Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

Impact of APAs on Voluntary Compliance

The referenced link is an excellent article written by  Ksenija Cipek in collaboration with Dr Manuel Pereira in an effort to promote transfer pricing simplification. Ksenija Cipek is the Assistance Director General for Legislation and International Cooperation at Ministry of Finance, Tax Administration of Croatia.

https://www.world.tax/articles/the-impact-of-the-advance-transfer-pricing-agreements-on-voluntary-compliance.php

Excerpts from the article

From all of this and despite the outstanding disadvantages, we can conclude that the APA is one of the measures that is affecting the increase in the number of voluntary compliant taxpayers, since the APA provides legal certainty, no instruments of tax auditing are initiated, the possibility of double taxation is eliminated, the reputation of taxpayers is strengthening and, last but not the least, resources are being saved on both sides. Furthermore, by introducing the possibility of concluding an APA in the legal framework of a given state, opportunity and incentive are being given for taxpayers to be voluntarily compliant. In this course of action, it will be important to exchange information with other countries and international organizations, to educate employees, to understand business processes and business transactions and, generally, market conditions and trends in certain business sectors.

To this end result, it is necessary and timely to regulate specific rules for applying APA to SMEs. The rules must be simple, responsive and cost-effective in terms of the cost of human resources, material costs as well as time-consuming cost. In that sense, it is necessary to make use of all available and modern technologies, such as web services etc. Some countries already have a regulated legislative framework specifically for APA applications to SMEs. However, this should not be an exception, but a rule, precisely because of the economic importance of these entrepreneurs in the economic development of each state.

Particular attention should be given to the simplification of transfer pricing documentation, for justified reasons and in the sense that SMEs will, generally, not have a lot of different transactions.

In order to increase the impact on voluntary compliance by as many taxpayers possible, irrespective of their size, this issue is one of the most important issues that deserve a legitimate focused attention on its capable and expeditious solution.

 

US GILTI; a confused state

As multinationals commence to calculate the US Tax Act’s provisions for Global Intangible Low-Taxed Income (GILTI), the literal language of the law and the Conference Report present a myriad of confusion.  The name of this provision is also a misnomer, as the income to be measured is not limited to that sourced from intangibles.

The intent of the provision, as explained in the Conference Report, is to provide a 10.5% (for 2018) tax on low-taxed earnings of foreign affiliates, as reduced by 10% of its tangible personal property measured by US tax principles.  This would be accomplished with an 80% foreign tax credit, thus legal entities in countries with a tax rate not exceeding 13.125% would not be subject to this additional minimum tax on foreign earnings.

Due to the speed of enactment, the technical details of the enacted law does not mirror this intent.  As a result, different US-based multinationals may be taking different approaches for measurement, ranging from the Conference Report intent to the enacted law which may not allow for any foreign tax credits based on the separate foreign basket approach coupled with uncertainty for the allocation of US expenses to such income.

This confused state will also present difficulties in measuring different aspects of this provision for different companies, depending on their interpretation and calculation.

Hopefully, this confusion will be clarified to align the law with the intent of the Conference Report.  Without such guidance, this provision will present undue costs, complexity and subjective interpretation going forward.

African Free Trade Agreement

44 of 55 countries have signed the African Free Trade Agreement, in an effort to promote efficient trade in the region.

With a combined gross domestic product of about
US$2.5 trillion and 1.2 billion people, Africa currently trades more with continents or countries outside of Africa than with fellow African countries.

The next step in the process of implementing the Continental FTA will be for the signatories to ratify the agreement and then implement the provisions of the agreement. Critical areas to consider include rules of origin to qualify for preferential taxes on imports from member countries as well as agreements of which physical barriers to trade are eliminated gradually.

The ultimate aim of the African Union is to become a political federation with one currency and one president across the whole continent.

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

 

http://www.ey.com/Publication/vwLUAssets/Forty-four_African_countries_sign_Continental_Free_Trade_Area_agreement/$FILE/2018G_02020-181Gbl_44%20African%20countries%20sign%20Continental%20Free%20Trade%20Area%20agreement.pdf

TEI”s comments: accounting for BEAT/GILTI/FDII

The Tax Executives Institute, Inc. (TEI) previously issued excellent comments regarding divergent views of the Big 4 accounting firms for US GAAP tax accounting issues for the new US Tax Act aspects.

These views are still divergent today as we approach the end of March, and further issues continue to develop that impact the cash tax and tax reporting aspects for the US Tax Act.  Accordingly, the same facts may provide a different repatriation tax liability and tax accounting for different multinational companies, certainly a difficult variable for comparison by tax experts and, most importantly, by investors.

As these positions may continue to diverge, position papers and discussions with the audit firm, Audit Committee of the Board of Directors and the company should be scheduled to ensure there are no surprises as earning release dates are emerging.  

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI%20Letter%20re%20ASC%20740%20treatment%20of%20BEAT%20and%20GILTI.pdf

US news: Phase 2 tax bill?

The latest US / OECD developments are detailed in the referenced EY Global Tax Alert, highlighting  a potential second tax bill (apart from technical corrections), status on the “Blue Book: by the Congressional Joint Committee on Taxation, Q&A IRS release re: Section 965 including how to pay the first estimate and report on the US federal income tax return, anti-corporate inversion regulations, and OECD’s Interim Report of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), titled “Tax Challenges Arising from Digitalisation.”  Additionally, OECD released the third batch of peer reports – Certainly an exciting and challenging time!

There are still many areas of debate and room for reasonable interpretation on major aspects of the US Tax Act, especially as the 2018 provisions of BEAT, FDII and GILTI are not encased within the one-year measurement period of SAB 118.  For companies subject to Q1 reporting, these uncertainties should be aligned with the auditor to avoid last-minute debates for material items.   

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_16_March_2018/$FILE/2018G_01558-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2016%20March%202018.pdf

UK: MAP guidance

Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, has published revised guidance on the Mutual Agreement Procedure (MAP) in its International Manual (INTM).  DLA Piper’s detailed publication is referenced herein.

The revised guidance, together with the supplementary Statement of Practice, provides detailed information on the following:

  • Eligibility for MAP
  • Access to MAP
  • Submitting a MAP request
  • Time limits
  • Protective MAP requests
  • MAP and domestic relief
  • Mutual agreement
  • Methods of relief and
  • Arbitration

Multinationals ought to consider more proactive use of the improved MAP, taken together with similar developments in other countries around the BEPS minimum standards, as a viable compliance risk management tool. Although double taxation is often a precondition in transfer pricing cases that end up in MAP, it is important to note that all issues concerning taxation not in accordance with tax treaties are eligible for MAP.

https://www.dlapiper.com/en/uk/insights/publications/2018/03/the-uk-releases-new-guidance-on-mutual-agreement-procedures/

 

US developments: Will FDII survive?

EY’s Global Tax Alert summarizes recent US developments, including (expected) pushback by the EU from the Tax Act’s FDII legislation.  The pushback is based upon WTO rules and OECD’s Article 24 on non-discrimination.

One elemental argument against the Foreign Derived Intangible Income (FDII) legislation is that it violates the World Trade Organization (WTO) rules.

“The tax press is reporting that the EU has requested that the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices conduct a “fast track” review of certain of the TCJA’s provisions. The request reportedly came after a meeting of EU Finance Ministers in which the Ministers discussed how to react to the tax reform law and whether to take action in the WTO.  According to the report, a recent EU document states that the new base erosion and anti-abuse tax may contravene the OECD Model Tax Convention’s Article 24 on non-discrimination.”

To the extent that the FDII is found to violate the WTO rules, the timing for this benefit is a short-term (i.e. 3-5 years) period.  Accordingly, relevant restructuring may avail this benefit in the next few years with a long-term strategy based on its revocation.  

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_9_March_2018/$FILE/2018G_01364-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%209%20March%202018.pdf

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