Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

CR reporting; tax policy norm

Corporate responsibility (CR) reporting is becoming more of a norm for MNE’s, illustrated by KPMG’s report as referenced herein.

Apart from policies, such as Human Rights, that should be a basic component of every MNE’s policy and referenced to the UN standard, tax policies are becoming more of a public norm than ever before.

A UK tax risk strategy is required to be published by every significant UK taxpayer by 12/31/2017 on a public website describing the tax risks of the UK group and how they are managed on a macro and micro based level.

Global tax policies are also proactively published by major MNE’s as part of their Best Practices and Enterprise Risk Management efforts.

A basic global tax policy, published or not, should be a primary tool integral to Board and company governance.  Tax risk management, including documentation thereof, will become more of a shout than a whimper by NGO’s, parliamentarians, tax advisors and internal governance standards of every MNE.

Tax policies are also becoming more integrated with business policies in corporate governance.

To the extent policies are lacking in an organization, now is the time to address this important aspect of risk management and Best Practice governance.

Click to access kpmg-survey-of-corporate-responsibility-reporting-2017.pdf

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Tax Risk Management

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US tax reform: 1 step closer

The US Senate passed their version of the Fiscal Year Budget 2018, an important step that leads to reconciliation of the budget this coming week by the House and Senate.

Following the budget reconciliation, allowing a majority vote for tax reform, US tax reform is now on the horizon for potential enactment by year-end 2017.

To the extent potential US tax reform has been on the backstage, or ignored by pessimists, this latest step should be a strong indication that everyone needs to understand the Framework, albeit brief, previously announced and advocated by President Trump.

Attention is now in the details, with significant tax and business consequences for the US and the world.

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

Click to access 2017G_05952-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2020%20October%202017.pdf

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Tax Risk Management

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EU: VAT proposals

The European Commission (EC) has proposed a new set of rules that is meant to introduce efficiencies into long-standing current practices.

The new principles include:

  • One Stop Shop
  • Destination principle, with VAT on goods collected by the selling State and transferred to the State of destination
  • Charging VAT on cross-border trade
  • “Certified Taxable Person” certification allowing simpler EU principles to apply
  • Quick fixes, including storing goods in another Member State

The EY Global Tax Alert is included for reference, which thereby includes links to the related proposals.

This proposal is significant for all businesses trading in the EU, and its principles should be reviewed to enable proactive planning.

Click to access 2017G_05695-171Gbl_Indirect_EC%20proposes%20far-reaching%20reform%20of%20EU%20VAT%20system.pdf

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Tax Risk Management

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US Sales & Use tax risk

I have linked a valuable reference took to assess US sales and use tax risk that will be helpful in understanding the differences between the “sales” and “use” components as well as the controls and systems necessary to control such risks in a Sarbanes Oxley “SOX” environment.

Most importantly, the tax function needs to be involved in monitoring contracts in which this risk may be evident, prior to execution of the document.  Sometimes, the sales/use tax function may not be a tax function, albeit within finance or the controllership area.  However, this area of tax is increasingly subjective, complex and requires the input of technical internal/external advisors to avoid large surprises and audit assessments across the country.

Additionally, foreign corporations may also want to review any inbound US activities, and related contracts, to assess potential US sales/use and state income tax obligations due to “nexus” within the borders of a state.

https://www.journalofaccountancy.com/issues/2017/apr/sales-and-use-tax-risk.html

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Tax Risk Management

Policy issues: US int’l tax reform

The Joint Committee of Taxation (JCT) has published a valuable reference to the principles underlying tax reform that will be presented to the Senate Finance Committee on October 3, 2017.

This reference is a helpful document into understanding some of the rationale and intentions that will become a part of the legislative writing process, as it includes background context of the issues.

A link to the JCT site and document is provided.

https://www.jct.gov

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Tax Risk Management

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US Tax Framework in print

The US Tax Framework was published Sept. 27, a notable date as this date is also used to mark the timeframe for expensing investments.

The main corporate tax points, and subtleties, include:

  • 20% corporate tax rate, but the tax rate and differential for one-time foreign earnings/cash is not specified.
  • Minimum tax on foreign profits to “level the playing field”
  • Territoriality system, exempting 100% of dividends (although the KPMG linked notes include the point that this is not equivalent to “distributions” thus a complicated Earnings and Profits tracking system may still apply)
  • Interest expense will be “limited” (EBITDA/other?)
  • R&D credit remains, although Sec. 199 US manufacturing incentive deduction is lost
  • Pass-through structures tax rate of 25%
  • Corporate AMT is gone.

The President has formally and forcefully announced his continued message for tax reform, as both the House and Senate Committees are now drafting language that will hopefully result in legislation enacted late 2017 or early 2018 with the political complexities / process.

Upon enactment, the US GAAP tax accounting will be complex and required results for public companies in the quarter of enactment.  Additionally, the timing for state enactment is also a separate complex issue that will need analysis.

The US Framework is repeatedly attempting to “level the playing field,” now the politicians, journalists, advisors and tax practitioners will all work with a little bit of fact to create a cocoon of fiction by which the impending tax reform can be measured.  

Click to access 2017G_05589-171Gbl_US%20tax%20reform%20-%20corporate%20and%20international%20provisions.pdf

Click to access Tax-Framework.pdf

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Tax Risk Management

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US int’l developments

EY’s Global Tax Alert highlights several postulates for potential US tax reform, in which both the House and Senate are busily writing new language this month to push this reform effort by President Trump.

The OECD’s additional guidance on Country-by-Country reporting is also reiterated, and the short-term extension for the US debt limit is provided to further the tax reform process.

Click to access 2017G_05086-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%208%20September%202017.pdf

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Tax Risk Management

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Danish PE: Intercompany contract risk

As countries become creative re: permanent establishment (PE) taxation, this scenario presented by the EY Global Tax Alert reminds all tax practitioners to be cognizant of what intercompany provisions are provided.

The Danish Tax Board referred to the contract between the Austrian company and the Danish company, according to which the Danish company would make offices and storage facilities available to the Austrian company. The Danish Tax Board was informed that the premises would be used by the subcontractor only. The Danish Tax Board ruled that according to the wording of the contract between the Austrian company and the Danish company, the Austrian company would have a place of business in Denmark at its disposal regardless of the fact that the services would be outsourced to a subcontractor.

Thus, providing for a storage closet (in literal terms) may impose PE liability, with the ensuing compliance and fees a significant factor for what was probably an inadvertent error by the drafters of the intercompany agreement.

The treaty had the same PE provisions as OECD’s Article 5 language, although noting that the OECD’s recommendations were looked to by the tax administration.

As a Best Practice, all intercompany agreements (anywhere in the world) need to be reviewed by an international tax practitioner prior to execution, whether in-house personnel or outside advisors.  

EY’s Alert provides additional details that should be reviewed to indicate the pervasiveness of the new PE rules, and the aggressiveness of tax administrations to literally interpret intercompany agreements.

Click to access 2017G_04863-171Gbl_Danish%20Tax%20Authority%20ruling%20on%20creation%20of%20permanent%20establishment.pdf

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OECD, Tax Risk Management

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US tax reform: Tax accounting impact

As the time for US seems to tick ever closer, EY’s Global Tax Alert highlights the tax accounting implications that would take effect on the “enactment date.”

Key items for consideration:

  • Tax attributes re: one-time repatriation/taxation of foreign earnings
  • Capital expensing impact
  • State tax impact, dependent on if they automatically follow federal tax law
  • APB 23, how will this be affected?

Although such items are hypothetical at the moment, some items may require additional planning to have the data available for the requisite disclosures.  Thus, the time for planning and consideration is the present.

Click to access 2017G_04560-172Gbl_US%20joint%20statement%20on%20tax%20reform.pdf

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Tax Risk Management

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Tax raids: Are they necessary / Are you ready?

With the introduction of BEPS Action Items, recently followed by the subjective assent procedures of the Multilateral Instrument, it seems that the aggressiveness of tax administrations to apply current tax laws, and BEPS Actions yet to be enacted, is on the increase.  One result of such actions is the continuation, in certain jurisdictions, of tax raids which are unannounced, intense and producing immediate distrust between the parties.

For tax administrations, the question is “Does the necessity of such raids still exist?” and if so, they should be delegated to those that are egregious and potentially criminal in nature after the refusal of the taxpayer to legally comply with prior requests and inquiries.

For MNE’s, a tax raid causes immediate panic at the Business Unit, thus at least one legal or tax contact regionally and globally should be available at any time to address a phone call on necessary action steps that day and going forward.  This communication protocol should be common knowledge throughout the global organization to ensure alignment and appropriate steps are immediately taken if a tax raid were to occur.

It is hopeful these circumstances will become less frequent around the world, although learnings can be taken from past experiences to form Best Practices for the future.

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Tax Risk Management

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UK: EU (Withdrawal) Bill

The UK EU exit bill has been introduced in Parliament, paving the way for suggested interpretations of:

  • Existing EU law
  • Loss of EU Directives
  • New customs regime
  • Transitional EU VAT case law
  • Social security contributions/benefits
  • Corporation tax impact of UK vs. EU law/Directives
  • Employee mobility
  • Employment law

This document portrays a glimpse into the thoughts behind the complex and myriad evolutions that will take place with the Brexit negotiations.  Tax, supply chains, individual changes, VAT, etc. and related unknown implications are still to be discovered; the EY Global Tax Alert provides a primer into the brave new world of a country exiting the EU.  Note, this is also a valuable reference for other countries considering this option.

Click to access 2017G_04283-171Gbl_UK%20Government%20introduces%20European%20Union%20Withdrawal%20Bill.pdf

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Tax Risk Management

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Intermediary transparency: EU’s wish list

The European Commission has proposed a new Directive calling for additional transparency into cross-border arrangements.  Initially, this proposal has the liability for such reporting borne by the advisor, however it may apparently be also transferred to the taxpayer.  The effective date would be 1//1/2019 with recurring reporting by the EU Member States on a quarterly basis thereafter.

In a common theme when the “transparency’ envelope is opened, the relevant basket of potential transactions is widened from the most aggressive to ordinary tax-planning transactions.  Hopefully, if the Directive is adopted, the Member States will use discretion and ask questions about such transactions prior to drawing intuitive conclusions  and assessing taxpayers before having all facts and transactional history for consideration.

The potential transactions include arrangements:

  • To which a confidentiality clause is attached
  • Where the fee is fixed by reference to the amount of the tax advantage derived or whether a tax advantage is actually derived
  • That involve standardized documentation which does not need to be tailored for implementation
  • Which use losses to reduce tax liability
  • Which convert income into capital or other categories of revenue which are taxed at a lower level
  • Which include circular transactions resulting in the round-tripping of funds
  • Which include deductible cross-border payments which are, for a list of reasons, not fully taxable where received (e.g., recipient is not resident anywhere, zero or low tax rate, full or partial tax exemption, preferential tax regime, hybrid mismatch)
  • Where the same asset is subject to depreciation in more than one jurisdiction
  • Where more than one taxpayer can claim relief from double taxation in respect of the same item of income in different jurisdictions
  • Where there is a transfer of assets with a material difference in the amount treated as payable in consideration for those assets in the jurisdictions involved
  • Which circumvent EU legislation or arrangements on the automatic exchange of information (e.g., by using jurisdictions outside exchange of information arrangements, or types of income or entities not subject to exchange of information)
  • Which do not conform to the “arms’ length principle” or to OECD transfer pricing guidelines
  • Which fall within the scope of the automatic exchange of information on advance cross-border rulings but which are not reported or exchanged

The proposal will be submitted to the European Parliament for consideration; this additional layer of transparent information will also be viewed by other countries as potential tools to uncover similar arrangements.  Several “arrangements” are also highly subjective, leading to additional transfer pricing disputes and increased double taxation.

EY’s Global Tax Alert provides additional details for this important proposal:

http://www.ey.com/gl/en/services/tax/international-tax/alert–european-commission-proposes-new-transparency-rules-for-intermediaries

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OECD, Tax Risk Management

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UK election: Finance Act changes?

The recent election, resulting in the Conservative Party losing a majority, introduces additional uncertainty into the Brexit process and also affects the Finance Act.

What will happen to the tabled Finance Act proposals that were deleted by the fast-track changes in the last amendment?  Additionally, what will be the effective dates, if they are formally introduced at a later date, April 2017, upon introduction or possible extending into 2018 or not at all based on the political uncertainty.

The normally routine Finance Act process, with no amendments and straightforward measures that can be planned for upon announcement, is no longer true.  At this moment, the tabled measures should not be considered probable to happen due to the new political nightmare that was self-created although not envisioned.

It is hopeful the UK Parliament will stabilize this process going forward, although in the near future there is no definitive certainty.

EY’s Global Tax Alert provides additional details:

Click to access 2017G_03722-171Gbl_UK%20election%20and%20its%20implications%20for%20Finance%20Act%20measures%20and%20tax%20proposals.pdf

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Tax Risk Management

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US developments: BAT still alive?

EY’s Global Tax Alert highlights the heightened uncertainty around the proposed Business Activity Tax (BAT) by the House and interested parties.

The BAT is a revenue raising proposal, thus the revenues from this plan would help to move a bill towards passage via the political complexities and processes required.  It is very important to monitor, as the death of this proposal would mean deriving that lost revenue from another initiative (i.e. raising the tax rate, etc.).  

Click to access 2017G_03417-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2025%20May%202017.pdf

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Tax Risk Management

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Double Tax disputes: Draft EU Directive

The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States.  A summary of the Draft Directive is provided, as well as referenced herein.

This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.

Key points:

  • 3 years, from first notification, to file a complaint by the taxpayer
  • Each competent authority (CA) acknowledges receipt within 2 months
  • Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
  • Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
  • Taxpayer may appeal per national rules a rejection of the complaint
  • CA’s try to resolve issue within 2 years, which may be extended by 1 year
  • Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement.  This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
  • Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
  • Advisory Commission to adopt a decisions within 6 months
  • CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
  • Professional secrecy standards are prescribed
  • Advisory or Alternative Commission opines in 3-6 months
  • CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
  • Final decision does not constitute a precedent
  •  (Redacted) decision is published and maintained in an online central repository
  • Evaluation of process by June 30, 2024 and issue a report

As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s.  The Directive can be reviewed via the attached link:

http://data.consilium.europa.eu/doc/document/ST-9420-2017-INIT/en/pdf

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Audits, Tax Risk Management, Transfer Pricing

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