Strategizing International Tax Best Practices – by Keith Brockman

Click to access COM_2022_216_1_EN_ACT_part1_v6.pdf

The European Commission (EC) issued today a proposal for a Council Directive to address the debt-equity bias, as part of the EU strategy on business taxation. The rules would introduce tax deductibility of notional interest on increases in equity, while providing for a limitation on net interest expense.

The effective date would be as of 1/1/2024, with Member States’ conforming their laws by 31 December 2023. The equity deduction is based upon a 30% limitation of EBITDA, with carryover provisions.

The proposal is a very interesting read, evidencing the intent to arrive at a practical and efficient methodology to place equity on a more level playing field as interest, from a tax deductibility aspect. Additionally, this intent would also minimize the placement of intercompany loans in entities which do not have a foreseeable ability to repay interest.

Although this is an EU proposal, other countries will be following these developments closely.

https://taxpolicy.ird.govt.nz/publications/2022/2022-ip-oecd-pillar-two

New Zealand has published a consultation re: its potential adoption of OECD Pillar 2, for which comments are due by July 1, 2022. The cite above provides a link to the document.

Notwithstanding the sovereign nature of this consultation, this document provides a valuable context for the rules of Pillar 2, and understanding how each of the complex rules affect the government’s position.

New Zealand provided a non-binding endorsement of Pillar 2, although the decision to formally adopt OECD Pillar 1, 2, and/or a digital services tax is yet to be determined. However, New Zealand is likely to adopt the OECD rules if most of the other countries also join in this global effort.

https://www.mof.gov.ae/en/resourcesAndBudget/Pages/FAQ.aspx

The cite above references the FAQ’s from the UAE Ministry of Finance for the upcoming corporate tax for the United Arab Emirates.

The tax will be effective for years beginning on, or after, June 1, 2023, so time is available for planning.

Some items to initially note: Allowance for a tax group, 9% rate for passive income to align with BEPS, a graduated tax rate with cognizance of potential adjustment for a OECD Pillar Two minimum tax provision, continuance of some incentives for free trade zone transactions, qualified dividends and capital gains from shareholdings of a UAE business will be exempt, withholding tax will not be applicable on domestic and cross-border payments, foreign tax credits are available, and transfer pricing rules will reference the OECD Transfer Pricing Guidelines.

These new rules highlight the interaction with upcoming OECD Pillar Two rules to ensure those tax receipts are not allocated elsewhere.

The Federal Tax Administration (FTA)has collaborated with the Swiss Tax Conference, EXPERT-suisse and an academic partner to set forth written principles and rules of conduct. These rules are focused upon employees of tax administrations, companies and tax professionals.

The format includes the following highlights:

General principles of conduct

Tax return process

Assessment

Advance tax ruling

Tax audit

Tax payment

Appeal procedure

A Code of Conduct is an importance governance tool for tax administrations and multinationals. It represents a baseline of understanding to achieve a fair, efficient and transparent process for all parties. This document would be an excellent opening item of discussion for any audit.

The link for reference is estv.admin.ch, FTA subtag, with tabs on the upper right for different languages.

The EU, as of October 5, 2021, will add Hong Kong to its “grey list” of non-cooperative jurisdictions for tax purposes.

The grey list imputes a sense of tax avoidance or harmful tax practices for Hong Kong. However, Hong Kong has until December 31, 2022 to change its legislation, thereby avoiding such characterization ongoing.

To the extent no relevant legislation is enacted, potential punitive measures by the EU include changing its characterization to a “blacklisted” jurisdiction, which would provide denial of deductions for payments made thereto, increased withholding tax, taxation of dividends and administrative rules.

This will be important for many reasons, as other aspects of tax (i.e., DAC 6 reporting) use these designations for potential further reporting obligations.

The European Parliament has adopted proposed changes to the draft seventh directive, amending 2011/16/EU, for information exchanges of online platforms.

Recent recommendations for adoption ensures this information can be used for other data sharing purposes (e.g., money laundering). Additionally, the expansion of beneficial ownership transparency and inclusion of real estate, trusts, crypto assets and some capital gains is included.

https://data.consilium.europa.eu/doc/document/ST-13130-2020-REV-1/en/pdf

ICAP handbook/rules

The OECE Forum on Tax Administration (FTA) has published a handbook explaining participation in the international compliance assurance program (ICAP).

This objective was started in 2018, and is now taking more substance. It is a three-stage process. The taxpayer provides relevant available transfer pricing documentation, and if all relevant jurisdictions and the taxpayer agree, a risk assessment is developed by the tax administrations. The final stage includes a risk graded letter.

The program does not provide absolute certainty, although it may provide learnings into potential gaps, while also providing tax administrations some limited certainty after their comprehensive review.

The handbook, link attached, provides additional details.

http://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/international-compliance-assurance-programme-handbook-for-tax-administrations-and-mne-groups.htm

OECD provides ERM tool

The OECD has, via a pilot program, developed five stages of ERM maturity against which tax administrations can self-assess their progress, for which anonymous data will also be helpful for the OECD going forward.

Multinationals have employed such tools for several years, and tax administrations can now assess their progress and risk status going forward.

http://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/maturity-model-series/enterprise-risk-management-maturity-model.htm

OECD Pillar I & II comments

Attached is EY’s summary of the recent meetings, in which comments were provided for various applications of Pillar I and II.

The EU has also expressed its desire to move forward with a digital service tax if the OECD falls behind in its targeted 2021 dates to prescribe rules. The OECD’s approach will also encounter issues re: dispute resolution in multiple countries, for which countries may not yet be ready for.

As the U.S. presidency is now decided, its direction will also influence the ongoing discussions for global implementation.

https://www.ey.com/en_gl/tax-alerts/oecd-inclusive-framework-political-leaders-promote-global-consen

The Joint Committee on Taxation has published a valuable reference for expiring tax provisions 2021-2029.

Although the benefits of Sec. 954(c)(6) were recently extended for 5 years, other provisions will be changing in the next few years, absent additional legislation.

https://www.jct.gov/publications/2021/jcx-1-21/

Joint Committee refunds

This report was issued in June, 2020, and is interesting to note the Treasury Inspector General’s report re: IRS process for refund claims.

This audit was initiated to assess the effectiveness of the IRS’s efforts to examine returns with refunds in excess of $2 million ($5 million for C corporations) and report to the Joint Committee on Taxation (JCT) on such refunds.

This issue is made more interesting as more companies are getting ready to file federal income tax carryback claims due to COVID-19 losses, for which such carry back was made possible by the Cares Act.

Mark January 14-15 on your calendar to attend the OECD consultation meeting for Pillar One and Two. Details provided for reference.

http://www.oecd.org/tax/beps/public-consultation-meeting-reports-on-the-pillar-one-and-pillar-two-blueprints.htm

US Sec 163(j), 954(c)(6)

The Consolidated Appropriations Act, 2021 (CAA) and OIRA have advanced interesting developments for early 2021.

New Section 163(j) interest regulations have not yet been posted on the IRS website, thereby this fact is significant for calendar-year taxpayers as they will not have to diligently read, and strategize, such information for year-end 2020, dependent upon the approach to evaluation of new legislation and timing.

Additionally, the exceptions to related party payments for Section 954(c)(6) have been extended for 5 years in the CAA. This is a new, and welcome, certainty provision for multinationals. Most importantly, this provision may also add in scheduling future taxable income to evaluate positive and negative evidence for affixing a Valuation Allowance on deferred tax assets that will reverse in the future.

The Employee Retention Tax Credit has also been extended, and liberalized, for the first two quarters of 2021.

UK: DAC6 conforming

UK has put forth new legislation, commencing 1/1/2021, focusing on Hallmark D only while they are presumably modifying the EU rules to new UK rules.

As an update, HMRC has clarified that only Hallmark D arrangements, including historical arrangements, are required to be reported commencing 1/1/2021.

https://www.legislation.gov.uk/uksi/2020/1649/regulation/2/made

Mexico: Outsourcing delay

The Mexican government has decided to delay this decision until February 2021.

It is hopeful the related profit-sharing consequences of such actions will also be addressed

However, impending legislation is not to be understated, as the breadth of their mandatory disclosure rules are both expansive and transparent moreso than the EU DAC6 provisions.

%d bloggers like this: