Strategizing International Tax Best Practices – by Keith Brockman

Taiwan’s recent amendments to its Income Tax Act provides rules for determination re: Controlled Foreign Corporations (CFC’s) and, most importantly, guidelines for determination of a company’s place of effective management (PEM) in Taiwan.

The PEM rules are becoming more important as MNE’s are arranging board meetings and making strategic directions in locations around the world, and not restricted to an entity’s country of incorporation.  Not restricted to Taiwan, PEM rules should be a strategic focus as its importance is significant, with similar rules being enacted in other countries.  

All MNE’s conducting business in Taiwan should be knowledgeable about these changes going forward, and planning accordingly.

EY’s Global Alert provides details of this development.

http://www.ey.com/Publication/vwLUAssets/Taiwan_issues_final_regulations_on_controlled_foreign_company_rules_and_place_of_effective_management/$FILE/2016G_02129-161Gbl_TW%20issues%20final%20regs%20on%20cfc%20rules%20and%20place%20of%20effective%20mgmt.pdf

OECD update

OECD has released discussion drafts on Action 7, attribution of profit to permanent establishments (PEs) and Actions 8-10 (profit splits).

It also requested public review of the document containing conforming changes to Chapter IX (business restructurings) of the OECD Transfer Pricing Guidelines (TPG).

The PE Discussion Draft is not restricted to issues related to PEs that will result from the changes made by the Action 7 Final Report, but also takes into account the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles, risk and capital.  This factor is especially important if countries do not adopt the new Action 5 PE Guidelines in a bilateral tax treaty or via the pending multilateral instrument.  Thus, this section will be all-encompassing and important to understand the drivers, such as key people functions, behind this issue.

The profit split guidance is indicia of a trend for some governments to apply this standard, albeit not from a pure economic/technical perspective.  Therefore, this complex guidance will enhance knowledge of those being asked the question from tax authorities, as well as in developing transfer pricing guidance.

EY’s Global Tax Alert describes these developments in greater detail.

http://www.ey.com/Publication/vwLUAssets/OECD_releases_discussion_drafts_on_profit_splits,_attribution_of_profits_to_permanent_establishments_and_conforming_amendments_to_OECD_Chapter_IX_on_business_restructurings/$FILE/2016G_02042-161Gbl_OECD%20releases%20drafts%20on%20profit%20splits,%20attribution%20of%20profits%20to%20PEs%20and%20TPG%20business%20restructuring.pdf

The US administration has released final regulations on its CbC reporting requirements.  This guidance provides voluntary filing for a 2016 calendar year US MNE, whereas 2017 is the required reporting year, due in 2018.  The OECD has also issued guidance to provide impetus for countries to accept voluntary filings by US MNE’s with IRS, rather than rely solely on its legislation for 2016.  However, this premise should be carefully reviewed, as countries have already enacted legislation and may not wish to change it.

Additionally, the filing period for a US MNE is Sept. 15th for a calendar year taxpayer, accelerating the Dec. 31st date proposed by the OECD.

This guidance will have widespread impact and contains many clarifications that should be  understood prior to collecting data.

http://www.ey.com/Publication/vwLUAssets/Final_US_country_by_country_reporting_regulations_analyzed_in-depth/$FILE/2016US_01933-161US_Final%20US%20CbC%20reporting%20regulations%20analyzed%20in%20depth.pdf

Tax Executives Institute, Inc. (TEI) has recently submitted comments in response to OECD’s public discussion draft on Action 15 re: technical issues for the upcoming Multilateral Instrument.

A link to TEI’s excellent comments are provided for reference:

http://www.tei.org/Documents/TEI-Comments-BEPS-Action-15-Tax-Treaty-Related-Measures-June-29-2016.pdf

Highlights:

  • Mandatory binding arbitration was not included, thus the increase in MAP cases seem inevitable.
  • A “baseball” type of arbitration is recommended.
  • All MAP cases should be eligible for arbitration.
  • All signatories should adopt the Action 14 minimum standard.
  • Countries should have the ability to choose what treaty-related BEPS measures it will adopt.
  • Countries should have the ability to choose what treaty partners and relevant tax treaties would apply for various BEPS provisions.
  • The modified provisions are only effective upon official ratification.
  • A new peer process should be adopted for treaty interpretation.

The multilateral instrument is key to the consistent application of BEPS Actions, and the well-written TEI comments are highly recommended for all interested parties.

As everyone knows, there is alot of uncertainty and doubt about what lies ahead for the UK as they will be leaving the EU, final timeline yet to be determined.

From a tax perspective, the linked EY Global Tax Alert summarily describes foreign exchange issues, alignment with EU court cases and Directives (including country-by-country reporting), ongoing BEPS alignment and conformity, treaty / immigration issues, EU State Aid, VAT and the need for transitional review.

Apart from BEPS, this change will compound the tax (un)certainty of the UK for the near future.

This is an excellent time for legal and operational review of UK operations, ensuring old structures and loans are dissolved, if possible, to mitigate future risks.  All multinationals should align with all stakeholders to face this radical change.  

http://www.ey.com/Publication/vwLUAssets/The_United_Kingdom_votes_to_leave_the_European_Union/$FILE/2016G_01773-161Gbl_UK%20United%20Kingdom%20votes%20to%20leave%20the%20EU.pdfUK

The controversial final Section 385 regulations are still being debated, with Treasury focusing on earnings stripping issues, although seemingly has heard valuable comments as to its detrimental effect on physical or notional cash pooling.  Every MNE should have read the proposed Reg’s and educated their treasury and finance functions accordingly, which should be an immediate priority due to its expansive potential effect on treasury, legal and tax structures going forward.  

The US House is set to release its tax blueprint next week, which may become more important if a Republican president is elected with potential reforms again in play.

EY’s Global Tax Alert discusses these topics and some BEPS updates.

http://www.ey.com/Publication/vwLUAssets/US_International_Tax_Developments_17_June_2016/$FILE/2016G_01618-161Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20June%202016.pdf

BEPS update

EY’s Global Tax Alert provides recent developments for BEPS by Australia, Austria, Belgium, EU, Germany, Iceland, India, Niger, and Romania.

http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_6_June_2016/$FILE/2016G_01449-161Gbl_The%20Latest%20on%20BEPS%20-%206%20June%202016.pdf

Highlights:

  • Australia: Local File is OECD +, going beyond OECD’s recommendations, including transactional detail.  This development is proving that global consistency is a rapidly fading ideal, as countries legislate what they think benefits them the most.  Unfortunately, this adds to the cost, time and complexity of preparing global reports.
  • Austria: Transfer pricing documentation draft regulations follows the OECD.
  • Economic and Financial Affairs Council of the European Union (ECOFIN): EU Member States Finance Ministers, envision adopting the Anti-Tax Avoidance Directive on 17 June 2016, subject to amendments.  Legal agreement was also reached on adoption of the Directive on the exchange of non-public country-by-country tax information.  Conclusions were also adopted on the European Commission communication on an external tax strategy and tax treaty abuse measures.
  • Germany: Transfer pricing technical draft introducing transfer pricing documentation standards as recommended by the OECD.  Master File and Local File documentation requirements introduced.
  • India: A 6% Equalization Levy (EL) to apply on gross payments for certain digital services received by a nonresident.
  • Niger: Thin capitalisation rules introduced.
  • Romania: To become a BEPS Associate and participate in the OECD’s framework.

As the above developments note, BEPS guidelines and intent remains very strong in the global community, with many changes already made and many more to come.

 

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