Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

BEPS update: ICAP

Attached are the latest BEPS developments; of particular importance is the International ComplianceAssurance Programme (ICAP).  This program is a voluntary program that focuses on the Country-by-Country (CbC) reports to openly discuss tax risks.

This is a welcome collaborative effort between the tax administrations and MNEs, vs. using the CbC reports to draw unfounded assumptions.

Tax audits should also use this approach at the beginning of an audit to foster understanding and risks.

Click to access 2018G_00553-181Gbl_The%20Latest%20on%20BEPS%20-%2029%20January%202018.pdf

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OECD, Tax Risk Management

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Leadership: 2018

Annual reviews are now being discussed, with employees wondering what technical goals and objectives lie ahead.

Most importantly, the art of leadership skills and training should be a required attribute on everyone’s agenda.  There are books for self-learning, and also real-time training can be conducted via leading small cross-functional meetings, being a champion on projects for coordination, and team activities

Leadership and developing leadership skills, in addition to requisite technical abilities, are what will make the difference for everyone.

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Tax Risk Management

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US Tax Act: Foreign earnings

As a further update to the US Tax Act, SEC has provided a 1-year window to provide a reasonable estimate with continual true-ups for a 1-year period to finalize the complex tax accounting effects.  Note that APB 23 is still alive, which has prompted several questions on its application against the background of the deemed repatriation transition tax.

The Act will significantly change earnings disclosures in the near future and the US debt market where debt may be more expensive due to interest limitations.

EY’s update provides details and relevant links for reference.

Click to access 2017G_07177-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2029%20December%202017.pdf

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Tax Risk Management

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US Tax Act: SIT implications

McDermott Will & Emery highlights the state tax effects of the deemed repatriation and GILTI tax; some of which may not may be intuitive.  The deemed repatriation income is included under Sec. 951(a), whereas the GILTI inclusion is includable under new Sec. 951A.

The concept of special deductions also is highlighted for further analysis.

Note, as different technical details of this bill are further reviewed, the SIT aspect becomes even more complex with timing issues by states not uniform from the federal changes.

The deemed repatriation inclusion will be includable in 2017 US federal income tax returns for calendar-year taxpayers, whereas most provisions will take effect in 2018 or later.

https://www.mwe.com/en/thought-leadership/publications/2017/12/state-tax-implications-repatriation-transition

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Tax Risk Management

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US tax bill passes House

One chamber (House) passed, on to the Senate later today!

http://www.cnn.com/videos/politics/2017/12/19/house-votes-tax-reform-bill-sot.cnn/video/playlists/president-trumps-tax-reform/

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Tax Risk Management

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US tax reform; imminent?

The House and Senate conferees agreed at the end of last week on a reconciliation bill to be forwarded this week for a final vote, and then signature (i.e. “enactment”) by President Trump.  An excellent summary of some key corporate provisions is included by McDermott, Will & Emery, and the actual text of the bill is linked for reference.

The complexity is abundant for year-end public company reporting, especially by US MNE’s, including a complex calculation of the accumulated foreign earnings upon which the one-time transition tax will apply.

It is not too soon to begin a discussion with auditors re: expected deliverables, especially concerning the practical aspects of the calculations that will be involved for year-end and the first quarter of 2018.

It is both a challenging and exciting time to be an international tax practitioner/advisor, as this is a revolutionary change in the history of US tax reform for all.

https://www.mwe.com/en/thought-leadership/publications/2017/12/tax-reform-conference-committee-reaches-agreement

Click to access CRPT-115HRPT-466.pdf

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Tax Risk Management

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EU’s List is published: Uncooperative Jurisdictions

The Council of the European Union (ECOFIN) has published its list of uncooperative tax jurisdictions, numbering 17:

American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates

The listing criteria are focused on three main categories: tax transparency, fair taxation and implementation of anti-BEPS measures.

 

There are potential counter-measures that could be employed by other jurisdictions, and there is the possibility of other countries aligning such countries on a comparable list.  This list will be reviewed annually, thereby expanding or diminishing accordingly.

EY’s Global Tax Alert provides historical context for development of this list.

Click to access 2017G_06895-171Gbl_Council%20of%20the%20EU%20publishes%20list%20of%20uncooperative%20jurisdictions%20for%20tax%20purposes.pdf

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OECD, Tax Risk Management

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Senate tax bill

Amid the last-minute penciled-in amendments and heated discussions, the Senate Bill was narrowly passed by a vote of 51-49, with the text referenced herein.

The bill now moves to a reconciliation phase between the House and Senate, with such bill potentially forwarded to the President for signature before Christmas.

Several amendments were passed, including a phase-out of the corporate property expensing provision after 2022, reinstatement of corporate AMT and an increase of the deemed repatriation tax for accumulated foreign earnings (thereby achieving greater tax revenues for passage).

The 479-page bill is still incredibly complex, in effect layering upon the present US tax rules in many areas, and the final reconciliation stage will produce additional changes.  However, it is expected that the Senate’s provisions will largely remain in place as the votes are more critical for passage and major shifts in an already contentious bill may point to possible defeat of the bill, which President Trump is not willing to accept.

Next stage after passage: A review, starting now, of earnings and profits, etc. that will drive the relevant tax accounting adjustments required for year-end closing of the books for calendar-year taxpayers due to “enactment” of the bill prior to Dec. 31st.

https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rXqXuQfYbRas/v0

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Tax Risk Management

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UK: Post Brexit Customs

As the UK prepares for a post Brexit deal with the EU, details are emerging re: the customs rules that are being contemplated.  Needless to say, it will not be as simple as the EU framework that accommodates this system currently.

EY’s summary provides details and highlights to think about re: current supply chains and routes to market for goods entering or leaving the EU via the UK.

Click to access 2017G_06713-171Gbl_Indirect_UK%20Government%20introduces%20new%20Customs%20Bill.pdf

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Tax Risk Management

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France: Budget retribution

Due to the unconstitutionality of the 3% tax on dividend distributions outside the French group based on the equality principle, the French Parliament has imposed an additional surtax to rectify its budget deficit.

This legislation will increase, for large companies, the effective tax rate to 39.4% or 44.4%  depending on the size of the turnover.  Unfortunately, this additional tax will be imposed on the relevant large companies that did not make a prior distribution subject to the 3% tax that will now be refunded.

This tax increase was necessitated by the unconstitutionality of the original 3% tax; which imposes a learning that such taxes that may be unconstitutional should be claimed as a refund early in the process notwithstanding the final developments.  

Deloitte’s summaries provide further details on this development for reference.

Click to access dttl-tax-alert-france-6-october-2017.pdf

Click to access dtt-tax-worldtaxadvisor-171124.pdf

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Tax Risk Management

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Poland’s new law: interco. limitations

Poland’s Corporate Income Tax Law will be formally amended, effective 1/1/2018.

  • One of the most important provisions is the limitation in intercompany royalty and service payments, using an absolute limitation and EBITDA basis.  (Note, a corollary offset does not provide matching offsets for the income inclusion by intercompany affiliates.)

This limitation goes beyond the OECD’s guidelines, and extrapolates interest deductibility  that is veiled as a “base erosion” device.

Multinationals need to review and plan accordingly for this limitation, which provides some APA safe harbors obtained with the Polish Ministry of Finance.  To the extent an APA is not possible and the limitation is exceeded, a company’s effective tax rate will be increased by this legislation.  

EY’s summaries of this important development are included for reference:

Click to access 2017G_06049-171Gbl_Poland%20-%20APA%20to%20remove%20tax%20deductibility%20limitation.pdf

Click to access 2017G_06726-171Gbl_Poland%20passes%202018%20corporate%20income%20tax%20reform.pdf

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Tax Risk Management

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Climate change: Disclosures

Katharine Blue, U.S. sustainability services leader for KPMG, highlights the necessity for disclosing the risks of climate change, which many companies are not yet adequately disclosing.

The KPMG Survey of Corporate Responsibility Reporting 2017 found that three-quarters of the largest companies worldwide by revenue (the G250) don’t acknowledge climate change as a financial risk. And nearly half of the largest 100 U.S. companies by revenue (the N100) don’t acknowledge financial risks of climate change in annual reports.

In 2015, Mark Carney, chairman of the Financial Stability Board (FSB) and chair and governor of the Bank of England, formed the Task Force on Climate-related Financial Disclosures (TCFD), the first international initiative to examine climate change in the context of financial stability.

There are two types of risk: physical and transition risks that should be reviewed for disclosure.

The referenced article provides valuable insight into this ever-growing issue, for which the lack of attention poses disclosure gaps/risks.  

http://ww2.cfo.com/risk-management/2017/11/companies-struggle-quantify-climate-risk/

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Tax Risk Management

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WIPO’s 2017 IP report: Intangible capital

The 2017 World Intellectual Property Report was recently issued by the World Intellectual Property Organization (WIPO), a biennial report, and provides some interesting findings that are important to understand as US tax reform and other countries are now focusing on the taxation of intangibles and the income resulting therefrom:

First-ever figures reveal that nearly one third of the value of manufactured products sold around the world comes from “intangible capital,” such as branding, design and technology, according to a WIPO study of the global value chains companies use to produce their goods.

Some WIPR 2017 findings

  • Intangible capital accounted, on average, for 30.4 percent of the total value of manufactured goods sold throughout 2000-2014.
  • The intangible capital share rose from 27.8 percent in 2000 to 31.9 percent in 2007, but has remained stable since then.
  • Overall, income from intangibles increased by 75 percent from 2000 to 2014 in real terms, amounting to USD 5.9 trillion in 2014.
  • Three product groups – food products, motor vehicles and textiles – account for close to 50 percent of the total income generated by intangible capital in the manufacturing global value chains.

References to the Report and summaries are provided for reference:

http://www.wipo.int/pressroom/en/articles/2017/article_0012.html

Click to access wipo_pub_944_2017-intro1.pdf

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Tax Risk Management, Transfer Pricing

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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/

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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

 

Click to access discussion-draft-toolkit-taxation-of-offshore-indirect-transfers.pdf

 

Click to access TEI-Comments-Offshore-Indirect-Transfers-Oct192017.pdf

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Tax Risk Management

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