Responsible Tax Matters

On 1 February 2023, the EU Commission presented its proposal for the EU Green Deal Industrial Plan. This proposal fits within the EU Green Deal, which includes the Fit for 55 legislative Package and the RePower EU Plan, designed to help the EU achieve its stated ambition of becoming the first climate-neutral continent by 2050.

The EU Green Deal Industrial Plan also comes in part as a response to the US' Inflation Reduction Act (IRA), and what the EU perceives as a risk of losing its green technology competitive edge due to the targeted tax incentives and benefits included in the IRA. President Biden himself described the IRA as "the most aggressive action ever […] to confront the climate crisis and increase our energy security".

So, the EU Green Deal Industrial Plan aims to "create a more supportive environment for the scaling up of the EU's manufacturing capacity for the net-zero technologies and products required to meet Europe's ambitious climate targets". Amongst other things, this would include relaxing state aid rules and generally easing access to tax breaks for sustainable companies.

As part of the EU Green Deal, there are already hundreds of EU and EU member state funding opportunities worth more than EUR 1 trillion. Some of these funding programmes include:

• Horizon Europe, the EU's biggest research & innovation programme with a budget of EUR 95.5 billion, aimed at tackling climate change
• InvestEU, supporting projects for energy and transport infrastructure
• Modernisation Fund, mostly funded through revenues from the EU's Emissions Trading System (EU ETS), aimed at supporting investments in the generation and use of energy from renewable energy
• Innovation Fund, supporting investments in clean energy and industry through calls for large and small-scale projects
• And more…
  
  

So, while the Industrial Plan still needs to be passed and translated into local law, companies already can apply for various funding opportunities and tax incentives in the EU, and in the US. To better understand how these developments could affect your company, and to figure out how to leverage these opportunities, do not hesitate to reach out to us and our global network of experts in grants and incentives.

For more details on the EU Green Deal Industrial Plan, please read this report prepared by members of the KPMG ESG Tax Global Team.

On 14 February 2023, the ECOFIN council adopted updates to the EU list of non-cooperative jurisdictions (the EU blacklist). Consequently, Russia, Costa Rica, British Virgin Islands and Marshall Islands were added to the EU blacklist (Annex I).

Recent press coverage has reported that many Danish multinationals that have chosen to divest or close down their Russian activities have not completed their exit from Russia. There are also a number of Groups that have chosen to continue their Russian activities.

Prior to the recent update, the blacklist had a very limited impact on Danish Groups, with Panama and Trinidad & Tobago largely being the only relevant jurisdictions for Danish MNE's subsidiaries. The lack of impact and the fact that the list does not include many jurisdictions that are commonly regarded as tax havens have led to frequent criticisms of the blacklist and an ongoing discussion of the criteria used to evaluate jurisdictions.

Danish investors that are signatories to the Tax Code of Conduct have a policy for the use of countries included in the list of non-cooperative jurisdictions, and in some cases they have implemented procedures for monitoring the use of blacklisted countries in their existing investments.

When jurisdictions are included in the EU blacklist or have been included in the grey list for a period of at least two years, they must be included in the public country-by-country report introduced in the EU for years beginning on 22 June 2024 and later. These reporting requirements are already in effect in Romania meaning that Danish Groups with subsidiaries of a certain size in Romania may already be required to publish a country-by-country report covering 2023 before the end of 2024.

Many groups that are in the process of winding down Russian operations have none or very limited transactions with their Russian companies. But companies with activities or entities in either of the now listed jurisdictions should ascertain if they have transactions with affiliated enterprises that now have to be reported under DAC6, since hallmark C1 b ii requires intra-group payments to blacklisted countries that are deductible for the payer to be reported.

Additionally, defensive measures implemented in the EU may lead to negative tax consequences. In Denmark that means that deduction for payments to group companies in these jurisdictions will be denied if the newly blacklisted countries are added to the list of sanctioned countries in the Tax Assessment Act. Similar laws may exist across the EU, therefore companies should assess their transactions with currently blacklisted companies and closely monitor the grey list for countries that may become relevant for their tax disclosures, compliance processes or tax costs of the group.

Discussion around the responsible use of tax incentives has picked up recently given their potential role in the green transition of the economy and the central role given to incentives in the ongoing debate around the Inflation Reduction Act in the USA and the EU response currently being debated.  

A recent report commissioned by Platform for Co-operation on Tax that examine the tax treatment of official development assistance using Benin, Cameroon, and Kenya as examples points to some negative consequences of incentives. The report mentions loss of revenue, lack of transparency, undue risk of fraud and large administrative strains on the limited resources of tax administrations in developing countries.

The report supports the need for good governance around tax incentives on the side of governments and companies alike.

In other news from developing countries' tax authorities, OECD's Global Forum on Tax have released their report on Capacity Building for Tax Transparency. Among the information contained in the report is that the work with establishing systems and building local capabilities through e.g. training programmes for exchange of information on request (EOIR) and automatic exchange of financial account information (AEOI) have resulted in additional EUR 30 billion of revenue identified in the period 2009-2022.

As part of the EU's wider efforts to counter tax evasion and reduce aggressive tax planning, the Commission has been working on the so-called "SAFE initiative", aimed at tackling the role of "enablers" involved in facilitating tax evasion and aggressive tax planning. This initiative comes on top of recent directives such as DAC6 (i.e. the mandatory disclosure rules), the Anti-Tax Avoidance Directives (ATAD 1&2), the public Country-by-Country Reporting (CbCR) directive, and other upcoming ones, such as ATAD 3 (also known as the "Unshell" proposal).

This initiative is being considered because, despite the efforts of the past decade, global corporate tax avoidance remains at an estimated USD 90-240 billion per year, including EUR 35-70 billion in the EU, and that tax evasion by wealthy individuals in the EU is estimated at around EUR 124 billion (in 2018). In addition, the ability of sanctioned individuals (such as, recently, Russian oligarchs) to evade EU sanctions with the help of "Western enablers" reignited a belief in the EU spheres that more needs to be done.

While the exact shape of the regulation of intermediaries is not set yet, it appears that, much like DAC6, the intermediaries covered by this initiative will not only be "external" tax advisers and lawyers, but also in-house tax specialists. A proposal is expected to be published by June 2023, followed by a short consultation period, and what is likely to be a short implementation period into member states' legislation. A first call for evidence already took place, where the EU Commission presented three policy options:

1. Requirement for all enablers to carry out dedicated due diligence procedures
2. Prohibition to facilitate tax evasion and aggressive tax planning combined with due diligence procedures and a requirement for enablers to register in the EU
3. Code of conduct for all enablers.
   
   

KPMG's response to the EU Commission's call for evidence can be found here. In short, we noted that before EU finalises this proposal, it is important to get an in-depth understanding of the current regulatory landscape across the EU and to assess the impact of existing rules, such as DAC6, the Whistleblower Directive and other current and proposed anti-abuse rules in the EU and its member states. This should allow the EU to identify the hallmarks of "bad apples" and determine the most effective counter-measures against unacceptable behaviour by this group of intermediaries, while limiting the administrative burden on the bulk of intermediaries, who are not enabling such practices.

• The International Sustainability Standards Board (ISSB) is set to issue its first two reporting standards by the end of June. Questions remain on the interoperability between ISSB's standards and the Global Reporting Initiative (GRI) reporting framework and the upcoming European Sustainability Reporting Standards (ESRS) – but the ISSB standards will reference GRI and the ESRS in their "sources of guidance for IFRS S1" (i.e. the General Requirements for Disclosure and Exposure).
• At the end of last year, our colleagues in the Netherlands, Belgium, and Luxemburg published a report on the state of Tax Transparency in the Benelux – based on the same approach as the one we published for the Nordics countries some months earlier.
• Administrative Guidance on the implementation of the Pillar 2 rules were approved by the OECD/G20 Inclusive Framework on 1 February 2023 and published to provide clarifications on technical ambiguities. This release follows the publication of Safe Harbours and Penalty Relief approved on 15 December 2022, which provide rules that may ease the time pressures of the implementation for some Groups.
• The IASB have published an exposure draft on proposed amendments to IAS 12 Income Taxes responding to the Pillar 2 model rules. Final guidance is expected during second quarter and will apply for financial years beginning on or after 1 January 2023. The current exposure draft contains a temporary exception for recognising and disclosing deferred tax assets and liabilities relating to Pillar 2 income taxes. The exposure draft also proposes disclosure requirements about periods in which Pillar 2 has been enacted but is not yet in effect. Among disclosures suggested in the draft are a list of countries where the reporting entity have a low GAAP ETR as well as known impacts of Pillar 2 rules already assessed by the entity.  
• Interview with Niels Fuglsang in Økonomisk Ugebrev, reiterating the points he made on a recent conference on responsible tax. Niels Fuglsang is a Member of the European Parliament for the Social Democrats and chief negotiator for a committee dealing with tax affairs that are working on a report with recommendations to combat tax havens. In the article, he lists a number of expected recommendations.
• While sanctions are unlikely to be increased, the report is likely to recommend new criteria for the list of non-cooperative jurisdictions. Other subjects include potential conflicts of interest for auditors delivering tax advice, cooling-off periods for highly placed staff in tax administrations who want to join advisory firms.
• KPMG US published an insightful report on the transfer pricing considerations of internal carbon fees, i.e. how setting an internal price on carbon to reduce emissions affects a company's tax and transfer pricing objectives. While the introduction of actual fees, instead of simply an implicit or shadow price, on the operations of business units or subsidiaries is still in its infancy, an increasing number of companies are starting to do just that – but often without the involvement of the tax department, leading to tax risks and headaches down the line.