Strategizing International Tax Best Practices – by Keith Brockman

Archive for November, 2017

UK: Post Brexit Customs

As the UK prepares for a post Brexit deal with the EU, details are emerging re: the customs rules that are being contemplated.  Needless to say, it will not be as simple as the EU framework that accommodates this system currently.

EY’s summary provides details and highlights to think about re: current supply chains and routes to market for goods entering or leaving the EU via the UK.

http://www.ey.com/Publication/vwLUAssets/UK_Government_introduces_new_Customs_Bill/$FILE/2017G_06713-171Gbl_Indirect_UK%20Government%20introduces%20new%20Customs%20Bill.pdf

France: Budget retribution

Due to the unconstitutionality of the 3% tax on dividend distributions outside the French group based on the equality principle, the French Parliament has imposed an additional surtax to rectify its budget deficit.

This legislation will increase, for large companies, the effective tax rate to 39.4% or 44.4%  depending on the size of the turnover.  Unfortunately, this additional tax will be imposed on the relevant large companies that did not make a prior distribution subject to the 3% tax that will now be refunded.

This tax increase was necessitated by the unconstitutionality of the original 3% tax; which imposes a learning that such taxes that may be unconstitutional should be claimed as a refund early in the process notwithstanding the final developments.  

Deloitte’s summaries provide further details on this development for reference.

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-alert-france-6-october-2017.pdf

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dtt-tax-worldtaxadvisor-171124.pdf

Poland’s new law: interco. limitations

Poland’s Corporate Income Tax Law will be formally amended, effective 1/1/2018.

  • One of the most important provisions is the limitation in intercompany royalty and service payments, using an absolute limitation and EBITDA basis.  (Note, a corollary offset does not provide matching offsets for the income inclusion by intercompany affiliates.)

This limitation goes beyond the OECD’s guidelines, and extrapolates interest deductibility  that is veiled as a “base erosion” device.

Multinationals need to review and plan accordingly for this limitation, which provides some APA safe harbors obtained with the Polish Ministry of Finance.  To the extent an APA is not possible and the limitation is exceeded, a company’s effective tax rate will be increased by this legislation.  

EY’s summaries of this important development are included for reference:

http://www.ey.com/Publication/vwLUAssets/Poland_-_Advanced_Pricing_Agreement_to_remove_new_limitation_on_tax_deductibility_of_intra-group_charges/$FILE/2017G_06049-171Gbl_Poland%20-%20APA%20to%20remove%20tax%20deductibility%20limitation.pdf

http://www.ey.com/Publication/vwLUAssets/Alert:_Poland_passes_2018_corporate_income_tax_reform/$FILE/2017G_06726-171Gbl_Poland%20passes%202018%20corporate%20income%20tax%20reform.pdf

Climate change: Disclosures

Katharine Blue, U.S. sustainability services leader for KPMG, highlights the necessity for disclosing the risks of climate change, which many companies are not yet adequately disclosing.

The KPMG Survey of Corporate Responsibility Reporting 2017 found that three-quarters of the largest companies worldwide by revenue (the G250) don’t acknowledge climate change as a financial risk. And nearly half of the largest 100 U.S. companies by revenue (the N100) don’t acknowledge financial risks of climate change in annual reports.

In 2015, Mark Carney, chairman of the Financial Stability Board (FSB) and chair and governor of the Bank of England, formed the Task Force on Climate-related Financial Disclosures (TCFD), the first international initiative to examine climate change in the context of financial stability.

There are two types of risk: physical and transition risks that should be reviewed for disclosure.

The referenced article provides valuable insight into this ever-growing issue, for which the lack of attention poses disclosure gaps/risks.  

http://ww2.cfo.com/risk-management/2017/11/companies-struggle-quantify-climate-risk/

WIPO’s 2017 IP report: Intangible capital

The 2017 World Intellectual Property Report was recently issued by the World Intellectual Property Organization (WIPO), a biennial report, and provides some interesting findings that are important to understand as US tax reform and other countries are now focusing on the taxation of intangibles and the income resulting therefrom:

First-ever figures reveal that nearly one third of the value of manufactured products sold around the world comes from “intangible capital,” such as branding, design and technology, according to a WIPO study of the global value chains companies use to produce their goods.

Some WIPR 2017 findings

  • Intangible capital accounted, on average, for 30.4 percent of the total value of manufactured goods sold throughout 2000-2014.
  • The intangible capital share rose from 27.8 percent in 2000 to 31.9 percent in 2007, but has remained stable since then.
  • Overall, income from intangibles increased by 75 percent from 2000 to 2014 in real terms, amounting to USD 5.9 trillion in 2014.
  • Three product groups – food products, motor vehicles and textiles – account for close to 50 percent of the total income generated by intangible capital in the manufacturing global value chains.

References to the Report and summaries are provided for reference:

http://www.wipo.int/pressroom/en/articles/2017/article_0012.html

http://www.wipo.int/edocs/pubdocs/en/wipo_pub_944_2017-intro1.pdf

APA update: China

China’s State Administration of Taxation (SAT) has issued its 2016 Advance Pricing Agreement (APA) update, noting that 14 APA’s were entered into for 2016.

Value chain quality and location specific advantages are positive factors leading to an efficient APA process.

It is noteworthy that China has increased scrutiny re: intercompany service agreements, and formal documentation thereto, thus an APA may prove to be advantageous provided that the relevant documentation can be timely provided.

The report, which is referenced herein as well as EY’s analysis, commences with the following summary: “This is the eighth APA annual report released by the State Administration of Taxation (“SAT”) to describe the latest mechanisms, procedures, and implementation of the APA program in China. This report is intended to provide guidance to enterprises interested in entering into APAs with the Chinese tax authority, and to serve as a reference for competent authorities of other countries (regions) and the general public to better understand China’s APA program. It does not have legal validity, and therefore should not be regarded as a legal basis for enterprises or the Chinese tax authority to negotiate or conclude an APA.”

With the ongoing BEPS complexity, and country dissimilarities / double taxation issues being compounded, the attached documents are a valuable reference in deciding on an APA decision (unilateral or bilateral) with China.

 

http://www.ey.com/Publication/vwLUAssets/China_issues_2016_Advance_Pricing_Agreement_Annual_Report/$FILE/2017G_06540-171Gbl_TP_China%20issues%202016%20APA%20Annual%20Report.pdf

http://www.chinatax.gov.cn/n810214/n810606/c2873201/part/2873221.pdf

Taiwan TP: Master File

Taiwan’s new transfer pricing (TP) guidance encompasses the local file, country-by-country (CbC) report and the Master File, effective for the 2017 tax year.

Inclusion of the TP Master File as a required document to be submitted annually is a new trend, apart from having it available upon audit.  Although generally protected by a tax administration’s confidentiality provisions, increasing circulation around the world increases the chances of a leak, inadvertent or otherwise.

Thus, it would be prudent to consider such information as being in the public domain when finalizing this report for distribution. 

https://home.kpmg.com/content/dam/kpmg/tw/pdf/2017/11/tw-e-tax-alert-issue100-eng.pdf

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