Strategizing International Tax Best Practices – by Keith Brockman

Archive for October, 2017

Offshore indirect transfers: TEI’s comments

On October 19, 2017, Tax Executives Institute (TEI) filed a letter with the Platform for Collaboration on Tax, a joint initiative of the World Bank, OECD, International Monetary Fund, and United Nations, regarding the Platform’s draft toolkit on the taxation of offshore indirect transfers.  TEI’s comments focused on the need for the Platform’s toolkit to educate and provide options to nations considering taxing offshore indirect transfers, rather than prescribing a preferred approach, among other things.

The Platform for Collaboration on Tax (the Platform), a joint initiative of the Organisation for Economic Co-Operation and Development, International Monetary Fund, United Nations, and World Bank, released a document entitled The Taxation of Offshore Indirect Transfers – A Toolkit (the Draft Toolkit or Toolkit) on 1 August 2017. The Draft Toolkit was designed to help developing countries address the complexities of taxing offshore indirect transfers of assets, which the Platform states is a practice by which some multinational corporations try to minimize their tax liability.

The toolkit and TEI’s submission paper are referenced herein for review

Highlights of TEI’s comments include the following points:

  • There should be symmetry and neutrality as compared to direct asset transfers
  • Status of toolkit is unclear, and is not a source of authoritative guidance
  • The goal of the draft toolkit is unclear
  • A capital gains tax can distort economic transactions
  • Gains and losses should be the subject of the toolkit
  • Most indirect transfers are made for economic, not tax, reasons
  • The general treaty definition of immovable property seems to have been abandoned with no reason

The toolkit can be applauded for launching a multi-organizational approach with some good ideas, although such ideas should be further challenged and developed prior to an overall vision and detailed rules promulgated

 

Click to access discussion-draft-toolkit-taxation-of-offshore-indirect-transfers.pdf

 

Click to access TEI-Comments-Offshore-Indirect-Transfers-Oct192017.pdf

CR reporting; tax policy norm

Corporate responsibility (CR) reporting is becoming more of a norm for MNE’s, illustrated by KPMG’s report as referenced herein.

Apart from policies, such as Human Rights, that should be a basic component of every MNE’s policy and referenced to the UN standard, tax policies are becoming more of a public norm than ever before.

A UK tax risk strategy is required to be published by every significant UK taxpayer by 12/31/2017 on a public website describing the tax risks of the UK group and how they are managed on a macro and micro based level.

Global tax policies are also proactively published by major MNE’s as part of their Best Practices and Enterprise Risk Management efforts.

A basic global tax policy, published or not, should be a primary tool integral to Board and company governance.  Tax risk management, including documentation thereof, will become more of a shout than a whimper by NGO’s, parliamentarians, tax advisors and internal governance standards of every MNE.

Tax policies are also becoming more integrated with business policies in corporate governance.

To the extent policies are lacking in an organization, now is the time to address this important aspect of risk management and Best Practice governance.

Click to access kpmg-survey-of-corporate-responsibility-reporting-2017.pdf

US tax reform: 1 step closer

The US Senate passed their version of the Fiscal Year Budget 2018, an important step that leads to reconciliation of the budget this coming week by the House and Senate.

Following the budget reconciliation, allowing a majority vote for tax reform, US tax reform is now on the horizon for potential enactment by year-end 2017.

To the extent potential US tax reform has been on the backstage, or ignored by pessimists, this latest step should be a strong indication that everyone needs to understand the Framework, albeit brief, previously announced and advocated by President Trump.

Attention is now in the details, with significant tax and business consequences for the US and the world.

EY’s Global Tax Alert provides additional details on this latest development.

Click to access 2017G_05952-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2020%20October%202017.pdf

S. Africa CbC / TP requirements

The South African Revenue Service (SARS) released its final notice re: requirements for filing the Country-by-Country (CbC) report, Master File and Local File, in alignment with OECD BEPS Action Item 13.

It is interesting that, pursuant to minimum thresholds, both a Master File and Local File are required to be filed, rather than only the Local File.  This may become more of a norm, versus an exception, as the global transfer pricing and risk environment will need to be reviewed in alignment with local business operations.  Hopefully, the review will encompass confidential limitations on the information received and will only encompass transfer pricing practices of the local operations rather than extend CbC presumptions or Master File analogies against the local data.

EY’s Global Tax Alert provides the relevant details of the SARS requirement.

Click to access 2017G_05868-171Gbl_TP_South%20African%20RS%20releases%20Public%20Notice%20concerning%20CbCR%20master%20and%20local%20file.pdf

EU: VAT proposals

The European Commission (EC) has proposed a new set of rules that is meant to introduce efficiencies into long-standing current practices.

The new principles include:

  • One Stop Shop
  • Destination principle, with VAT on goods collected by the selling State and transferred to the State of destination
  • Charging VAT on cross-border trade
  • “Certified Taxable Person” certification allowing simpler EU principles to apply
  • Quick fixes, including storing goods in another Member State

The EY Global Tax Alert is included for reference, which thereby includes links to the related proposals.

This proposal is significant for all businesses trading in the EU, and its principles should be reviewed to enable proactive planning.

Click to access 2017G_05695-171Gbl_Indirect_EC%20proposes%20far-reaching%20reform%20of%20EU%20VAT%20system.pdf

OECD: CbC-Effective tax risk assessment

OECD has published new handbooks, one of which relates to country-by-country (CbC) reports and how tax administrations can incorporate this information into their tax risk processes, inclusive of risk tools and governance processes.

Other reports/handbooks have also been issued that will be a valuable reference:

  • Tax Administration 2017
  • The Changing Tax Compliance Environment and the role of audit
  • Shining Light on the Shadow Economy
  • CbC: Handbook on effective implementation

 

Click to access 2017G_05389-171Gbl_OECD%20publishes%20two%20handbooks%20on%20Country-by-Country%20reporting.pdf

US Sales & Use tax risk

I have linked a valuable reference took to assess US sales and use tax risk that will be helpful in understanding the differences between the “sales” and “use” components as well as the controls and systems necessary to control such risks in a Sarbanes Oxley “SOX” environment.

Most importantly, the tax function needs to be involved in monitoring contracts in which this risk may be evident, prior to execution of the document.  Sometimes, the sales/use tax function may not be a tax function, albeit within finance or the controllership area.  However, this area of tax is increasingly subjective, complex and requires the input of technical internal/external advisors to avoid large surprises and audit assessments across the country.

Additionally, foreign corporations may also want to review any inbound US activities, and related contracts, to assess potential US sales/use and state income tax obligations due to “nexus” within the borders of a state.

https://www.journalofaccountancy.com/issues/2017/apr/sales-and-use-tax-risk.html

Policy issues: US int’l tax reform

The Joint Committee of Taxation (JCT) has published a valuable reference to the principles underlying tax reform that will be presented to the Senate Finance Committee on October 3, 2017.

This reference is a helpful document into understanding some of the rationale and intentions that will become a part of the legislative writing process, as it includes background context of the issues.

A link to the JCT site and document is provided.

https://www.jct.gov

US Tax Framework in print

The US Tax Framework was published Sept. 27, a notable date as this date is also used to mark the timeframe for expensing investments.

The main corporate tax points, and subtleties, include:

  • 20% corporate tax rate, but the tax rate and differential for one-time foreign earnings/cash is not specified.
  • Minimum tax on foreign profits to “level the playing field”
  • Territoriality system, exempting 100% of dividends (although the KPMG linked notes include the point that this is not equivalent to “distributions” thus a complicated Earnings and Profits tracking system may still apply)
  • Interest expense will be “limited” (EBITDA/other?)
  • R&D credit remains, although Sec. 199 US manufacturing incentive deduction is lost
  • Pass-through structures tax rate of 25%
  • Corporate AMT is gone.

The President has formally and forcefully announced his continued message for tax reform, as both the House and Senate Committees are now drafting language that will hopefully result in legislation enacted late 2017 or early 2018 with the political complexities / process.

Upon enactment, the US GAAP tax accounting will be complex and required results for public companies in the quarter of enactment.  Additionally, the timing for state enactment is also a separate complex issue that will need analysis.

The US Framework is repeatedly attempting to “level the playing field,” now the politicians, journalists, advisors and tax practitioners will all work with a little bit of fact to create a cocoon of fiction by which the impending tax reform can be measured.  

Click to access 2017G_05589-171Gbl_US%20tax%20reform%20-%20corporate%20and%20international%20provisions.pdf

Click to access Tax-Framework.pdf

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