Strategizing International Tax Best Practices – by Keith Brockman

After a long waiting period, with many discussions as to its predicted content, the OECD’s Multilateral Convention pursuant to BEPS Action 15 is ready for prime time.  Links to EY’s Global Tax Alert, and OECD’s Explanatory Statement and Multilateral Convention are provided for reference.

The Multilateral Convention is very flexible as to what a country wants, or does not want, within its treaty related provisions to signify its alliance with BEPS Actions.

EY’s Global Tax Alert states: “The tax treaty related BEPS measures covered by the multilateral instrument include (elements of): (i) Action 2 on hybrid mismatch arrangements, (ii) Action 6 on treaty abuse, (iii) Action 7 on the artificial avoidance of the PE status; and (iv) Action 14 on dispute resolution. The substance of the tax treaty provisions relating to these actions was agreed under the final BEPS package released in October 2015. The multilateral instrument does not modify or add to the substance of these provisions. The instrument is solely focused on how to modify the provisions in bilateral or regional tax treaties in order to align these treaties with the BEPS measures.”

Due to the flexibility of the new Convention, this unilateral based process poses many questions as to the consistency of intent for the related BEPS Actions around the world.  It is certain that, in the short term, there will be considerable complexity and varying interpretations of what the Convention means.  Accordingly, the Explanatory Statement and Multilateral Convention are to be reviewed carefully to understand short and long-term trends in this new era of international tax.

http://www.ey.com/Publication/vwLUAssets/OECD_releases_multilateral_instrument_to_modify_bilateral_tax_treaties_under_BEPS_Action_15/$FILE/2016G_04025-161Gbl_OECD%20releases%20MI%20to%20modify%20bilateral%20tax%20treaties%20under%20BEPS%20Action%2015.pdf

http://www.oecd.org/tax/treaties/explanatory-statement-multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf

http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf:

The Dutch Secretary of Finance has thoughtfully issued a Decree, whereby the notification period for informing the tax administration of the Country-by-Country (CbC) report for tax year 2016 is delayed until Sept. 1, 2017.

it is intended to officially confirm that the Dutch tax authorities will accept CbC reports that have been filed in other jurisdictions on a voluntary basis (parent surrogate filing) in line with guidance issued by the Organisation for Economic Co-operation and Development (OECD)

The Dutch State Secretary of Finance expects that it may take until August 2017 to have clarity on the automatic exchange of information matching process for reporting fiscal years starting on or after 1 January 2016.

Hopefully, other countries will follow this practical approach, as it represents a win-win for taxpayers and the tax administration.  However, other countries still need to be reviewed, especially for US multinationals, to verify additional notifications required by Dec. 31, 2016.

http://www.ey.com/Publication/vwLUAssets/Dutch_Government_publishes_Decree_extending_deadline_for_filing_first_notifications_under_Country-by-Country_reporting_rules/$FILE/Dutch%20Gvt%20publishes%20Decree%20extending%20deadline%20for%20filing%20first%20notifications%20under%20CbC%20reporting%20rules.pdf

India states its UN TP intent

The 2016 draft of the UN TP Manual includes India’s latest expression of alignment, as well as differing views from the OECD BEPS Actions 8-10 and 13.

Accordingly, the Indian tax administration is of the view that the guidance flowing from the final report of the BEPS project on Actions 8-10 should be utilized by both the transfer pricing officers (TPOs) and taxpayers in situations of ambiguity in interpretation of the law. However, India has not endorsed the guidance in the BEPS report pertaining to low value adding intra group services under Action 10 and has not opted for the simplified approach. Further, India has endorsed the recommendations contained in the BEPS final report on Action 13, which supported the three-tiered documentation regime comprising a Local File, a Master File and a Country-by-Country Report and has already carried out legislative changes in its domestic law.

India is known for its creativity, non-technical aggressive positions, and the number of years required to appeal initial assessments.  Some of these positions, currently in litigation and dispute, have been reiterated as a further stance in their hard line position on transfer pricing to enhance its economic fisc.  Accordingly, interested international tax practitioners should be cognizant of these positions, as other countries will surely “look and see” if such positions could also benefit their economic fisc similarly. 

EY’s Global Tax Alert is provided for reference.

http://www.ey.com/Publication/vwLUAssets/India_revises_Country_Chapter_comments_in_UN_Practical_Manual_on_Transfer_Pricing_Issues_for_Developing_Countries/$FILE/2016G_03873-161Gbl_TP_IN%20revises%20Cntry%20Cptr%20comments%20in%20UN%20Practical%20Manual%20on%20TP%20Issues%20for%20Dev%20Cntries.pdf

US update: Tax reform is near

With the (unexpected) victory for President-elect Trump, coupled with a majority in both the House and Senate, it is highly likely US tax reform is near.  There is a close correlation with Trump’s Plan and the Republican’s Blueprint tax reform initiative, although transitional details (Foreign Tax Credits, Earnings & Profits, etc.) still need to be completed.  The US tax rate may no longer be one of the highest in the world, and the tax economics of moving business initiatives, and repatriating cash, to the US are welcome thoughts for US based multinationals.  However, attention needs to be focused on the details, including Q4 2016 actions that may provide more efficiencies for the expected 2017 US tax reform.

EY’s Global Tax Alert, and the Blueprint are included for reference.

http://www.ey.com/gl/en/services/tax/international-tax/alert–us-election-2016-and-the-tax-landscape

https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf

US: BEPS Action 5 sharing

 

The IRS has indicated its willingness to share unilateral Advance Pricing Agreement (APA) information to align with BEPS Action 5 re: transparency and substance.

As other jurisdictions have provided taxpayers to submit summary information that will be shared in such exchange, the IRS has not yet indicated such procedures.  Thus, it is advised that any multinational with such rulings attempt to obtain a copy of the information to be shared, prior to the automatic sharing process, to ensure its accuracy.

The EY Global Alert provides additional details of this new development.

Most importantly, any taxpayer with tax rulings should already be looking at the information that could be shared to address potential questions/issues by other tax authorities, especially if there are different transfer pricing arrangements in place.

http://www.ey.com/Publication/vwLUAssets/US_IRS_will_follow_BEPS_Action_5_recommendation_by_exchanging_summaries_of_unilateral_APAs_V2/$FILE/2016US_03632-161US_TP_US%20IRS%20will%20follow%20BEPS%20Action%205%20rec%20by%20exchanging%20summs%20of%20unilateral%20APAs.pdf

The European Commission issued a significantly important proposal for a Double Taxation Dispute Resolution; it hopes to remain a leader in this ever-changing international tax arena with a mandate for binding arbitration, as applicable, as one of the leading initiatives.  This proposal would require a unanimous adoption by all EU Member States (although UK’s vote may be considered to be of less significance as time moves on, it still counts).

Other proposals of the three-prong package include a renewed focus on the Common Consolidated Corporate Tax Base (CCCTB) and hybrid mismatches with third countries.  The last initiative is interesting, as the EU now seeks to expand its reach with those countries outside the EU.

Although each proposal is significant as a stand-alone initiative, the Dispute Resolution would provide the most benefit at a critical time for a win-win relationship going forward.

EY’s Global Tax Alert provides further details on this initiative for reference.

http://www.ey.com/Publication/vwLUAssets/European_Commission_announces_proposal_on_double_taxation_dispute_resolution_mechanisms_in_the_European_Union/$FILE/2016G_03538-161Gbl_EC%20announces%20proposal%20on%20double%20taxation%20dispute%20resolution%20mechanisms%20in%20the%20EU.pdf

The US Treasury and IRS issued the long-awaited Sec. 385 rules re: debt characterization, documentation and potential impact on a company’s international treasury system and related borrowings/distributions.

There are some exemptions everyone was wanting: foreign-to-foreign transactions, cash pooling (notwithstanding related documentation), in addition to relaxed timing for documentation matched to the timing for filing the US federal income tax return and a transition rule pre-2018.  However, there are strict documentation rules re: cash pools, including a trigger for substantially modifying terms of the agreement and other significant changes.

Note, the new rules are in addition to the subjective rules on debt characterization in IRC Sec. 385, further complicating characterization of debt instruments.

EY’s Global Tax Alert provides a comprehensive summary of this latest development, which all multinationals are studying to determine what impact it has for 2016, and future operations.

As treasury operations and tax strategies/planning are ineffective operating in silo fashion, it is also a good time to assess the organizational structure for tax and treasury operations to ensure they are operating as one strategic unit.  

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_14_October_2016/$FILE/2016G_03341-161Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2014%20October%202016.pdf

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