[World Tax News] Russia to Suspend Tax Treaties with all Unfriendly Countries and more

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

1. Russia to Suspend Tax Treaties with all Unfriendly Countries

In collaboration with the Ministry of Finance, an initiative has been announced by the Russian Ministry of Foreign Affairs to suspend tax treaties with countries that have unilaterally imposed economic restrictions on Russia.

Since 2022, Western nations have implemented unilateral economic sanctions against Russia, including placing Russia on the EU blacklist for tax purposes in February of this year. Such measures are deemed as violations of international law, and therefore, Russia is entitled to respond with countermeasures.

In light of this, the Russian Ministry of Foreign Affairs and Ministry of Finance has suggested that the President issue an executive order to suspend all double taxation avoidance agreements with countries that have imposed unilateral economic sanctions against Russia. This suspension will remain in effect until Russia’s violated rights are restored.

Source: Press Release

2. Australia releases draft legislation to strengthen thin capitalization rules

The Australian Government has released an exposure draft legislation to strengthen thin capitalization rules in line with the Organisation for Economic Cooperation and Development (OECD) ‘s best practice guidance.

The following are key changes introduced in the draft bill viz-viz current law:

(a) The ‘general class investor’ definition is introduced. The definition is a consolidation of the previous general classes of entities. In the current law, General class investors are either an ‘outward investor (general)’, ‘inward investment vehicle (general)’ or ‘inward investor (general)’.

(b) In the new law, Earnings-based tests (being the fixed ratio test and the group ratio test) disallow an amount of an entity’s debt deductions based on the entity’s earnings or profits. In contrast, the current thin capitalization rules disallow an amount of an entity’s debt deductions by reference to the quantum of debt held by the entity relative to its assets.

(c) In the new law, The fixed ratio test replaces the safe harbour debt test for all general-class investors. The fixed ratio test disallows net debt deductions that exceed a specified proportion (30 per cent) of tax EBITDA. Under the safe harbour debt test, debt deductions in excess of 60 per cent of the average value of the entity’s Australian assets are disallowed.

(d) A special deduction is allowed in an income year for debt deductions disallowed under the fixed ratio test over the previous 15 years to the extent that the entity’s fixed ratio earnings limit (tax EBITDA) exceeds the entity’s net debt deductions for the income year. This deduction isn’t present under the current thin capitalization rules.

(e) The group ratio test replaces the worldwide gearing debt test for all general-class investors. Said test disallows debt deductions to the extent that the entity’s net debt deductions exceed the group ratio earnings limit for the income year. The worldwide gearing debt test allows an entity’s Australian operations to be geared up to 100 per cent of the gearing of the worldwide group to which the Australian entity belongs.

Source:

• Public Consultations
• Treasury Laws Amendment (Measures For Future Bills) Bill 2023: Thin Capitalisation Interest Limitation

3. Italy: Tax Reform Proposals encompass reduction in Tax Rates

On March 16, 2023, the Italian Council of Ministers unveiled tax reform proposals with various noteworthy modifications. These proposals comprise:

(a) Reduction in Corporate Tax:

A reduced rate of corporate tax (IRES) will be implemented for companies that pledge to generate employment and boost economic growth through investments. The reduced rate will be available provided that the profits eligible for the reduced rate are utilized in qualifying investments within two years and are not allocated or employed for activities unrelated to business operations.

(b) Abolition of the Regional tax on productive activities (IRAP):

To ensure comparable tax revenue, the abolition of the regional tax on productive activities (IRAP) is proposed, and IRES surtaxes will be introduced.

(c) Changes to Individual Income Tax Rates:

Changes are introduced to simply individual income tax, including a reduction in the number of brackets/rates from four to three, with reported rates of 23%, 33%, and 43%

(d) VAT Reforms:

Comprehensive VAT reforms are proposed to align the Italian VAT system more effectively with the EU legislation.

Source: Press Release