Strategizing International Tax Best Practices – by Keith Brockman

The OECD recently published its peer review report on treaty shopping re: prevention of treaty abuse under the inclusive framework on BEPS Action 6.  A link to the document is included for reference.

Article 6 targeted treaty abuse; Action 15 introduced the multilateral instrument (MLI) to implement BEPS actions.  The MLI is the mechanism whereby countries are implementing the treaty-shopping minimum standard.

The first Peer Review shows the effectiveness of implementing the minimum standard for treaty abuse.  The intent of Action 6 is to stop treaty shopping in its entirety.

The treaty shopping minimum standard requires countries to include two components in their tax agreements; an express statement on non-taxation and one of three ways to address treaty-shopping.  The provisions require bilateral agreement.  The 2017 OECD Model Tax Convention includes the following express statement: “Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance…”

The three methods of addressing treaty shopping include;

  1. Principal Purpose Test (PPT) alone, or
  2. PPT with a simplified or detailed version of the Limitation on Benefits (LOB) rule, or
  3. Detailed LOB rule with a mechanism to deal with conduit arrangements.

As the MLI’s are agreed, it is important to understand the three methods above, and the express statement which includes reference to the elimination of double taxation, a concept which is sometimes ignored in the pursuit of perceived treaty / tax abuse.

 

https://read.oecd-ilibrary.org/taxation/prevention-of-treaty-abuse-peer-review-report-on-treaty-shopping_9789264312388-en#page1

Tax dispute: Benchmarking

KPMG has published their 2018 tax dispute benchmarking survey, interviewing 159 senior tax professionals of US based multinationals.

  • State tax disputes have accelerated, more than IRS or foreign tax audits
  •  State authorities are not developing risk assessment proficiencies
  • All audits are taking longer to resolve
  • Canada, India, China, Germany and Italy rank as the most difficult to resolve
  • Transfer pricing remains as the top issue of examination
  • 58% of respondents did not have a dispute resolution budget
  • Tax disputes are not monitored by technology, with ⅓ Excel tracking
  • External law firms are being engaged at the start of the proposed assessment

As tax disputes, and the difficulty of resolving them, are escalating, it is revealing that most companies in the survey do not have a process in place for audits before they commence.  This survey should be reviewed, with Best Practices and learnings, in mind for the future.

https://tax.kpmg.us/content/dam/tax/en/pdfs/2018/2018-kpmg-tdr-benchmarking-report.pdf

This recent case underscores the reluctance to assume all EU Member States will interpret the EU Directive in accord with its meaning.

The Lux parent had a dividend exemption regime, thus Italy claims there is really not a dividend, thus withholding tax applies despite the EU Directive and similar court cases.  This reasoning may point to advance planning/rulings for similar transactions, or look for options to otherwise accomplish the cash planning objectives.

EY’s Global Tax Alert provides details on this interesting development.

https://www.ey.com/Publication/vwLUAssets/Italian_Supreme_Court_denies_withholding_tax_exemption_under_EU_Parent-Subsidiary_Directive_in_absence_of_actual_dividend_taxation_at_EU_parent_company_level/$FILE/2019G_000316-19Gbl_Italian%20SC%20denies%20WHT%20exemption%20under%20EU%20Parent-Subsidiary%20Directive.pdf

Final Sec 965 Reg’s

The first set of final Regulations were recently issued; some changes include:

  • Stock basis flexibility
  • Right to have some changes in methods of accounting as “regarded”
  • Clarification of ordering rules
  • Elect to not disregard payments between SFC’s between measurement dates
  • Including only actual Sec 956 inclusions for the “without” calculation

As the Regulations were issued in January, this set of Reg’s, as well as others to be issued by June 22, 2019, will be treated as having retroactive effect to the enactment date of December 22, 2017.

https://www.ey.com/Publication/vwLUAssets/Alert:_US_Final_Section_965_regulations_largely_follow_proposed_regulations_-_but_include_significant_changes/$FILE/2019G_012895-18Gbl_US%20-%20Final%20Sec.%20965%20regs%20largely%20follow%20proposed%20regs.pdfFinal

US int’l developments

The US legislative docket continues to be busy in the New Year.  Democrats have taken control of the House, with a Republican majority in the Senate, so tax cut legislation bills will be vigorously contested.

EY’s Global Tax Alert highlights the political scene re: tax legislation.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_4_January_2019/$FILE/2019G_012733-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%204%20Jan%202019.pdf

EC: Tax Policies in the EU

The European Commission has published a 2018 survey of tax policies.

The “Tax Policies in the EU survey” examines how Member States’ tax systems help to promote investment and employment, how they are working to reduce tax fraud, evasion and avoidance, and how tax systems help to address income inequalities and ensure social fairness.

It substantiates the priorities outlined in the Annual Growth Survey  in the area of taxation and presents in a clear and accessible fashion the most recent reforms in Member States and the main indicators used by the European Commission to analyse tax policies in the context of the European Semester . It also presents reform options to improve efficiency and fairness in tax systems.

New elements of this year’s edition include a summary of important business taxation reforms in third countries, an analysis on taxation as an environmental policy instrument, a focus on the implications of new forms of work for labour taxation, an analysis of the influence of the overall tax mix on progressivity, and an overview of recent EU tax initiatives.

Tables starting at page 111 include EU Member State summaries, including sections re: employer social security contributions, corporate / other income taxes, VAT, environmental related taxes, transaction taxes and other taxes.  The summaries also refer to the actual bill that was enacted for further reference. 

This publication is a valuable summary of tax policies, trends, and tax reforms in 2018.

https://ec.europa.eu/taxation_customs/sites/taxation/files/tax_policies_survey_2018.pdf

France: Happy New Year bill

The French bill has approved the Finance Bill for 2019, subject to constitutional review for enactment generally effective 1/1/19.  Some important provisions include:

  • Interest deductibility, 30% EBITDA/debt-to-equity, limitaitons
  • Favorable rate of 10%, vs. 15%, for patent related activities, aligning with the DEMPE/nexus provisions of BEPS Action Item 5.
  • Royalty deduction limitation for beneficiaries with less than a 25% effective tax rate and it is listed as a harmful tax regime by the OECD
  • For FYs beginning on or after 1 January 2019, a new anti-abuse provision will be applicable as a result of the transposition of article 6 of the ATAD.  The main purpose, or one of the main purposes, anti-abuse test re: the EU ATAD will be used to determine if the anti-abuse rule applies for corporate income tax
  • A new anti-abuse provision for all other taxes than CIT will allow the FTA to disregard acts which, by seeking to benefit from a literal application of provisions or decisions, against the initial objective sought by their authors, were driven by the main purpose of avoiding or reducing the tax burden which would have normally been borne by the taxpayers, due to their situation or their real activities, if those acts had not been entered into.  This provision is effective in 2020
  • French GAAR rule is retained (allowing flexibility to combat perceived abuse)
  • The Finance Bill for 2019 transposes into French domestic law the provisions of the Directive 2017/1852 dated 10 October 2017 as regards mechanisms to settle double taxation arising as a result of the application of double tax treaties concluded between EU Member States.
  • French tax consolidation group rules are modified

France is known for its proactivity in enacting anti-abuse legislation, and especially interesting is the royalty deduction limitation which  a two-prong test, whereas Germany is also considering a harsher test to combat the US FDII benefit.  

EY’s Global Tax Alert provides detailed summaries of the above provisions, among others.

https://www.ey.com/Publication/vwLUAssets/French_Parliament_approves_Finance_Bill_for_2019/$FILE/2018G_012550-18Gbl_French%20Parliament%20approves%20Finance%20Bill%20for%202019.pdfFranc

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