Strategizing International Tax Best Practices – by Keith Brockman

Dutch TP decree

The Dutch Finance Secretary published a new transfer pricing (TP) decree, generally in alignment with OECD’s 2017 guidelines, with some caveats.

Observations:

  • The 2017 OECD changes were clarifying in nature, thus the guidelines apply to prior years
  • Aligned with OECD concept of (non) recognition of controlled transactions
  • The OECD Guidelines refer to the development, enhancement, maintenance, protection and exploitation (DEMPE) functions, although the development and enhancement functions will receive a higher rating
  • New guidance on a purchase of shares, followed by a restructuring
  • Public database results for economic analyses will be subject to further review
  • Simplified approach of cost + 5% is adopted for intra-group services

As some of the above concepts will be reviewed, and adopted, by other countries the new decree is a must read for TP professionals.

EY’s referenced Global Tax Alert provides additional details.

https://www.ey.com/Publication/vwLUAssets/Dutch_Finance_Secretary_publishes_new_Decree_on_application_of_the_arms-length_principle_and_OECD_Guidelines/$FILE/2018G_02953-181Gbl_TP_Netherlands%20arms-length%20principle%20and%20OECD%20guidelines.pdf

The IRS is pursuing many avenues of guidance this year and next, including:

  • Proposed rules for US Tax Act Sec. 965 in August 2018, which should be just in time for the 1-year SAB 118 period that ends Q3 for calendar-year taxpayers.
  • Proposed rules for Foreign Tax Credit of the US Tax Act in August 2018
  • Proposed rules for GILTI in Sept. 2018 (hopefully this will allow consolidated calculation vs. separate shareholder chain rule currently written in the law)
  • Proposed rules for BEAT in October 2018
  • Other rules should follow in 2019

This guidance will hopefully clarify the above provisions to allow relevant tax planning, based on the certainty of the US Tax Act provisions.

EY’s Global Alert highlights these developments

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_11_May_2018/$FILE/2018G_02785-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2011%20May%202018.pdf

The confusion over details of the US Tax Act continues, among them:

GILTI: Literal application of the Sec. 78 gross-up component to the general basket (As a calendar-year public company nears the end of the year, this decision will become more significant as millions of dollars in tax liabilities and income tax provisions are in play)

GILTI: Vagaries into the US expense allocations, including interest and R&D

Interest: Interpretation (proposed regulations to be issued although no timeline, different types of business, gross receipts test

Upcoming Bluebook for issues needing technical correction, although political agreement may be difficult for such guidance

Technical corrections: slim chance this year

EY’s Global Alert provides additional details of these issues,

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_4_May_2018/$FILE/2018G_02657-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%204%20May%202018.pdf

The referenced link provides information to the state of play re: EU State Aid rulings and investigations.

The list of final decisions adopted since 2014 concerning tax planning practices and the list of formal ongoing investigations is presented.

The letters provide comprehensive detail into the background of the investigations and rulings, providing insight for potential transactions that may be under review in the future.

http://ec.europa.eu/competition/state_aid/tax_rulings/index_en.html

US int’l developments

EY’s Global Tax Alert provides the latest US updates, noting the following:

  • Regarding the TCJA’s foreign derived intangible income (FDII) provision, a Treasury official was quoted as saying the Government is actively looking at how to apply the disqualification for related-party services that are substantially similar to services provided by the related party to US taxpayers.
  • A senior IRS official said the legislative history and the purpose of the provision strongly suggests that the Internal Revenue Code Section 78 GILTI gross-up should be placed in the GILTI basket. The official conceded that that interpretation is not in the statute, however.
  • Reflecting on the base erosion anti-abuse tax (BEAT), the official said Treasury is presently undecided if including a markup disqualifies the entire charge or just the amount of the markup for related-party services, that otherwise qualifies for the services cost method exception.

    The noted highlights are very critical in estimating the impact on financial statements, as well as compliance and planning opportunities.  To the extent timely guidance is not provided this year, there will be additional uncertainties in how to measure the effects of the complex Tax Act provisions.  

     

     

 

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_27_April_2018/$FILE/2018G_02505-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2027%20April%202018.pdf

US Tax Act; SIT changes

The referenced link provides a copy of TEI’s submission that was provided earlier this year, as it is timely to address the numerous (and sometimes retroactive) changes that states are enacting to align with the US Tax Act enacted December 22, 2017.

The impact on public companies, from adopting state changes, and then sometimes amending such adoptions based on legislative challenges, is a daily / weekly review to incorporate all changes into a company’s effective tax rate through deferred tax impacts. TEI suggests a future deduction, over a number of years, to offset negative impacts on current earnings and minimize tax rate volatility.

Aside from legislative changes, there will be additional legal challenges as some states are trying to step beyond the boundaries of collecting a fair tax by including a portion of income and disallowing 100% of the deduction on the new Tax Act changes.

The article is well written and hopefully results in some states adopting some ameliorative measures.

https://www.tei.org/sites/default/files/advocacy_pdfs/2018.02.14%20-%20SALT%20Policy%20-%20Deferred%20Tax%20Relief%20-%20FINAL.pdf

The referenced link is an excellent article written by  Ksenija Cipek in collaboration with Dr Manuel Pereira in an effort to promote transfer pricing simplification. Ksenija Cipek is the Assistance Director General for Legislation and International Cooperation at Ministry of Finance, Tax Administration of Croatia.

https://www.world.tax/articles/the-impact-of-the-advance-transfer-pricing-agreements-on-voluntary-compliance.php

Excerpts from the article

From all of this and despite the outstanding disadvantages, we can conclude that the APA is one of the measures that is affecting the increase in the number of voluntary compliant taxpayers, since the APA provides legal certainty, no instruments of tax auditing are initiated, the possibility of double taxation is eliminated, the reputation of taxpayers is strengthening and, last but not the least, resources are being saved on both sides. Furthermore, by introducing the possibility of concluding an APA in the legal framework of a given state, opportunity and incentive are being given for taxpayers to be voluntarily compliant. In this course of action, it will be important to exchange information with other countries and international organizations, to educate employees, to understand business processes and business transactions and, generally, market conditions and trends in certain business sectors.

To this end result, it is necessary and timely to regulate specific rules for applying APA to SMEs. The rules must be simple, responsive and cost-effective in terms of the cost of human resources, material costs as well as time-consuming cost. In that sense, it is necessary to make use of all available and modern technologies, such as web services etc. Some countries already have a regulated legislative framework specifically for APA applications to SMEs. However, this should not be an exception, but a rule, precisely because of the economic importance of these entrepreneurs in the economic development of each state.

Particular attention should be given to the simplification of transfer pricing documentation, for justified reasons and in the sense that SMEs will, generally, not have a lot of different transactions.

In order to increase the impact on voluntary compliance by as many taxpayers possible, irrespective of their size, this issue is one of the most important issues that deserve a legitimate focused attention on its capable and expeditious solution.

 

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