Strategizing International Tax Best Practices – by Keith Brockman

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.$FILE/2016G_03341-161Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2014%20October%202016.pdf

Canada targets cash pools

As MNE’s (anxiously) await the final Treas. Reg. Section 385 final regulations (for which the House and Senate seem unable to slow down Treasury’s intent) and its potential impact on cash pools and foreign-to-foreign transactions, Canada has proposed rules providing for deemed dividend and withholding tax treatment for certain cash pool arrangements, notwithstanding notional pool arrangements.

The perceived abuse of cash pools, albeit physical or notional, has trumped the basic business tenets and rationale of international business.  As a result, significant complications have resulted in additional costs, compliance and regulatory oversight that stifles basic business transactions.

MNE’s with physical cash pools may have, or will need to, consider notional vs. cash pools as countries look at such opportunities with its sovereign right for revenues and source taxation.  Notional cash pools are no longer safe, as a result.

These non-intuitive rules should introduce discussions between tax administrations and MNE’s located in their jurisdiction to truly understand business dynamics prior to enacting draft/final rules affecting such instruments.  Until that time, MNE’s will have to consider restructuring that further begets questions of complexity and planning arrangements.

Details of Canada’s proposal are provided in EY’s Global Tax Alert provided as reference.’s_proposed_legislative_amendments_may_tax_cross-border_notional_cash_pooling_arrangements/$FILE/2016G_03209-161Gbl_CA%20proposed%20leg%20amdmts%20may%20tax%20cross%20border%20notional%20cash%20pooling%20argmts.pdf

As a long-standing advocate of Tax Executive Institute’s (TEI’s) expertise and peer networking for all executive tax members of multinationals, their reappointment as a member of the VAT Expert Group is a sound testament to their advice for the international tax community.

Additionally, TEI’s training programs, and opportunities to be a guest speaker, should be taken advantage of if one has the opportunity.

TEI Appointed as Member to the European Commission’s VAT Expert Group
TEI Staff

On September 30, 2016, the European Commission reappointed TEI as a member of the VAT Expert Group for a three-year term. The VAT Expert Group was established in 2012 for the purpose of “advis[ing] the Commission on the preparation of legislative acts and other policy initiatives in the field of VAT” and “provid[ing] insight concerning the practical implementation of legislative acts and other EU policy initiatives in the field of VAT.” The VAT Expert Group’s next meeting will take place on October 17, 2016 in Brussels.

TEI has participated as a member of the VAT Expert Group since its inception. Allard van Nes will continue to continue to serve as TEI’s primary representative and Lorry G. Limbourg will serve as Mr. van Nes’ alternate. TEI wishes to thank Lynne Clare for her work as the alternate representative during TEI’s prior terms.

As MNE’s are preparing for the country-by-country (CbC) reporting in 2017 for the 2016 tax year, it is readily apparent that the OECD’s intent of Dec. 31, 2017 is readily being eroded by several countries.

For example, US has proposed reporting (obligatory for the 2017 tax year) as of Sept. 15 of the following year, aligned with timing for filing of the federal income tax return.

China has imposed a May 31 date, if a Cbc report is required, aligned with its tax return due date.

Other countries are choosing different dates for CbC reporting, as well as Master File and Local File reporting, that impose additional compliance and timing demands on all MNE’s, based on the earliest date chosen by a country in which it operates.

What does this mean?  Earlier preparation, compressed timelines, mismatching of Master File, Local File and CbC reports, notwithstanding its intended comprehensive alignment.

Additionally, all US MNE’s must now review rules to determine if a surrogate filing entity is required for the 2016 CbC report as the US report is not obligatory.  The stated filing entity must be communicated by this year-end, 2016, with varying penalty amounts applicable for non-reporting.

As a simple idea is turning into a tsunami of complexity, tax administrations will have to understand how such information is beneficial for transfer pricing risk analysis, as most people will concede that a CbC report has no direct relationship to transfer pricing.




E-auditing: Mexico’s plan

Mexico has has announced its proactive e-auditing plan, as detailed in EY’s Tax Alert.

This type of audit will require a new skill set by the business:

  • E-mail governance, as the lack of a response signifies deemed acceptance of an assessment
  • Proactive audit management, not relying on letters and physical meetings
  • Coordination with Corp. HQ/Regional Tax for advance appeal planning
  • Pre-audit electronic reconciliation
  • Electronic cross-reference processes during the year for self-verification to identify gaps
  • IS expertise to ensure proper governance

This type of auditing, as well as joint audits, etc. signify a new trend for tax administrations having to cope with less resources and the intent to capture a fair share of tax.$FILE/2016G_02849-161Gbl_MX%20Tax%20Authorities%20to%20start%20e%20audits%20during%20September%202016.pdf

With the recent decision re: Ireland state aid by the European Commission, the litigious stage now commences by Ireland, as the order has been provided to collect the state aid, with interest, from the multinational.

As the relevant rulings were not brought forward for approval upon their commencement by Ireland from the European Commission, the Commission now has the right to consider if such rulings are state aid.

This determination will not probably be final for several years as it progresses through the courts, however it does indicate a further trend of uncertainty re: transfer pricing rulings granted by EU Member States.  Coupled with the intent of BEPS, the legal aspects of transfer pricing may start to sway towards a perceived “intention” for fairness and non-discrimination, with a “fair tax” flag being waved ever more rigorously.

This uncertainty will provide further chaos with new international tax perspectives being displayed in the public domain.

The EY Global Tax Alert is provided for reference.$FILE/2016G_02659-161Gbl_European%20Commission%20finds%20Ireland%20granted%20illegal%20State%20aid%20and%20orders%20recovery.pdf

The OECD released a discussion draft on Aug 22 addressing branch mismatch structures, following up its action under BEPS Action 2 re: hybrid mismatch arrangements.  In summary, the draft provides rules that neutralize different legal prescriptions between the branch and head office countries.  It is made clear that taxation at a higher tier structure is not a mismatch, and a secondary rule is also addressed that would address this mismatch at the head office country.

Interested parties should respond with their comments by Sept. 19th.

The EY Global Tax Alert and OECD draft links are provided for reference.

Based on this clear intent, it is imperative for all MNE’s to review all branch structures for current mismatch arrangements to asses the potential impact and future actions, as applicable.$FILE/2016G_02575-161Gbl_OECD%20releases%20Discussion%20Draft%20on%20branch%20mismatch%20structures.pdf

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