Strategizing International Tax Best Practices – by Keith Brockman

Author Archive

Danish PE: Intercompany contract risk

As countries become creative re: permanent establishment (PE) taxation, this scenario presented by the EY Global Tax Alert reminds all tax practitioners to be cognizant of what intercompany provisions are provided.

The Danish Tax Board referred to the contract between the Austrian company and the Danish company, according to which the Danish company would make offices and storage facilities available to the Austrian company. The Danish Tax Board was informed that the premises would be used by the subcontractor only. The Danish Tax Board ruled that according to the wording of the contract between the Austrian company and the Danish company, the Austrian company would have a place of business in Denmark at its disposal regardless of the fact that the services would be outsourced to a subcontractor.

Thus, providing for a storage closet (in literal terms) may impose PE liability, with the ensuing compliance and fees a significant factor for what was probably an inadvertent error by the drafters of the intercompany agreement.

The treaty had the same PE provisions as OECD’s Article 5 language, although noting that the OECD’s recommendations were looked to by the tax administration.

As a Best Practice, all intercompany agreements (anywhere in the world) need to be reviewed by an international tax practitioner prior to execution, whether in-house personnel or outside advisors.  

EY’s Alert provides additional details that should be reviewed to indicate the pervasiveness of the new PE rules, and the aggressiveness of tax administrations to literally interpret intercompany agreements.

Click to access 2017G_04863-171Gbl_Danish%20Tax%20Authority%20ruling%20on%20creation%20of%20permanent%20establishment.pdf

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OECD, Tax Risk Management

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New Zealand: OECD & beyond

New Zealand’s government has announced the introduction of new BEPS compliant rules that will be effective mid-2018.  Additionally, the government has taken this opportunity to expand upon the OECD’s rules, in an attempt to ensure that a “fair share of tax” is paid by multinationals doing business in the country.

Acknowledging the OECD’s intent to provide flexibility with its BEPS Actions and subjective language therein, New Zealand is looking for this legislation to impose rules above and beyond the BEPS Actions.  For example, anti-PE rules will be introduced that look to Australia’s provisions, which were initially introduced by the UK as diverted profit tax schemes to collect additional tax.

International tax practitioners should review these provisions and plan their tax strategies accordingly, knowing that New Zealand will introduce double taxation sooner vs. later in the global concept.

EY’s Global Tax Alert provides relevant details of New Zealand’s proposals.

Click to access 2017G_04691-171Gbl_New%20Zealand%20to%20implement%20wide%20ranging%20international%20tax%20reforms.pdf

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OECD

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TP documentation for Malaysia: OECD+

As countries continue to align and/or expand the OECD’s transfer pricing documentation (Master File and Local File), including country-by-country (CbC) reporting, the path towards consistency continues to widen, introducing subjective determinations that will potentially lead to additional disputes and double taxation.  EY’s Global Tax Alert provides the relevant details.

The Guidelines adopt a substance over conduct principle associated with contracts and require a more detailed analysis of functions performed, assets employed and risks assumed.

The Guidelines require the functional analysis to align value-creating activities with transfer pricing outcomes by increasing remuneration for significant functions undertaken, with an emphasis on financial capacity to assume risk and exercise control over risk. Failure to conform to the terms of the written contract may cause the transaction to be recharacterized according to the factual substance, and transactions without a commercial substance can be disregarded.

Most importantly, the tax authorities will be looking at contracts with the ability to recharacterize or disregard such transaction.  To the extent additional approvals and guidelines are not adopted by the relevant tax administration, this may lead to new chaos in the transfer pricing world, including a potential ability to avoid tax treaty interpretations and increase the risk of double taxation.

The intent of various countries to adopt the new OECD transfer pricing models needs to be reviewed early to determine potential risks in one or more countries.

Click to access 2017G_04640-171Gbl_TP_Malaysia%20updates%20TP%20guidelines%20and%20introduces%20master%20file%20requirements.pdf

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OECD

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US tax reform: Tax accounting impact

As the time for US seems to tick ever closer, EY’s Global Tax Alert highlights the tax accounting implications that would take effect on the “enactment date.”

Key items for consideration:

  • Tax attributes re: one-time repatriation/taxation of foreign earnings
  • Capital expensing impact
  • State tax impact, dependent on if they automatically follow federal tax law
  • APB 23, how will this be affected?

Although such items are hypothetical at the moment, some items may require additional planning to have the data available for the requisite disclosures.  Thus, the time for planning and consideration is the present.

Click to access 2017G_04560-172Gbl_US%20joint%20statement%20on%20tax%20reform.pdf

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Tax Risk Management

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US CbC Agreements

The US jurisdictional Country-by-Country (CbC) status table, link provided herein, provides a quick reference into the countries that will automatically accept the US 2016 CbC report, as it is not an obligatory filing for US MNE’s.  To the extent a country is not on this list, a detailed review will be required to ensure that timely reporting is done, possibly on a surrogate country basis.

This list should be monitored to ensure proper governance of the CbC reporting requirements, noting that filing less reports is simpler due to possible different rules, currencies and/or interpretations of similar rules by different countries.

https://www.irs.gov/businesses/country-by-country-reporting-jurisdiction-status-table

Category:

OECD, Transfer Pricing

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OECD: Action 2 – Branch mismatches

OECD has published, pursuant to OECD BEPS Action 2, its framework entitled “Neutralising the Effects of Branch Mismatch Arrangements.”  A link to the report is provided for reference.

The report includes five types of branch mismatch arrangements:

  • Disregarded branch structures where the branch is not a Permanent Establishment (PE)
  • Diverted branch payments
  • Deemed branch/notional payments
  • Branch payments leading to a double deduction (DD)
  • Imported branch mismatches

Recommendations to domestic law are included to prevent perceived abuses for the five types of mismatch arrangements.  Numerous examples are also provided in the document to illustrate the branch arrangements and recommendations thereto.

This document is required reading for all international tax practitioners, as tax administrations will be seriously considering the recommendations and may decide to try to enforce such rules prior to official legislative actions.

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/neutralising-the-effects-of-branch-mismatch-arrangements-action-2_9789264278790-en#.WX0tijOZOqA#page1

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OECD

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Tax raids: Are they necessary / Are you ready?

With the introduction of BEPS Action Items, recently followed by the subjective assent procedures of the Multilateral Instrument, it seems that the aggressiveness of tax administrations to apply current tax laws, and BEPS Actions yet to be enacted, is on the increase.  One result of such actions is the continuation, in certain jurisdictions, of tax raids which are unannounced, intense and producing immediate distrust between the parties.

For tax administrations, the question is “Does the necessity of such raids still exist?” and if so, they should be delegated to those that are egregious and potentially criminal in nature after the refusal of the taxpayer to legally comply with prior requests and inquiries.

For MNE’s, a tax raid causes immediate panic at the Business Unit, thus at least one legal or tax contact regionally and globally should be available at any time to address a phone call on necessary action steps that day and going forward.  This communication protocol should be common knowledge throughout the global organization to ensure alignment and appropriate steps are immediately taken if a tax raid were to occur.

It is hopeful these circumstances will become less frequent around the world, although learnings can be taken from past experiences to form Best Practices for the future.

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Tax Risk Management

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UK: EU (Withdrawal) Bill

The UK EU exit bill has been introduced in Parliament, paving the way for suggested interpretations of:

  • Existing EU law
  • Loss of EU Directives
  • New customs regime
  • Transitional EU VAT case law
  • Social security contributions/benefits
  • Corporation tax impact of UK vs. EU law/Directives
  • Employee mobility
  • Employment law

This document portrays a glimpse into the thoughts behind the complex and myriad evolutions that will take place with the Brexit negotiations.  Tax, supply chains, individual changes, VAT, etc. and related unknown implications are still to be discovered; the EY Global Tax Alert provides a primer into the brave new world of a country exiting the EU.  Note, this is also a valuable reference for other countries considering this option.

Click to access 2017G_04283-171Gbl_UK%20Government%20introduces%20European%20Union%20Withdrawal%20Bill.pdf

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Tax Risk Management

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The Platform’s TP toolkit

On 22 June 2017, the “Platform for Collaboration on Tax” (the Platform) – a joint effort of the Organisation for Economic Co-operation and Development (OECD), United Nations (UN), International Monetary Fund (IMF) and World Bank Group (WBG) – released a toolkit (the Toolkit) designed to help developing countries address the lack of “comparables” for transfer pricing analyses and better understand mineral product pricing practices.

This Toolkit should also be reviewed by multinationals (MNEs) in developing countries to address the potential lack of comparables to better understand how the tax authorities will approach a transfer pricing audit.  The mining supplement is required reading for those working in that industry.

Additional toolkits will be forthcoming:

  • TP documentation
  • Indirect transfer of assets
  • Base eroding payments
  • Tax treaty negotiation capacity
  • Supply chain management
  • BEPS risk assessment

As the first edition of the Toolkit has now been published, it will be interesting to watch developing countries apply the tools prescribed, providing a baseline going forward.  All international tax practitioners should be familiar with this latest joint endeavor, as it is an indication of the shared resource approach that is now our future.

EY’s Global Tax Alert provides additional details, and the OECD Toolkit are referenced for review.

Click to access 2017G_04037-171Gbl_OECD%20UN%20IMF%20and%20World%20Bank%20issue%20toolkit%20for%20difficulties%20in%20accessing%20comparable%20data%20for%20TP%20analysis.pdf

Click to access toolkit-on-comparability-and-mineral-pricing.pdf

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OECD / UN

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OECD / BEPS update

EY’s Global Tax Alert provides a succinct summary of the latest OECD and BEPS developments, including:

  • G20 and exchange of information upon request standard
  • Multilateral instrument, 68 countries moving forward
  • Peer reviews on BEPS 4 minimum standards:
    • Action 5, harmful tax practices
    • Action 6, treaty abuse
    • Action 13, country-by-country reporting (CbCR)
    • Action 14, dispute resolution
  • Action 5 peer reviews of preferential tax regimes
  • Action 13, CbCR exchange relationships; important for US MNE’s and similar jurisdictions without obligatory 2016 reporting
  • MAP peer reviews
  • Discussion drafts on profit splits and attribution of profits re: PE’s; comment period to Sept. 15, 2017
  • Branch mismatch forthcoming revisions
  • Common reporting standard
  • Digital taxation

OECD is still very busy, with a plethora of BEPS follow-up and other activities, although there seems to be continuing flexibility to gain collaboration that will also lead to added complexity and disputes.

Click to access 2017G_04094-171Gbl_OECD%20provides%20updates%20on%20tax%20activities%20in%20Tax%20Talk%20webcast.pdf

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OECD

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Intermediary transparency: EU’s wish list

The European Commission has proposed a new Directive calling for additional transparency into cross-border arrangements.  Initially, this proposal has the liability for such reporting borne by the advisor, however it may apparently be also transferred to the taxpayer.  The effective date would be 1//1/2019 with recurring reporting by the EU Member States on a quarterly basis thereafter.

In a common theme when the “transparency’ envelope is opened, the relevant basket of potential transactions is widened from the most aggressive to ordinary tax-planning transactions.  Hopefully, if the Directive is adopted, the Member States will use discretion and ask questions about such transactions prior to drawing intuitive conclusions  and assessing taxpayers before having all facts and transactional history for consideration.

The potential transactions include arrangements:

  • To which a confidentiality clause is attached
  • Where the fee is fixed by reference to the amount of the tax advantage derived or whether a tax advantage is actually derived
  • That involve standardized documentation which does not need to be tailored for implementation
  • Which use losses to reduce tax liability
  • Which convert income into capital or other categories of revenue which are taxed at a lower level
  • Which include circular transactions resulting in the round-tripping of funds
  • Which include deductible cross-border payments which are, for a list of reasons, not fully taxable where received (e.g., recipient is not resident anywhere, zero or low tax rate, full or partial tax exemption, preferential tax regime, hybrid mismatch)
  • Where the same asset is subject to depreciation in more than one jurisdiction
  • Where more than one taxpayer can claim relief from double taxation in respect of the same item of income in different jurisdictions
  • Where there is a transfer of assets with a material difference in the amount treated as payable in consideration for those assets in the jurisdictions involved
  • Which circumvent EU legislation or arrangements on the automatic exchange of information (e.g., by using jurisdictions outside exchange of information arrangements, or types of income or entities not subject to exchange of information)
  • Which do not conform to the “arms’ length principle” or to OECD transfer pricing guidelines
  • Which fall within the scope of the automatic exchange of information on advance cross-border rulings but which are not reported or exchanged

The proposal will be submitted to the European Parliament for consideration; this additional layer of transparent information will also be viewed by other countries as potential tools to uncover similar arrangements.  Several “arrangements” are also highly subjective, leading to additional transfer pricing disputes and increased double taxation.

EY’s Global Tax Alert provides additional details for this important proposal:

http://www.ey.com/gl/en/services/tax/international-tax/alert–european-commission-proposes-new-transparency-rules-for-intermediaries

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OECD, Tax Risk Management

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UK election: Finance Act changes?

The recent election, resulting in the Conservative Party losing a majority, introduces additional uncertainty into the Brexit process and also affects the Finance Act.

What will happen to the tabled Finance Act proposals that were deleted by the fast-track changes in the last amendment?  Additionally, what will be the effective dates, if they are formally introduced at a later date, April 2017, upon introduction or possible extending into 2018 or not at all based on the political uncertainty.

The normally routine Finance Act process, with no amendments and straightforward measures that can be planned for upon announcement, is no longer true.  At this moment, the tabled measures should not be considered probable to happen due to the new political nightmare that was self-created although not envisioned.

It is hopeful the UK Parliament will stabilize this process going forward, although in the near future there is no definitive certainty.

EY’s Global Tax Alert provides additional details:

Click to access 2017G_03722-171Gbl_UK%20election%20and%20its%20implications%20for%20Finance%20Act%20measures%20and%20tax%20proposals.pdf

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Tax Risk Management

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MLI instrument is born

The OECD provides a comprehensive list of countries that have signed the new multilateral instrument (MLI).

Most importantly, each country’s position on the various positions with other countries can be viewed.  While being transparent, this myriad of menu selections will produce an even more complex environment globally.  The strive for collaboration is somewhat achieved, based on more than 60 countries executing this document.  However, the goal of simplification can certainly be questioned.

OECD’s press release and a link to this list is provided for reference.  All international tax practitioners should review this long-awaited document.

http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm

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OECD

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Hybrid mismatches: EU / Rest of World

On May 29. 2017 the EU Council adopted the Anti-Tax Avoidance Directive (ATAD), to be effective by 1/1/2020 between EU and the rest of world for hybrid mismatch arrangements.  This Directive is known as ATAD-2 and follows the intent of BEPS Action 2, hybrid mismatch arrangements.

ATAD 2 expands the scope to address hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches.

EY’s Global Tax Alert provides additional details; all hybrid mismatch arrangements will be of limited use going forward to the extent they are included in these new rules.

Click to access 2017G_03493-171Gbl_EU%20Council%20adopts%20Directive%20to%20address%20hybrid%20mismatches%20with%20third%20countries.pdf

Category:

Transfer Pricing

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US developments: BAT still alive?

EY’s Global Tax Alert highlights the heightened uncertainty around the proposed Business Activity Tax (BAT) by the House and interested parties.

The BAT is a revenue raising proposal, thus the revenues from this plan would help to move a bill towards passage via the political complexities and processes required.  It is very important to monitor, as the death of this proposal would mean deriving that lost revenue from another initiative (i.e. raising the tax rate, etc.).  

Click to access 2017G_03417-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2025%20May%202017.pdf

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Tax Risk Management

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