Strategizing International Tax Best Practices – by Keith Brockman

US int’l developments

As 2019 year-end is quickly approaching, there are important items of legislation still pending, including the following:

  • US Tax Act (TCJA) technical corrections, including the ability to apply transition tax overpayments (several Republicans and Democrats have already agreed to sponsor a relevant bill), and CFC downward attribution rules
  • Tax extenders, including the important look-through rules for CFC’s, which expires at the end of this year
  • Additional tax treaties will be reviewed, following the recent ratification of Spain and Japan treaties with the US
  • Final BEAT regulations, with new proposed regulations in some areas
  • Section 163(j) rules for application to CFC’s
  • GILTI high-tax exclusions
  • Final foreign tax credit regulations
  • Section 245A dividends received deduction regulations
  • FDII and anti-hybrid regulations

The above items are important as stand-alone items, and represent a significant amount of regulations to absorb prior to year-end if they can be issued this year.

These changes may significantly impact the annual ETR of multinationals in the fourth quarter, as well as introduce new TCJA concepts into treaties and complex Limitation of Benefit (LOB) clauses therein.

The TCJA complexities, and interpretations thereto, continue this year and next, posing compliance and planning uncertainties going forward.

EY’s Global Tax Alert provided additional details, as referenced.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_13_September_2019/$FILE/2019G_001146-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2013%20Sept%202019.pdf

The US tax treaty protocols will enter into force between US and the countries of Japan and Spain.

The Japanese protocol will have effect for withholding taxes (e.g., related to dividends and interest) for amounts paid or credited on or after the first day of the third month following the date on which the protocol enters into force — that is, 1 November 2019. For all other taxes, the Japanese Protocol will apply to tax years beginning on or after 1 January 2020.

For withholding taxes, the Spanish protocol generally will apply to amounts paid or credited on or after 27 November 2019, the date on which the protocol enters into force. For taxes determined by reference to a tax period, the protocol will apply for tax years beginning on or after 27 November 2019 (e.g., 1 January 2020, for calendar-year taxpayers). In all other cases, the protocol will apply on or after 27 November 2019.

The key features of the protocols are detailed in the EY Global Tax Alert, as reference. For the Spanish protocol, the new limitation on benefits requirements must be met timely for treaty-based withholding rates to apply.

https://www.ey.com/Publication/vwLUAssets/US_Treasury_Department_announces_entry-into-force_dates_of_tax_treaty_protocols_with_Japan_and_Spain/$FILE/2019G_001059-19Gbl_US%20-%20Japan%20and%20Spain%20protocols%20entry-into-force%20dates.pdf

As the French digital services tax (DST) is in effect from 1/1/2019, with the first payment due in November, there is considerable uncertainty how this tax will be repealed/refunded when/if an OECD DST model takes its place.

The politicians see this as a potential remedy to put out the fire which started with implementation of this tax.  However, this issue becomes more complex from an international tax perspective as to how a refund/repeal would be treated: prospectively, retroactively, or some other method.

As this tax, similar to other provisions, was enacted unilaterally by the French administration anxious to improve their fisc, it is now shown to be disingenuous timing at the expense of multinationals which now have to pay this tax.  Hopefully, other countries do not follow this lead in advance of the OECD DST proposals.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_29_August_2019/$FILE/2019G_003927-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2029%20Aug%202019.pdf

MESA Tax Guide

KPMG’s Middle East and South Asia (MESA) e-guide was recently published, providing a tax overview of GCC countries, wider Middle East countries and South Asian countries.

The reported countries include:

  • Bahrain
  • Kuwait
  • Oman
  • Qatar
  • Saudi Arabia
  • UAE
  • Egypt
  • Iraq
  • Jordan
  • Lebanon
  • Yemen
  • Bangladesh
  • Pakistan
  • Sri Lanka

The report provides a summary of Direct Taxes, including branches/permanent establishments, Tax Treaties, Indirect/Withholding taxes, Accounting rules including loss carryovers, and details about each country’s tax rules and requirements.

The guide is a handy reference, especially as the included countries are experiencing significant changes in their tax rules and guidance.

https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/08/mesa-tax-guide.pdf

US int’l developments

Proposed Regulations were issued for cloud computing and digital transactions; this is an especially important area re: sourcing of income, definitions, etc. especially in light of France and others looking to implement a digital services tax.

Publication 5188 was revised re: FATCA data reporting.

OECD released Peer 2 review reports re: re: BEPS Action 14 (dispute resolution).  Interestingly, some US treaties include a MAP provision, although not all are consistent with the minimum standard.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_16_August_2019/$FILE/2019G_003793-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2016%20Aug%202019.pdf

EU Directive 2018/822, adopted May 25, 2018, is in process of being adopted by Member States through the end of this year.  A summary of the status is as follows:

  • Adopted: Hungary, Poland, Lithuania, Slovenia
  • Published legislation: Austria, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Italy, Luxembourg, Netherlands, Portugal, Slovakia, Spain and UK
  • Formal consultation: Latvia and Sweden
  • Informal consultations: Belgium, France, Ireland, Malta, and Romania
  • No action yet; Bulgaria, Croatia and Greece
  • Under the Directive, cross-border reportable arrangements, where the first step of implementation is taken during the transitional period between 25 June 2018 and 30 June 2020, are required to be reported by 31 August 2020. As of 1 July 2020, reporting will be required within 30 days of a triggering event, e.g., the cross-border arrangement being ready for implementation.  However, Poland has earlier rules.

International tax professionals should be aware of the above rules, coordinating relevant reporting externally and internally.

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

https://www.ey.com/Publication/vwLUAssets/EU_Mandatory_Disclosure_Rules_-_An_update_on_local_country_implementation_status_and_trends/$FILE/2019G_003690-19Gbl_EU%20Mandatory%20Disclosure%20Rules%20-%20Update%20on%20local%20countries.pdf

Canada: Draft legislation

Canada’s Dept of Finance released draft legislative proposals, with comments due by 7 October 2019.

Canada has complex rules re: foreign affiliate dumping, etc. making it more complex to place subsidiaries under a Canadian holding company without proper planning for Paid Up Capital and other items, and these proposals appear to tighten those rules.

Cross border securities lending arrangements are included re: additional rules.

Tax professionals with Canadian operations should monitor this legislation accordingly.

EY’s Global Tax Alert provides additional details therein.

https://www.ey.com/Publication/vwLUAssets/Finance_Canada_releases_draft_legislation_for_2019_budget_measures/$FILE/2019G_003652-19Gbl_Canada%20-%20Draft%20legislation%20for%202019%20budget%20measures.pdf

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