Strategizing International Tax Best Practices – by Keith Brockman

Author Archive

2019 BDO Board Survey

BDO’s 2019 Board of Directors survey is attached.

The 2019 BDO Board Survey, conducted by Market Measurement, Inc., an independent market research consulting firm on behalf of the Corporate Governance Practice of BDO USA, examined the opinions of 180 corporate directors of public company boards.

Respondents represent a distribution of organizations across industries and market value, from less than $200M to more than $10B.

Re: impact of the Tax Cuts and Jobs Act (TCJA), approx. 47% of the respondents were affected by the reduced Federal tax rate, although less than 20% were impacted by tax losses, foreign earnings impact or interest expense limitations.  This is very surprising with the TCJA GILTI provisions.

Almost two-thirds of directors (65%) report a high or moderate understanding of their company’s total tax liability.

Page 7 of the report is interesting, as it illustrates actions pursued as a result of tax reform.  These actions include MA&A, stock buy-backs, increased dividends and repatriation of cash to the US.

Click to access attachment.aspx

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Tax Risk Management

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US Int’l developments

The US developments are centered around the new regulations for BEAT and Foreign Tax Credit (FTC).

The new BEAT regulations include:

  • Excludes non-recognition transactions re: Sec. 332, 351, 355, and 368
  • Allows foregoing a deduction, albeit it will be for all US federal tax purposes
  • Clarifies anti-abuse rules

The final FTC regulations include:

  • Reducing previously taxed E&P baskets to 10, from 16
  • Gross tested income is tiered up for purposes of allocating interest expense
  • Foreign tax redeterminations are addressed
  • Foreign branch rules are detailed

Additionally, Section 987 regulations are deferred by another year.

EY’s Global Tax Alert details the latest developments.

Click to access 2019G_005410-19Gbl_German%20Federal%20Council%20approves%20Research%20Allowance%20Act.pdf

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TJCA

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Germany’s Research Allowance

Commencing in 2020, a new R&D incentive will be in place for German R&D activities.  This incentive was passed to stimulate its goal of raising R&D expenditures to 3.5% of GDP by 2025.

This incentive is worthy to review, especially as there is certainty re: certification of activities qualifying as R&D upfront, vs. a potential audit dispute years later.

Click to access 2019G_005410-19Gbl_German%20Federal%20Council%20approves%20Research%20Allowance%20Act.pdf

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Tax Risk Management

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CbCR: Not (yet) public for EU

Although this initiative did not receive a majority vote by the EU Competitiveness Council (COMPET), the real story is whether a unanimous (Tax Directive, Article 115 TFEU) or majority (Accounting Directive, Article 501(1) TFEU) vote is needed.

The Legal Service of the Council of the EU concluded on 11 November 2016, that the proposal must be based on Article 115 TFEU.  For the legal basis to be changed by the Council, nevertheless, unanimity is required.

Thereafter, the European Parliament’s Committee on Legal Affairs, pursuant to Rule 39(3) of the Rules of Procedure, decided of its own motion, to provide an opinion on the legal basis of the proposal amending the Accounting Directive. The Committee considered that there is a link between transparency and public scrutiny. It concluded on 12 January 2017 that the proposal must be based on Article 50(1) TFEU, instead of Article 115 TFEU. This opinion contradicted legal advice given to the Council of Member States in November 2016.

This contest will continue, with possible appeals depending on whether the Accounting or Tax Directive rules will be followed.  To date, several countries do not agree to public reporting, thereby other EU Members have envisioned using the Accounting Directive majority rule vote to pass this initiative.

 

Click to access 2019G_005555-19Gbl_EU%20-%20Public%20CbCR%20not%20approved%20in%20latest%20vote.pdf

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Tax Risk Management

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MNE Tax Policies: Examples

As year-end is approaching, many multinationals take this opportunity to review, and revise accordingly, their global tax policies/principles.  Additionally, UK also has an requirement to publish the company’s UK tax principles, which is usually a subset of the global policy.

Global tax policies/principles are generally approved by the Board of Directors, although not an express requirement, however it is a Best Practice.

Examples include Unilever, Siemens Gamesa, Siemens, Shell, Mars and Starbucks, which are all in the public domain.

https://www.unilever.com/sustainable-living/what-matters-to-you/tax.html

Click to access corporate-tax-policy.pdf

Click to access siemens-tax-code-of-conduct-and-tax-policy.pdf

https://www.shell.com/sustainability/transparency/shells-approach-to-tax.html#

https://gbr.mars.com/about/tax-strategy

Click to access 77CB10D4E6DD403A92D568DE90148166.pdf

 

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Tax Risk Management

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US Regs: BEAT overview

KPMG’s initial observations of the final and proposed BEAT regulations are attached for reference:

Click to access 19569.pdf

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IRS

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US FTC Regs: Overview

KPMG has provided a quick turnaround on the final and proposed Foreign Tax Credit regulations, linked for reference.

Click to access tnf-ftc-initial-impressions-dec3-2019.pdf

 

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IRS

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US BEAT/FTC Reg’s

Final and proposed Regulations were issued with respect to the Foreign Tax Credit and BEAT.  Noting this regulation package collectively amounts to over 650 pages, it will require time and attention to webcasts, etc. to fully understand the breadth of these rules, especially as they may pertain to 2018 and/or 2019.

Click to access td-9882.pdf

Click to access reg-105495-19.pdf

Click to access 2019-25744.pdf

Click to access 2019-25745.pdf

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IRS

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Global tax disputes survey

KPMG has issued a 2019 survey benchmarking tax disputes, linked for reference.

The report is divided into four sections:

  1. Tax audits and disputes-the changing environment
  2. Tax dispute management today
  3. Leveraging technology
  4. Tax dispute management of the future

Some observations in the report:

  • Tax authorities are becoming more aggressive, with less appetite to settle
  • Increased penalties
  • Cooperative compliance is still the highest rated tool to resolve disputes
  • More focus on international transactions
  • More information sharing by tax administrations
  • Dedicated resources in multinationals for dispute resolution, including global head of controversy
  • Hiring talent with dispute management experience
  • Internal process for handling audit disputes
  • Dispute management budget > 10% of tax budget
  • Tax dispute technology, apart from Excel, is still in its infancy
  • New trends: Global head of controversy, dedicated budget/staff/technology, escalation/communication processes and a global tax audit software platform

As audits escalate, disputes will likewise increase.  Accordingly, this issue warrants additional attention especially with respect to processes and talent.

Click to access the-global-tax-disputes-environment.pdf

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Tax Risk Management

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Thailand: TP (risk disclosure)

The Thailand Revenue Department (TRD) has published a new transfer pricing (TP) form for taxpayers with revenue of THB 200 million, effective as of 1/1/19 and due by May 29, 2020 for calendar-year taxpayers.  The form delineates different forms of intercompany transactions for separate disclosure.

The disclosure form will be used for TP analysis and potential audits.

This risk analysis technique is becoming more the norm for countries, vs. trying to review the tax return for which such information is not readily apparent.

Accordingly, the tax return review process, via regionally, globally or external advisors, should be reviewed to ensure this form is prepared in advance with the relevant governing controls for accuracy.  

Click to access 2019G_005392-19Gbl_TP_Thailand%20publishes%20transfer%20pricing%20disclosure%20form.pdf

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Transfer Pricing

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OECD Pillar I: Transform ALP

The Organisation for Economic Co-operation and Development (OECD) held a public consultation on the Secretariat Proposal for a “Unified Approach” under Pillar 1 of the BEPS 2.0 project on 21-22 November 2019 in Paris at the OECD Conference Centre.

The OECD Secretariat laid out the timeline for meetings of the Inclusive Framework for the end of January 2020 and in June/July 2020, and suggested that, at a minimum, a high-level political agreement on the Pillar One framework must be achieved by the January meeting.

One commonality voiced at the meeting was that the existing global transfer pricing system, based on the arm’s-length principle, needs to be changed and should at least be augmented by some more formulaic rules.

This common voice is expressed in terms of Pillar One re: digital tax, although this concept has also been trending for international tax in general.  It will be interesting to watch this development as the meetings address Pillar Two and a global minimum tax.

Videos of the meeting and other details can be referenced in the EY Global Tax Alert.

Click to access 2019G_005349-19Gbl_Report%20on%20recent%20US%20intl%20tax%20developments%20-%2027%20Nov%202019.pdf

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OECD / UN

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Critical Audit Matters (CAM)

US and international accounting standards have introduced the CAM process into the audit process, some of which include income tax accounts as a selected disclosure due to their materiality and the nature of being especially complex, challenging, subjective or complex auditor judgment (which is increasingly the norm for international tax rules)

For each CAM communicated in the auditor’s report, the auditor must:

Identify the CAM, describe the principal considerations that led the auditor to determine that the matter is a CAM,

Describe how the CAM was addressed in the audit, and

Refer to the relevant financial accounts/disclosures that relate to the CAM

As income taxes become more complex and subjective, including the effect of the Tax Cuts and Jobs Act (TCJA), MLI amendments to double tax treaties including permanent establishment (PE), OECD guidance and tax audit issues, a tax CAM may become more significant going forward, as it is an annual determination.

To the extent income tax is a CAM, there will be specific disclosures, preceded by more diligent review of the tax accounts, subjective determinations, etc. as part of the normal tax provision process.

PCAOB summary guidance and the relevant guidance links are referenced.

 

Click to access Implementation-of-Critical-Audit-Matters-The-Basics.pdf

https://pcaobus.org/Standards/Auditing/Pages/AS3101.aspx

 

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Tax Risk Management

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US: TCJA Reg chronology

Pending developments this year are focused on the Tax Cuts and Jobs Act (TCJA).

This week expectations – Final FTC Regs, final and proposed BEAT Regs

This year (maybe) – Final and proposed Sec. 163(j) Regs (currently at 550 pages)

This year/January 2020 – Sec 267A final and proposed Regs, Sec 863(b) sourcing proposed Regs

by June 30, 2020 – Final FDII regulations, GILTI high-tax exclusion, Sec 250 participation exemption

EY’s Global Tax Alert provides further details, including OECD developments reported on previously

Click to access 2019G_005186-19Gbl_Report%20on%20recent%20US%20intl%20tax%20developments%20-%2015%20Nov%202019.pdf

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OECD Pillar II: GloBE

The OECD has released a public consultation document on Global Anti-Base Erosion (GloBE), providing novel new rules to address a global minimum tax structure.  Comments are due by 02 December 2019, which will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.

Comments are requested specifically in three areas: (i) use of financial accounts for tax tax base/timing differences, (ii) combining high-tax and low-tax income, and (iii) carve-out and threshold mechanisms.

The document is well worthy to read, as it shows the new direction (worldwide minimum tax), although the EU and others are yet to be completely convinced.  

The document is referenced for review.

Click to access public-consultation-document-global-anti-base-erosion-proposal-pillar-two.pdf.pdf

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OECD / UN

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US: Int’l update/FTC Reg’s

  • The Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) completed its review of final and temporary foreign tax credit (FTC) regulations on 29 October, including R&D expense allocation.  These rules are imminent.
  • Final Sec. 385 regulations were issued, removing the final documentation requirements
  • Sec. 385 Advance Notice of Proposed Rulemaking was issued re: Distribution Regulations
  • The Congressional Joint Committee on Taxation staff released the General Explanation of Certain Tax Legislation Enacted in the 115th Congress (JCS-2-19) on 31 October. Colloquially known as the Blue Book, the publication includes a description of all tax legislation enacted in the 115th Congress, with the exception of the 2017 Tax Cuts and Jobs Act (Public Law 115-97), which was covered in a separate General Explanation released in December 2018.
  • A Brexit extension was approved this week, with the UK’s Article 50 period (after which the UK will leave the EU) legally extended by the EU until 31 January 2020.

EY’s Global Tax Alert provides more details, with a reference link.

The FTC regulations, to be issued in final and proposed form, will be complex, long and will provide certainty, as well as more questions into this complex area.

Click to access 2019G_004918-19Gbl_Report%20on%20recent%20US%20intl%20tax%20developments%20-%201%20Nov%202019.pdf

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TJCA

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