Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

VAT, Saudi Arabia-trend?

Saudi Arabia has tripled its 2-year old VAT law, from 5% to 15%, as of July 1, 2020.

Does this represent a new trend for countries hungry for revenues due to shortfalls from COVID-19?

HEROES Act: House wish list

The Democratic House passed an extensive new CARES-19 bill, which is subject to Senate review and further amendments.  Most importantly, the effective dates are retroactive, thereby reversing / revising some provisions of the prior enacted CARES Act bill.

For multinationals, the NOL carry back period is restricted to years beginning 1/1/2018, thereby negating the positive rate arbitrage from 21% to 35% for 2016 and 2017.  Additionally, the Employee Retention Tax Credit provisions have been liberalized, from a change in the quarterly decline in gross receipts for year-over-year and increasing the amount of “qualified wages” eligible for the credit.

DAC6: UK draft guidance

In response to prior comments, including additional clarification, HMRC has issued draft guidance for which comments are to be received by May 15, 2020.

With regard to penalties, which are a significant concern re: implementation and reporting of DAC6 reportable arrangements, there will be a “reasonable excuse” guideline.  This guideline will be supporting by the governance and documentation principles established in the reporting process.

EY’s Alert provides additional details on this recent development.

DAC6: 3-month deferral

In response to comments from countries, companies and tax advisors, the EU Commission has prepared a draft Council Directive to extend the DAC6 reporting deadlines by 3-months due to COVID-19 considerations.

The initial report, covering the period from June 25, 2018 to June 30, 2020 will be due by November 30, 2020 (currently August 31, 2020).  The 30-day reporting, currently commencing July 1, 2020, will be delayed until October 1, 2020, thereby the first 30-day report would include the period from July 1 to October 1, due 30 days thereafter.

The legal basis for this change is sourced from Articles 113 (indirect tax) and 115 (direct tax) of the Treaty on the Functioning of the European Union (TFEU).  Reportable cross-border arrangements may relate to both indirect and direct tax, thus both legal bases are relevant for the proposed rules.  As a result, a Directive is required to change the prior legislation.

Member States shall adopt and publish, by May 31, 2020, the laws and administrative provisions necessary to comply with the Directive, and communicate to the Commission accordingly.

The Directive will enter into force on the day following that of its publication in the Official Journal of the European Union. 

The extension will allow reporting parties additional time to collect supporting documentation for the initial reporting date, and develop sustainable processes for 30-day reporting thereafter.  

Click to access 08-05-2020-proposal_for_a_council_directive_amending_directive_201116eu.pdf

ERTC: IRS reversal

IRS has agreed to reverse its FAQ decision in which it denied the benefits of the Employee Retention Tax Credit for health care expenses of furloughed employees that were not receiving a salary for not working.

This is a welcome change, as it conforms to the intent of the Cares Act, Joint Committee on Taxation and Senate Finance Committee.

It is hopeful they will also revise their distinction of benefits for “essential” and “non-essential” businesses.

As a reminder, the FAQ’s do not have legislative authority and are at the lowest level of guidance, which begins with the Internal Revenue Code and Regulations.


Poland WHT: Pay now, refund later; A new trend?

Effective July 1, 2020, regular payments subject to withholding, and fulfilling tax treaty requirements, will be subject to paying the withholding taxes and filing for a refund, which is estimated to be a 6-month lag.

Exceptions would be approval by the tax administration, also a 6-month process, or assertion by the board of directors that all requirements have been met which is subject to personal liability and therefore a personal deterrent.

As other countries generally follow such trends, will COVID-19 prompt such actions to preserve final cash flow?

EY’s Alert provides additional details on this development.


ERTC: IRS guidance

IRS has just published extensive Q and A guidance, including Form 7200 and instructions, with respect to the Employee Retention Tax Credit (ERTC).

The comprehensive guidance will be used as reference for claiming the credit, and attention to detail will be the key for documentation.  The interaction with deferral or employment taxes is included, as well as the definition of gross receipts for determining the quarterly reduction of gross receipts over the prior year corresponding quarter.

DAC6: Penalty mitigation

Deloitte’s recent penalty mitigation survey summarizes the penalties and possible mitigation/appeal strategies to minimize such risks.

With COVID19, it will be more interesting as Member States will be looking for more monies to restore their fiscal growth.

Click to access DAC6%20country-specific%20penalties%20and%20penalty%20mitigation%20survey%20%28Deloitte%29.pdf

COVID19: States should lag with Fed

A recent TEI article urges the states to follow the lag procedures that IRS has put in place.    From a practical perspective, there may not be anybody to collect the mail, so why not extend the filing dates and audit dates?

The letter is succinct and builds a strong case for its positions, and a valuable read for state tax professionals.

Click to access State%20Tax%20Administration%20and%20Payment%20Relief-FTA-3-25-2020.pdf

UK:CCO & DAC6 risk

The attached article from National Law Review provides meaningful insight into a tax risk framework encompassing the UK Corporate Criminal Offenses (CCO) Act and EU Directive on Administration Cooperation (DAC6) requirements.

The approach to performing compliance with the CCO and DAC6 Acts should be an integrated risk framework approach.

CbC: TEI’s comments to OECD

TEI has submitted comments to the OECD addressing potential changes to the current Country-by-Country (CbC) reporting regime.

Extract of some comments:

  • The cost/benefit of a high level risk analysis should be weighed against the costs and system of multinationals having to implement such recommendations.
  • Secondary filings are still required due to lack of signed bilateral agreements; additional the countries do not have consistent (e.g. XML) filing processes.
  • When countries finalize CbC legislation, the required report should be the following year, allowing time to review and design such requirements by multinationals.
  • The Master File is not consistent among countries; this leads to further costs and time to implement.  Proposed changes should be implemented for the local file.
  • The consolidated group revenue threshold should not be changed
  • OECD should postpone asking for more items such as related party interest, royalty, services, R&D expenses, etc.  This information duplicates the same items in the local tax returns.
  • Preparing country consolidate level reporting is significantly more complex to prepare, in part because of elimination entry tracing.
  • The definition of deferred taxes and other items should be further clarified.

Multinationals filing U.S. GAAP financials also face some of these same issues as FASB is considering similar data as part of the tax footnote, for example.  They are currently weighing the cost/benefit of such information, most importantly the level of insight gained by the reader of the financial statements.

Additionally, countries are still proposing the public disclosure of CbC reports, including a recent proposal by the U.S.

Tax practitioners should follow this trend, as one country is all that is required to prompt insight, and questions, into the underlying data.

Click to access TEI%20Comments%20-%20OECD%20County-by-Country%20Reporting%20Review%20-%20FINAL%20to%20OECD%205%20March%202020.pdf

TP 2020 & COVID 19

As COVID 19 ravages the world, the world of transfer pricing will also feel extraordinary consequences.  The attached articles from Rödl & Partner highlight transfer pricing considerations in China, which can apply in most other countries, and a COVID 19 tax summary of each EU Member State’s relevant developments, updated daily.

Highlights of China’s TP considerations:

  • Subsidiary losses: should they be borne by the Principal?
  • Intra-group financing, including thin capitalization, loss compensation (although contract adjustments require relevant approvals prior to taking effect), and guarantee fees
  • Adjustment of transfer pricing methods

It should be noted that current year comparables will include many loss making companies due to COVID 19, thus advance thinking may be necessary prior to year-end.

DAC6 developments and country status

Deloitte’s March update of DAC6 legislation for the various countries is attached, providing a valuable reference as legislation is continually enacted.

You may also refer to the DAC6 blog page for hallmark transaction updates.

Lux tightens rules for payments to EU blacklist countries

Luxembourg, in a draft law, appears ready to adopt one of the EU recommended measures for non-deductibility of costs payable to an EU black list country.  However, there is also an economic exception in the draft, although the documentation to avail the exception is not yet known.

The new law should apply as of 1/1/2021, although not yet certain.

An alert from Goodwin provides additional details.

Mexico: DAC6 look alike

As DAC6 is rapidly approaching, Mexico has enacted new obligations for reportable transactions with similar excessive penalties as a deterrent.

Taxpayers with Mexican operations should be aware of, and prepare for, this new world of real-time reporting and a governance process for sustainability.


Click to access 2020G_001313-20Gbl_Mexico%20-%20New%20reportable%20transaction%20obligation.pdf

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