Strategizing International Tax Best Practices – by Keith Brockman

The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States.  A summary of the Draft Directive is provided, as well as referenced herein.

This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.

Key points:

  • 3 years, from first notification, to file a complaint by the taxpayer
  • Each competent authority (CA) acknowledges receipt within 2 months
  • Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
  • Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
  • Taxpayer may appeal per national rules a rejection of the complaint
  • CA’s try to resolve issue within 2 years, which may be extended by 1 year
  • Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement.  This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
  • Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
  • Advisory Commission to adopt a decisions within 6 months
  • CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
  • Professional secrecy standards are prescribed
  • Advisory or Alternative Commission opines in 3-6 months
  • CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
  • Final decision does not constitute a precedent
  •  (Redacted) decision is published and maintained in an online central repository
  • Evaluation of process by June 30, 2024 and issue a report

As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s.  The Directive can be reviewed via the attached link:

http://data.consilium.europa.eu/doc/document/ST-9420-2017-INIT/en/pdf

The Court of Justice of the European Union (CJEU) has struck down the controversial “fairness tax” of Belgium, based upon violations of the Parent-Subsidiary Directive and the freedom of establishment.

Taxpayers who have paid this tax should file a claim for refund, and all taxpayers should be aware of any similar “fairness” provision that unfairly discriminates taxpayers based on enacted EU legislation.

EY’s Global Tax Alert provides additional details.

http://www.ey.com/Publication/vwLUAssets/Belgian_fairness_tax_ruled_incompatible_with_EU_law_by_CJEU/$FILE/2017G_03275-171Gbl_Belgian%20fairness%20tax%20ruled%20incompatible%20with%20EU%20law%20by%20CJEU.pdf

The Australian Tax Office (ATO) has issued a roadmap and risk guidelines re: intercompany financing parameters.  Taxpayers have an 18-month amnesty period to move their related party financing arrangements to a “green” low-risk zone.  EY’s Global Tax Alert provides further details.

Rest of World: All countries watch what other tax administrations are legislating, thus this roadmap/risk rating process may be arising in many other countries.  This should be an additional warning signal to multinationals to review such arrangements, as what one considers “arm’s-length” may not be completely nil risk dependent on the legislation of particular countries.  Unfortunately, this will lead to additional complexity and probably double taxation consequences.  

http://www.ey.com/Publication/vwLUAssets/Australian_Taxation_Offices_compliance_approach_for_cross-border_related_party_financing_arrangements_has_major_impact_on_multinational_businesses/$FILE/2017G_03234-171Gbl_TP_AU%20TOs%20compliance%20approach%20for%20cross-border%20related%20party%20financing%20arrangements.pdf

India’s APA results

India has released its APA annual report, providing valuable insight into recently filed APAs and the process.

  • Intragroup services by the Indian applicants have been the most covered international transactions in the bilateral APAs.
  • The transaction net margin method has been used in 70% of the unilateral cases and 90% of the bilateral cases.
  • India has concluded unilateral APAs in 29 months and bilateral APAs in 39 months.

As India is recognized as very creative and aggressive in its transfer pricing practices, this report should be reviewed to test whether an APA should be filed, as well as in other countries for additional certainty.

EY’s Global Tax Alert provides additional details, included for reference.

http://www.ey.com/Publication/vwLUAssets/India_issues_APA_annual_report/$FILE/2017G_03043-171Gbl_TP_India%20issues%20APA%20annual%20report.pdf

 

US tax developments

President Trump has announced his simplistic intentions re: tax reform, and the timing is critical although lacking in substantive detail.

Apart from a lower rate (still undecided what that will be), the notion of territoriality is reinforced, in addition to the one-time tax on foreign earnings.  The one-time tax is an important part of any legislation, as it will be used to drive the necessary revenues, apart from other provisions, for ultimate passage.

Most importantly, there is a renewed effort by the legislators to undertake discussions with business leaders to better understand the complexity of new legislation and its overall impact on US and global trade.  The proposed import / export actions have reinforced a necessity to understand the widespread impact on different industries and the future economic growth limitations.

Realizing there are many moving parts now on Capitol Hill, it is imperative to call attention to those actions that will impact, positively or negatively, a corporation’s future ability to drive economic growth and new jobs.

http://www.ey.com/Publication/vwLUAssets/Alert:_US_President_Trumps_tax_plan_calls_for_15_percent_business_rate_-_territorial_tax_system/$FILE/2017G_01993-171Gbl_US%20President%20Trumps%20tax%20plan%20calls%20for%2015%20percent%20business%20rate%20-%20territorial%20tax%20system.pdf

The UN has published the second edition (First edition in 2013) of a transfer pricing manual for developing countries.

The world has changed considerably since 2013, notably affected by BEPS and the OECD’s  actions, including collaborating with developing countries.  However, the UN notes developing countries may not have the sophistication as other developed countries, and this manual provides valuable insight into the trends in this area.

The transfer pricing practices of Mexico, China and Brazil are also summarized in this edition.

The TP Manual is a “must read” for international tax practitioners to fully understand today’s complex dynamics that do not lead to global consistency or simplification.

http://mnetax.com/wp-content/uploads/2017/04/UN-2017-Manual-TP.pdf

 

EY’s Global Tax Alert provides details on Australia’s new Diverted Profits Tax (DPT), effective in 2018 for calendar year taxpayers.

  • Penalty up to 40% can be assessed
  • Interaction with transfer pricing documentation and country-by-country (CbC) risk assessment
  • Diverted profits taxed at less than 24% are vulnerable
  • Proactive review of one’s documentation and risk assessment is recommended

Australia has patterned their DPT after the UK implemented a similar scheme, although posing some different characteristics.

As countries are reaching out to tax profits that are subject to a lower rate of tax elsewhere, this is providing a license to tax that cannot be ignored by multinationals with Australian operations.

http://www.ey.com/Publication/vwLUAssets/Australia_passes_Diverted_Profits_Tax_and_Penalties_law/$FILE/2017G_01485-171Gbl_Australia%20passes%20Diverted%20Profits%20Tax%20and%20Penalties%20law.pdf

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