Strategizing International Tax Best Practices – by Keith Brockman

US int’l update

Monumental progress was recently made, in the form of 4 treaty protocols being approved; Luxembourg, Switzerland, Japan and Spain.  This will hopefully start a natural progression towards prompt treaty approvals/ratifications.

Additional Section 965, transition tax, FAQ’s were issued.  As you may recall, there was an infamous FAQ issued 13 April, 2018, whereby all overpayments from 2017 were deemed to be credited in their entirety to the 8 years, if elected, of transition tax liability. This important issue is still being contested, and am hopeful that HR 2985 calling for its proper reversal (i.e. IRS was wrong) will attract additional cosponsors and be an integral component of a tax technical corrections package that will be passed this year.

The 2019 United Nations (UN) tax treaty negotiation manual, attached for reference, was updated to reflect changes in the 2017 UN Model Treaty to include changes that resulted from the OECD’s base erosion and profit-shifting project.

Transfer pricing: IRS officials noted that completing the advance pricing and mutual agreement program’s (APMA’s) functional cost diagnostic model (FCDM) is a detailed process and taxpayers may want to submit the model form only in complex cases.

EY’s Global Tax Alert contains additional details, provided as reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_19_July_2019/$FILE/2019G_003420-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2019%20July%202019.pdf

https://www.un.org/esa/ffd/wp-content/uploads/2019/06/manual-bilateral-tax-treaties-update-2019.pdf

The recently concluded G20 Leaders’ Summit continues to endorse the OECD’s digital project, which includes future debates on nexus allocations, profit allocations and minimum tax.

EY’s Global Tax Alert highlights these developments, as well as remind international tax colleagues to continually monitor these important developments.

https://www.ey.com/Publication/vwLUAssets/G20_Leaders_Summit_Declaration_reiterates_endorsement_of_OECD_workplan_for_development_of_new_international_tax_rules/$FILE/2019G_003186-19Gbl_G20%20Leaders%20endorse%20OECD%20plan%20re%20new%20intl%20tax%20rules.pdf

EY’s Global Tax Alert highlights the recent BEPS developments, including the country-specific Multilateral Instruments (MLIs) with varying changes to its covered treaties and other treaty provisions.

It is noteworthy, at these MLIs approach legislation targets, that it is no longer intuitive as to how a country’s treaty provisions interact with other treaty partners, apart from general guiding principles that will vary as to the relevant details therein.

UN developments; In June 2019, the Report on the Eighteenth Session of the Committee of Experts on International Cooperation in Tax Matters (Committee), which was held by the United Nations (UN) on 23-26 April 2019 in New York, was released. The report describes a number of substantive issues related to tax cooperation in tax matters that were discussed during the session. Among others, the session addressed: (i) the next update of the UN Model Double Taxation Convention between developed and developing countries; (ii) the update of the UN Transfer Pricing (TP) Manual; (iii) dispute avoidance and resolution; and (iv) tax consequences of the digitalized economy.

African Tax Administration Forum (ATAF): In June 2019, the African Tax Administration Forum (ATAF) issued a paper on “The Place Of Africa In The Shift Towards Global Tax Governance: Can the taxation of the digitalised economy be an opportunity for more inclusiveness?” (the paper). The paper provides an overview of the current international tax governance landscape and inroads towards inclusiveness.

Country updates: Austria, Russia, Bulgaria, Canada, Finland, Guernsey, India, Ireland, Netherlands, Switzerland, Israel, China, Italy, Myanmar, New Zealand, Panama, Slovak Republic, Spain, Sweden, and Zimbabwe.

https://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_28_June_2019/$FILE/2019G_003051-19Gbl_The%20Latest%20on%20BEPS%20-%2028%20June%202019.pdf

IRS indicated that it will no longer assert that taxpayers are precluded from claiming foreign tax credits for the contribution sociale généralisée (CSG) and the contribution pour le remboursement de la dette sociale (CRDS).

As a result, US citizens and resident aliens who pay the CSG and CRDS in France may now claim foreign tax credits to offset their US income tax. Additionally, they potentially may file claims for refund of US income tax by claiming foreign tax credits for CSG and CRDS paid in the last 10 years under Internal Revenue Code Section 6511.

The appeals court indicated the text of the Totalization Agreement required consideration of French law in evaluating whether CSG and CRDS amended or supplemented the French social tax laws in the Agreement.the US Government, represented by the Department of State, and the French Government now have a shared understanding that the laws enacting CSG and CRDS do not amend or supplement the French social tax laws listed in the Totalization Agreement. As a result, the IRS will no longer disallow foreign tax credits for CSG and CRDS.

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

https://www.ey.com/Publication/vwLUAssets/US_IRS_ends_challenge_to_creditability_of_French_CSG_and_CDRS/$FILE/2019G_003135-19Gbl_US%20IRS%20-%20French%20CSG%20and%20CDRS%20are%20creditable%20taxes.pdf

UAE: Economic substance

The United Arab Emirates (UAE) have enacted new economic substance requirements that entered into force at the end of April 2019.

In response to EU Code of Conduct Group (COCG) initiatives, the governments of Bahamas, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and Seychelles introduced economic substance rules with effect from 1 January 2019. The rules are based on the guidance and requirements issued by the EU and the OECD, and are designed to ensure that companies operating in a low or no corporate tax jurisdiction have a substantial purpose other than tax reduction and an economic outcome that is aligned with value creation.  To align with the international standards, the UAE has now enacted substance rules.

To meet the economic substance requirement, companies will generally need to satisfy the following three tests:

  1. The company should be directed and managed in the UAE for the specific activity.
  2. The company’s CIGA should be performed in the UAE.
  3. The company should have an adequate level of qualified employees, premises and annual operating expenditures.

Companies with UAE operations, especially without adequate substance, should review the new rules or administrative penalties or reregistration.

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

https://www.ey.com/Publication/vwLUAssets/UAE_enacts_economic_substance_rules/$FILE/2019G_003050-19Gbl_UAE%20enacts%20economic%20substance%20rules.pdf

On 20 June 2019, the Spanish Government published draft legislation and draft guidance addressing the implementation of the European Union (EU) Directive on the mandatory disclosure and exchange of cross-border tax arrangements (referred to as DAC6 or the Directive). Under DAC6, taxpayers and intermediaries are required to report cross-border reportable arrangements from 1 July 2020. However, reports will retrospectively cover arrangements where the first step is implemented between 25 June 2018 and 1 July 2020.

Comments are requested by July 12, 2019.

Key highlights

  • The scope of taxes covered is not broader than the Directive.
  • The definition of reportable arrangements does not include domestic arrangements.
  • In addition to Hallmarks A-E included in DAC6, Spain’s draft guidance also includes additional information on the interpretation and application of these hallmarks.
  • The definition of intermediaries is not broader than the definition in DAC6.
  • The Spanish draft legislation includes an annual reporting obligation, detailing the use of reportable cross-border arrangements that have already been reported before any tax authority. This obligation is not required under the Directive. The draft legislation includes a list of nexus thresholds with Spain which give rise to this obligation.
  • Penalties for failures to report are expected to apply and will range between €3,000 and up to the maximum of the fees received/agreed or the value of the tax impact of the arrangement.
  • Intermediaries are exempt from the obligation to report where the reporting obligation would breach legal professional privilege (LPP). LPP is foreseen both for lawyers and other intermediaries, but only in limited cases. If there are no EU intermediaries which can report, the obligation will shift to the taxpayer.
  • The Spanish Tax Authority will publish on its website, for information purposes, the most relevant reported cross-border arrangements as well as the tax information related to the applicable regime or characterization of such cases.

Multinationals with cross-border transactions subject to such reporting should review Spain’s proposals, as well as monitor other EU Member States for additional obligations not required under the Directive. 

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

https://www.ey.com/Publication/vwLUAssets/Spain_issues_draft_mandatory_disclosure_regime_legislation/$FILE/2019G_003011-19Gbl_Spain%20issues%20draft%20mandatory%20disclosure%20regime%20legislation.pdf

Euro tax update

KPMG’s Euro Tax Flash is attached for reference, highlighting:

  • ECOFIN Financial Transactions Tax
  • Revised EU Blacklist, including: American Samoa, Belize, Fiji, Guam, the Marshall Islands, Oman, Samoa, Trinidad and Tobago, the United Arab Emirates, the US Virgin Islands, and Vanuatu

https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/06/etf-406-ecofin-financial-transaction-tax-dominca-eu-blacklist.pdf

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