Strategizing International Tax Best Practices – by Keith Brockman

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On 20 June 2019, the Spanish Government published draft legislation and draft guidance addressing the implementation of the European Union (EU) Directive on the mandatory disclosure and exchange of cross-border tax arrangements (referred to as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  • In addition to Hallmarks A-E included in DAC6, Spain’s draft guidance also includes additional information on the interpretation and application of these hallmarks.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

IRS and Treasury released, on June 14th, a set of proposed and final Regulations on GILT, in addition to Temporary and Proposed Regulations on Section 245A that relate, partly, to GILTI.  A copy of the proposals are provided for reference, with some highlights to date:

  • REG 106282-18 is a Notice of proposed rule making with temporary regulations that limit the dividends received deduction available for certain dividends received from current or former controlled foreign corporations (CFCs).  Per the Notice, “only small U.S. taxpayers with fiscal year CFCs that transfer assets in related party transactions during the gap period, or U.S. taxpayers that transfer more than 10 percent of their stock of a CFC in a taxable year or U.S. taxpayers that reduce their ownership of stock of a CFC by more than 10 percent, have the potential to be affected by these regulations.”
  • REG 101828-19, Notice of proposed rule making re: domestic partnership treatment ( adopting an aggregate approach), and proposed GILTI regulations for gross income subject to a high rate of foreign tax.  Note the GILTI final regulations adopt the GILTI high tax exclusions of the original proposed regulations without change, however the proposed regulations would allow an expanded election whereby the high-tax determination is made at the QBU level.  An election made with respect to a CFC applies with respect to each high-taxed QBU of the CFC, and a U.S. shareholder must make the same election with respect to each of its CFCs.  This high-tax change would apply to taxable years of foreign corporations beginning on or after the date that final regulations are published in the Federal Register.
  • TD9865, Final temporary regulations under Section 245A
  • TD9866, Final and temporary regulations re: GILTI guidance, pro-rata shares of Subpart F income and certain foreign tax credit provisions.  Note that future guidance is reserved re: allocation and apportionment of expenses for the foreign tax credit limitation under Section 904.  
    • Future guidance is expected to clarify that Sec. 250 does not apply to CFCs as an allocable deduction
    • Final regulations retain the current GILTI high tax exclusion, noting that the rules prescribed by a separate notice of proposed rule making for an expanded exclusion cannot be used until the relevant regulations are effective.
    • De minimis and full inclusion rules are clarified
    • The effect of a qualified deficit or a chain deficit in determining gross tested income is disregarded, and the final regulations are revised accordingly
    • Final regulations retain the tested loss QBAI exclusion, although there is a reduction to tested interest expense of a CFC for a “tested loss QBAI amount”
    • Final regulations retain the netting approach for determining specified interest expense, with certain modifications
    • Final regulations define “interest expense” and “interest income” by reference to Section 163(j) 
    • Rules for basis adjustment of tested loss CFCs will be a separate project

The regulations/notice of proposed rule making are extensive, complex and represent over 500 pages of guidance, although certain provisions and clarifications represent favorable rules based on comments received.

The rules clarify current law, comments received and explanations why they were, or were not, considered.  Thus, a detailed review refreshes such insights into the long history of the international tax provisions.

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12436.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12442.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12437.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12441.pdf

Singapore/Korea DTT

A revised Double Tax Treaty (DTT) has been signed by Singapore and Korea, to be effective after ratification by both countries, including:

  • 5% royalty withholding tax rate
  • Article 26: New anti-abuse provision

The reduction in withholding tax rate is a welcome revision, among other details, as outlined in EY’s Global Tax Alert

https://www.ey.com/Publication/vwLUAssets/Singapore_and_Korea_sign_revised_income_tax_treaty/$FILE/2019G_002898-19Gbl_Singapore%20and%20Korea%20sign%20revised%20income%20tax%20treaty.pdf

Corporate tax amendments have been proposed in the Draft Taxation Laws Amendment Bill 2019, referred to as “initial 2019 TLAB.”  The primary change is to address potential dividend stripping schemes, with comments due by 25 June 2019.  Draft legislation is expected in July 2019.

To the extent that corporate reorganizations/dividends are envisioned in S. Africa, this legislation should be reviewed, with valuable comments provided to ensure fairness in the final legislation.

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

https://www.ey.com/Publication/vwLUAssets/South_Africa_publishes_initial_list_of_proposed_corporate_tax_law_amendments_-_focusing_on_anti-tax_avoidance_measures/$FILE/2019G_002864-19Gbl_South%20Africa%20-%20Prop%20corp%20tax%20rules%20-%20anti-tax%20avoidance%20measures.pdf

ERM: Tax risk

The Enterprise Risk Management (ERM) process should be a coordinated process envisioning a multinational’s tax risks around the world.

The evolution with BEPS, ongoing developments re: digital taxation, multilateral instruments (MLIs) becoming effective, permanent establishment (PE) changes, and countries enacting unilateral legislation inconsistent with international norms are some examples why international tax/transfer pricing should be among the top ten risks of most multinationals.

Legacy ERM procedures may not be as effective in the current tax world as they were recently.  However, have multinationals really incorporated these changes into the ERM process re: uncertainty and risk management?

Members of the Board of Directors, responsible for ultimate risk, should also be asking this question as a reminder/refresher for the ERM process.  Tax executives, knowledgeable of such risks, should also be proactive in this process to educate others about recent global changes that may impact their organization.

Questions and challenges for ERM should be developed as new tax legislation is becoming more complex and uncertain in countries around the world.

 

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