[World Tax News] Canada implements digital service tax and global minimum tax and more

Editorial team – [2024] 163 taxmann.com 763 (article)

World Tax News provides a weekly digest of tax news from around the world. Here is a glimpse of the tax happening in the world this week.

1. Canada implements the Digital Service Tax and the Global Minimum Tax

On June 20, 2024, the Department of Finance Canada announced that the Fall Economic Statements Implementation Act, 2023 (Bill C-59) and Budget Implementation Act, 2024, No. 1 (Bill C-69) received royal assent.

The 2023 Fall Economic Statement highlights measures to increase affordability, expand housing availability and ensure equitable economic growth across the country.

Bill C-69 reflects the federal government's commitment to building a Canada that benefits all generations.

Bill C-69 includes the Global Minimum Tax Act, which enacted a 15% global minimum tax under Pillar Two for qualifying groups of multinational enterprises (MNEs) beginning December 31, 2023.

Key provisions of the Autumn 2023 Economic Statements Implementation Act include:

• The introduction of a 3% digital services tax (DST) under the Digital Services Tax Act, pending implementation on a date to be determined by the Governor in Council, not before 1 January 2024.
• Applying the profit stripping rules under BEPS Action 4 guidelines, limiting the deduction of net interest expense to a fixed ratio of tax EBITDA. It was initially set at 40% for fiscal years beginning on October 1, 2023, and then reduced to 30% for fiscal years beginning on January 1, 2024.
• Implementing hybrid mismatch rules under BEPS Action Two guidelines to address deduction and exclusion mismatches.
• The dividend disallowance received deduction for dividends received by Canadian financial institutions on certain shares held as market property.
• Implementing a number of changes to the general anti-avoidance rule (GAAR) as well as introducing a new penalty applicable to transactions subject to GAAR and extending the normal reassessment period for GAAR by three years in certain circumstances.

Source:

2. Minimum standard of effective taxation for individuals with very high net worth; Report of the Brazilian presidency of the G20

In February 2024, the Brazilian Presidency of the G20 invited Professor Gabriel Zucman to speak to the finance ministers of the G20 gathered in Sao Paulo. Its objective was to advocate for a reform to ensure global tax progressivity. During his speech, Zucman proposed implementing a coordinated minimum tax standard for billionaires, building on previous international cooperation efforts to address the low effective tax rates of the wealthiest individuals. Subsequently, the Brazilian Presidency of the G20 commissioned a report to assess the practicality of this proposal.

On June 25, 2024, Gabriel Zucman published a report on an effective coordinated minimum tax standard for very high net worth individuals.

This report presents a proposal for an internationally coordinated standard that ensures the effective taxation of extremely high net worth individuals. In the basic proposal, individuals with more than $1 billion in wealth would be required to pay a minimum annual tax equal to 2% of their wealth.

This standard can be flexibly implemented by participating countries through various domestic instruments, including a presumptive income tax, an income tax on a broad notion of income, or a wealth tax.

The reports draw the following main conclusion:

• Using recent advances in international tax cooperation, such a unified standard has now become technically feasible.
• It can be implemented effectively, even without universal approval, by strengthening exit taxes and implementing “tax collectors of last resort” mechanisms, similar to the coordinated minimum tax applied to multinational corporations.
• The introduction of a minimum tax of 2% on the wealth of billionaires would generate about 200-250 billion dollars per year globally from about 3,000 taxpayers. Extending this tax to cent millionaires would add an additional $100-140 billion.
• This global standard would effectively mitigate the regressive elements found in current tax systems among the wealthiest individuals.
• Rather than replacing them, it would complement domestic progressive tax policies by increasing transparency about high-end wealth, reducing incentives for tax avoidance, and preventing a competitive downward spiral in tax rates. .
• Its economic implications must be assessed in light of the observed average pre-tax annual return on wealth for very high net worth individuals, which has been 7.5% over the past four decades (adjusted for inflation) and the current effective tax rate of billionaires, which amounts to 0.3% of their wealth.

Source: An ultra-high net worth plan for a coordinated tax standard for individuals

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