Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

German IP: Change is coming

It appears the Section 49 provision, imposing withholding taxes on IP registered in Germany, will soon be abolished.

At the meeting of the U.S. Council for International Business and OECD, a representative from the Ministry of Finance stated that this change should happen shortly.

The context behind this welcome change appears to be from other countries analogizing the current position as having hallmarks of a digital service tax. Additionally, the absence of the withholding tax should, technically and/or procedurally, should ease a transition into the Pillar 1 and 2 plans.

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Tax transparency, Asset Manager perspective

Click to access PIRC_TAX-BRIEF_FINAL.pdf

The cite above is a briefing from Pensions & Investment Research Consultants Limited (PIRC) summarizing their review of how asset managers engage their portfolio on tax matters. Interestingly, PIRC expects that US asset managers will need to review their tax approach and incorporate such provisions in their stewardship and voting guidelines.

Excerpts of the review:

  • Where remuneration and performance are based on tax sensitive indicators, the concern is that companies will use riskier tax strategies for minimization; and they would vote NO for these remuneration related resolutions.
  • Vote NO if non-audit fees > 50% of audit fees for the current year, or prior three years.
  • Vote NO for proposals to reincorporate in another jurisdiction that appears to be motivated by aggressive tax planning
  • Vote YES for disclosures of a company’s tax policy, referencing GRI 207-1 and GRI 207-2 (refer to prior post for GRI details).
  • Vote NO to audit committee members who evidence no corporate tax management focus.
  • Vote YES for public Country-by-Country Reporting (CbCR).
  • Vote NO to financial statements do not publish CbCR.

Notwithstanding the above excerpts are sourced from an asset manager perspective, these trends are critical to monitor and align tax expectations/risks with the Audit Committee/Board of Directors. Imperative to these discussions is the presence of the tax executive in regular audit committees to discuss relevant tax risks, opportunities and provide transparency into the global governance process.

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Italy TP: Greater alignment with OECD

The Italian Revenue Agency issued Circular No. 16/E on May 24th, resulting in audit practices that should be more closely aligned to the OECD transfer pricing principles on comparables and the arm’s-length principle (ALP).

The Circular acknowledges the OECD principles for the arm’s-length range and loss-making transactions, thereby allowing taxpayers following OECD principles to also be aligned with Italian transfer pricing practices.

Italy’s audit premise has generally focused on the median of the range as equating to the ALP, with little or no deviation. However, the relevant OECD principles for ALP and comparables of loss companies are found in Chapter III, Section A.7, commencing with par. 3.55. The ALP focus by the OECD is based on the fact that transfer pricing is not an exact science, and there will be many occasions when the application of the most appropriate method(s) produces a range of figures all of which are relatively equally reliable. Par. 3.60 states “If the relevant condition of the controlled transaction (e.g. price or margin) is within the arm’s-length range, no adjustment should be made.”

Italy has also generally not accepted loss-making companies from the chosen comparables. OECD par. 3.64 is very clear in ascertaining that loss-making transactions can be comparable, with no overriding rule on the inclusion or exclusion of such comparables.

The OECD section is worth reading again, especially if transfer pricing results are not always at the median and/or loss-making transactions are included as comparables, especially with prior COVID-affected years. Italy now seems to be more acceptable to such principles, and taxpayers should assert OECD principles more explicitly in the transfer pricing reports with related justification. This assertion should apply in Italy, and other countries which state that OECD transfer pricing principles are followed.

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Tax transparency: GRI 207

Tax transparency is experiencing a dramatic upsurge in interest by various stakeholders. The year 2024 is looking to be exciting, with OECD’s Pillar 1 & 2 proposals and EU’s CbC directive to be possibly effective. Most recently, shareholders of Amazon put forth a proposal inviting additional tax transparency into its global tax practices, via implementing (some or all) parts of GRI 207.

Click to access gri-207-tax-standard-2019-factsheet.pdf

The above link provides a primer/reference into the workings of this transparency initiative, which is divided into 4 parts. The Standard was developed by an expert multi-stakeholder technical committee under the oversight of the Global Sustainability Standards Board (GSSB) with input from over 250 stakeholders from multiple constituencies.

207-1: This information provides a publicly available tax strategy, outlining responsible personnel, compliance approach and integration into business operations/strategies.

207-2: The second part addresses tax compliance and risk roles/mitigation and (again) how tax is placed within the Company.

207-3: Part 3 is focused on engagement of stakeholders, including public tax policy advocacy, tax authority interaction and feedback processes.

207-4: This final part includes Country-by-County (CbC) reporting, for all jurisdictions.

Notwithstanding the link of some/all information as a public document, I highly recommend all multinationals have the first 3 parts formalized for review./approval by the Audit Committee/Board of Directors.

This document represents a win-win proposal and may also serve as an impetus to formalize Best Practices such responding to governmental consultations, integration with OECD principles, interactions with auditors, delineating the difference in tax planning vs. tax evasion, etc.

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EU: 2023 15% minimum corp. tax

On May 19, the Members of European Parliament (MEPs) approved a EU Commission proposal to adopt a 15% corporate minimum tax, to be effective as of 1/1/2023.

The next step for effective passage is the unanimous approval by the EU Council.

The timing is interesting, as the US is in a political quagmire re: Pillar 2 and any GILTI changes. However, the EU and other countries are unilaterally proposing domestic minimum top-up taxes to retain revenue that otherwise may be allocated/shared by other jurisdictions.

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EU Proposed Directive: debt-equity bias

Click to access COM_2022_216_1_EN_ACT_part1_v6.pdf

The European Commission (EC) issued today a proposal for a Council Directive to address the debt-equity bias, as part of the EU strategy on business taxation. The rules would introduce tax deductibility of notional interest on increases in equity, while providing for a limitation on net interest expense.

The effective date would be as of 1/1/2024, with Member States’ conforming their laws by 31 December 2023. The equity deduction is based upon a 30% limitation of EBITDA, with carryover provisions.

The proposal is a very interesting read, evidencing the intent to arrive at a practical and efficient methodology to place equity on a more level playing field as interest, from a tax deductibility aspect. Additionally, this intent would also minimize the placement of intercompany loans in entities which do not have a foreseeable ability to repay interest.

Although this is an EU proposal, other countries will be following these developments closely.

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Pillar 2: New Zealand consultation

https://taxpolicy.ird.govt.nz/publications/2022/2022-ip-oecd-pillar-two

New Zealand has published a consultation re: its potential adoption of OECD Pillar 2, for which comments are due by July 1, 2022. The cite above provides a link to the document.

Notwithstanding the sovereign nature of this consultation, this document provides a valuable context for the rules of Pillar 2, and understanding how each of the complex rules affect the government’s position.

New Zealand provided a non-binding endorsement of Pillar 2, although the decision to formally adopt OECD Pillar 1, 2, and/or a digital services tax is yet to be determined. However, New Zealand is likely to adopt the OECD rules if most of the other countries also join in this global effort.

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UAE corporate tax: coming soon

https://www.mof.gov.ae/en/resourcesAndBudget/Pages/FAQ.aspx

The cite above references the FAQ’s from the UAE Ministry of Finance for the upcoming corporate tax for the United Arab Emirates.

The tax will be effective for years beginning on, or after, June 1, 2023, so time is available for planning.

Some items to initially note: Allowance for a tax group, 9% rate for passive income to align with BEPS, a graduated tax rate with cognizance of potential adjustment for a OECD Pillar Two minimum tax provision, continuance of some incentives for free trade zone transactions, qualified dividends and capital gains from shareholdings of a UAE business will be exempt, withholding tax will not be applicable on domestic and cross-border payments, foreign tax credits are available, and transfer pricing rules will reference the OECD Transfer Pricing Guidelines.

These new rules highlight the interaction with upcoming OECD Pillar Two rules to ensure those tax receipts are not allocated elsewhere.

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Switzerland: Code of Conduct Taxation 2021

The Federal Tax Administration (FTA)has collaborated with the Swiss Tax Conference, EXPERT-suisse and an academic partner to set forth written principles and rules of conduct. These rules are focused upon employees of tax administrations, companies and tax professionals.

The format includes the following highlights:

General principles of conduct

Tax return process

Assessment

Advance tax ruling

Tax audit

Tax payment

Appeal procedure

A Code of Conduct is an importance governance tool for tax administrations and multinationals. It represents a baseline of understanding to achieve a fair, efficient and transparent process for all parties. This document would be an excellent opening item of discussion for any audit.

The link for reference is estv.admin.ch, FTA subtag, with tabs on the upper right for different languages.

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Grey List: Add “Hong Kong”

The EU, as of October 5, 2021, will add Hong Kong to its “grey list” of non-cooperative jurisdictions for tax purposes.

The grey list imputes a sense of tax avoidance or harmful tax practices for Hong Kong. However, Hong Kong has until December 31, 2022 to change its legislation, thereby avoiding such characterization ongoing.

To the extent no relevant legislation is enacted, potential punitive measures by the EU include changing its characterization to a “blacklisted” jurisdiction, which would provide denial of deductions for payments made thereto, increased withholding tax, taxation of dividends and administrative rules.

This will be important for many reasons, as other aspects of tax (i.e., DAC 6 reporting) use these designations for potential further reporting obligations.

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EU Parliament adopts DAC7 report

The European Parliament has adopted proposed changes to the draft seventh directive, amending 2011/16/EU, for information exchanges of online platforms.

Recent recommendations for adoption ensures this information can be used for other data sharing purposes (e.g., money laundering). Additionally, the expansion of beneficial ownership transparency and inclusion of real estate, trusts, crypto assets and some capital gains is included.

https://data.consilium.europa.eu/doc/document/ST-13130-2020-REV-1/en/pdf

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ICAP handbook/rules

The OECE Forum on Tax Administration (FTA) has published a handbook explaining participation in the international compliance assurance program (ICAP).

This objective was started in 2018, and is now taking more substance. It is a three-stage process. The taxpayer provides relevant available transfer pricing documentation, and if all relevant jurisdictions and the taxpayer agree, a risk assessment is developed by the tax administrations. The final stage includes a risk graded letter.

The program does not provide absolute certainty, although it may provide learnings into potential gaps, while also providing tax administrations some limited certainty after their comprehensive review.

The handbook, link attached, provides additional details.

http://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/international-compliance-assurance-programme-handbook-for-tax-administrations-and-mne-groups.htm

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OECD provides ERM tool

The OECD has, via a pilot program, developed five stages of ERM maturity against which tax administrations can self-assess their progress, for which anonymous data will also be helpful for the OECD going forward.

Multinationals have employed such tools for several years, and tax administrations can now assess their progress and risk status going forward.

http://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/maturity-model-series/enterprise-risk-management-maturity-model.htm

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OECD Pillar I & II comments

Attached is EY’s summary of the recent meetings, in which comments were provided for various applications of Pillar I and II.

The EU has also expressed its desire to move forward with a digital service tax if the OECD falls behind in its targeted 2021 dates to prescribe rules. The OECD’s approach will also encounter issues re: dispute resolution in multiple countries, for which countries may not yet be ready for.

As the U.S. presidency is now decided, its direction will also influence the ongoing discussions for global implementation.

https://www.ey.com/en_gl/tax-alerts/oecd-inclusive-framework-political-leaders-promote-global-consen

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Joint Committee refunds

This report was issued in June, 2020, and is interesting to note the Treasury Inspector General’s report re: IRS process for refund claims.

This audit was initiated to assess the effectiveness of the IRS’s efforts to examine returns with refunds in excess of $2 million ($5 million for C corporations) and report to the Joint Committee on Taxation (JCT) on such refunds.

This issue is made more interesting as more companies are getting ready to file federal income tax carryback claims due to COVID-19 losses, for which such carry back was made possible by the Cares Act.

Click to access 202030023fr.pdf

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