the latest move is seen as protecting US tech giants that derive many of their profits abroad even though they may not have a physical presence in the country.
The UK currently has its own Digital Services Tax (DST), which is expected to raise in the region of £300 million a year, which will increase to £500 million by 2024/25, as reported by Lexology.com. The DST, which came into effect in April 2020, imposes a 2% levy on the revenues made in the UK by search engines, social media services and online marketplaces. Should any reforms be pushed through and global tax agreements come into force, then this tax would need to be scrapped.
At the heart of the global tax reforms are the proposals of the Organisation for Economic Cooperation and Development (OECD) whose blueprint consists of two main pillars. The first, or Pillar 1, which was initially proposed in October 2019, seeks for a fairer distribution of the taxation of MNE profits according to the country where that income was generated. While the OECD wants to target companies with a turnover of $750 million, the US wants to shift the focus to the top 100 global MNEs. Pillar 2 relates to the global minimum tax with the OECD quoting 12.5%, significantly lower than the 21% proposed by the Biden administration.
Global tax news updates
Elsewhere, the government in the Netherlands has decided to review the Dutch legal entity qualification policy to bring it in line with other EU states. This would remove a number of hybrid mismatches that have resulted from the ‘unanimous consent requirement’, which, as explained by International Tax Review online, is unique to the Netherlands. The requirement affects whether a partnership-like entity is considered to be ‘opaque’ – where the members are only taxed on the distributions made by the entity – or ‘transparent’, in which case they will be subject to tax on profits and gains.
The Netherlands, like other member states, implemented the EU’s Anti-Tax Avoidance Directive II (ATAD II) in 2019 but this was reviewed by the Dutch parliament because “ATAD II only deals with the consequences of hybrid mismatches by neutralising deduction/non-inclusion and double deduction outcomes. The implementation of ATAD II does not deal with the root cause of hybrid mismatches”.
Hybrid mismatch arrangements essentially exploit the differences in the tax treatment of instruments, entities or transfers in cross-border trade, which would result in loss of tax revenue. The effect of such mismatches is often a double deduction of the same expenses in two jurisdictions or a ‘deduction without inclusion’ where income is deducted in one state without being included in the income of the other state. Under the new proposals, the ‘unanimous consent requirement’ would no longer be relevant and the similarity approach – where Dutch and foreign legal forms are treated the same for tax purposes – would apply.
Recent developments in global tax
Ireland is currently facing mounting pressure to overhaul its corporate tax regime and follow the European Commission’s ‘Business Taxation for the 21st Century’ plan, which will mean that its corporation tax income, which currently accounts for 21% of tax revenues, would be severely diminished, as reported in The Irish Times.
The Irish rate of corporation tax is currently 12.5%, significantly lower than the 21% proposed by the US and one of the lowest of any EU member state. Proposals for a digital tax levy, which could be announced as early as July 2021, would impact the big tech giants such as Google, Microsoft and Facebook that have their European HQs in Ireland.
In a statement from its website, the Commission wants to simplify ‘the patchwork of national corporate tax rules’ that make cross-border taxation so complex given the 27 different tax systems that pose such problems to businesses – both in terms of compliance costs and double taxation, which can be damaging to growth. It also directly addressed the topic of the changing landscape, and in particular the growing digital economy, stating that “business models continue to become ever more international, complex and digital”.
Meanwhile, the republic of Indonesia is also carefully considering its position on the taxation of cryptocurrencies, which are becoming extremely popular. Neilmaldrin Noor, a spokesperson for the country’s tax office said, “It is important to know that…if there is a profit or capital gain generated from a transaction, the profit is an object of income tax. So the tax payer who receives capital gain has to pay the tax and report it.” Cryptocurrencies can be traded as a commodity in south east Asia’s biggest economy, but cannot be used as a payment instrument.
Recruitment firms must stay aware of the latest tax legislation around the globe
As we continue to see, with global tax reform rife, triggering changes in tax regimes and indirect taxes across the EU and many countries around the world, recruitment agencies have to make sure that they – and the contractors they place – adhere to local and national tax legislation. International contractor compliance and management solutions will help businesses navigate the complexities of global taxation systems and avoid stiff penalties and liabilities that can be incurred if regulations are not followed to the letter.
Want to learn more about the complexities around global tax compliance? 6CATS International’s specialists are on hand to guide you every step of the way. Contact them today.