Strategizing International Tax Best Practices – by Keith Brockman

E-auditing: Mexico’s plan

Mexico has has announced its proactive e-auditing plan, as detailed in EY’s Tax Alert.

This type of audit will require a new skill set by the business:

  • E-mail governance, as the lack of a response signifies deemed acceptance of an assessment
  • Proactive audit management, not relying on letters and physical meetings
  • Coordination with Corp. HQ/Regional Tax for advance appeal planning
  • Pre-audit electronic reconciliation
  • Electronic cross-reference processes during the year for self-verification to identify gaps
  • IS expertise to ensure proper governance

This type of auditing, as well as joint audits, etc. signify a new trend for tax administrations having to cope with less resources and the intent to capture a fair share of tax.

http://www.ey.com/Publication/vwLUAssets/Mexican_Tax_Authorities_to_start_e_audits_during_September_2016/$FILE/2016G_02849-161Gbl_MX%20Tax%20Authorities%20to%20start%20e%20audits%20during%20September%202016.pdf

With the recent decision re: Ireland state aid by the European Commission, the litigious stage now commences by Ireland, as the order has been provided to collect the state aid, with interest, from the multinational.

As the relevant rulings were not brought forward for approval upon their commencement by Ireland from the European Commission, the Commission now has the right to consider if such rulings are state aid.

This determination will not probably be final for several years as it progresses through the courts, however it does indicate a further trend of uncertainty re: transfer pricing rulings granted by EU Member States.  Coupled with the intent of BEPS, the legal aspects of transfer pricing may start to sway towards a perceived “intention” for fairness and non-discrimination, with a “fair tax” flag being waved ever more rigorously.

This uncertainty will provide further chaos with new international tax perspectives being displayed in the public domain.

The EY Global Tax Alert is provided for reference.

http://www.ey.com/Publication/vwLUAssets/European_Commission_finds_Ireland_granted_illegal_State_aid_and_orders_recovery/$FILE/2016G_02659-161Gbl_European%20Commission%20finds%20Ireland%20granted%20illegal%20State%20aid%20and%20orders%20recovery.pdf

The OECD released a discussion draft on Aug 22 addressing branch mismatch structures, following up its action under BEPS Action 2 re: hybrid mismatch arrangements.  In summary, the draft provides rules that neutralize different legal prescriptions between the branch and head office countries.  It is made clear that taxation at a higher tier structure is not a mismatch, and a secondary rule is also addressed that would address this mismatch at the head office country.

Interested parties should respond with their comments by Sept. 19th.

The EY Global Tax Alert and OECD draft links are provided for reference.

Based on this clear intent, it is imperative for all MNE’s to review all branch structures for current mismatch arrangements to asses the potential impact and future actions, as applicable.  

http://www.ey.com/Publication/vwLUAssets/OECD_releases_Discussion_Draft_on_branch_mismatch_structures/$FILE/2016G_02575-161Gbl_OECD%20releases%20Discussion%20Draft%20on%20branch%20mismatch%20structures.pdf

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/neutralising-the-effects-of-hybrid-mismatch-arrangements-action-2-2015-final-report_9789264241138-en#page1

The US Treasury and IRS released the 2016-2017 Priority Guidance Plan, which highlights intended final regulations re: Sec. 956 for loans to foreign partnerships, and Sec. 367(d) transfers of intangible property to foreign corporations.

Treasury has stated its acknowledgment of concerns re: 385 rules, and intends to address them in rules still going forward for release in several weeks.  These rules are far-reaching (per the current proposed Regulations) and merit immediate attention by tax and treasury practitioners in all MNE’s.  Most importantly, the Sec. 385 rules re: loans/distributions are in addition to the current subjective debt/equity subjective rules and a long history of case law.  Accordingly the impact on documentation should be completed within the next 3 months by all MNE’s.

EY’s Global Tax Alert provides further details on the US international developments.

http://www.ey.com/Publication/vwLUAssets/EY-are-you-ready-for-your-close-up/$FILE/EY-are-you-ready-for-your-close-up.pdf

Luxembourg: CbC reporting

The draft country-by-country (CbC) law has been forwarded to Parliament, in alignment with the EU Directive for 2016 tax year reporting.

A surrogate parent entity should file a CbC report with the Luxembourg tax authorities in one of the following cases:

  • The ultimate parent entity (UPE) is not obliged to file a CbC report in its country of residence,
  • The UPE is obliged to submit a CbC report, but there is no automatic exchange of CbC reports between Luxembourg and the country of residence of the UPE or
  • The UPE is obliged to submit a CbC report,and there is automatic exchange of CbC reports, but due to systematic failure, no effective exchange of information takes place.

As the terminology includes “obliged” vs. voluntary filings in some countries, the filing entity and disclosure rules should be reviewed.  Additionally, there are significant penalties for late/non-filing.

 

The EY Global Tax Alert, linked for reference, provides additional details.

http://www.ey.com/Publication/vwLUAssets/Luxembourg_introduces_draft_law_on_country-by-country_reporting/$FILE/2016G_02418-161Gbl_TP_Luxembourg%20introduces%20draft%20law%20on%20country-by-country%20reporting.pdf

The OECD, in its June release of country-by-country (CbC) guidance, sets forth guidance of BEPS Action 13 re: parent-surrogate reporting that includes the US, Japan and tentatively Switzerland, for which there are no obligatory filing requirements for the calendar tax year 2016.

However, several countries have previously enacted legislation that may not literally accommodate such rules (i.e. voluntary filing to a parent surrogate).  To the extent there is this possibility, will the parent surrogate country indemnify such taxpayers for non-filing penalties, etc. imposed by another country for failing to file according to its specific legislation?  Alternatively, a detailed review of the specific legislation of all countries adopting CbC is in order.  Simplification of CbC filing is the intent of the OECD Guidelines, however additional assurance would be welcome by the parent surrogate countries to support this presumption.

The OECD guidance is attached for reference:

http://www.oecd.org/tax/exchange-of-tax-information/guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.pdf

Taiwan’s recent amendments to its Income Tax Act provides rules for determination re: Controlled Foreign Corporations (CFC’s) and, most importantly, guidelines for determination of a company’s place of effective management (PEM) in Taiwan.

The PEM rules are becoming more important as MNE’s are arranging board meetings and making strategic directions in locations around the world, and not restricted to an entity’s country of incorporation.  Not restricted to Taiwan, PEM rules should be a strategic focus as its importance is significant, with similar rules being enacted in other countries.  

All MNE’s conducting business in Taiwan should be knowledgeable about these changes going forward, and planning accordingly.

EY’s Global Alert provides details of this development.

http://www.ey.com/Publication/vwLUAssets/Taiwan_issues_final_regulations_on_controlled_foreign_company_rules_and_place_of_effective_management/$FILE/2016G_02129-161Gbl_TW%20issues%20final%20regs%20on%20cfc%20rules%20and%20place%20of%20effective%20mgmt.pdf

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