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.
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.
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.
KPMG has issued a 2019 survey benchmarking tax disputes, linked for reference.
The report is divided into four sections:
- Tax audits and disputes-the changing environment
- Tax dispute management today
- Leveraging technology
- 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.
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.
The US tax treaty protocols will enter into force between US and the countries of Japan and Spain.
The Japanese protocol will have effect for withholding taxes (e.g., related to dividends and interest) for amounts paid or credited on or after the first day of the third month following the date on which the protocol enters into force — that is, 1 November 2019. For all other taxes, the Japanese Protocol will apply to tax years beginning on or after 1 January 2020.
For withholding taxes, the Spanish protocol generally will apply to amounts paid or credited on or after 27 November 2019, the date on which the protocol enters into force. For taxes determined by reference to a tax period, the protocol will apply for tax years beginning on or after 27 November 2019 (e.g., 1 January 2020, for calendar-year taxpayers). In all other cases, the protocol will apply on or after 27 November 2019.
The key features of the protocols are detailed in the EY Global Tax Alert, as reference. For the Spanish protocol, the new limitation on benefits requirements must be met timely for treaty-based withholding rates to apply.
As the French digital services tax (DST) is in effect from 1/1/2019, with the first payment due in November, there is considerable uncertainty how this tax will be repealed/refunded when/if an OECD DST model takes its place.
The politicians see this as a potential remedy to put out the fire which started with implementation of this tax. However, this issue becomes more complex from an international tax perspective as to how a refund/repeal would be treated: prospectively, retroactively, or some other method.
As this tax, similar to other provisions, was enacted unilaterally by the French administration anxious to improve their fisc, it is now shown to be disingenuous timing at the expense of multinationals which now have to pay this tax. Hopefully, other countries do not follow this lead in advance of the OECD DST proposals.