Strategizing International Tax Best Practices – by Keith Brockman

US int’l developments

EY’s Global Tax Alert highlights several postulates for potential US tax reform, in which both the House and Senate are busily writing new language this month to push this reform effort by President Trump.

The OECD’s additional guidance on Country-by-Country reporting is also reiterated, and the short-term extension for the US debt limit is provided to further the tax reform process.

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_8_September_2017/$FILE/2017G_05086-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%208%20September%202017.pdf

EY’s Global Tax Alert outlines an excellent presentation of the verbiage contained in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), in addition to specificity re: China’s intent of each of the BEPS Action Items.

The MLI contains four types of provisions. Depending on the type of provision, the interaction with CTAs varies. A provision can have one of the following formulations: (i)”in place of”; (ii)”applies to”; (iii)”in the absence of”; and (iv)”in place of or in the absence of.”

A provision that applies ”in place of” an existing provision is intended ”to replace an existing provision” if one exists, and is not intended to apply if no existing provision exists. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.

 

A provision that ”applies to” provisions of a CTA is intended ”to change the application of an existing provision without replacing it,” and therefore may only apply if there is an existing provision. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.

A provision that applies ”in the absence of” provisions of a CTA is intended ”to add a provision” if one does not already exist. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that does not contain a provision within the scope of the relevant MLI provision.

A provision that applies ”in place of or in the absence of” provisions of a CTA is intended ”to replace an existing provision or to add a provision.” This type of provision will apply in all cases in which all the parties to a CTA have not reserved their right for the entirety of an article to apply to its CTAs. If all Contracting Jurisdictions notify the existence of an existing provision, that provision will be replaced by the provision of the MLI to the extent described in the relevant compatibility clause. Where the Contracting Jurisdictions do not notify the existence of a provision, the provision of the MLI will still apply. If there is a relevant existing provision which has not been notified by all Contracting Jurisdictions, the provision of the MLI will prevail over that existing provision, superseding it to the extent that it is incompatible with the relevant provision of the MLI (according to the explanatory statement of the MLI, an existing provision of a CTA is considered “incompatible” with a provision of the MLI if there is a conflict between the two provisions). Lastly, if there is no existing provision, the provision of the MLI will, in effect, be added to the CTA.

China’s intent with respect to its positions for each of the BEPS Actions are also outlined in the EY Global Tax Alert, as such intent would affect over 100 double tax treaties.  

http://www.ey.com/Publication/vwLUAssets/Mainland_China_signs_Multilateral_Convention_to_Implement_Tax_Treaty_Related_Measures_to_Prevent_BEPS/$FILE/2017G_04865-171Gbl_Mainland%20CN%20signs%20MC%20to%20Implement%20Tax%20Treaty%20Related%20Measures%20to%20Prevent%20BEPS.pdf

As countries become creative re: permanent establishment (PE) taxation, this scenario presented by the EY Global Tax Alert reminds all tax practitioners to be cognizant of what intercompany provisions are provided.

The Danish Tax Board referred to the contract between the Austrian company and the Danish company, according to which the Danish company would make offices and storage facilities available to the Austrian company. The Danish Tax Board was informed that the premises would be used by the subcontractor only. The Danish Tax Board ruled that according to the wording of the contract between the Austrian company and the Danish company, the Austrian company would have a place of business in Denmark at its disposal regardless of the fact that the services would be outsourced to a subcontractor.

Thus, providing for a storage closet (in literal terms) may impose PE liability, with the ensuing compliance and fees a significant factor for what was probably an inadvertent error by the drafters of the intercompany agreement.

The treaty had the same PE provisions as OECD’s Article 5 language, although noting that the OECD’s recommendations were looked to by the tax administration.

As a Best Practice, all intercompany agreements (anywhere in the world) need to be reviewed by an international tax practitioner prior to execution, whether in-house personnel or outside advisors.  

EY’s Alert provides additional details that should be reviewed to indicate the pervasiveness of the new PE rules, and the aggressiveness of tax administrations to literally interpret intercompany agreements.

http://www.ey.com/Publication/vwLUAssets/Danish_Tax_Authority_rules_subcontracting_of_services_by_foreign_company_to_non-related_foreign_entity_creates_a_permanent_establishment_in_Denmark/$FILE/2017G_04863-171Gbl_Danish%20Tax%20Authority%20ruling%20on%20creation%20of%20permanent%20establishment.pdf

New Zealand: OECD & beyond

New Zealand’s government has announced the introduction of new BEPS compliant rules that will be effective mid-2018.  Additionally, the government has taken this opportunity to expand upon the OECD’s rules, in an attempt to ensure that a “fair share of tax” is paid by multinationals doing business in the country.

Acknowledging the OECD’s intent to provide flexibility with its BEPS Actions and subjective language therein, New Zealand is looking for this legislation to impose rules above and beyond the BEPS Actions.  For example, anti-PE rules will be introduced that look to Australia’s provisions, which were initially introduced by the UK as diverted profit tax schemes to collect additional tax.

International tax practitioners should review these provisions and plan their tax strategies accordingly, knowing that New Zealand will introduce double taxation sooner vs. later in the global concept.

EY’s Global Tax Alert provides relevant details of New Zealand’s proposals.

http://www.ey.com/Publication/vwLUAssets/New_Zealand_to_implement_wide_ranging_international_tax_reforms/$FILE/2017G_04691-171Gbl_New%20Zealand%20to%20implement%20wide%20ranging%20international%20tax%20reforms.pdf

As countries continue to align and/or expand the OECD’s transfer pricing documentation (Master File and Local File), including country-by-country (CbC) reporting, the path towards consistency continues to widen, introducing subjective determinations that will potentially lead to additional disputes and double taxation.  EY’s Global Tax Alert provides the relevant details.

The Guidelines adopt a substance over conduct principle associated with contracts and require a more detailed analysis of functions performed, assets employed and risks assumed.

The Guidelines require the functional analysis to align value-creating activities with transfer pricing outcomes by increasing remuneration for significant functions undertaken, with an emphasis on financial capacity to assume risk and exercise control over risk. Failure to conform to the terms of the written contract may cause the transaction to be recharacterized according to the factual substance, and transactions without a commercial substance can be disregarded.

Most importantly, the tax authorities will be looking at contracts with the ability to recharacterize or disregard such transaction.  To the extent additional approvals and guidelines are not adopted by the relevant tax administration, this may lead to new chaos in the transfer pricing world, including a potential ability to avoid tax treaty interpretations and increase the risk of double taxation.

The intent of various countries to adopt the new OECD transfer pricing models needs to be reviewed early to determine potential risks in one or more countries.

http://www.ey.com/Publication/vwLUAssets/Malaysia_updates_transfer_pricing_guidelines_and_introduces_master_file_requirements/$FILE/2017G_04640-171Gbl_TP_Malaysia%20updates%20TP%20guidelines%20and%20introduces%20master%20file%20requirements.pdf

As the time for US seems to tick ever closer, EY’s Global Tax Alert highlights the tax accounting implications that would take effect on the “enactment date.”

Key items for consideration:

  • Tax attributes re: one-time repatriation/taxation of foreign earnings
  • Capital expensing impact
  • State tax impact, dependent on if they automatically follow federal tax law
  • APB 23, how will this be affected?

Although such items are hypothetical at the moment, some items may require additional planning to have the data available for the requisite disclosures.  Thus, the time for planning and consideration is the present.

http://www.ey.com/Publication/vwLUAssets/US_Administration_releases_Joint_Statement_on_Reform_-_Income_Tax_accounting_considerations_related_to_potential_future_US_tax_legislation_and_steps_companies_can_take_now_to_prepare/$FILE/2017G_04560-172Gbl_US%20joint%20statement%20on%20tax%20reform.pdf

US CbC Agreements

The US jurisdictional Country-by-Country (CbC) status table, link provided herein, provides a quick reference into the countries that will automatically accept the US 2016 CbC report, as it is not an obligatory filing for US MNE’s.  To the extent a country is not on this list, a detailed review will be required to ensure that timely reporting is done, possibly on a surrogate country basis.

This list should be monitored to ensure proper governance of the CbC reporting requirements, noting that filing less reports is simpler due to possible different rules, currencies and/or interpretations of similar rules by different countries.

https://www.irs.gov/businesses/country-by-country-reporting-jurisdiction-status-table

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