Transfer Pricing News from the week of September 15, 202116th September 2021
Poland Takes Another Stand Against Tax Avoidance with the Polish Deal
Intercompany royalty payments and service transactions are often used for legitimate intercompany business—not profit shifting. But for the Polish tax authorities, that sentiment may take some convincing. Years after the initial BEPS initiative, Poland continues to take aggressive measures against tax avoidance. The latest? A new tax bill, dubbed the Polish Deal, includes a corporate minimum income tax as a special anti-avoidance measure. The corporate minimum tax would be imposed on taxpayers in a loss position from reasons other than capital gains and when economic activity is equal to less than 1% of its tax revenue. (Certain taxpayers would be exempt: startups, financial institutions, taxpayer’s whose revenue decreased at least 30% from the prior year, and taxpayers with simple corporate structures). Tax authorities estimate a 450-million euros return (that’s at least $532 million) from the deal. And if you’ve been reading the tax news lately, you may have noticed that the rest of the world has been busy negotiating a global minimum tax, which for now stands at “at least 15%.” How much is Poland’s? It equals 10% of a base derived from a sum of numbers computed by algorithms and formulas. The Polish Deal would repeal Poland’s 2018 anti-avoidance provisions, which limited the deductibility of intercompany service payment and royalties and drove an increase in the number of advanced pricing agreements in the country. If this bill passes, it will make new APAs less advantageous for companies. Of course, the Polish Deal still needs to make it through Parliament. If it passes, you can expect taxpayers to fall in line at the start of 2022.
Are Digital Services Taxes Here to Stay?
One of the potential dealbreakers for the U.S. in signing on for the OECD’s global tax reform has long been the question of digital services taxes. These unilateral taxes are often imposed on revenue—not profits—for digital services like online advertising, and they are issued in varying amounts at the discretion of each individual country (3% by Belgium, 5% by Czech, 7.5% by Hungary, and so on). The question the U.S. has been asking is, “If we sign, will these taxes go away?” According to the OECD in July, the answer was a simple, yes. In fact, the organization said, the plan includes, “the removal of all digital services taxes and other relevant similar measures on all companies.” But now some experts are thinking these unilateral levies may be here to stay. Pillar 1 reallocates Amount A (residual profits) based on where revenue is earned—not a company’s physical presence—but only a small number of companies (79 at last count) will be affected. Some countries may feel like companies should pay some kind of digital services tax and some experts think tax authorities will reinstate those levies under another name.
Safe Harbor Rules Could Mean Higher Taxes for Mexican Maquiladoras
Looks like advanced pricing agreements may no longer be an option for factories in Mexico known as maquiladoras. Mexico’s Office of the Treasury and Public Credit just proposed a bill for these companies—which are factories located on the Mexican side of the U.S.-Mexico border—to determine taxable income by means of a safe harbor as opposed to advanced pricing agreements. The problem for the factories is the safe-harbor strategy stands to increase their taxes by at least 30%. Currently, companies operating under Mexico’s maquiladora regime can opt for advanced pricing agreements OR safe harbor rules. Under safe harbor rules, the company’s tax base is determined by calculating 6.9% of the total value of the assets or 6.5% of operating costs—whichever is greater. In 2020, 456 maquiladoras opted for APAs while more than 600 opted for safe harbors. Still, having the choice is a huge benefit, as the method used can drastically affect a company’s taxable income. The safe harbor advantage, of course, is simplicity—the rules and calculations are straightforward. However, for some companies, that comes at a price. The bill will be in the negotiation stage until October 31, but it’s expected to fly through without issue. The government claims the move away from APAs isn’t to raise more tax revenue, it’s to improve efficiency. Given that so much time and so many resources go into APA revisions, the government thinks they’re not the solution they were supposed to be. Of course, we can’t help but notice the move to safe harbor rules will free up tax authorities to focus on audits.
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