Strategizing International Tax Best Practices – by Keith Brockman

Italy’s new guidelines deny benefits of the Notional Interest Deduction (NID) to “tainted contributions” to avoid the granting of dual benefits by respective entities.  There is a tracing mechanism that can be confirmed in a ruling process to rebut the dual benefit presumption.

PwC’s publication provides a succinct summary of this latest development.

http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-guidelines-notional-interest-deduction-anti-avoidance-rules.pdf

The NID arrangement may represent an opportunity to achieve a local tax benefit as OECD’s BEPS Action Item and unilateral legislation enacted by various countries restrict interest expense deductions premised on the basis of a base erosion / profit shifting technique, although not suggesting an interest income offset that would ameliorate double taxation for a multinational organization.  

However, the proposed US Model Income Tax Convention (refer to 23 May 2015 post) includes the denial of treaty benefits for Special Tax Regimes, which is inclusive of a NID arrangement.  The arrangement that Italy is providing may not receive treaty benefits with the US if this proposal is included in the final legislation, thereby providing evidence of unilateral actions that produce non-intuitive and disjunctive results.  This lack of coordination will increase with future unilateral actions by countries that mitigate the OECD’s brave intentions to achieve global consistency and uniform guidelines.

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