Strategizing International Tax Best Practices – by Keith Brockman

Author Archive

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

Click to access wipo_pub_944_2017-intro1.pdf

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Tax Risk Management, Transfer Pricing

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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.

 

Click to access 2017G_06540-171Gbl_TP_China%20issues%202016%20APA%20Annual%20Report.pdf

Click to access 2873221.pdf

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Transfer Pricing

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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. 

Click to access tw-e-tax-alert-issue100-eng.pdf

Category:

Transfer Pricing

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US Tax Bill

The House Ways and Means Committee published the initial draft of their bill on Nov. 2, 2017, a far-reaching document that had a few surprises.

Apart from the expected provisions, albeit different tax rates for the transition tax to a (quasi) territorial system than was expected, the double dip corporate interest provisions (worst of either rule) added a base erosion principle for most large multinationals in addition to a 30% tax based limitation.  This new limitation was based on the premise that debt was being used in the US, receiving a tax benefit therefrom, while such proceeds have been transferred offshore resulting in a non-symmetrical base erosion assumption.

Additionally, a new 20% excise tax on payments to foreign affiliates from the US that are deductible, includable in cost of goods sold/inventory or as fixed assets are subject to a non-deductible 20% excise tax.  This provision raises $155 billion.  Most importantly, this does not have an export offset that was present in the now extinct Business Activities Tax provision, and is not limited to US headquartered multinationals.  Knowing this provision would be challenging for most organizations to react quickly thereto, the effective date is 2019 whereas most of the provisions have an effective date of 2018.

Both of these “surprise” provisions already have many decrying the present draft, while the House Ways and Means Subcommittee is already in process of revising this document.

Aside from the formal bill, the House comments of each section should be reviewed, as it underscores the intent of the writers for such provision.

For the political process, this bill will be changed by the House Ways and Means prior to a vote by the House, another version will be produced by the Senate and a final reconciliation bill will need to be passed by both the House and Senate prior to forwarding to President Trump for signature.

The effective enactment date is being pushed for the end of this year, although it may easily drift into the first quarter of 2018.

A link to the bill is provided, which should serve as a baseline followed by legislative changes as it flows through the process, potentially becoming the largest tax code change since the 1986 provisions.

https://waysandmeans.house.gov/tax-cuts-jobs-act-resources/

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Tax Risk Management

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Offshore indirect transfers: TEI’s comments

On October 19, 2017, Tax Executives Institute (TEI) filed a letter with the Platform for Collaboration on Tax, a joint initiative of the World Bank, OECD, International Monetary Fund, and United Nations, regarding the Platform’s draft toolkit on the taxation of offshore indirect transfers.  TEI’s comments focused on the need for the Platform’s toolkit to educate and provide options to nations considering taxing offshore indirect transfers, rather than prescribing a preferred approach, among other things.

The Platform for Collaboration on Tax (the Platform), a joint initiative of the Organisation for Economic Co-Operation and Development, International Monetary Fund, United Nations, and World Bank, released a document entitled The Taxation of Offshore Indirect Transfers – A Toolkit (the Draft Toolkit or Toolkit) on 1 August 2017. The Draft Toolkit was designed to help developing countries address the complexities of taxing offshore indirect transfers of assets, which the Platform states is a practice by which some multinational corporations try to minimize their tax liability.

The toolkit and TEI’s submission paper are referenced herein for review

Highlights of TEI’s comments include the following points:

  • There should be symmetry and neutrality as compared to direct asset transfers
  • Status of toolkit is unclear, and is not a source of authoritative guidance
  • The goal of the draft toolkit is unclear
  • A capital gains tax can distort economic transactions
  • Gains and losses should be the subject of the toolkit
  • Most indirect transfers are made for economic, not tax, reasons
  • The general treaty definition of immovable property seems to have been abandoned with no reason

The toolkit can be applauded for launching a multi-organizational approach with some good ideas, although such ideas should be further challenged and developed prior to an overall vision and detailed rules promulgated

 

Click to access discussion-draft-toolkit-taxation-of-offshore-indirect-transfers.pdf

 

Click to access TEI-Comments-Offshore-Indirect-Transfers-Oct192017.pdf

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Tax Risk Management

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CR reporting; tax policy norm

Corporate responsibility (CR) reporting is becoming more of a norm for MNE’s, illustrated by KPMG’s report as referenced herein.

Apart from policies, such as Human Rights, that should be a basic component of every MNE’s policy and referenced to the UN standard, tax policies are becoming more of a public norm than ever before.

A UK tax risk strategy is required to be published by every significant UK taxpayer by 12/31/2017 on a public website describing the tax risks of the UK group and how they are managed on a macro and micro based level.

Global tax policies are also proactively published by major MNE’s as part of their Best Practices and Enterprise Risk Management efforts.

A basic global tax policy, published or not, should be a primary tool integral to Board and company governance.  Tax risk management, including documentation thereof, will become more of a shout than a whimper by NGO’s, parliamentarians, tax advisors and internal governance standards of every MNE.

Tax policies are also becoming more integrated with business policies in corporate governance.

To the extent policies are lacking in an organization, now is the time to address this important aspect of risk management and Best Practice governance.

Click to access kpmg-survey-of-corporate-responsibility-reporting-2017.pdf

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Tax Risk Management

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US tax reform: 1 step closer

The US Senate passed their version of the Fiscal Year Budget 2018, an important step that leads to reconciliation of the budget this coming week by the House and Senate.

Following the budget reconciliation, allowing a majority vote for tax reform, US tax reform is now on the horizon for potential enactment by year-end 2017.

To the extent potential US tax reform has been on the backstage, or ignored by pessimists, this latest step should be a strong indication that everyone needs to understand the Framework, albeit brief, previously announced and advocated by President Trump.

Attention is now in the details, with significant tax and business consequences for the US and the world.

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

Click to access 2017G_05952-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2020%20October%202017.pdf

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Tax Risk Management

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S. Africa CbC / TP requirements

The South African Revenue Service (SARS) released its final notice re: requirements for filing the Country-by-Country (CbC) report, Master File and Local File, in alignment with OECD BEPS Action Item 13.

It is interesting that, pursuant to minimum thresholds, both a Master File and Local File are required to be filed, rather than only the Local File.  This may become more of a norm, versus an exception, as the global transfer pricing and risk environment will need to be reviewed in alignment with local business operations.  Hopefully, the review will encompass confidential limitations on the information received and will only encompass transfer pricing practices of the local operations rather than extend CbC presumptions or Master File analogies against the local data.

EY’s Global Tax Alert provides the relevant details of the SARS requirement.

Click to access 2017G_05868-171Gbl_TP_South%20African%20RS%20releases%20Public%20Notice%20concerning%20CbCR%20master%20and%20local%20file.pdf

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OECD

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EU: VAT proposals

The European Commission (EC) has proposed a new set of rules that is meant to introduce efficiencies into long-standing current practices.

The new principles include:

  • One Stop Shop
  • Destination principle, with VAT on goods collected by the selling State and transferred to the State of destination
  • Charging VAT on cross-border trade
  • “Certified Taxable Person” certification allowing simpler EU principles to apply
  • Quick fixes, including storing goods in another Member State

The EY Global Tax Alert is included for reference, which thereby includes links to the related proposals.

This proposal is significant for all businesses trading in the EU, and its principles should be reviewed to enable proactive planning.

Click to access 2017G_05695-171Gbl_Indirect_EC%20proposes%20far-reaching%20reform%20of%20EU%20VAT%20system.pdf

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Tax Risk Management

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OECD: CbC-Effective tax risk assessment

OECD has published new handbooks, one of which relates to country-by-country (CbC) reports and how tax administrations can incorporate this information into their tax risk processes, inclusive of risk tools and governance processes.

Other reports/handbooks have also been issued that will be a valuable reference:

  • Tax Administration 2017
  • The Changing Tax Compliance Environment and the role of audit
  • Shining Light on the Shadow Economy
  • CbC: Handbook on effective implementation

 

Click to access 2017G_05389-171Gbl_OECD%20publishes%20two%20handbooks%20on%20Country-by-Country%20reporting.pdf

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OECD

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US Sales & Use tax risk

I have linked a valuable reference took to assess US sales and use tax risk that will be helpful in understanding the differences between the “sales” and “use” components as well as the controls and systems necessary to control such risks in a Sarbanes Oxley “SOX” environment.

Most importantly, the tax function needs to be involved in monitoring contracts in which this risk may be evident, prior to execution of the document.  Sometimes, the sales/use tax function may not be a tax function, albeit within finance or the controllership area.  However, this area of tax is increasingly subjective, complex and requires the input of technical internal/external advisors to avoid large surprises and audit assessments across the country.

Additionally, foreign corporations may also want to review any inbound US activities, and related contracts, to assess potential US sales/use and state income tax obligations due to “nexus” within the borders of a state.

https://www.journalofaccountancy.com/issues/2017/apr/sales-and-use-tax-risk.html

Category:

Tax Risk Management

Policy issues: US int’l tax reform

The Joint Committee of Taxation (JCT) has published a valuable reference to the principles underlying tax reform that will be presented to the Senate Finance Committee on October 3, 2017.

This reference is a helpful document into understanding some of the rationale and intentions that will become a part of the legislative writing process, as it includes background context of the issues.

A link to the JCT site and document is provided.

https://www.jct.gov

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Tax Risk Management

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US Tax Framework in print

The US Tax Framework was published Sept. 27, a notable date as this date is also used to mark the timeframe for expensing investments.

The main corporate tax points, and subtleties, include:

  • 20% corporate tax rate, but the tax rate and differential for one-time foreign earnings/cash is not specified.
  • Minimum tax on foreign profits to “level the playing field”
  • Territoriality system, exempting 100% of dividends (although the KPMG linked notes include the point that this is not equivalent to “distributions” thus a complicated Earnings and Profits tracking system may still apply)
  • Interest expense will be “limited” (EBITDA/other?)
  • R&D credit remains, although Sec. 199 US manufacturing incentive deduction is lost
  • Pass-through structures tax rate of 25%
  • Corporate AMT is gone.

The President has formally and forcefully announced his continued message for tax reform, as both the House and Senate Committees are now drafting language that will hopefully result in legislation enacted late 2017 or early 2018 with the political complexities / process.

Upon enactment, the US GAAP tax accounting will be complex and required results for public companies in the quarter of enactment.  Additionally, the timing for state enactment is also a separate complex issue that will need analysis.

The US Framework is repeatedly attempting to “level the playing field,” now the politicians, journalists, advisors and tax practitioners will all work with a little bit of fact to create a cocoon of fiction by which the impending tax reform can be measured.  

Click to access 2017G_05589-171Gbl_US%20tax%20reform%20-%20corporate%20and%20international%20provisions.pdf

Click to access Tax-Framework.pdf

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Tax Risk Management

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US int’l developments

EY’s Global Tax Alert highlights several postulates for potential US tax reform, in which both the House and Senate are busily writing new language this month to push this reform effort by President Trump.

The OECD’s additional guidance on Country-by-Country reporting is also reiterated, and the short-term extension for the US debt limit is provided to further the tax reform process.

Click to access 2017G_05086-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%208%20September%202017.pdf

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Tax Risk Management

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MLI Language primer / China’s intent

EY’s Global Tax Alert outlines an excellent presentation of the verbiage contained in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), in addition to specificity re: China’s intent of each of the BEPS Action Items.

The MLI contains four types of provisions. Depending on the type of provision, the interaction with CTAs varies. A provision can have one of the following formulations: (i)”in place of”; (ii)”applies to”; (iii)”in the absence of”; and (iv)”in place of or in the absence of.”

A provision that applies ”in place of” an existing provision is intended ”to replace an existing provision” if one exists, and is not intended to apply if no existing provision exists. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.

 

A provision that ”applies to” provisions of a CTA is intended ”to change the application of an existing provision without replacing it,” and therefore may only apply if there is an existing provision. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.

A provision that applies ”in the absence of” provisions of a CTA is intended ”to add a provision” if one does not already exist. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that does not contain a provision within the scope of the relevant MLI provision.

A provision that applies ”in place of or in the absence of” provisions of a CTA is intended ”to replace an existing provision or to add a provision.” This type of provision will apply in all cases in which all the parties to a CTA have not reserved their right for the entirety of an article to apply to its CTAs. If all Contracting Jurisdictions notify the existence of an existing provision, that provision will be replaced by the provision of the MLI to the extent described in the relevant compatibility clause. Where the Contracting Jurisdictions do not notify the existence of a provision, the provision of the MLI will still apply. If there is a relevant existing provision which has not been notified by all Contracting Jurisdictions, the provision of the MLI will prevail over that existing provision, superseding it to the extent that it is incompatible with the relevant provision of the MLI (according to the explanatory statement of the MLI, an existing provision of a CTA is considered “incompatible” with a provision of the MLI if there is a conflict between the two provisions). Lastly, if there is no existing provision, the provision of the MLI will, in effect, be added to the CTA.

China’s intent with respect to its positions for each of the BEPS Actions are also outlined in the EY Global Tax Alert, as such intent would affect over 100 double tax treaties.  

Click to access 2017G_04865-171Gbl_Mainland%20CN%20signs%20MC%20to%20Implement%20Tax%20Treaty%20Related%20Measures%20to%20Prevent%20BEPS.pdf

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OECD

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