Double Taxation Causes Additional Fees on Cross-Border Transactions

Cross-border trade is increasingly being transacted by multinational companies as the business world develops. However, dealing with global taxation rules by more than one jurisdiction sometimes creates new business costs for these multinational companies. Tax disputes often occur with several jurisdictions as a consequence of increasingly complex cross-border transactions.

BATS-Consulting Managing Partner, Brian Pramudita, stated that it is important for the tax authorities of various countries to work together to focus on developing a more appropriate and cohesive dispute resolution process in order to safeguard the development of international trade.

This is an alternative solution especially for small to medium sized private companies to resolve their cross-border tax disputes more effectively when the problem involves more than one tax authority. More than that, certainty for taxpayers to avoid double taxation needs to be the focus of any implementation of international tax policies.

The Complexity of International Taxation

The global tax landscape is increasingly heading towards exponential changes that can have a significant impact on companies transacting across borders. In 2021, for example, there have been joint discussions between the OECD and G-20 member countries that are members of the Inclusive Framework (IF) and resulted in an agreement on two main pillars as p taxation of the digital economy sector for multinational companies.

Pillar One: Unified Approach, this pillar seeks to provide a solution to the right and taxation base that is fairer for market jurisdictions on the income earned by companies from those jurisdictions without being based anymore on the physical presence of the company in question.

Pillar 1 is implemented in all sectors of multinational companies with a global gross circulation threshold exceeding €20 billion and profitability above 10%. Based on the agreed roadmap, threshold ini adjusted to €10 Billion after evaluation of the implementation of policies related to Pillar 1 running for 7 years. The final agreement proposes the imposition of a tax of 25% of the residual profit whose taxation rights are granted to market jurisdictions.

 Pillar Two: Global Anti-Base Erosion (GloBE), this pillar seeks to reduce tax competition while protecting the tax base by applying the minimum corporate income tax rate (global minimum tax).

Pillar 2 is applied to groups of companies with a global gross circulation of over €750 million. The policy presents a proposed minimum tax value of 15% that multi-national corporations must pay on revenues arising in each jurisdiction in which they operate. If there is a discrepancy between the effective tax rate of the company and the minimum tax rate, then the jurisdiction of domicile may apply top-up tax or additional tax on the company that has an effective tax rate below 15%.

Obligations such as the creation of country-by-country reporting (CbCR) for multinational companies with a consolidated gross circulation exceeding €750 million (based on OECD guidance or valued at equivalent to Rp11 trillion in Indonesia) are the reference for determining threshold on Pillar 2. The reason is that the CbCR reported by the company will be exchanged between jurisdictions under international agreements. This information will facilitate the implementation of top-up tax for companies that are indicated to be subject to an effective tax rate below the global minimum tax.

Unlike Pillar 1 which is mandatory, Pillar 2 is more flexible and non-mandatory. The proposal of these two pillars is expected to reach the finalization stage until phase iof implementation in countries that are members of the Inclusive Framework (IF) in 2023. Thus, based on the initial roadmap, an evaluation of the implementation of the adjustment of Pillar 1 threshold from €20 Billion to €10 Billion will be carried out by 2030.

 Implications for Private Companies

Recommendations related to Pillar 1 and Pillar 2 are welcomed internationally considering the pace of development in international trade and business. However, this proposal raises claims that when the OECDs Pillar Two proposal is implemented, there is the potential for greater controversy at the international level, either between taxpayers and jurisdiction or between the jurisdictions themselves, regarding the proper allocation of income if implementation does not accompanied by an efficient tax dispute resolution mechanism between two or more countries. International concerns have not been sufficient to enable taxpayers, especially small and medium-sized companies, to effectively resolve their cross-border tax disputes when more than one tax authority is involved.

 Meanwhile, there is a potential increase in tax audits which creates greater business costs as a result of the development of the pace of cross-border trade. This will be a problem when more than one jurisdiction claims to be entitled to collect taxes from a company on the same source of income. It is important to note that the original purpose of the tax treaty was to avoid the imposition of double taxation in the international sphere. It is unfortunate that the complexity of international taxes lowers the aggregate corporate tax compliance so that it can be a cost in case of violations.

 Tax disputes that occur as a result of cross-border trade are more focused on business cases with large transactions. For mid-to-high-end multinationals, providing an investment budget for dispute resolution makes a lot of sense. However, for lower-middle-class private companies, they generally risk less from a monetary perspective than large multinationals. In a sense, they may find conditions where they are involved in a disproportionate conflict with the tax authorities in lain jurisdictions. In the absence of a more cost-effective alternative to smaller-scale private companies, it allows companies to accept the emergence of the potential for double taxation as a new cost of running a business.

Solutions Needed for Efficient Cross-Border Trade

A better solution in reducing the potential for cross-border tax disputes is needed to ensure that double taxation does not then become an acceptable norm for medium to low-income multinational companies due to cross-border trade. Opinions have emerged regarding Pillar Two of the OECD which should include a proposal for an efficient dispute resolution mechanism, especially for small to medium scale companies to minimize business costs. Alternative solutions are needed to deal with smaller disputes more efficiently, thereby reducing the potential for objections or reclaims in areas where a resolution has been reached.

An integrated tax arbitration system may be needed in the future, especially for multinational companies or lower-middle level taxpayers who earn income from abroad, given the rapid development of traffic between countries. The existence of this system can be used as a means for small disputes that arise both between taxpayers and tax authorities and between jurisdictions, can be resolved through a verification process that is fast, precise, and does not require large costs.

Collaboration is also required from countries that have tax treaty to create an integrated administrative scheme that provides easier taxation activities for the taxpayers of each partner country. For example, the cohesive step of integrated system innovation between tax treaty partner jurisdictions to obtain tax treaty facilities. To enjoy P3B facilities, taxpayers in partner countries need to report a WPLN Domicile Certificate (SKD) to the tax authorities of the country of residence. This SKD contains information that the taxpayer in question is really a citizen of a partner country that has been approved by the Competent Authority as the competent authority of the partner country so that he is eligible to get P3B facilities in the country of domicile.

If there is a system that has been integrated between tax treaty partner jurisdictions, then the scheme for providing benefits for partner country taxpayers to get facilities from tax treaty will be easier. Approval is obtained from the Competent Authority as the competent authority for the taxpayer so that the verification process in the domestic country becomes more efficient. That way, small and medium-scale taxpayers can more easily reach the P3B facilities that they should get. However, in spite of all these efforts, justice for taxpayers to be released from the bondage of double taxation needs to be an indicator that deserves to be evaluated on the effectiveness of the implementation of international tax policies for taxpayers who make cross-border transactions.