Strategizing International Tax Best Practices – by Keith Brockman

OECD update: CbC reporting

OECD has updated guidelines for several aspects of Country-by-Country (CbC) reporting, including:

  • Dividends included in pre-tax book income
  • Definition of revenues and taxes paid
  • Aggregate data in one jurisdiction/eliminations
  • Accumulated earnings/loss
  • Treatment of major shareholdings / ownership by multiple groups
  • Short accounting periods
  • Parent surrogate filing

As the 2017 CbC report is almost due for US calendar-year taxpayers, it is imperative to review the OECD guidelines to ensure year-to-year consistency, with relevant statements attached for transparency.

A link to the guidelines is attached for reference.

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

The proposed Reg’s provide some answers, such as calculating GILT on a consolidated approach, but has punted (subject to later guidance) on GILTI foreign tax credits, the Sec. 250 deduction which also is applicable for the FDII provision, definitive guidance on a separate GILTI basket (although noting its expectation) and application of Sec. 163j  re: interest expense.

Complex rules are set forth to determine a particular US shareholder’s portion of GILTI.  These rules were necessary as the separate shareholder approach was further clarified as a consolidated calculation which does alleviate unnecessary planning to accomplish that result.

Additionally, anti-abuse provisions were included to combat perceived abuse, some of which have already sparked heated controversy.  As an example, a CFC’s tested loss does not represent a loss carryover against future year’s tested income.  “Donut hole” planning initiated by many taxpayers has also been reversed by this guidance.

The guidance further confirms that each controlled foreign corporation (CFC)’s income calculation is to be based on the concept of a US tax return and principles approach.  Additionally, ADS depreciation is to be used regardless of the acquisition date of the foreign tangible property.

Practitioners will be absorbing this new complexity to change their calculations for Q3 Annual ETR calculations, while also finalizing the SAB 118 one-year period to finalize the Sec. 965 deemed repatriation tax provisions effective in Q4 2017 for a calendar-year taxpayer.   

Technical/practical articles and webinars have already started in earnest, as everyone is learning about these new rules simultaneously.

A reference to the proposed Regulations are included for reference.

https://www.irs.gov/pub/irs-drop/reg-104390-18.pdf

TP: France = OECD+

France has adopted transfer pricing “clarification” requirements, effective for 2018 tax years, that expand beyond OECD’s guidance (i.e. OECD+).

It is important to note that these additional requirements pose a significant burden to multinationals trying to achieve consistency in preparing transfer pricing reports for all countries simultaneously.  Thus, additional requirements will require additional processes, cost and compliance demands.

Summary of new items for Master File:

  • Description of the main services providers within the group, other than R&D services, re: related human capital, equipment, financial and logistic resources of the inter-company service providers
  • Intangible asset strategy, including information on transactions subcontracted to unrelated R&D sub-contractors
  • R&D transfer pricing policies

Summary of items for Local File:

  • Business objectives, including risks and financing
  • Reconciliation of statutory and management accounts used for transfer pricing

Some of the above items will prove to be controversial, especially if they would infer any information that would be confidential and strategic in nature. Hopefully, such concepts will not be a “copy and paste” exercise for transfer pricing requirements in other countries.   

PwC’s Tax Insights link provides additional context of this significant development.

 

https://www.pwc.com/gx/en/tax/newsletters/pricing-knowledge-network/assets/pwc-tp-france-tpdoc.pdf?elq_mid=13079&elq_cid=1272441

The Organisation for Economic Co-operation and Development (OECD) on 30 August released a fourth round of stage 1 Base Erosion and Profit Shifting (BEPS) Action 14 peer reports on improving tax dispute resolution mechanisms. The reports assess each country’s efforts to implement the Action 14 minimum standard.

Valuable insights from these reports can be gained, especially if a taxpayer is under audit where some of these questions/uncertainties may arise.  The peer reports are performed on a desk audit basis, with other parties comments considered by OECD.

Some insights are APA rollbacks, granting of MAP in all/certain transfer pricing cases, etc.  Reference links are provided.

Reports covering Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand and Portugalwere published.

http://www.oecd.org/tax/beps/oecd-releases-fourth-round-of-beps-action-14-peer-review-reports-on-improving-tax-dispute-resolution-mechanisms.htm

 

US int’l developments

The US Tax Act GILTI regulations are under review, and should be released before the end of Q3, that will require review and incorporation into the annual ETR.  The regulations are expected to address a consolidated, vs. separate shareholder, approach for the calculation as well as some guidance re: US expense allocation.  EY’s Global Tax Alert summarizes the status of this guidance.

Additionally, guidance was recently released on Sec. 162(m) compensation, also necessitating review for Q3 reporting.

The proposed regulations that were released for Sec. 965, deemed repatriation tax, are expected to be followed up by final regulations by June 2019.  The third quarter 2018 marks the end of the SAB 118 period to finalize such amounts, notwithstanding additional guidance in the future.  Note, these regulations should provide definitive guidance on some pending items (inclusion of PTI for a E&P deficit foreign corporation; calculation of Sec. 986 gain for Sec. 965b E&P) that may require amending 2017 corporate income tax returns.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_24_August_2018/$FILE/2018G_010907-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2024%20August%202018.pdf

The European Commission has recently amended the definition of “exporter” for EU purposes.  The new definition allows greater flexibility, although still postulates that non-EU established companies may not act as an EU exporter.

Article 1(19) of the UCC DA now requires a company that wants to act as an “exporter,” to be a person established in the EU customs territory and:

  • Has the power to determine that the goods are to be brought outside the customs territory of the Union

     

    or

  • Is a party to the contract under which goods are to be taken out of that customs territory

In summary, the EU supply chains should be reviewed re: whom is acting as an exporter, as well as how the new rule may simplify such actions.

EY’s Global Tax Alert provides additional details for this important change:

 

https://www.ey.com/Publication/vwLUAssets/European_Commission_amends_definition_of_exporter_in_the_EU/$FILE/2018G_010770-18Gbl_Indirect_EC%20amends%20definition%20of%20exporter%20in%20the%20EU.pdf

Significant tax developments have recently transpired for US / international tax.

  • Section 965 Proposed Regulations have been issued, including discussion of potential stock basis elections that are critical to review (reference link).
  • Proposed Regulations issued for capital expensing provisions of US Tax Act (reference link)
  • IRS has published its statutory interpretation of their previously issued FAQ Q&A that 2017 overpayments of federal income tax are allocated solely to transitional tax liability in its entirety prior to allocating such amount to its 2018 federal income tax liability without transition tax.  In summary, the reasoning is that the transition tax is a 2017 liability, notwithstanding the ability to make an election to pay in installments. Considerable debate is currently ongoing re: this latest development, as it seemingly obviates the election methodology solely for one instance of overpayments, yet preserving the ability of deferred payments if a prior year overpayment is not present.
  • The Ninth Circuit Court of Appeals has reversed the Tax Court’s holding in Altera v. Commissioner, and upheld a 2003 regulation that requires participants in a cost sharing arrangement (CSA) to treat stock-based compensation costs (SBC costs) as compensable.  The Appellate Court concluded that the regulations were valid under general administrative law principles and that under current law, SBC costs should be treated as shared by participants in a CSA. It is important to note that the Tax Court’s taxpayer-favorable opinion is still precedent and authority for taxpayers located in geographical areas outside of the Ninth Circuit’s jurisdiction.

  • The IRS Foreign Account Tax Compliance Act (FATCA) certification portal is now live. The FATCA Registration System has been updated to allow for the completion and submission of the certification of pre-existing accounts and periodic certifications. The IRS is recommending that all FATCA registered entities should monitor their message board for notifications. The registration system allows for the establishment of an online account for financial institutions to register with the IRS, renew their agreement, and complete and submit FATCA certifications.

EY’s Global Tax Alert discusses some of the latest developments.

Technical and lengthy documentation re: the above highlights will need critical reading and review in the very near future for US / international tax professionals.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_3_August_2018/$FILE/2018G_010605-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%203%20August%202018.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-16476.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-16716.pdf

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