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.

 

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Tax Risk Management

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.

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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.

 

Click to access 2018G_02020-181Gbl_44%20African%20countries%20sign%20Continental%20Free%20Trade%20Area%20agreement.pdf

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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.  

Click to access TEI%20Letter%20re%20ASC%20740%20treatment%20of%20BEAT%20and%20GILTI.pdf

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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.   

Click to access 2018G_01558-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2016%20March%202018.pdf

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OECD, Tax Risk Management

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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/

 

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OECD, Tax Risk Management

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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.  

Click to access 2018G_01364-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%209%20March%202018.pdf

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OECD, Tax Risk Management

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Italy; electronic invoicing

The wave of electronic invoicing has arrived for Italy, with B2B transactions commencing in 2019.

As EY’s Global Tax Alert details, companies should begin to assess procedures for normal accounts payable/receivable transactions, etc.

This is the wave of the future, so ERP systems should be reviewed (or external vendors sought) to perform this function timely.

Click to access 2018G_01269-181Gbl_Indirect_Italian%20Budget%20Law%20introduces%20mandatory%20E-invoicing.pdf

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Belgian Fairness Tax lesson: Appeal early

The EY Global Alert link highlights the fact that the former Belgian Fairness Tax was determined to violate:

  • Principle of legality
  • Article 4, Parent-Subsidiary Directive
  • Constitutional principles of equality and non-discrimination

Despite these multiple violations of law, the principle of equality was limited to assessments commencing in 2019, with limited exception.

Most importantly, the lesson learned from this not-uncommon example is: Appeal early to preserve your legal rights; as courts may not preserve such rights in their final decision.  

 

Click to access 2018G_01226-181Gbl_Belgian%20Constitutional%20Court%20annuls%20Fairness%20tax.pdf

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European Holdco’s: Summary

Deloitte’s link, updated in January 2018, provides a useful reference for attributes of EU holding companies from different countries.

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-holdco-matrix-europe.pdf?nc=1

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EU: CCTB / CCCTB (It’s back!)

The concepts of Common Corporate Tax Base (CCTB) and Common Consolidated Corporate Tax Base (CCCTB) once again emerge as a perceived solution to tax the Member States via a “digital presence” and commonality in computing tax liabilities of the EU Member States.

These proposals have emerged in prior years, now with a digital presence emphasis, although such measures have required a unanimous vote which is difficult to achieve.  However, this trend is always worth watching as the public perception may help to sway those countries that strive to protect their sovereignty over taxation.

http://www.europarl.europa.eu/news/en/press-room/20180219IPR98113/new-eu-corporate-tax-plan-embracing-digital-presence-approved-in-committee

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EU Taxe 3 probe: Paradise Lost

The EU Parliament will open an inquiry, Taxe 3, into financial crime, tax evasion and tax avoidance as a follow-up to the unfinished work released from the Paradise Papers.  A special committee of 45 MEPs will spend a year on this project, with a primary focus on VAT fraud via offshore tax havens.

This development continues the trend to identify potential abuses, albeit via legal sovereign laws and/or intentional illegal tax evasion.

Thus, the reputational risk of all multinationals is still at the forefront of today’s news.  This development should be monitored for transparency and spill-over effects.  

https://www.theguardian.com/news/2018/feb/08/paradise-papers-eu-parliament-votes-launch-tax-inquiry

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US developments: US Tax Act

EY’s referenced Global Tax Alert shares Treasury’s position on pending updates, as well as the European Commission (EC) questionnaire being developed for the FDII incentive of the US Tax Act.

The GILTI provision of the Tax Act is admittedly very complex, even more so by the legislation that it is to be computed on a shareholder legal ownership chain basis, vs. consolidated group basis as the transition tax.  This may produce non-intuitive results, and Treasury should provide an update in 4-6 weeks on this point.  However, for purposes of calculating the annual effective tax rate for the first quarter, a taxpayer may need to be ready for calculation on a shareholder and group basis for timely preparation and reporting.

As expected, the European Commission is preparing questionnaires to multinationals to gauge the impact of the FDII.  This particular provision was envisioned as being a driver of opposing international views and analyses.  This provision is important to monitor going forward, as well as not putting reorganization structures in place that cannot be reversed if this provision would be repealed.

Finally, the deemed repatriation transition tax is not expected to change significantly.  However, there is not universal certainty about the ability to deduct pro-rata foreign taxes on a November 2 calculation, vs. Dec. 31, for a foreign corporation.

Click to access 2018G_01028-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2023%20Feb%202018.pdf

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UK DPT: Round 2 review

HMRC is now reviewing diverted profit tax cases in round 2: citing the following EY’s link referenced herein:

There are already 100+ DPT cases ongoing and hundreds more “Large” and “Mid-Sized” cases will now be reviewed and enquiries launched in the next 12 to 18 months. Market intelligence suggests a particular focus on Mid-Sized cases, and on sectors including life sciences, oil and gas, and mining and metals. HMRC is also investigating a number of captive insurance arrangements within large groups.

As a reminder, DPT is aimed at groups that use what HMRC sees as contrived arrangements to circumvent rules on permanent establishment (PE) and transfer pricing. DPT is intended to address two broad situations:

  • A UK company (or UK PE of a foreign company) uses entities or transactions that lack economic substance to exploit tax mismatches to reduce effective taxation to below 80% of rate otherwise payable in the UK.
  • A person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a PE in the UK.

 

Note, the UK DPT is not arguable on a tax treaty basis, and it is based on the concept of pay now, to be resolved later.  It was also enacted as a deterrent for taxpayers to start paying regular tax, vs. no tax, as a DPT was seen as an avenue to avoid the additional tax and controversy.  Thus, it is prudent to review any potential instances of DPT.  

Click to access 2018G_00778-181Gbl_UK%20TA%20begins%20second%20round%20of%20enquiries%20on%20Diverted%20Profits%20Tax.pdf

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GILTI: Shareholder test

The global intangible low-taxed income (GILTI) provision in the US Tax Cuts and Jobs Act (Tax Act) was legislated based on the principal of each relevant US, or relevant, shareholder.  This contrasts with the US consolidated group approach for the Sec. 965 repatriation tax, thus will/should both be consistent?

Currently, a planning review of the US/relevant shareholders may be dictated based on the types of controlled foreign corporation (CFCs) in that particular shareholder chain.  However, there has been acknowledgment of this mismatch for ownership tests, and a possibility that the GILTI provisions may also conform to a US consolidated group approach.

Pending further guidance, it may be prudent to calculate the GILTI effect on both approaches and take advantage of the 1-year SEC measurement period for public companies for more definitive rules.  However, US public MNE’s should review the potential guidance to be issued for Q1, with clarity as to whether a reasonable amount will be calculated as part of the Annual ETR process, or omitted therefrom.

Based on the complexity of this provision, additional challenges are present if the current shareholder chain approach is not changed.  Notwithstanding this aspect, there are many complexities involved with this calculation to derive a reasonable amount or a number which is ultimately final and certain.

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