Strategizing International Tax Best Practices – by Keith Brockman

Archive for August, 2017

Danish PE: Intercompany contract risk

As countries become creative re: permanent establishment (PE) taxation, this scenario presented by the EY Global Tax Alert reminds all tax practitioners to be cognizant of what intercompany provisions are provided.

The Danish Tax Board referred to the contract between the Austrian company and the Danish company, according to which the Danish company would make offices and storage facilities available to the Austrian company. The Danish Tax Board was informed that the premises would be used by the subcontractor only. The Danish Tax Board ruled that according to the wording of the contract between the Austrian company and the Danish company, the Austrian company would have a place of business in Denmark at its disposal regardless of the fact that the services would be outsourced to a subcontractor.

Thus, providing for a storage closet (in literal terms) may impose PE liability, with the ensuing compliance and fees a significant factor for what was probably an inadvertent error by the drafters of the intercompany agreement.

The treaty had the same PE provisions as OECD’s Article 5 language, although noting that the OECD’s recommendations were looked to by the tax administration.

As a Best Practice, all intercompany agreements (anywhere in the world) need to be reviewed by an international tax practitioner prior to execution, whether in-house personnel or outside advisors.  

EY’s Alert provides additional details that should be reviewed to indicate the pervasiveness of the new PE rules, and the aggressiveness of tax administrations to literally interpret intercompany agreements.

http://www.ey.com/Publication/vwLUAssets/Danish_Tax_Authority_rules_subcontracting_of_services_by_foreign_company_to_non-related_foreign_entity_creates_a_permanent_establishment_in_Denmark/$FILE/2017G_04863-171Gbl_Danish%20Tax%20Authority%20ruling%20on%20creation%20of%20permanent%20establishment.pdf

New Zealand: OECD & beyond

New Zealand’s government has announced the introduction of new BEPS compliant rules that will be effective mid-2018.  Additionally, the government has taken this opportunity to expand upon the OECD’s rules, in an attempt to ensure that a “fair share of tax” is paid by multinationals doing business in the country.

Acknowledging the OECD’s intent to provide flexibility with its BEPS Actions and subjective language therein, New Zealand is looking for this legislation to impose rules above and beyond the BEPS Actions.  For example, anti-PE rules will be introduced that look to Australia’s provisions, which were initially introduced by the UK as diverted profit tax schemes to collect additional tax.

International tax practitioners should review these provisions and plan their tax strategies accordingly, knowing that New Zealand will introduce double taxation sooner vs. later in the global concept.

EY’s Global Tax Alert provides relevant details of New Zealand’s proposals.

http://www.ey.com/Publication/vwLUAssets/New_Zealand_to_implement_wide_ranging_international_tax_reforms/$FILE/2017G_04691-171Gbl_New%20Zealand%20to%20implement%20wide%20ranging%20international%20tax%20reforms.pdf

TP documentation for Malaysia: OECD+

As countries continue to align and/or expand the OECD’s transfer pricing documentation (Master File and Local File), including country-by-country (CbC) reporting, the path towards consistency continues to widen, introducing subjective determinations that will potentially lead to additional disputes and double taxation.  EY’s Global Tax Alert provides the relevant details.

The Guidelines adopt a substance over conduct principle associated with contracts and require a more detailed analysis of functions performed, assets employed and risks assumed.

The Guidelines require the functional analysis to align value-creating activities with transfer pricing outcomes by increasing remuneration for significant functions undertaken, with an emphasis on financial capacity to assume risk and exercise control over risk. Failure to conform to the terms of the written contract may cause the transaction to be recharacterized according to the factual substance, and transactions without a commercial substance can be disregarded.

Most importantly, the tax authorities will be looking at contracts with the ability to recharacterize or disregard such transaction.  To the extent additional approvals and guidelines are not adopted by the relevant tax administration, this may lead to new chaos in the transfer pricing world, including a potential ability to avoid tax treaty interpretations and increase the risk of double taxation.

The intent of various countries to adopt the new OECD transfer pricing models needs to be reviewed early to determine potential risks in one or more countries.

http://www.ey.com/Publication/vwLUAssets/Malaysia_updates_transfer_pricing_guidelines_and_introduces_master_file_requirements/$FILE/2017G_04640-171Gbl_TP_Malaysia%20updates%20TP%20guidelines%20and%20introduces%20master%20file%20requirements.pdf

US tax reform: Tax accounting impact

As the time for US seems to tick ever closer, EY’s Global Tax Alert highlights the tax accounting implications that would take effect on the “enactment date.”

Key items for consideration:

  • Tax attributes re: one-time repatriation/taxation of foreign earnings
  • Capital expensing impact
  • State tax impact, dependent on if they automatically follow federal tax law
  • APB 23, how will this be affected?

Although such items are hypothetical at the moment, some items may require additional planning to have the data available for the requisite disclosures.  Thus, the time for planning and consideration is the present.

http://www.ey.com/Publication/vwLUAssets/US_Administration_releases_Joint_Statement_on_Reform_-_Income_Tax_accounting_considerations_related_to_potential_future_US_tax_legislation_and_steps_companies_can_take_now_to_prepare/$FILE/2017G_04560-172Gbl_US%20joint%20statement%20on%20tax%20reform.pdf

US CbC Agreements

The US jurisdictional Country-by-Country (CbC) status table, link provided herein, provides a quick reference into the countries that will automatically accept the US 2016 CbC report, as it is not an obligatory filing for US MNE’s.  To the extent a country is not on this list, a detailed review will be required to ensure that timely reporting is done, possibly on a surrogate country basis.

This list should be monitored to ensure proper governance of the CbC reporting requirements, noting that filing less reports is simpler due to possible different rules, currencies and/or interpretations of similar rules by different countries.

https://www.irs.gov/businesses/country-by-country-reporting-jurisdiction-status-table

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