Local tax reforms in the Americas
Governments in the Americas are discussing Pillar Two and related policies, but few have announced firm intentions. In the region, a wide variety of tax reforms have been recently enacted or are currently underway. In a novel move, Ecuador enacted an optional tax increase for taxpayers seeking tax stability. Taxpayers that increase their effective income tax rate by two percentage points will not be affected by any future tax reforms for up to five years. Additionally, Ecuador enacted a variety of investment and employment incentives and tax debt penalty and interest amnesty, with a VAT increase under debate.
Chile is considering a new tax reform package (after the 2022 bill was rejected), including transparency reform, a corporate tax rate decrease (from 27% to 25%), implementation of Pillar Two rules, R&D and small-and medium-sized entity investment incentives and measures to address tax evasion and avoidance.
The first phase of Brazilian tax reform was approved in 2023, including replacement of the existing five VAT taxes with two main taxes after a transition phase. An increase in litigation at the outset is anticipated, until the understanding of the new concepts and procedures in this legislation becomes settled. A second phase of tax reform is expected in early 2024, with details that flesh out previously approved measures and a corporate income tax proposal that may include Pillar Two provisions.
The US is still addressing implementation of the 2022 Inflation Reduction Act, including the development of detailed guidance on the green energy tax credits and the corporate alternative minimum tax. The upcoming expiration of major provisions of the 2017 Tax Cuts and Jobs Act is expected to be a focus of discussion in preparation for potential legislative action beyond the 2024 elections.
Policy and enforcement innovation continue in Asia-Pacific
Jurisdictions in Asia-Pacific were some of the first to adopt Pillar Two and many are now considering options for changing tax incentives and adopting nontax incentives to remain competitive in a Pillar Two world.
Many jurisdictions in the region are under pressure to collect tax shortfalls or reduce debt. Accordingly, several jurisdictions are expected to increase audit activity. Transfer pricing is expected to remain the leading tax risk in the region in 2024. Jurisdictions also continue to invest heavily in tax administration technology, including e-invoicing and other digital tax administration enhancements.
Asia-Pacific jurisdictions continue to be at the forefront of factoring tax governance into classification of taxpayers by risk level. Several jurisdictions are adopting new programs or expanding existing programs. Singapore and Malaysia are encouraging taxpayers to participate in their relatively new voluntary programs, and New Zealand is expanding its focus on governance in 2024.
Change rippling through Europe, the Middle East and Africa
There was a flurry of legislative activity at the end of 2023 as most EU Member States transposed the EU Minimum Tax Directive into domestic legislation. Several other jurisdictions in the region have also enacted Pillar Two legislation. And across the region, there are additional jurisdictions that have legislation moving through the process or have announced their intention to implement the Pillar Two rules.
The European Commission has stated that agreement on VAT in the Digital Age is a top priority and agreement is expected soon. Negotiations are continuing on the Faster and Safer Relief of Excess Withholding Taxes (FASTER) proposal and may reach conclusion in the first half of 2024. Public consultations on the Transfer Pricing Directive and the Business in Europe: Framework for Income Taxation (BEFIT) proposals closed in January 2024 with extensive comments received; for each of these proposals, the path forward remains unclear. While there have been extensive negotiations around the Unshell proposal, no agreement has been reached.
Windfall taxes are still a topic of discussion in the region, with several energy and bank windfall taxes in effect. Ukraine has newly adopted a 50% tax on the windfall profits of banks in the 2023 tax year (i.e., retrospectively).
The transitional phase of the EU CBAM began in October 2023, with importers of goods now required to submit quarterly reports on "embedded emissions" in imported goods. The United Kingdom has confirmed that it will also implement a CBAM by 2027.
In an effort to attract business, Saudi Arabia is offering a 30-year tax relief package, including a 0% rate on corporate income tax and on withholding tax, for approved regional headquarters activities in Saudi Arabia.
South Africa is conducting a comprehensive review of all corporate tax incentives, with a view to broadening the tax base. However, in the short term, increased revenue is expected from stronger enforcement and enhanced compliance, rather than significant structural tax changes.