Strategizing International Tax Best Practices – by Keith Brockman

The referenced link is a Best Practices portrayal of tax risk management and governance overview as published by the Australian Tax Office (ATO).

The outline summarizes:

  • Director’s Summary
  • Board-level responsibilities
  • Managerial level responsibilities
  • Tax control framework
  • Testing of controls
  • Self-assessment procedures

The outline is a valuable review of the tax processes and controls that demand a more formal approach, with the advent of subjective guidelines, anti-avoidance rules, etc.  

https://www.ato.gov.au/Business/Large-business/In-detail/Key-products-and-resources/Tax-risk-management-and-governance-review-guide/

 

Under the mandate of the Report on Actions 8-10 of the BEPS Action Plan (“Aligning Transfer Pricing Outcomes with Value Creation”), Working Party No. 6 (“WP6”) has produced a non-consensus discussion draft on financial transactions.

Comments are due by September 7, 2018.  The treasury function, guarantees, intra-group loans, cash pooling transactions and captive insurance are the broad agendas discussed.

The guidance is not intended to prevent countries from implementing approaches to address capital structure and interest deductibility under domestic legislation, nor does it seek to mandate accurate delineation under Chapter I as the only approach for determining whether purported debt should be respected as debt.

As this guidance is critical for establishing if an instrument is true debt, as well as transfer pricing implications for financial relationships, this discussion draft is critical to review and provide relevant comments.

The OECD’s discussion draft is referenced herein for review.

 

http://www.oecd.org/tax/transfer-pricing/BEPS-actions-8-10-transfer-pricing-financial-transactions-discussion-draft-2018.pdf

The OECD published the final report on revised guidance to apply the transactional profit split method, as part of BEPS Action 10.  This guidance provides the final text, based on comments received.

Additionally, OECD published final guidance for tax administrations for determining the proper approach to apply for hard-to-value intangibles.  This text is included as an annex to Chapter VI of the Transfer Pricing Guidelines.  This approach should promote consistency and, hopefully, minimize double taxation.

The text of these reports are provided for reference, as they are a must read for transfer pricing professionals.

http://www.oecd.org/tax/transfer-pricing/revised-guidance-on-the-application-of-the-transactional-profit-split-method-beps-action-10.pdf

http://www.oecd.org/tax/transfer-pricing/guidance-for-tax-administrations-on-the-application-of-the-approach-to-hard-to-value-intangibles-BEPS-action-8.pdf

Tax Executives Institute (TEI) recently submitted a letter in response to requested comments by the OECD re: revisions to its transfer pricing guidelines.  The submission is well drafted and articulate, generally urging OECD to improve current practices rather than adopting new complex mechanisms.

An example of several suggestions is provided:

TEI suggests a number of elements should be included in future guidance to improve transfer pricing compliance practices. First, tax authorities should share their risk assessments with taxpayers so taxpayers can improve their compliance processes where appropriate, or engage in a discussion with tax authorities regarding their view of the taxpayer’s compliance risk. Second, to avoid transfer pricing disputes, Chapter IV should urge tax authorities to focus audit activity on transactions that are more likely to be tax motivated (i.e., between high and low tax jurisdictions), rather than simple intercompany transactions where the taxpayer makes reasonable efforts to price the transactions and where the possibility of a tax motivation is remote. For example, head office cost allocations between countries with relatively comparable tax rates should be viewed as low risk. Finally, the OECD should encourage countries to consider halting interest and penalties if dispute resolution takes longer than two years and if the country does not have a mandatory arbitration procedure.

 

TEI’s submission should be read in its entirety to further understand the direction of OECD and possible remedies in the complex world of transfer pricing.

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI%20Comments%20-%20OECD%20TPG%20-%20Chapter%20IV%20and%20VII%20-%20FINAL%20to%20OECD%2019%20June%202018.pdf

The Supreme Court has held in the Mayfair case decided June 21, 2018, that physical presence is no longer required for a state to collect sales and use tax from an out-of-state seller.  Both out-of-state and foreign sellers will be affected by this ruling that overrules decades of sales and tax foundations upon which constitutional law was based.

Under National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, and Quill Corp. v. North Dakota, 504 U. S. 298, South Dakota may not require a business that has no physical presence in the State to collect its sales tax.

The referenced Supreme Court decision and EY’s Global Tax Alert highlight this major development.

Multinationals will need to review all sales into every state to determine their domestic law, irrespective of prior Constitutional limitations for physical nexus.  

 

https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_22_June_2018/$FILE/2018G_010006-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2022%20June%202018.pdf

US tariffs: update

On 15 June 2018, the President of the United States (US) announced that the US will move forward and implement a 25% tariff on US$34 billion of goods from China that contain industrially significant technologies.

The proposed list of April 3 has been updated to the latest list as of June 15.

The deadline for submitting comments for the latest set of proposed items is 20 July 2018, while the deadline for filing requests to appear at the public hearing is 29 June 2018.

EY’s Global Tax Alert includes details on this latest listing, and also provides the following Best Practices on this topic:

  • Mapping the complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, alternative sourcing options, and to assess any opportunities to mitigate impact.
  • Identifying strategies to defer, eliminate, or recover the excess duties such as bonded warehouses, Foreign Trade Zones, or substitution drawback and their equivalent under China customs regulations.
  • Exploring strategies to minimize the customs value of imported products subject to the additional duties, re-evaluating current transfer pricing approaches, and for US imports, considering US customs strategies, such as First Sale for Export.

As this this latest round of tariff battles ensue, transfer pricing and other aspects of international tax are directly and indirectly impacted.  Thus, it is imperative to monitor the latest developments while developing possible plans of action.

https://www.ey.com/Publication/vwLUAssets/US_imposes_first_set_of_tariffs_on_China_origin_products_-_publishes_list_of_34_billion_in_goods_subject_to_additional_25_percent_duty_effective_6_July_2018/$FILE/2018G_03201-181Gbl_Indirect_US%20imposes%20first%20set%20of%20tariffs%20on%20China%20origin%20products.pdfUS

IRS recently updated its previously published Q and A’s re: application of Sec. 965 deemed repatriation tax instructions re: estimated tax payments for 2018.  The prior version still has a debatable Question 14 that applied a 2017 overpayment to the entire amount of deemed repatriation tax (not just the first installment) prior to application for the first estimated payment of federal income tax generally due April 15th.

As Question 14 was issued literally just prior to the first installment date, corporations may have missed this point and thereby would be subject to interest and penalty for late payment.

The latest update obviates such penalties if the second estimated payment is a cumulative catch-up amount for both the first and second estimates.  

However, what was not fixed is the apparent ability by IRS to apply the overpayment solely to deemed repatriation tax in its entirety prior to applying it to estimated federal income tax liability due.  This is still a question in the minds of many.  

EY’s Global Tax Alert highlights this development.

https://www.ey.com/Publication/vwLUAssets/US_IRS_updates_Section_965_transition_tax_FAQs_to_include_late-payment_penalty_and_filing_relief_-_action_may_be_needed_by_15_June_2018/$FILE/2018G_03498-181Gbl_US%20IRS%20updates%20Section%20965%20transition%20tax%20FAQs.pdf

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