Favorable rate of 10%, vs. 15%, for patent related activities, aligning with the DEMPE/nexus provisions of BEPS Action Item 5.
Royalty deduction limitation for beneficiaries with less than a 25% effective tax rate and it is listed as a harmful tax regime by the OECD
For FYs beginning on or after 1 January 2019, a new anti-abuse provision will be applicable as a result of the transposition of article 6 of the ATAD. The main purpose, or one of the main purposes, anti-abuse test re: the EU ATAD will be used to determine if the anti-abuse rule applies for corporate income tax
A new anti-abuse provision for all other taxes than CIT will allow the FTA to disregard acts which, by seeking to benefit from a literal application of provisions or decisions, against the initial objective sought by their authors, were driven by the main purpose of avoiding or reducing the tax burden which would have normally been borne by the taxpayers, due to their situation or their real activities, if those acts had not been entered into. This provision is effective in 2020
French GAAR rule is retained (allowing flexibility to combat perceived abuse)
The Finance Bill for 2019 transposes into French domestic law the provisions of the Directive 2017/1852 dated 10 October 2017 as regards mechanisms to settle double taxation arising as a result of the application of double tax treaties concluded between EU Member States.
French tax consolidation group rules are modified
France is known for its proactivity in enacting anti-abuse legislation, and especially interesting is the royalty deduction limitation which a two-prong test, whereas Germany is also considering a harsher test to combat the US FDII benefit.
EY’s Global Tax Alert provides detailed summaries of the above provisions, among others.
As time for implementation of the Multilateral Instrument (“MLI”) draws near, it may be time to refresh the history and current status of this instrument.
Reference links are provided for The Multilateral Convention, Guidance for the Development of Synthesised Texts published by the OECD in November 2018, and Status of the Parties to a MLI as of December 21, 2018. An extract from the
An extract from the Synthesized Texts is provided as context:
This Guidance has been prepared to provide suggestions to Parties to the MLI for the development of documents they could produce to help users of the MLI to understand its effects on tax agreements it covers and modifies (the “Covered Tax Agreements”). The objective is to present in a single document and for each covered tax agreement: the text of a Covered Tax Agreement, including the text of relevant amending instruments; the elements of the MLI that have an effect on the Covered Tax Agreement as a result of the interaction of the MLI positions of its Contracting Jurisdictions; and information on the dates on which the provisions of the MLI have effect in each Contracting Jurisdiction for the Covered Tax Agreement. Such documents would be referred to as “synthesised texts”.
To ensure clarity and transparency for the application of the MLI, Parties that intend to develop documents setting out the impact of the MLI on their Covered Tax Agreements should be as consistent as possible. This Guidance sets out a suggested approach for the development of synthesised texts. The Guidance also suggests sample language that could be included in the synthesised texts. At this stage, the sample language includes: a sample general disclaimer on the synthesised texts; a sample disclaimer on the entry into effect of the provisions of the MLI; for each MLI Article, “sample boxes” of the provisions of the MLI that could modify the covered tax agreements; and sample footnote texts on the entry into effect of the provisions of the MLI.
As the New Year draws near from a personal perspective, it is also a New Year for birth of the MLI and its impact on worldwide tax treaties.
Complex new guidance continually is rolling off the press for scrutiny, especially for year-end compliance. EY’s Global Tax Alert provides a summary of recent developments, references to IRS Notice 2019-01, IRS FAQ’s, and Proposed Regulations for BEAT are provided for reference.
Proposed BEAT Regulations provide certainty re: Service Cost Method payments and the mark-up component that would be includable. BEAT is not limited to cash payments, and would also include amounts paid or accrued using any other form of consideration including property, stock or the assumption of a liability.
Notice 2019-01 was issued to address the rules for repatriations, generally arising from Sec. 959(c)(1), (2) and (3) in that order based on a LIFO approach. Compliance complexity has expanded significantly, demanding more time from multinational tax departments that will require added resources, technology demands and external advisor costs.
A new House Ways and Means tax package was introduced Dec. 10th, preserving the (correct) notion that tax year 2017 overpayments would not exclusively be attributed to the deemed repatriation tax without offset to 2018 regular tax liability. The package would also provide technical guidance for downward attribution rules.
IRS FAQ’s have been updated, attached for reference.
The IRS on 13 December issued proposed regulations (REG-132881-17) under Code Sections 1471–1474 (FATCA) and Sections 1441–1461.
The Organisation for Economic Co-operation and Development (OECD) will release a major update on its work on the taxation of the digital economy at the end of January 2019, according to Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration.
The Tax Executives Institute (TEI) provided insgihtful comments to the recently issued GILTI Proposed Regulations, addressing the following main points:
Proposed regulation section 1.951A-3(h)(1) (the “temporarily held property rule”) provides that temporarily held property acquired with “a principal purpose” of reducing a U.S. shareholder’s GILTI inclusion will be disregarded
Basis adjustment rule for tested losses
Only used tested losses should increase Subpart F E&P
Basis reductions should only apply to actual transfers of stock
Deemed Sec. 367(d) expense should reduce tested income
Prop. Reg. § 1.951A-2(c)(5) anti-abuse rule (and authority to issue such rule)
TEI’s comments are well reasoned and should be reviewed to further understand the complexities, and need for added clarification going forward.
Links to the proposed Foreign Tax Credit Regulations, and EY’s detailed Global Tax Alert, are provided for reference.
To the extent there are perceived favorable items, (i.e. including GILTI income and stock as subject to exemption rules), there are unfavorable items (i.e. exemption rules also affecting the FDII calculation and overall complexity).
From a multinational company perspective, these complex rules require almost immediate application for financial statement purposes while regular tax compliance/provision systems struggle to catch up. Thus, new technology will be required to prepare non-intuitive calculations that are still uncertain for many to fully comprehend and apply.
The IRS recently released Proposed Regulations on Section 163(j): an interest limitation that is applicable for the calculation of Global Intangible Low-Taxed Income (“GILTI”) under the US Tax Act (“TCJA”). A copy of the Proposed Regulations are provided for reference, highlighting some areas of clarity/surprise. Comments are due within 60 days of publication in the Federal Register, with a public hearing set for Feb. 25, 2019.
Former Proposed Regulations for Sec. 163(j), never finalized, are withdrawn
Proposed Regulations may be elected for 2018
General rule-Same as C corp; election (alternative method) for a CFC group
One limit for a consolidated group (affiliated, non-cons. group, or partnership n/a)
Adjusted Taxable Income (“ATI”) requires an adjustment for:
Capitalizable Sec. 263A costs re: inventory/sales
sales/dispositions of certain property
Sec. 78 gross-up, Sec. 951(a) Subpart F, Sec. 951A GILTI, Sec. 250(a)(1)(B) deduction, without regard to Sec. 250(a)(2) limitation, related to GILTI
Upper tier CFC members include “excess interest” of lower tier CFC’s
Further guidance re: ordering of Code provisions, including BEAT, will be issued
A “new” definition of interest is provided, including:
Sec. 1275(a) and Reg. Sec. 1.1275-1(d) instruments
Accrued market discount
Guaranteed payments of Sec. 702(c)
Income/loss re: hedges of interest-bearing assets/liabilities
Swaps, separated into a loan and payment swap (collateralized swap n/a)
Debt issuance costs
Sec. 382 attribution for pre/post-change periods
Sec. 381 includes the attribute for disallowed interest expense carryovers
No effect on E&P
Sec. 163(j) limit at partnership level
Intercompany CFC debt is included as interest income and expense, thus resulting in a net -0-; other debt will be a net adjustment to be allocated to separate CFC’s
New Form 8990 will be required
The most contentious items, as noted in recent days, are the adjustment of Sec. 263A depreciation (thus a factory does not add back depreciation in EBITDA), add back of Sec. 78, Sec. 951(a), Sec. 951A as reduced by the relevant Sec. 250 amount, complexity including excess ATI adjustments, and the new definition of interest, which includes interest equivalent instruments/transactions that will be included as a potential limitation.
The 439 pages require several readings for a general comprehension, aided by webinars and summaries from various advisory firms.