Alot of regulation activity is taking place, in advance of the June 22nd date that would allow provisions of the Tax Act to be retroactive to date of enactment. Additionally, the regulations will clarify tax return reporting for calendar year US-based multinationals.
The IRS issued final regulations (T.D. 9857), effective 13 May 2019, that address the recognition and deferral of foreign currency gain or loss with respect to qualified business units (QBUs) subject to Section 987 (Section 987 QBUs) in connection with certain QBU terminations and other transactions involving partnerships.
The IRS released, on 17 May, proposed regulations under Sections 954 and 958 on the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). The IRS also released proposed regulations that provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business in computing foreign personal holding company income.
Eagerly-anticipated final GILTI regulations moved closer to release this week, having been received for review by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) on 16 May.
Proposed regulations under Sections 951(b) and Section 951A were also sent to OIRA for review on the same day.
In addition, interim final regulations under Sections 91 and 245A were received by OIRA on 15 May.
EY’s Global Tax Alert provides details on the above actions, for reference.
As expected, the European Commission has sent a letter this week to US Treasury commenting that: the Foreign Derived Intangible Income (FDII) deduction violates international trade law. “The design of the FDII deduction is incentivizing tax avoidance and aggressive tax planning by offering a possibility to undercut local tax rates in foreign economies.” The Commission further described the FDII is an “incentive for foreign economies to lower corporate tax rates in a ‘race to the bottom.’” The letter included a statement that the European Commission was “ready to protect the economic interest of the European Union in light of discriminatory rules and practices.”
EY’s Global Tax Alert is provided for added reference.
India’s Central Board of Direct Taxes has published a report for comments, due by May 18th.
The Committee has recommended a mixed or balanced approach (“fractional apportionment”) that allocates profits between the jurisdiction where sales take place and the jurisdiction where supply is undertaken. India’s position is that such approach is acceptable in other tax treaties. However, the risk of double taxation is present if this approach is not adopted by other countries. Additionally, the approach differs from the OECD approach, which then introduces more complexity for all multinationals with Indian operations.
India is known for its long appeals, and different approaches to its fisc. Accordingly this report should be reviewed, with a possibility to comment, prior to further actions. This report, and methodologies, will also be closely followed by other countries in this complex and subjective area of PE profit allocations.
EY’s Global Tax Alert provides additional details, for reference.
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.
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.
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.
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: