International tax news and other global updates for Q4 2022

Each quarter, our international tax and global consulting experts compile updates from around the world to help you stay up to date on international changes. This quarter, we discuss Brazil’s election, the OECD’s annual data on worldwide corporate taxes, China’s R&D-related incentives, and the UK’s autumn statement, among various other updates.

Take a look at the updates below and reach out to your Plante Moran advisor if you have any questions about how these items may affect you.

• Organization for Economic Cooperation and Development (OECD) general updates
• Australia
• Brazil
• Canada
• China
• Germany
• Ireland
• Japan
• Mexico
• United Kingdom (UK)

Organization for Economic Cooperation and Development (OECD) general updates

• On May 11, 2022, the European Commission published the debt-equity basis reduction allowance (DEBRA) directive proposal. The proposal introduces a deductible allowance for equity-financed new investments, while at the same time limiting the deductibility of interest expense. The purpose of the proposal is to encourage companies to finance investments through equity rather than debt. DEBRA would apply to all taxpayers subject to corporate income tax in one or more member states with a few excepted taxpayers, such as credit institutions or investment firms. Once adopted, the proposal should be implemented by member states by Dec. 31, 2023, and would enter into force beginning Jan. 1, 2024.
• The OECD released its annual statistics on corporate taxes around the world. The data analyzes the tax systems of over 160 jurisdictions. The data showed the following: 
  • More jurisdictions are providing R&D incentives year over year with 65 jurisdictions, providing incentives in 2021 versus 57 in 2019.
  • Tax rates appear to be stabilizing in 2022 with the average tax rate for all jurisdictions at 20% for 2022, 20% in 2021, and 28% in the year 2000.
  • Jurisdictions with a corporate income tax rate of zero averaged $2 million of revenue per employee compared with those above zero at $300,000.
  • Corporate income taxes account for a higher share of revenue for those governments outside of the OECD. The averages were as follows for each of the regions:
    • OECD countries: 9.6% 
    • Africa: 18.8%
    • Latin America: 15.8% 
    • Asia and the Pacific Region: 18.2%

  The OECD believes that this data shows the need to implement the proposed Pillar Two of international tax reform, which seeks to ensure that multinational entities pay their fair share of taxes. The OECD’s goal is to have jurisdictions enact legislation yet in 2022 and be effective in 2023.

Australia

• A new Australian budget was released on October 25. From a high level, key points include:
  • Intercompany royalty payments made to tax haven jurisdictions, defined as having a corporate income tax rate that’s less than 15%, are no longer deductible for groups with over an $1 billion revenue (“large” groups).
  • Large groups will have a “light” version of their country-by-country report made public.
  • Interest deductibility thin capitalization rules that had been based on an asset safe harbor test to be replaced by 30% EBITDA rules.

Brazil

• Brazil reelects Luiz Inácio Lula da Silva (Lula) to a third term. In a runoff election held on October 30, Brazil reelected Luiz Inácio Lula da Silva (Lula) against the incumbent, Jair Bolsonaro. Lula, who served as the president of Brazil from Jan. 1, 2003, to Dec. 31, 2010, was tried, convicted, and subsequently imprisoned for his alleged involvement in the “Operation Car Wash” corruption scandal of 2018 and, as a result, was unable to run for president that year. He was released from prison on Nov. 8, 2019, and his prior conviction was overturned by the Brazilian Supreme Court on March 8, 2021, on the grounds that the Federal Circuit court that previously convicted him lacked jurisdiction to do so. His election has incited various large protests and civil unrest across the country in the past weeks.

Lula hasn’t revealed much with specific regard to taxation during his campaign; however, tax reform will be prioritized early on in his administration with a focus on lowering indirect taxes to the level of that of other OECD countries, environmental and sustainability initiatives, and a reduction in consumption taxes while increasing taxes on income, dividends, and wealth. Additionally, Lula has discussed the idea of creating a value-added tax at the federal and state level to replace the current PIS & COFINS and ICMS & ISS taxes, respectively.

As for international trade, Fernando Haddad, the former mayor of São Paulo, and presumed front-runner to be appointed as Lula’s finance minister, stated at a recent event that Lula plans to begin to review and resume trade deals that have been “sitting on the shelf,” including a trade deal between Mercosur and the European Union.

Canada

• Underutilized Housing Tax Act — A new national tax regime introduced effective Jan. 1, 2022, whereby underused residential property owned by nonresidents, non-Canadians is subject to tax at 1% of the value of the property. All entities owning residential property that aren’t an “excluded owner” (including but not limited to a Canadian citizen or permanent resident) must file the prescribed form to either pay the tax or claim an exemption by April 30, 2023.
• Clean technology tax incentives — Capital cost allowance classes for clean energy equipment have been expanded for equipment acquired after April 6, 2022, and manufacturers of qualifying zero-emission technology can be eligible for a temporary reduced corporate tax rate for tax years starting after 2021.
• Investment tax credit for carbon capture, utilization, and storage — A new refundable credit was introduced for businesses that incur eligible expenses after 2021 and before 2041.
• Small business deduction — For tax years starting after April 6, 2022, the phase out of the small business deduction is increased from C$15 million of tax capital to C$50 million of tax capital.

China

• Incentives for high-tech enterprises — High-tech enterprises enjoy one-off pretax deduction of equipment purchased in Q4 2022. Any new equipment and appliances purchased by high-tech enterprises from Oct. 1 to Dec. 31, 2022, are allowed to be deducted in the full amount at one time when calculating the taxable income in the current year of 2022, plus an additional 100% deduction before tax. This policy is applicable to enterprises with a valid high-tech qualification during Q4 2022.
• Simplified tax-related procedures for business dormancy and deregistration — Earlier this year, the Chinese government introduced the dormant company policy. To further address the tax policies, State Taxation Administration issued the “Announcement on Streamlining the Tax-Related Items in the Closure and Deregistration Procedures of Market Entities.” According to the announcement, companies previously filing corporate income tax, individual income tax, and value-added tax on a monthly basis can choose to file on a quarterly basis during dormancy, which helps to further reduce operating cost for dormant companies
• Hong Kong reinforces protection of personal information in the public Company Registry platform — Hong Kong has implemented a new inspection regime under the Companies Ordinance to protect personal information. Previously, the usual residential addresses (URAs) and full identification numbers (IDNs) of any company’s director, company secretaries, or other relevant persons could be accessed by the public on the Companies Register. Starting Oct. 24, 2022, the URAs and IDNs are considered as “Protection Information” and are no longer accessible to the public.

Only the correspondence addresses of directors and partial IDN of directors and company secretaries will be shown in the Company registers. However, the Protected Information is still required to file to the Companies Registry but won’t be open to the public. Only specified persons (e.g., data subject, member of the company, etc.) could apply for the access of such protected information of directors or/and other persons from the Registry.

In order to comply with the new regulations, HK-registered companies should consult with their service provider to update the correspondence address and file to Companies Registry accordingly.

• R&D-related incentives
  • Increased pretax deduction of R&D expense: For enterprises that currently apply for 175% of the pretax deduction of R&D expenses, the R&D expenses deduction will be increased to 200% from Oct. 1 to Dec. 31, 2022.
  • For enterprises entitled to pretax deduction of R&D expenses for annual tax filing of 2022, the R&D expenses in Q4 2022 can be calculated according to the actual amount incurred by the enterprise at its discretion, or by calculating the portion of R&D expenses of operating months after Oct. 1, 2022, to the total operating months in the whole year. 

Germany

• U.S. mergers may be treated as taxable sales — The German Supreme Tax Court ruled that U.S. mergers of German-owned companies that fail to meet the German comparable requirements may be taxed in Germany. The court ruled that German taxation rights exist over a foreign company restructuring that would otherwise be covered by the German Reorganization Tax Act (RTA). In the recently decided case, a merger with associated boot was considered fully taxable as the cash/boot component exceeded the maximum percentage allowed under German reorganization provisions. U.S. subsidiaries of German companies should closely review future U.S. reorganization plans to ensure tax is not triggered in Germany.
• German transfer pricing documentation requirements upheld — On Oct. 13, 2022, the Court of Justice of the European Union upheld that a German law requiring the presentation of transfer pricing documentation with related parties abroad doesn’t violate the European Union’s rule of freedom of establishment. An unnamed German taxpayer challenged the assessment of surcharges in addition to increased tax upon a transfer pricing adjustment. The court rejected the argument, noting that the surcharges don’t provide preferential treatment incompatible with EU law. Note that a pending bill in German Parliament may further tighten the German transfer pricing documentation rules, allowing only a 30-day period to provide documentation as opposed to the currently allowed 60 days.
• Implementation of EU global minimum tax rules — The French and German governments recently indicated that both countries will implement the global minimum tax rules by the end of 2022, if the EU Pillar 2 tax project doesn’t generate unanimous agreement of its proposed global minimum tax initiative. Hungary is the only EU member state that hasn’t yet agreed to the EU Pillar 2 initiative. In response, Germany’s leading business group, the Federation of German industries, issued a position paper on Nov. 7, 2022, urging the German government to postpone the implementation of the global minimum tax. The group indicated that a unilateral approach would hurt German competitiveness, so the rules should be delayed until German companies can properly plan for the adjusted tax rate, potentially to 2025.

Ireland

• On October 20, the Irish Department of Finance published their 2022 Finance Bill — Key points include:
  • Amendment of the research and development tax credit to align with global definition under OECD guidance. One important note that’s also included in the changes is the removal of caps on payable R&D credit claims.
  • The current Knowledge Development Box, the Irish innovation incentive, was due to end in 2023. The Finance Bill extends this program for four years but with changes that make it compliant with the OECD Pillar Two framework.

Japan

• Qualified invoice issuer rules — Japanese tax authorities have clarified that under the new Qualified Invoice Issuer (QII) rules coming into effect starting Oct. 1, 2023,  a taxpayer must show the Japanese Consumption Tax (JCT) amount in Japanese Yen (JPY) on the invoice, even if the transaction is shown on the invoice in a different currency, to support a JCT input credit on the JCT return. If the amount is not shown in JPY, the invoice will not be considered a proper qualified invoice for purposes of taking an input JCT credit under the new rules. The new system will also require sellers to include their QII number on invoices for a purchaser receiving the invoice for the purchaser to receive an input credit for the JCT on the invoice. Sellers must apply to the tax office to receive a QII number. The National Tax Agency (NTA) has indicated that QII applications should be submitted no later than March 31, 2023 to ensure that the application will be processed by Oct. 1, 2023.
• E-storage rules — The FY 2022 Tax Reform Proposal contained various changes to Japan’s e-storage rules. The NTA has released an explanation of various e-storage provisions, along with a Q&A regarding these provisions, on its website.

Mexico

• Chinese manufacturers — Chinese manufacturing companies are looking into Mexico as an export hub to the United States. This situation has resulted in substantial levels of investment. Some interesting indicators are shown as follows: 
  • Chinese investment in Mexico reached a record high of approximately US $606.3 million (about 80 billion yen) in 2021. 
  • The total number of Chinese companies with direct investment in Mexico reached 1,289 as of 2022, and according to the Mexican Ministry of Economy, China has become Mexico’s second largest import partner after the United States.
  • It has been noted that manufacturing investment is mainly concentrated in the northern part of the country near the United States. A clear example of the Chinese expansion into Mexico is the partial Chinese-owned Hofusan Industrial Park located outside of Monterrey, Mexico, approximately 200 km south of the U.S. border.
  • Factors such as Mexico’s location, portfolio of FTAs (free trade agreements), competitive manufacturing costs, and abundant and skilled workforce, among others, appear to have played a significant role on the recent Chinese investments. 
• Ultimate beneficial owner (UBO) — As an effort to prevent and fight money laundering by companies and other legal entities in Mexico, the Tax Administration Service (SAT) included as part of the 2022 tax reform the obligation for all legal entities incorporated under the laws of Mexico to identify, gather, and maintain, as part of their accounting records, information about their ultimate beneficial owners (UBO). 
  • Mexican Federal Tax Code define as UBO any individual or group of individuals that:
    • Directly or indirectly receives benefits of their participation in a legal entity or trust; or ultimately exercises the rights of use, enjoyment, or disposal of an asset or service. 
    • Directly or indirectly has control of a legal entity, trust, or legal vehicle. 
  • Failure to provide this information may result in economic penalties in addition to other possible administrative sanctions.

UK

• Autumn Statement under new Prime Minister — Under the very short leadership of Liz Truss, many UK tax changes were announced. Most of those changes were swiftly rolled back due to the reaction from the market and global business community. After just a brief term as Prime Minister, Liz Truss was replaced by Rishi Sunak, a prior Chancellor of the Exchequer, who released his Autumn Statement on November 17.
• Key points announced include:
  • Corporate tax rate increasing to 25% as of April 1, 2023. 
  • Research and development credit increasing from 13 to 20% for expenses incurred as of April 1, 2023, for larger corporates; however, there will be a decrease in the credit for small and medium-sized enterprises from 130 to 86%. There is an indication that the government is working toward consolidating the rules into a single rate for all companies, regardless of size.
  • The GBP 1M cap for a 100% write-off on certain plant and machinery investment has been made permanent. The amount had been set to be reduced to GBP 200,000 as of April 2023.
  • Updates to draft legislation under the global minimum tax rules to include all corporate groups with revenue over EUR 750M. The rules will impose certain additional taxes to corporate groups with an effective tax rate below 15%. The rules will apply to tax years beginning after Dec. 31, 2023 
  • Transfer pricing documentation must be kept and retained as of April 1, 2023, for large multinational businesses. The documentation must be kept in a standardized format.
• Anti-hybrid rules: Additional disclosure on UK income tax returns — Anti-hybrid rules continue to be an area of focus for U.S. companies with non-US subsidiaries that elect to be disregarded under the U.S. “check-the-box” rules.

The UK income tax return for corporations, CT600, now includes a box to check related to hybrids and requires Form CT600B to be completed disclosing certain information about their hybrid status. For groups that previously did not address their hybrid status, this new requirement to disclose the position on the UK tax return is expected to increase HMRC attention into companies with hybrid structures.