Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

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/

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

 

https://www.oecd.org/tax/discussion-draft-toolkit-taxation-of-offshore-indirect-transfers.pdf

 

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI-Comments-Offshore-Indirect-Transfers-Oct192017.pdf

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.

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-responsibility-reporting-2017.pdf

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.

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_20_October_2017/$FILE/2017G_05952-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2020%20October%202017.pdf

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.

http://www.ey.com/Publication/vwLUAssets/European_Commission_proposes_far-reaching_reform_of_EU_VAT_system/$FILE/2017G_05695-171Gbl_Indirect_EC%20proposes%20far-reaching%20reform%20of%20EU%20VAT%20system.pdf

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

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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