Strategizing International Tax Best Practices – by Keith Brockman

Archive for June, 2019

New US Reg’s: GILTI, 245A,et al.

IRS and Treasury released, on June 14th, a set of proposed and final Regulations on GILT, in addition to Temporary and Proposed Regulations on Section 245A that relate, partly, to GILTI.  A copy of the proposals are provided for reference, with some highlights to date:

  • REG 106282-18 is a Notice of proposed rule making with temporary regulations that limit the dividends received deduction available for certain dividends received from current or former controlled foreign corporations (CFCs).  Per the Notice, “only small U.S. taxpayers with fiscal year CFCs that transfer assets in related party transactions during the gap period, or U.S. taxpayers that transfer more than 10 percent of their stock of a CFC in a taxable year or U.S. taxpayers that reduce their ownership of stock of a CFC by more than 10 percent, have the potential to be affected by these regulations.”
  • REG 101828-19, Notice of proposed rule making re: domestic partnership treatment ( adopting an aggregate approach), and proposed GILTI regulations for gross income subject to a high rate of foreign tax.  Note the GILTI final regulations adopt the GILTI high tax exclusions of the original proposed regulations without change, however the proposed regulations would allow an expanded election whereby the high-tax determination is made at the QBU level.  An election made with respect to a CFC applies with respect to each high-taxed QBU of the CFC, and a U.S. shareholder must make the same election with respect to each of its CFCs.  This high-tax change would apply to taxable years of foreign corporations beginning on or after the date that final regulations are published in the Federal Register.
  • TD9865, Final temporary regulations under Section 245A
  • TD9866, Final and temporary regulations re: GILTI guidance, pro-rata shares of Subpart F income and certain foreign tax credit provisions.  Note that future guidance is reserved re: allocation and apportionment of expenses for the foreign tax credit limitation under Section 904.  
    • Future guidance is expected to clarify that Sec. 250 does not apply to CFCs as an allocable deduction
    • Final regulations retain the current GILTI high tax exclusion, noting that the rules prescribed by a separate notice of proposed rule making for an expanded exclusion cannot be used until the relevant regulations are effective.
    • De minimis and full inclusion rules are clarified
    • The effect of a qualified deficit or a chain deficit in determining gross tested income is disregarded, and the final regulations are revised accordingly
    • Final regulations retain the tested loss QBAI exclusion, although there is a reduction to tested interest expense of a CFC for a “tested loss QBAI amount”
    • Final regulations retain the netting approach for determining specified interest expense, with certain modifications
    • Final regulations define “interest expense” and “interest income” by reference to Section 163(j) 
    • Rules for basis adjustment of tested loss CFCs will be a separate project

The regulations/notice of proposed rule making are extensive, complex and represent over 500 pages of guidance, although certain provisions and clarifications represent favorable rules based on comments received.

The rules clarify current law, comments received and explanations why they were, or were not, considered.  Thus, a detailed review refreshes such insights into the long history of the international tax provisions.

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12436.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12442.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12437.pdf

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12441.pdf

Singapore/Korea DTT

A revised Double Tax Treaty (DTT) has been signed by Singapore and Korea, to be effective after ratification by both countries, including:

  • 5% royalty withholding tax rate
  • Article 26: New anti-abuse provision

The reduction in withholding tax rate is a welcome revision, among other details, as outlined in EY’s Global Tax Alert

https://www.ey.com/Publication/vwLUAssets/Singapore_and_Korea_sign_revised_income_tax_treaty/$FILE/2019G_002898-19Gbl_Singapore%20and%20Korea%20sign%20revised%20income%20tax%20treaty.pdf

S. Africa: Anti-tax avoidance

Corporate tax amendments have been proposed in the Draft Taxation Laws Amendment Bill 2019, referred to as “initial 2019 TLAB.”  The primary change is to address potential dividend stripping schemes, with comments due by 25 June 2019.  Draft legislation is expected in July 2019.

To the extent that corporate reorganizations/dividends are envisioned in S. Africa, this legislation should be reviewed, with valuable comments provided to ensure fairness in the final legislation.

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

https://www.ey.com/Publication/vwLUAssets/South_Africa_publishes_initial_list_of_proposed_corporate_tax_law_amendments_-_focusing_on_anti-tax_avoidance_measures/$FILE/2019G_002864-19Gbl_South%20Africa%20-%20Prop%20corp%20tax%20rules%20-%20anti-tax%20avoidance%20measures.pdf

ERM: Tax risk

The Enterprise Risk Management (ERM) process should be a coordinated process envisioning a multinational’s tax risks around the world.

The evolution with BEPS, ongoing developments re: digital taxation, multilateral instruments (MLIs) becoming effective, permanent establishment (PE) changes, and countries enacting unilateral legislation inconsistent with international norms are some examples why international tax/transfer pricing should be among the top ten risks of most multinationals.

Legacy ERM procedures may not be as effective in the current tax world as they were recently.  However, have multinationals really incorporated these changes into the ERM process re: uncertainty and risk management?

Members of the Board of Directors, responsible for ultimate risk, should also be asking this question as a reminder/refresher for the ERM process.  Tax executives, knowledgeable of such risks, should also be proactive in this process to educate others about recent global changes that may impact their organization.

Questions and challenges for ERM should be developed as new tax legislation is becoming more complex and uncertain in countries around the world.

 

New Zealand DST: In play

Not awaiting the OECD’s proposals for which a Workplace will be delivered in 2020, implementation following that several years later, New Zealand seeks to propose a 2-3% Digital Services Tax (DST) in the interim.  Public comments will be accepted by July 18th. The Government discussion document and EY’s Global Tax Alert provide details, as referenced herein.

Discussion document highlights:

The Government is committed to ensuring everyone pays their fair share of tax, including digital multinationals. Achieving this will require changes to the current tax rules. There are two options for this:

  • The first option is to apply a separate digital services tax (DST) to certain digital transactions. A DST taxes at a low rate (for example, 2% to 3%) the gross turnover of certain highly digitalised businesses that are attributable to the country.
  • The other option is to change the current international income tax rules, which have been agreed to by countries (usually referred to as “the international tax framework”).

In summary, New Zealand is not patient to wait for OECD rules, wishes to implement a transition tax in the interim and plans to repeal this tax with the OECD solution when it becomes effective.

https://www.ey.com/Publication/vwLUAssets/New_Zealand_Government_to_seriously_consider_a_Digital_Services_Tax/$FILE/2019G_002780-19Gbl_Indirect_New%20Zealand%20considers%20Digital%20Services%20Tax.pdf

http://taxpolicy.ird.govt.nz/sites/default/files/2019-dd-digital-economy.pdf

OECD Digital Tax: Consensus Solution?

On 31 May 2019, the Organisation for Economic Co-operation and Development (OECD) released its document Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy (the Workplan).

The Workplan describes the planned approach for addressing the tax challenges of the digitalization of the economy that has been agreed upon by the 129 jurisdictions participating in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Workplan was approved at the 28-29 May plenary meeting of the BEPS Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer organizations.

A final report is envisioned for 2020, including:

Pillar One focuses on the allocation of taxing rights, and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules;

Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

Under Pillar One, the first option (i) Modified Residual Profit-Split method would allocate to market jurisdictions a portion of an MNE group’s non-routine profit that reflects the value created in markets that is not recognised under the existing profit allocation rules, or (ii) the fractional apportionment method involves the determination of the amount of profits subject to the new taxing rights without making any distinction between routine and non-routine profit, or (iii) distribution-based approached that would provide a baseline profit attributable to marketing, distribution, and user-related activities.  The concept of losses is also to be recognized in the relevant model.

 

As stated in the workplace, the real risk is that “A further issue is the recognition that if the Inclusive Framework does not deliver a comprehensive consensus-based solution within the agreed G20 time frame, there is a risk that more jurisdictions will adopt uncoordinated unilateral tax measures.”

Additionally, the current workplace is focused on digital tax, although some concepts may creep into discussions of income tax.

A reference to the Workplan is provided for reference.

 

https://www.oecd.org/tax/beps/programme-of-work-to-develop-a-consensus-solution-to-the-tax-challenges-arising-from-the-digitalisation-of-the-economy.pdf

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