Strategizing International Tax Best Practices – by Keith Brockman

Final Section 956 Reg’s have been issued, reducing the Section 956 inclusion by an equivalent amount that would have been eligible for the Section 245 dividends received deduction.

Final GILTI Regulations will be issued by June 22, thereby providing retroactivity to the effective date of the TCJA.

Final BEAT Regulations will also be issued by the end of summer, although not soon enough for retroactive effect.

EY’s Global Tax Alert provides additional details, for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_23_May_2019/$FILE/2019G_002538-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2023%20May%202019.pdf

As Final Regulations are in process, TEI’s practical and thoughtful comments were submitted re: the proposed Section 250 Regulations.  A copy of the comments are provided for reference, with highlights including:

  • Determination of domestic and foreign use are impractical rules for which a multinational company will find difficult to effectively implement.  A seller’s shipping address would be an alternative solution
  • Long-term supply contracts may be difficult to obtain new documentation annually, thus such documentation of the initial contract should suffice
  • Business Service provisions have rules that will prove difficult to obtain, workable rules should be designed and implemented
  • Effective date of the final regulations should be tax years beginning at least one year after the date of publication, to allow time for system changes
  • Final section 250 regulations should provide that the exploitation of manufacturing and supply chain IP is a foreign used service, consumed at the place of manufacture, if it meets the physical transformation and proximity requirements outlined in the regulations
  • Advance payments of section 451 are to be related to the timing for related cost of goods sold amounts to prevent distortion
  • Final regulations clarify where the charitable contribution deduction limitation fits in the ordering rule, along with sections 163(j), 172, and 250.

  • Prop. Treas. Reg. § 1.250(b)-1(d)(2) provides that the exclusive apportionment rules in Treas. Reg. § 1.861–17(b) do not apply, this provision is a disincentive and should be changed

     

    TEI’s comments are informative, especially due to the inclusion of suggested alternatives to the proposed rules and therefore worth reviewing.   

    https://www.tei.org/sites/default/files/advocacy_pdfs/tei_comments_-_proposed_section_250_regulations_-_final_to_irs_treasury_6_may_2019.pdf

Alot of regulation activity is taking place, in advance of the June 22nd date that would allow provisions of the Tax Act to be retroactive to date of enactment.  Additionally, the regulations will clarify tax return reporting for calendar year US-based multinationals.  

The IRS issued final regulations (T.D. 9857), effective 13 May 2019, that address the recognition and deferral of foreign currency gain or loss with respect to qualified business units (QBUs) subject to Section 987 (Section 987 QBUs) in connection with certain QBU terminations and other transactions involving partnerships.

The IRS released, on 17 May, proposed regulations under Sections 954 and 958 on the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). The IRS also released proposed regulations that provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business in computing foreign personal holding company income.

Eagerly-anticipated final GILTI regulations moved closer to release this week, having been received for review by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) on 16 May.

Proposed regulations under Sections 951(b) and Section 951A were also sent to OIRA for review on the same day.

In addition, interim final regulations under Sections 91 and 245A were received by OIRA on 15 May.

EY’s Global Tax Alert provides details on the above actions, for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_17_May_2019/$FILE/2019G_002432-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20May%202019.pdf

As expected, the European Commission has sent a letter this week to US Treasury commenting that: the Foreign Derived Intangible Income (FDII) deduction violates international trade law.  “The design of the FDII deduction is incentivizing tax avoidance and aggressive tax planning by offering a possibility to undercut local tax rates in foreign economies.”  The Commission further described the FDII is an “incentive for foreign economies to lower corporate tax rates in a ‘race to the bottom.’” The letter included a statement that the European Commission was “ready to protect the economic interest of the European Union in light of discriminatory rules and practices.”

EY’s Global Tax Alert is provided for added reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_10_May_2019/$FILE/2019G_002276-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2010%20May%202019.pdf

India’s Central Board of Direct Taxes has published a report for comments, due by May 18th.

The Committee has recommended a mixed or balanced approach (“fractional apportionment”) that allocates profits between the jurisdiction where sales take place and the jurisdiction where supply is undertaken.  India’s position is that such approach is acceptable in other tax treaties.  However, the risk of double taxation is present if this approach is not adopted by other countries.  Additionally, the approach differs from the OECD approach, which then introduces more complexity for all multinationals with Indian operations.  

India is known for its long appeals, and different approaches to its fisc.  Accordingly this report should be reviewed, with a possibility to comment, prior to further actions.  This report, and methodologies, will also be closely followed by other countries in this complex and subjective area of PE profit allocations.

EY’s Global Tax Alert provides additional details, for reference.

https://www.ey.com/Publication/vwLUAssets/Indian_Tax_Administration_invites_public_comments_on_proposal_to_amend_rules_on_profit_attribution_to_permanent_establishment/$FILE/2019G_001978-19Gbl_TP_India%20-%20Proposal%20to%20amend%20PE%20profit%20attrib%20rules.pdf

OECD TP Guidelines

This 2017 edition of the OECD Transfer Pricing Guidelines incorporates the substantial revisions made in 2016 to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. It also includes the revised guidance on safe harbours approved in 2013 which recognises that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty.

A link to the Guidelines is attached for reference.

http://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm

The United States Trade Representative (“USTR”) announced it was granting an exclusion to an additional 21 Chinese-origin products meeting specific listed descriptions, as described in EY’s Global Tax Alert included for reference.

Best Practices include:

  • Mapping the complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, alternative sourcing options, and to assess any opportunities to mitigate impact such as tariff engineering.
  • Identifying strategies to defer, eliminate, or recover the excess duties such as bonded warehouses, Free Trade Zones, substitution drawback, Chapter 98 and equivalent programs under China customs regulations.
  • Exploring strategies to minimize the customs value of imported products subject to the additional duties, re-evaluating current transfer pricing approaches, and for US imports, considering US customs strategies, such as First Sale for Export.

Duties/tariffs are a significant component of product costs, supply chain management and controlling costs.  This function should have a global oversight / value-add function which requires talented personnel with the technical acumen to drive this initiative.  

https://www.ey.com/Publication/vwLUAssets/USTR_publishes_new_exclusions_for_Chinese-origin_products/$FILE/2019G_001932-19Gbl_Indirect_USTR%20publishes%20new%20exclusions%20for%20Chinese-origin%20products.pdf

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