Pending developments this year are focused on the Tax Cuts and Jobs Act (TCJA).
This week expectations – Final FTC Regs, final and proposed BEAT Regs
This year (maybe) – Final and proposed Sec. 163(j) Regs (currently at 550 pages)
This year/January 2020 – Sec 267A final and proposed Regs, Sec 863(b) sourcing proposed Regs
by June 30, 2020 – Final FDII regulations, GILTI high-tax exclusion, Sec 250 participation exemption
EY’s Global Tax Alert provides further details, including OECD developments reported on previously
The OECD has released a public consultation document on Global Anti-Base Erosion (GloBE), providing novel new rules to address a global minimum tax structure. Comments are due by 02 December 2019, which will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.
Comments are requested specifically in three areas: (i) use of financial accounts for tax tax base/timing differences, (ii) combining high-tax and low-tax income, and (iii) carve-out and threshold mechanisms.
The document is well worthy to read, as it shows the new direction (worldwide minimum tax), although the EU and others are yet to be completely convinced.
The document is referenced for review.
- The Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) completed its review of final and temporary foreign tax credit (FTC) regulations on 29 October, including R&D expense allocation. These rules are imminent.
- Final Sec. 385 regulations were issued, removing the final documentation requirements
- Sec. 385 Advance Notice of Proposed Rulemaking was issued re: Distribution Regulations
- The Congressional Joint Committee on Taxation staff released the General Explanation of Certain Tax Legislation Enacted in the 115th Congress (JCS-2-19) on 31 October. Colloquially known as the Blue Book, the publication includes a description of all tax legislation enacted in the 115th Congress, with the exception of the 2017 Tax Cuts and Jobs Act (Public Law 115-97), which was covered in a separate General Explanation released in December 2018.
- A Brexit extension was approved this week, with the UK’s Article 50 period (after which the UK will leave the EU) legally extended by the EU until 31 January 2020.
EY’s Global Tax Alert provides more details, with a reference link.
The FTC regulations, to be issued in final and proposed form, will be complex, long and will provide certainty, as well as more questions into this complex area.
As the OECD ventures forth in digital transactions and global minimum tax standards, it is always helpful to keep in mind the UN Practical TP Manual for Developing Countries, which adheres to the arm’s-length principle. Links to the Manual and the Committee of Experts on International Cooperation in Tax Matters are provided for reference.
In April 2019, a new chapter was added on Financial Transactions, Profit Splits and revised text on establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits.
- Attachment A: the proposed new Chapter B on Financial Transactions. The draft discusses the importance of corporate financing decisions within multinational groups and how those decisions could lead to tax base erosion. The Chapter discusses interaction with rules and measures against base erosion; common types of intra- group financial transactions and of group financing departments; the process of actual delineation and relevant characteristics of financial transactions; the process and system of credit rating; potential transfer pricing methods, including the use of simplification measures/safe harbours; different types of intra group loans and relevant characteristics; determining the arm’s length nature of intra-group loans; different types of intra group financial guarantees and relevant characteristics; determining the arm’s length nature of intra-group financial guarantees; and available methods. The chapter also discusses cash pooling practices and captive insurance, without getting into further detail on the delineation and arm’s length pricing of those specific transactions. Different types of intra-group loans are mentioned, and the draft identifies four steps to determine the arm’s length nature of intra-group loans: (i) analyse economically relevant characteristics; (ii) accurately delineate the entire transaction undertaken as well as (iii) selection and (iv) application, of the most appropriate transfer pricing method.
- Attachment B: Revision to the guidance contained in the Manual on the transactional profit-split method (Chapter B.3.3.) with the main focus being on seeking consistency of this guidance with the work done in the context of the Inclusive Framework on BEPS, while providing more practical examples.
- Attachment C: A progress draft of the work on sections C.2. Establishing Transfer Pricing Capability in Developing Countries (previously C.5.); C.4. Risk Assessment (Previously part of C.3.) and C.5. Transfer Pricing Audits. The purpose is mainly to streamline the sequences of presentation and to eliminate overlaps in the current text.
The OECD has now two proposals in process: Pillar One addresses the digital economy and Pillar Two sets forth a global minimum tax system; global anti-base erosion (GloBE) proposal. The proposals are linked herein for reference.
Both proposals may have one or more legal entities of a multinational taxed on more than one approach, whether they have a digital business segment, and also dependent on the countries where it is taxed notwithstanding the type of business it operates.
This represents a new era of BEPS, and one that demands attention to as the proposals move forward.
Pillar One summary
- Scope. The approach covers highly digital business models but goes wider – broadly focusing on consumer-facing businesses with further work to be carried out on scope and carve-outs. Extractive industries are assumed to be out of the scope.
- New Nexus. For businesses within the scope, it creates a new nexus, not dependent on physical presence but largely based on sales. The new nexus could have thresholds including country specific sales thresholds calibrated to ensure that jurisdictions with smaller economies can also benefit. It would be designed as a new self-standing treaty provision.
- New Profit Allocation Rule going beyond the Arm’s Length Principle. It creates a new profit allocation rule applicable to taxpayers within the scope, and irrespective of whether they have an in-country marketing or distribution presence (permanent establishment or separate subsidiary) or sell via unrelated distributors. At the same time, the approach largely retains the current transfer pricing rules based on the arm’s length principle but complements them with formula based solutions in areas where tensions in the current system are the highest.
- Increased Tax Certainty delivered via a Three Tier Mechanism. The approach increases tax certainty for taxpayers and tax administrations and consists of a three tier profit allocation mechanism, as follows:
- ‒ Amount A – a share of deemed residual profit6 allocated to market jurisdictions using a formulaic approach, i.e. the new taxing right
- ‒ Amount B – a fixed remuneration for baseline marketing and distribution functions that take place in the market jurisdiction; and
- ‒ Amount C – binding and effective dispute prevention and resolution mechanisms relating to all elements of the proposal, including any additional profit where in-country functions exceed the baseline activity compensated under Amount B.
Pillar Two Summary
Under Pillar Two, the Members of the Inclusive Framework have agreed to explore an approach that leaves jurisdictions free to determine their own tax system, including whether they have a corporate income tax and where they set their tax rates, but considers the right of other jurisdictions to apply the rules explored further below where income is taxed at an effective rate below a minimum rate. Within this context, and on a without prejudice basis, the members of the Inclusive Framework have agreed a programme of work that contains exploration of an inclusion rule, a switch over rule, an undertaxed payment rule, and a subject to tax rule. They have further agreed to explore, as part of this programme of work, issues related to rule co-ordination, simplification, thresholds, compatibility with international obligations and any other issues that may emerge in the course of the work.
Members of the Inclusive Framework agree that any rules developed under this Pillar should not result in taxation where there is no economic profit nor should they result in double taxation.
This part sets out the global anti-base erosion (GloBE) proposal which seeks to address remaining BEPS risk of profit shifting to entities subject to no or very low taxation It first provides background including the proposed rationale for the proposal and then summarises the mechanics of the proposed rules together with a summary of the issues that will be explored as part of the programme of work.
While the measures set out in the BEPS package have further aligned taxation with value creation and closed gaps in the international tax architecture that allowed for double non-taxation, certain members of the Inclusive Framework consider that these measures do not yet provide a comprehensive solution to the risk that continues to arise from structures that shift profit to entities subject to no or very low taxation. These members are of the view that profit shifting is particularly acute in connection with profits relating to intangibles, prevalent in the digital economy, but also in a broader context; for instance group entities that are financed with equity capital and generate profits, from intra-group financing or similar activities, that are subject to no or low taxes in the jurisdictions where those entities are established.
Final and proposed Foreign Tax Credit (FTC) regulations are in review by OMB’s Office of Information and Regulatory Affairs.
These regulations join the pending BEAT regulations in OIRA.
We should expect both sets of regulations in the very near future.