28th January 2022
As any recruiter placing contractors or permanent employees overseas will attest, getting to grips with the international tax system can cause headaches and understanding changes to tax reform can seem like a moving target. In recent years we have witnessed the introduction of new levies such as the digital services tax, as well as a raft of bilateral tax treaties between nations, and this trend shows no sign of abating.
There are currently more huge changes on the horizon than is typical, and staffing agencies have a legal and moral responsibility to keep their candidates updated on the latest rules. Here are some of the upcoming international tax changes that you need to know about now:
Russia’s tax treaties under review
The Russian Ministry of Finance is currently in the process of reviewing and renegotiating its existing double taxation treaties (DTTs), meaning that the withholding tax (WHT) rate on dividends and interest could increase to 15 per cent in the near future for firms withdrawing funds away from taxation in the Russian Federation.
So far, the country has agreed terms and its proposed 15 per cent WHT with Cyprus, Luxembourg and Malta. Discussions with the Netherlands, Switzerland and Hong Kong are ongoing.
This is the latest move Moscow has taken in recent years to clamp down on Russian companies registered abroad in low-tax jurisdictions. It is widely believed the move is motivated both by a desire to bring cash back into the country in line with international attempts to hamper the use of low-tax jurisdictions by the world’s largest companies, coupled with a desire to subjugate Russian firms to Russian laws and courts, thus increasing the Kremlin’s control.
Reform in Malaysia
Malaysia’s new Finance Act (FA), which was announced in the country’s last Budget, will see significant changes to the Malaysian taxation system. These include changes to the foreign-sourced income (FSI) exemption, as well as incentives for businesses and individuals.
It was originally announced that the country’s FSI exemption – which meant that income derived from outside of Malaysia was not subject to tax locally for firms that were not operating in the shipping and financial services sectors – was set to be scrapped entirely. However, an eleventh-hour amendment means that the exemption has been tightened rather than abolished.
It has since been confirmed that all categories of foreign-sourced income received in Malaysia by tax-resident individuals from the 1st of January 2022 to the 31st of December 2026 would be tax-exempt provided that no partnership business was carried on by the individual. For tax-resident companies and limited liability partnerships, only foreign-sourced dividend income received in Malaysia by the end of 2026 is tax-exempt, and all other types of foreign-sourced income remain taxable.
However, in both instances, the exemption is subject to compliance with conditions that have yet to be issued by the Inland Revenue Board. Hence, it remains uncertain as to how the FSI exemption will operate in practice.
Recently announced tax relief for individuals can be claimed against expenses including upskilling or self-enhancement conducted by a recognised body, the purchase of a smartphone or computer, and payments for accommodation at premises registered with the Commissioner of Tourism. These and other changes have been introduced as rule-makers attempt to offset the impact of covid-19.
International tax changes: what’s coming in 2022
As governments around the world ramp up to implement OECD-derived plans for digital tax reform in an effort to stifle tax competition and boost tax revenues, it seems 2022 looks set to be the year when the international tax system may change forever.
Following a landmark agreement on global tax reform, which was brokered by the Organisation for Economic Co-operation and Development, the world is currently working towards the effective implementation of a global minimum corporate income tax rate of 15 per cent for multinational enterprises. This is outlined in ‘Pillar II’ of the OECD’s pillar solution to tax reform, which is also referred to as the Global Anti-Base Erosion (“GloBE”) proposal.
In the United States, lawmakers are currently battling to get the proposal through Congress, with the Biden administration tying the proposed global minimum rate to its $1.75 trillion Build Back Better infrastructure bill.
Some low-income and developing countries, including Sri Lanka, Pakistan and Nigeria have yet to commit, suggesting that the plan unfairly curtails their tools to attract legitimate investment and pursue economic growth. Yet, in total, 137 tax administrations have committed support for this initiative worldwide by becoming Inclusive Framework members, with major global economies including Brazil, China, and India jumping on board. However, the roadmap for effective implementation globally is still not yet certain, so business leaders and recruiters will need to keep an ear to the ground to ensure they don’t miss crucial announcements.
Placing talent internationally is a great way to diversify revenue streams and spread business risk, particularly at a time when the market is so uncertain. However, operating globally is not without its challenges, and you have a responsibility to ensure that your contractors are not inadvertently on the wrong side of local or international laws. If you are struggling to keep abreast of international tax changes, talk to 6CATSPRO to ensure you are always operating compliantly.