Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

Singapore/Korea DTT

A revised Double Tax Treaty (DTT) has been signed by Singapore and Korea, to be effective after ratification by both countries, including:

  • 5% royalty withholding tax rate
  • Article 26: New anti-abuse provision

The reduction in withholding tax rate is a welcome revision, among other details, as outlined in EY’s Global Tax Alert

https://www.ey.com/Publication/vwLUAssets/Singapore_and_Korea_sign_revised_income_tax_treaty/$FILE/2019G_002898-19Gbl_Singapore%20and%20Korea%20sign%20revised%20income%20tax%20treaty.pdf

S. Africa: Anti-tax avoidance

Corporate tax amendments have been proposed in the Draft Taxation Laws Amendment Bill 2019, referred to as “initial 2019 TLAB.”  The primary change is to address potential dividend stripping schemes, with comments due by 25 June 2019.  Draft legislation is expected in July 2019.

To the extent that corporate reorganizations/dividends are envisioned in S. Africa, this legislation should be reviewed, with valuable comments provided to ensure fairness in the final legislation.

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

https://www.ey.com/Publication/vwLUAssets/South_Africa_publishes_initial_list_of_proposed_corporate_tax_law_amendments_-_focusing_on_anti-tax_avoidance_measures/$FILE/2019G_002864-19Gbl_South%20Africa%20-%20Prop%20corp%20tax%20rules%20-%20anti-tax%20avoidance%20measures.pdf

ERM: Tax risk

The Enterprise Risk Management (ERM) process should be a coordinated process envisioning a multinational’s tax risks around the world.

The evolution with BEPS, ongoing developments re: digital taxation, multilateral instruments (MLIs) becoming effective, permanent establishment (PE) changes, and countries enacting unilateral legislation inconsistent with international norms are some examples why international tax/transfer pricing should be among the top ten risks of most multinationals.

Legacy ERM procedures may not be as effective in the current tax world as they were recently.  However, have multinationals really incorporated these changes into the ERM process re: uncertainty and risk management?

Members of the Board of Directors, responsible for ultimate risk, should also be asking this question as a reminder/refresher for the ERM process.  Tax executives, knowledgeable of such risks, should also be proactive in this process to educate others about recent global changes that may impact their organization.

Questions and challenges for ERM should be developed as new tax legislation is becoming more complex and uncertain in countries around the world.

 

New Zealand DST: In play

Not awaiting the OECD’s proposals for which a Workplace will be delivered in 2020, implementation following that several years later, New Zealand seeks to propose a 2-3% Digital Services Tax (DST) in the interim.  Public comments will be accepted by July 18th. The Government discussion document and EY’s Global Tax Alert provide details, as referenced herein.

Discussion document highlights:

The Government is committed to ensuring everyone pays their fair share of tax, including digital multinationals. Achieving this will require changes to the current tax rules. There are two options for this:

  • The first option is to apply a separate digital services tax (DST) to certain digital transactions. A DST taxes at a low rate (for example, 2% to 3%) the gross turnover of certain highly digitalised businesses that are attributable to the country.
  • The other option is to change the current international income tax rules, which have been agreed to by countries (usually referred to as “the international tax framework”).

In summary, New Zealand is not patient to wait for OECD rules, wishes to implement a transition tax in the interim and plans to repeal this tax with the OECD solution when it becomes effective.

https://www.ey.com/Publication/vwLUAssets/New_Zealand_Government_to_seriously_consider_a_Digital_Services_Tax/$FILE/2019G_002780-19Gbl_Indirect_New%20Zealand%20considers%20Digital%20Services%20Tax.pdf

http://taxpolicy.ird.govt.nz/sites/default/files/2019-dd-digital-economy.pdf

TEI comments: Proposed 250 Reg’s

As Final Regulations are in process, TEI’s practical and thoughtful comments were submitted re: the proposed Section 250 Regulations.  A copy of the comments are provided for reference, with highlights including:

  • Determination of domestic and foreign use are impractical rules for which a multinational company will find difficult to effectively implement.  A seller’s shipping address would be an alternative solution
  • Long-term supply contracts may be difficult to obtain new documentation annually, thus such documentation of the initial contract should suffice
  • Business Service provisions have rules that will prove difficult to obtain, workable rules should be designed and implemented
  • Effective date of the final regulations should be tax years beginning at least one year after the date of publication, to allow time for system changes
  • Final section 250 regulations should provide that the exploitation of manufacturing and supply chain IP is a foreign used service, consumed at the place of manufacture, if it meets the physical transformation and proximity requirements outlined in the regulations
  • Advance payments of section 451 are to be related to the timing for related cost of goods sold amounts to prevent distortion
  • Final regulations clarify where the charitable contribution deduction limitation fits in the ordering rule, along with sections 163(j), 172, and 250.

  • Prop. Treas. Reg. § 1.250(b)-1(d)(2) provides that the exclusive apportionment rules in Treas. Reg. § 1.861–17(b) do not apply, this provision is a disincentive and should be changed

     

    TEI’s comments are informative, especially due to the inclusion of suggested alternatives to the proposed rules and therefore worth reviewing.   

    https://www.tei.org/sites/default/files/advocacy_pdfs/tei_comments_-_proposed_section_250_regulations_-_final_to_irs_treasury_6_may_2019.pdf

US Reg update: 987/954/958/PTI/GILTI

Alot of regulation activity is taking place, in advance of the June 22nd date that would allow provisions of the Tax Act to be retroactive to date of enactment.  Additionally, the regulations will clarify tax return reporting for calendar year US-based multinationals.  

The IRS issued final regulations (T.D. 9857), effective 13 May 2019, that address the recognition and deferral of foreign currency gain or loss with respect to qualified business units (QBUs) subject to Section 987 (Section 987 QBUs) in connection with certain QBU terminations and other transactions involving partnerships.

The IRS released, on 17 May, proposed regulations under Sections 954 and 958 on the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). The IRS also released proposed regulations that provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business in computing foreign personal holding company income.

Eagerly-anticipated final GILTI regulations moved closer to release this week, having been received for review by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) on 16 May.

Proposed regulations under Sections 951(b) and Section 951A were also sent to OIRA for review on the same day.

In addition, interim final regulations under Sections 91 and 245A were received by OIRA on 15 May.

EY’s Global Tax Alert provides details on the above actions, for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_17_May_2019/$FILE/2019G_002432-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20May%202019.pdf

US int’l update: EC contests FDII

As expected, the European Commission has sent a letter this week to US Treasury commenting that: the Foreign Derived Intangible Income (FDII) deduction violates international trade law.  “The design of the FDII deduction is incentivizing tax avoidance and aggressive tax planning by offering a possibility to undercut local tax rates in foreign economies.”  The Commission further described the FDII is an “incentive for foreign economies to lower corporate tax rates in a ‘race to the bottom.’” The letter included a statement that the European Commission was “ready to protect the economic interest of the European Union in light of discriminatory rules and practices.”

EY’s Global Tax Alert is provided for added reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_10_May_2019/$FILE/2019G_002276-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2010%20May%202019.pdf

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