Strategizing International Tax Best Practices – by Keith Brockman

Author Archive

US Reg update: 987/954/958/PTI/GILTI

Alot of regulation activity is taking place, in advance of the June 22nd date that would allow provisions of the Tax Act to be retroactive to date of enactment.  Additionally, the regulations will clarify tax return reporting for calendar year US-based multinationals.  

The IRS issued final regulations (T.D. 9857), effective 13 May 2019, that address the recognition and deferral of foreign currency gain or loss with respect to qualified business units (QBUs) subject to Section 987 (Section 987 QBUs) in connection with certain QBU terminations and other transactions involving partnerships.

The IRS released, on 17 May, proposed regulations under Sections 954 and 958 on the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). The IRS also released proposed regulations that provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business in computing foreign personal holding company income.

Eagerly-anticipated final GILTI regulations moved closer to release this week, having been received for review by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) on 16 May.

Proposed regulations under Sections 951(b) and Section 951A were also sent to OIRA for review on the same day.

In addition, interim final regulations under Sections 91 and 245A were received by OIRA on 15 May.

EY’s Global Tax Alert provides details on the above actions, for reference.

Click to access 2019G_002432-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20May%202019.pdf

Category:

Tax Risk Management, TJCA

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US int’l update: EC contests FDII

As expected, the European Commission has sent a letter this week to US Treasury commenting that: the Foreign Derived Intangible Income (FDII) deduction violates international trade law.  “The design of the FDII deduction is incentivizing tax avoidance and aggressive tax planning by offering a possibility to undercut local tax rates in foreign economies.”  The Commission further described the FDII is an “incentive for foreign economies to lower corporate tax rates in a ‘race to the bottom.’” The letter included a statement that the European Commission was “ready to protect the economic interest of the European Union in light of discriminatory rules and practices.”

EY’s Global Tax Alert is provided for added reference.

Click to access 2019G_002276-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2010%20May%202019.pdf

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Tax Risk Management

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India PE: Profit proposal

India’s Central Board of Direct Taxes has published a report for comments, due by May 18th.

The Committee has recommended a mixed or balanced approach (“fractional apportionment”) that allocates profits between the jurisdiction where sales take place and the jurisdiction where supply is undertaken.  India’s position is that such approach is acceptable in other tax treaties.  However, the risk of double taxation is present if this approach is not adopted by other countries.  Additionally, the approach differs from the OECD approach, which then introduces more complexity for all multinationals with Indian operations.  

India is known for its long appeals, and different approaches to its fisc.  Accordingly this report should be reviewed, with a possibility to comment, prior to further actions.  This report, and methodologies, will also be closely followed by other countries in this complex and subjective area of PE profit allocations.

EY’s Global Tax Alert provides additional details, for reference.

Click to access 2019G_001978-19Gbl_TP_India%20-%20Proposal%20to%20amend%20PE%20profit%20attrib%20rules.pdf

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PE, Tax Risk Management

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OECD TP Guidelines

This 2017 edition of the OECD Transfer Pricing Guidelines incorporates the substantial revisions made in 2016 to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. It also includes the revised guidance on safe harbours approved in 2013 which recognises that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty.

A link to the Guidelines is attached for reference.

http://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm

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OECD / UN, Transfer Pricing

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Tariffs: China exclusions & Best Practices

The United States Trade Representative (“USTR”) announced it was granting an exclusion to an additional 21 Chinese-origin products meeting specific listed descriptions, as described in EY’s Global Tax Alert included for reference.

Best Practices include:

  • Mapping the complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, alternative sourcing options, and to assess any opportunities to mitigate impact such as tariff engineering.
  • Identifying strategies to defer, eliminate, or recover the excess duties such as bonded warehouses, Free Trade Zones, substitution drawback, Chapter 98 and equivalent programs under China customs regulations.
  • Exploring strategies to minimize the customs value of imported products subject to the additional duties, re-evaluating current transfer pricing approaches, and for US imports, considering US customs strategies, such as First Sale for Export.

Duties/tariffs are a significant component of product costs, supply chain management and controlling costs.  This function should have a global oversight / value-add function which requires talented personnel with the technical acumen to drive this initiative.  

Click to access 2019G_001932-19Gbl_Indirect_USTR%20publishes%20new%20exclusions%20for%20Chinese-origin%20products.pdf

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Tax Risk Management

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UN: TP developments

The UN Transfer Pricing Subcommittee has provided a work designed to move forward its guidance in updating the UN Practical Manual on Transfer Pricing for Developing Countries.  The paper provides three attachments addressing:

  • Financial Transactions, a new chapter
  • Profit Splits, revised text
  • Establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits, revised text

All three attachments are significant and timely issues, noting the EU and other countries similar emphasis on these topics.

The paper is a valuable read in understanding UN’s direction on the above issues, and is included as a referenced link.

Click to access 18STM_CRP1_Update-UN-Practical-Manual-on-Transfer-Pricing.pdf

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OECD / UN, Transfer Pricing

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EU: Profit Split method

The EU Joint Transfer Pricing Forum recently published a paper illustrating when to use the profit split method (PSM) and how to accomplish the split of profits per the OECD Guidelines.  The report is linked as a reference.

The report is a complement to, and supports, the OECD Revised Guidelines on the application of the Transactional Profit Split Method issued in June 2018.

As this method is not simple, and is also a focus on transfer pricing issues in the US, this paper is valuable into the application and concepts of PSM.

 

Click to access report_on_the_application_of_the_profit_split_method_within_the_eu_en.pdf

Category:

Tax Risk Management, Transfer Pricing

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US/OECD int’l developments

Recent international tax developments include:

  • US has communicated its concern to France regarding its Digital Services Tax
  • US TCJA Section 250 final regulations will include guidance on “end-user” conformity and FDII documentation
  • The IRS may use the new Advance Pricing and Mutual Agreement Program (APMA) Functional Cost Diagnostic Model released last February in examinations in appropriate cases, according to an IRS official this week
  • GAO urged the IRS to develop a “comprehensive plan for managing efforts to leverage FATCA data in agency compliance efforts
  • The Organisation for Economic Co-operation and Development’s Forum on Tax Administration (FTA) announced a second pilot of the International Compliance Assurance Program (ICAP 2.0). A new handbook that will guide the second pilot was also endorsed and published by the FTA. ICAP is a voluntary risk assessment and assurance program designed to facilitate open and cooperative multilateral engagement between multinational enterprise (MNE) groups willing to engage actively and transparently and tax administrations in jurisdictions where the MNEs have business activities.

Additional guidance, tax exam techniques and risk assessment are still very much in process in an effort to reduce uncertainty and provide faster resolutions to tax audits.  EY’s Global Tax Alert provides additional details for reference.

Click to access 2019G_001616-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%205%20April%202019.pdf

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Tax Risk Management

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Australia: Self-assessed Distributor margin profile

In what may be the next int’l trend in risk assessment, the Australian Tax Office (“ATO”) has quantified, in sector tables, stated ranges of distributor profit margins by which a taxpayer’s risk will be determined for potential review/audit.  A Reportable Tax Position schedule will be the reporting vehicle for such self-assessment, effective for years ending on or after June 30, 2018.

The guidance is likely to affect the ATO’s starting position for unilateral APA, Mutual Agreement Procedure and bilateral APA discussions.

All inbound distributor arrangements are subject to reporting.  As a result, many multinationals may further consider an APA going forward.

General distributor results are as follows:

High risk: Less than 2.1%

Medium risk: 2.1% – 5.3%

Low risk: Above 5.3%

EY’s Global Tax Alert provides additional guidance on this important development:

Click to access 2019G_000801-19Gbl_TP_Australia%20-%20Guidance%20to%20distributor%20profit%20margins%20-%20Action%20required.pdf

 

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Tax Risk Management

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US developments/OECD toolkit

Recent international tax developments include the following:

  • OECD is progressing on a Digital Strategy, with planned consensus in 2020 (hopefully separate countries will have added patience for a coordinated approach)
  • US Previously Taxed Income (PTI) regulations are due this summer/fall
  • Foreign Account Tax Compliance Act (FATCA) final regulations were issued, effective March 2019 and expanding the definition of “responsible person”
  • India and the US reached agreement to exchange Country-by-Country (CbC) reports, thus alleviating any need to provide separate India CbC reports for US taxpayers
  • OECD released a Beneficial Ownership Toolkit (reference attached) to assist developing countries in identification of ultimate beneficial owners

EY’s Global Tax Alert is also attached for reference.

Click to access beneficial-ownership-toolkit.pdf

Click to access 2019G_000806-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2022%20March%202019.pdf

Category:

Tax Risk Management

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UK Spring Statement: Pay your fair share

The UK Chancellor’s Spring Statement was announced on March 13, 2019 with a focus on the following:

  • Making Tax Digital, a light approach to penalties for companies striving to comply
  • Digital Services Tax; companies should pay their fair share (also a theme when the Diverted Profits Tax was announced)
  • Depreciation allowances
  • A policy paper re: HMRC’s approach to tax avoidance, evasion and other…

Additional consultations will follow, including the Digital Services Tax planned for April, 2020.

As the UK is still negotiating its entrance into, or exit from, Brexit, these developments will be especially important.

EY’s Global Tax Alert provides details for reference:

Click to access 2019G_000796-19Gbl_UK%20Chancellor%20announces%20Spring%20Statement.pdf

Category:

Tax Risk Management

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TCJA parking non-deductibility; TEI offers valuable insight/safe harbors

IRS Notice 2018-99, published on Christmas Eve, has created quite a controversy in its short history for creating non value-added work in extricating costs of a company’s (leased or owned) parking facilities for which a federal tax deduction would not be allowable.  The Notice and TEI’s letter are attached for reference.

TEI’s timely letter expresses the history of this provision, and most importantly the inordinate amount of work, legal fees, etc. that would be involved pursuant to the Notice.

Two safe harbor provisions are suggested for implementation; Owned facilities $100 per parking spot per directly attributable expenses, and leased facilities would use 5% of the rent as the deemed amount subject to disallowance.

It is hopeful that IRS will quickly respond to current controversy and adopt such harbor provisions, or similar provisions, to avoid significant costs involved in preparing the 2018 federal income tax returns.  

Click to access n-18-99.pdf

Click to access TEI%20Comments%20on%20Notice%202018-99_FINAL_2.22.19.pdf

Category:

Tax Risk Management

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BEAT: TEI’s comments

Tax Executives Institute, Inc. (TEI) recently provided comments to the proposed BEAT regulations, including the following:

  • Use of services cost methodology should be clarified
  • A payee’s Subpart F income should be excluded (i.e. avoid double taxation)
  • Nonrecognition transactions should be excluded
  • A payor’s recognized loss transaction should not also have BEAT implications
  • No blended rates
  • Anti-abuse rule should be clarified
  • A recomputation approach should be available for NOL taxpayers

The thoughtful comments provide additional context of the intent for the BEAT provisions, and suggestions to carry out the intent of legislation without extending into other transactions that would have been initially thought as not within the BEAT purview.

Click to access TEI-Comments-Proposed-BEAT-Regulations-FINAL-to-IRS-19Feb2019.pdf

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Tax Risk Management

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OECD: Treaty abuse peer review report

The OECD recently published its peer review report on treaty shopping re: prevention of treaty abuse under the inclusive framework on BEPS Action 6.  A link to the document is included for reference.

Article 6 targeted treaty abuse; Action 15 introduced the multilateral instrument (MLI) to implement BEPS actions.  The MLI is the mechanism whereby countries are implementing the treaty-shopping minimum standard.

The first Peer Review shows the effectiveness of implementing the minimum standard for treaty abuse.  The intent of Action 6 is to stop treaty shopping in its entirety.

The treaty shopping minimum standard requires countries to include two components in their tax agreements; an express statement on non-taxation and one of three ways to address treaty-shopping.  The provisions require bilateral agreement.  The 2017 OECD Model Tax Convention includes the following express statement: “Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance…”

The three methods of addressing treaty shopping include;

  1. Principal Purpose Test (PPT) alone, or
  2. PPT with a simplified or detailed version of the Limitation on Benefits (LOB) rule, or
  3. Detailed LOB rule with a mechanism to deal with conduit arrangements.

As the MLI’s are agreed, it is important to understand the three methods above, and the express statement which includes reference to the elimination of double taxation, a concept which is sometimes ignored in the pursuit of perceived treaty / tax abuse.

 

https://read.oecd-ilibrary.org/taxation/prevention-of-treaty-abuse-peer-review-report-on-treaty-shopping_9789264312388-en#page1

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OECD

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Tax dispute: Benchmarking

KPMG has published their 2018 tax dispute benchmarking survey, interviewing 159 senior tax professionals of US based multinationals.

  • State tax disputes have accelerated, more than IRS or foreign tax audits
  •  State authorities are not developing risk assessment proficiencies
  • All audits are taking longer to resolve
  • Canada, India, China, Germany and Italy rank as the most difficult to resolve
  • Transfer pricing remains as the top issue of examination
  • 58% of respondents did not have a dispute resolution budget
  • Tax disputes are not monitored by technology, with ⅓ Excel tracking
  • External law firms are being engaged at the start of the proposed assessment

As tax disputes, and the difficulty of resolving them, are escalating, it is revealing that most companies in the survey do not have a process in place for audits before they commence.  This survey should be reviewed, with Best Practices and learnings, in mind for the future.

Click to access 2018-kpmg-tdr-benchmarking-report.pdf

Category:

Audits

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