Strategizing International Tax Best Practices – by Keith Brockman

The US Treasury and IRS released the 2016-2017 Priority Guidance Plan, which highlights intended final regulations re: Sec. 956 for loans to foreign partnerships, and Sec. 367(d) transfers of intangible property to foreign corporations.

Treasury has stated its acknowledgment of concerns re: 385 rules, and intends to address them in rules still going forward for release in several weeks.  These rules are far-reaching (per the current proposed Regulations) and merit immediate attention by tax and treasury practitioners in all MNE’s.  Most importantly, the Sec. 385 rules re: loans/distributions are in addition to the current subjective debt/equity subjective rules and a long history of case law.  Accordingly the impact on documentation should be completed within the next 3 months by all MNE’s.

EY’s Global Tax Alert provides further details on the US international developments.

http://www.ey.com/Publication/vwLUAssets/EY-are-you-ready-for-your-close-up/$FILE/EY-are-you-ready-for-your-close-up.pdf

Luxembourg: CbC reporting

The draft country-by-country (CbC) law has been forwarded to Parliament, in alignment with the EU Directive for 2016 tax year reporting.

A surrogate parent entity should file a CbC report with the Luxembourg tax authorities in one of the following cases:

  • The ultimate parent entity (UPE) is not obliged to file a CbC report in its country of residence,
  • The UPE is obliged to submit a CbC report, but there is no automatic exchange of CbC reports between Luxembourg and the country of residence of the UPE or
  • The UPE is obliged to submit a CbC report,and there is automatic exchange of CbC reports, but due to systematic failure, no effective exchange of information takes place.

As the terminology includes “obliged” vs. voluntary filings in some countries, the filing entity and disclosure rules should be reviewed.  Additionally, there are significant penalties for late/non-filing.

 

The EY Global Tax Alert, linked for reference, provides additional details.

http://www.ey.com/Publication/vwLUAssets/Luxembourg_introduces_draft_law_on_country-by-country_reporting/$FILE/2016G_02418-161Gbl_TP_Luxembourg%20introduces%20draft%20law%20on%20country-by-country%20reporting.pdf

The OECD, in its June release of country-by-country (CbC) guidance, sets forth guidance of BEPS Action 13 re: parent-surrogate reporting that includes the US, Japan and tentatively Switzerland, for which there are no obligatory filing requirements for the calendar tax year 2016.

However, several countries have previously enacted legislation that may not literally accommodate such rules (i.e. voluntary filing to a parent surrogate).  To the extent there is this possibility, will the parent surrogate country indemnify such taxpayers for non-filing penalties, etc. imposed by another country for failing to file according to its specific legislation?  Alternatively, a detailed review of the specific legislation of all countries adopting CbC is in order.  Simplification of CbC filing is the intent of the OECD Guidelines, however additional assurance would be welcome by the parent surrogate countries to support this presumption.

The OECD guidance is attached for reference:

http://www.oecd.org/tax/exchange-of-tax-information/guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.pdf

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.

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