Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

Tariffs: China exclusions & Best Practices

The United States Trade Representative (“USTR”) announced it was granting an exclusion to an additional 21 Chinese-origin products meeting specific listed descriptions, as described in EY’s Global Tax Alert included for reference.

Best Practices include:

  • Mapping the complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, alternative sourcing options, and to assess any opportunities to mitigate impact such as tariff engineering.
  • Identifying strategies to defer, eliminate, or recover the excess duties such as bonded warehouses, Free Trade Zones, substitution drawback, Chapter 98 and equivalent programs under China customs regulations.
  • Exploring strategies to minimize the customs value of imported products subject to the additional duties, re-evaluating current transfer pricing approaches, and for US imports, considering US customs strategies, such as First Sale for Export.

Duties/tariffs are a significant component of product costs, supply chain management and controlling costs.  This function should have a global oversight / value-add function which requires talented personnel with the technical acumen to drive this initiative.  

https://www.ey.com/Publication/vwLUAssets/USTR_publishes_new_exclusions_for_Chinese-origin_products/$FILE/2019G_001932-19Gbl_Indirect_USTR%20publishes%20new%20exclusions%20for%20Chinese-origin%20products.pdf

EU: Profit Split method

The EU Joint Transfer Pricing Forum recently published a paper illustrating when to use the profit split method (PSM) and how to accomplish the split of profits per the OECD Guidelines.  The report is linked as a reference.

The report is a complement to, and supports, the OECD Revised Guidelines on the application of the Transactional Profit Split Method issued in June 2018.

As this method is not simple, and is also a focus on transfer pricing issues in the US, this paper is valuable into the application and concepts of PSM.

 

https://ec.europa.eu/taxation_customs/sites/taxation/files/report_on_the_application_of_the_profit_split_method_within_the_eu_en.pdf

US/OECD int’l developments

Recent international tax developments include:

  • US has communicated its concern to France regarding its Digital Services Tax
  • US TCJA Section 250 final regulations will include guidance on “end-user” conformity and FDII documentation
  • The IRS may use the new Advance Pricing and Mutual Agreement Program (APMA) Functional Cost Diagnostic Model released last February in examinations in appropriate cases, according to an IRS official this week
  • GAO urged the IRS to develop a “comprehensive plan for managing efforts to leverage FATCA data in agency compliance efforts
  • The Organisation for Economic Co-operation and Development’s Forum on Tax Administration (FTA) announced a second pilot of the International Compliance Assurance Program (ICAP 2.0). A new handbook that will guide the second pilot was also endorsed and published by the FTA. ICAP is a voluntary risk assessment and assurance program designed to facilitate open and cooperative multilateral engagement between multinational enterprise (MNE) groups willing to engage actively and transparently and tax administrations in jurisdictions where the MNEs have business activities.

Additional guidance, tax exam techniques and risk assessment are still very much in process in an effort to reduce uncertainty and provide faster resolutions to tax audits.  EY’s Global Tax Alert provides additional details for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_5_April_2019/$FILE/2019G_001616-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%205%20April%202019.pdf

Australia: Self-assessed Distributor margin profile

In what may be the next int’l trend in risk assessment, the Australian Tax Office (“ATO”) has quantified, in sector tables, stated ranges of distributor profit margins by which a taxpayer’s risk will be determined for potential review/audit.  A Reportable Tax Position schedule will be the reporting vehicle for such self-assessment, effective for years ending on or after June 30, 2018.

The guidance is likely to affect the ATO’s starting position for unilateral APA, Mutual Agreement Procedure and bilateral APA discussions.

All inbound distributor arrangements are subject to reporting.  As a result, many multinationals may further consider an APA going forward.

General distributor results are as follows:

High risk: Less than 2.1%

Medium risk: 2.1% – 5.3%

Low risk: Above 5.3%

EY’s Global Tax Alert provides additional guidance on this important development:

https://www.ey.com/Publication/vwLUAssets/Australian_Taxation_Office_releases_final_guidance_on_compliance_approach_to_distributor_profit_margins_-_Action_required/$FILE/2019G_000801-19Gbl_TP_Australia%20-%20Guidance%20to%20distributor%20profit%20margins%20-%20Action%20required.pdf

 

US developments/OECD toolkit

Recent international tax developments include the following:

  • OECD is progressing on a Digital Strategy, with planned consensus in 2020 (hopefully separate countries will have added patience for a coordinated approach)
  • US Previously Taxed Income (PTI) regulations are due this summer/fall
  • Foreign Account Tax Compliance Act (FATCA) final regulations were issued, effective March 2019 and expanding the definition of “responsible person”
  • India and the US reached agreement to exchange Country-by-Country (CbC) reports, thus alleviating any need to provide separate India CbC reports for US taxpayers
  • OECD released a Beneficial Ownership Toolkit (reference attached) to assist developing countries in identification of ultimate beneficial owners

EY’s Global Tax Alert is also attached for reference.

http://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_22_March_2019/$FILE/2019G_000806-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2022%20March%202019.pdf

UK Spring Statement: Pay your fair share

The UK Chancellor’s Spring Statement was announced on March 13, 2019 with a focus on the following:

  • Making Tax Digital, a light approach to penalties for companies striving to comply
  • Digital Services Tax; companies should pay their fair share (also a theme when the Diverted Profits Tax was announced)
  • Depreciation allowances
  • A policy paper re: HMRC’s approach to tax avoidance, evasion and other…

Additional consultations will follow, including the Digital Services Tax planned for April, 2020.

As the UK is still negotiating its entrance into, or exit from, Brexit, these developments will be especially important.

EY’s Global Tax Alert provides details for reference:

https://www.ey.com/Publication/vwLUAssets/UK_Chancellor_announces_Spring_Statement/$FILE/2019G_000796-19Gbl_UK%20Chancellor%20announces%20Spring%20Statement.pdf

TCJA parking non-deductibility; TEI offers valuable insight/safe harbors

IRS Notice 2018-99, published on Christmas Eve, has created quite a controversy in its short history for creating non value-added work in extricating costs of a company’s (leased or owned) parking facilities for which a federal tax deduction would not be allowable.  The Notice and TEI’s letter are attached for reference.

TEI’s timely letter expresses the history of this provision, and most importantly the inordinate amount of work, legal fees, etc. that would be involved pursuant to the Notice.

Two safe harbor provisions are suggested for implementation; Owned facilities $100 per parking spot per directly attributable expenses, and leased facilities would use 5% of the rent as the deemed amount subject to disallowance.

It is hopeful that IRS will quickly respond to current controversy and adopt such harbor provisions, or similar provisions, to avoid significant costs involved in preparing the 2018 federal income tax returns.  

https://www.irs.gov/pub/irs-drop/n-18-99.pdf

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI%20Comments%20on%20Notice%202018-99_FINAL_2.22.19.pdf

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