Strategizing International Tax Best Practices – by Keith Brockman

Archive for April, 2018

US int’l developments

EY’s Global Tax Alert provides the latest US updates, noting the following:

  • Regarding the TCJA’s foreign derived intangible income (FDII) provision, a Treasury official was quoted as saying the Government is actively looking at how to apply the disqualification for related-party services that are substantially similar to services provided by the related party to US taxpayers.
  • A senior IRS official said the legislative history and the purpose of the provision strongly suggests that the Internal Revenue Code Section 78 GILTI gross-up should be placed in the GILTI basket. The official conceded that that interpretation is not in the statute, however.
  • Reflecting on the base erosion anti-abuse tax (BEAT), the official said Treasury is presently undecided if including a markup disqualifies the entire charge or just the amount of the markup for related-party services, that otherwise qualifies for the services cost method exception.

    The noted highlights are very critical in estimating the impact on financial statements, as well as compliance and planning opportunities.  To the extent timely guidance is not provided this year, there will be additional uncertainties in how to measure the effects of the complex Tax Act provisions.  



US Tax Act; SIT changes

The referenced link provides a copy of TEI’s submission that was provided earlier this year, as it is timely to address the numerous (and sometimes retroactive) changes that states are enacting to align with the US Tax Act enacted December 22, 2017.

The impact on public companies, from adopting state changes, and then sometimes amending such adoptions based on legislative challenges, is a daily / weekly review to incorporate all changes into a company’s effective tax rate through deferred tax impacts. TEI suggests a future deduction, over a number of years, to offset negative impacts on current earnings and minimize tax rate volatility.

Aside from legislative changes, there will be additional legal challenges as some states are trying to step beyond the boundaries of collecting a fair tax by including a portion of income and disallowing 100% of the deduction on the new Tax Act changes.

The article is well written and hopefully results in some states adopting some ameliorative measures.

Impact of APAs on Voluntary Compliance

The referenced link is an excellent article written by  Ksenija Cipek in collaboration with Dr Manuel Pereira in an effort to promote transfer pricing simplification. Ksenija Cipek is the Assistance Director General for Legislation and International Cooperation at Ministry of Finance, Tax Administration of Croatia.

Excerpts from the article

From all of this and despite the outstanding disadvantages, we can conclude that the APA is one of the measures that is affecting the increase in the number of voluntary compliant taxpayers, since the APA provides legal certainty, no instruments of tax auditing are initiated, the possibility of double taxation is eliminated, the reputation of taxpayers is strengthening and, last but not the least, resources are being saved on both sides. Furthermore, by introducing the possibility of concluding an APA in the legal framework of a given state, opportunity and incentive are being given for taxpayers to be voluntarily compliant. In this course of action, it will be important to exchange information with other countries and international organizations, to educate employees, to understand business processes and business transactions and, generally, market conditions and trends in certain business sectors.

To this end result, it is necessary and timely to regulate specific rules for applying APA to SMEs. The rules must be simple, responsive and cost-effective in terms of the cost of human resources, material costs as well as time-consuming cost. In that sense, it is necessary to make use of all available and modern technologies, such as web services etc. Some countries already have a regulated legislative framework specifically for APA applications to SMEs. However, this should not be an exception, but a rule, precisely because of the economic importance of these entrepreneurs in the economic development of each state.

Particular attention should be given to the simplification of transfer pricing documentation, for justified reasons and in the sense that SMEs will, generally, not have a lot of different transactions.

In order to increase the impact on voluntary compliance by as many taxpayers possible, irrespective of their size, this issue is one of the most important issues that deserve a legitimate focused attention on its capable and expeditious solution.


US GILTI; a confused state

As multinationals commence to calculate the US Tax Act’s provisions for Global Intangible Low-Taxed Income (GILTI), the literal language of the law and the Conference Report present a myriad of confusion.  The name of this provision is also a misnomer, as the income to be measured is not limited to that sourced from intangibles.

The intent of the provision, as explained in the Conference Report, is to provide a 10.5% (for 2018) tax on low-taxed earnings of foreign affiliates, as reduced by 10% of its tangible personal property measured by US tax principles.  This would be accomplished with an 80% foreign tax credit, thus legal entities in countries with a tax rate not exceeding 13.125% would not be subject to this additional minimum tax on foreign earnings.

Due to the speed of enactment, the technical details of the enacted law does not mirror this intent.  As a result, different US-based multinationals may be taking different approaches for measurement, ranging from the Conference Report intent to the enacted law which may not allow for any foreign tax credits based on the separate foreign basket approach coupled with uncertainty for the allocation of US expenses to such income.

This confused state will also present difficulties in measuring different aspects of this provision for different companies, depending on their interpretation and calculation.

Hopefully, this confusion will be clarified to align the law with the intent of the Conference Report.  Without such guidance, this provision will present undue costs, complexity and subjective interpretation going forward.

African Free Trade Agreement

44 of 55 countries have signed the African Free Trade Agreement, in an effort to promote efficient trade in the region.

With a combined gross domestic product of about
US$2.5 trillion and 1.2 billion people, Africa currently trades more with continents or countries outside of Africa than with fellow African countries.

The next step in the process of implementing the Continental FTA will be for the signatories to ratify the agreement and then implement the provisions of the agreement. Critical areas to consider include rules of origin to qualify for preferential taxes on imports from member countries as well as agreements of which physical barriers to trade are eliminated gradually.

The ultimate aim of the African Union is to become a political federation with one currency and one president across the whole continent.

EY’s Global Tax Alert provides additional details on this exciting development.$FILE/2018G_02020-181Gbl_44%20African%20countries%20sign%20Continental%20Free%20Trade%20Area%20agreement.pdf

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