Strategizing International Tax Best Practices – by Keith Brockman

The UK Chancellor’s Spring Statement was announced on March 13, 2019 with a focus on the following:

  • Making Tax Digital, a light approach to penalties for companies striving to comply
  • Digital Services Tax; companies should pay their fair share (also a theme when the Diverted Profits Tax was announced)
  • Depreciation allowances
  • A policy paper re: HMRC’s approach to tax avoidance, evasion and other…

Additional consultations will follow, including the Digital Services Tax planned for April, 2020.

As the UK is still negotiating its entrance into, or exit from, Brexit, these developments will be especially important.

EY’s Global Tax Alert provides details for reference:

https://www.ey.com/Publication/vwLUAssets/UK_Chancellor_announces_Spring_Statement/$FILE/2019G_000796-19Gbl_UK%20Chancellor%20announces%20Spring%20Statement.pdf

IRS Notice 2018-99, published on Christmas Eve, has created quite a controversy in its short history for creating non value-added work in extricating costs of a company’s (leased or owned) parking facilities for which a federal tax deduction would not be allowable.  The Notice and TEI’s letter are attached for reference.

TEI’s timely letter expresses the history of this provision, and most importantly the inordinate amount of work, legal fees, etc. that would be involved pursuant to the Notice.

Two safe harbor provisions are suggested for implementation; Owned facilities $100 per parking spot per directly attributable expenses, and leased facilities would use 5% of the rent as the deemed amount subject to disallowance.

It is hopeful that IRS will quickly respond to current controversy and adopt such harbor provisions, or similar provisions, to avoid significant costs involved in preparing the 2018 federal income tax returns.  

https://www.irs.gov/pub/irs-drop/n-18-99.pdf

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI%20Comments%20on%20Notice%202018-99_FINAL_2.22.19.pdf

BEAT: TEI’s comments

Tax Executives Institute, Inc. (TEI) recently provided comments to the proposed BEAT regulations, including the following:

  • Use of services cost methodology should be clarified
  • A payee’s Subpart F income should be excluded (i.e. avoid double taxation)
  • Nonrecognition transactions should be excluded
  • A payor’s recognized loss transaction should not also have BEAT implications
  • No blended rates
  • Anti-abuse rule should be clarified
  • A recomputation approach should be available for NOL taxpayers

The thoughtful comments provide additional context of the intent for the BEAT provisions, and suggestions to carry out the intent of legislation without extending into other transactions that would have been initially thought as not within the BEAT purview.

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI-Comments-Proposed-BEAT-Regulations-FINAL-to-IRS-19Feb2019.pdf

The OECD recently published its peer review report on treaty shopping re: prevention of treaty abuse under the inclusive framework on BEPS Action 6.  A link to the document is included for reference.

Article 6 targeted treaty abuse; Action 15 introduced the multilateral instrument (MLI) to implement BEPS actions.  The MLI is the mechanism whereby countries are implementing the treaty-shopping minimum standard.

The first Peer Review shows the effectiveness of implementing the minimum standard for treaty abuse.  The intent of Action 6 is to stop treaty shopping in its entirety.

The treaty shopping minimum standard requires countries to include two components in their tax agreements; an express statement on non-taxation and one of three ways to address treaty-shopping.  The provisions require bilateral agreement.  The 2017 OECD Model Tax Convention includes the following express statement: “Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance…”

The three methods of addressing treaty shopping include;

  1. Principal Purpose Test (PPT) alone, or
  2. PPT with a simplified or detailed version of the Limitation on Benefits (LOB) rule, or
  3. Detailed LOB rule with a mechanism to deal with conduit arrangements.

As the MLI’s are agreed, it is important to understand the three methods above, and the express statement which includes reference to the elimination of double taxation, a concept which is sometimes ignored in the pursuit of perceived treaty / tax abuse.

 

https://read.oecd-ilibrary.org/taxation/prevention-of-treaty-abuse-peer-review-report-on-treaty-shopping_9789264312388-en#page1

Tax dispute: Benchmarking

KPMG has published their 2018 tax dispute benchmarking survey, interviewing 159 senior tax professionals of US based multinationals.

  • State tax disputes have accelerated, more than IRS or foreign tax audits
  •  State authorities are not developing risk assessment proficiencies
  • All audits are taking longer to resolve
  • Canada, India, China, Germany and Italy rank as the most difficult to resolve
  • Transfer pricing remains as the top issue of examination
  • 58% of respondents did not have a dispute resolution budget
  • Tax disputes are not monitored by technology, with ⅓ Excel tracking
  • External law firms are being engaged at the start of the proposed assessment

As tax disputes, and the difficulty of resolving them, are escalating, it is revealing that most companies in the survey do not have a process in place for audits before they commence.  This survey should be reviewed, with Best Practices and learnings, in mind for the future.

https://tax.kpmg.us/content/dam/tax/en/pdfs/2018/2018-kpmg-tdr-benchmarking-report.pdf

This recent case underscores the reluctance to assume all EU Member States will interpret the EU Directive in accord with its meaning.

The Lux parent had a dividend exemption regime, thus Italy claims there is really not a dividend, thus withholding tax applies despite the EU Directive and similar court cases.  This reasoning may point to advance planning/rulings for similar transactions, or look for options to otherwise accomplish the cash planning objectives.

EY’s Global Tax Alert provides details on this interesting development.

https://www.ey.com/Publication/vwLUAssets/Italian_Supreme_Court_denies_withholding_tax_exemption_under_EU_Parent-Subsidiary_Directive_in_absence_of_actual_dividend_taxation_at_EU_parent_company_level/$FILE/2019G_000316-19Gbl_Italian%20SC%20denies%20WHT%20exemption%20under%20EU%20Parent-Subsidiary%20Directive.pdf

Final Sec 965 Reg’s

The first set of final Regulations were recently issued; some changes include:

  • Stock basis flexibility
  • Right to have some changes in methods of accounting as “regarded”
  • Clarification of ordering rules
  • Elect to not disregard payments between SFC’s between measurement dates
  • Including only actual Sec 956 inclusions for the “without” calculation

As the Regulations were issued in January, this set of Reg’s, as well as others to be issued by June 22, 2019, will be treated as having retroactive effect to the enactment date of December 22, 2017.

https://www.ey.com/Publication/vwLUAssets/Alert:_US_Final_Section_965_regulations_largely_follow_proposed_regulations_-_but_include_significant_changes/$FILE/2019G_012895-18Gbl_US%20-%20Final%20Sec.%20965%20regs%20largely%20follow%20proposed%20regs.pdfFinal

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