Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

VAT refund: EC steps in

This is a very interesting case and would seem to form precedence for EU Member States and taxpayers in a similar situation, resulting from a request for a preliminary ruling to the EC from the Supreme Administrative Court, Czech Republic and the Kingdom of Spain also submitted written observations.

 Are tax authorities able to defer the refund of the total amount of excess VAT even though only a small part is still the subject of an ongoing tax inspection? The tax authorities and the Commission believe so, arguing that the deduction under Article 179 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’) is to be made only from the total amount.

 This question is particularly sensitive because the part of the claimed deduction still to be investigated might be connected with a third party’s fraudulent transactions, about which the taxable person possibly should have known. According to the Court’s case-law, this would permit (or require) the tax authorities to refuse the deduction in this regard.  But does this also mean that the deduction in respect of other indisputably ‘legitimate’ transactions can be deferred for several years?  Theoretically, the inspection of a single transaction to the value of one euro could therefore defer the tax assessment for all other transactions for several years. 

It can be stated, as an interim conclusion, that Articles 179, 183 and 273 of the VAT Directive do not include a right for the Member States to limit in time the total amount of excess VAT if only part of it is disputed, while the other part is undisputed.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=221824&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=953875

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Tax transparency: Shell’s 2018 report

Royal Dutch Shell PLC has published their 2018 tax contribution report, including country-by-country (CbC) statistics.

Public transparency of CbC reports has been in the vision of the EU (Dec. 6, 2019 blog), although it has not yet passed.

Shell’s report reflects a proactive effort to promote global transparency, and is an exemplary model to follow.

Click to access shell_tax_contribution_report_2018.pdf

 

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EU Code of Conduct

The Council of the EU published its latest report, summarized and referenced herein:

  • The US complies with all the EU Member States re: Automatic Exchange of Information (AEOI) due to its double tax treaty network, FATCA, etc.
  • Guidance on notional interest deductions who wish to adopt a similar method, as not harmful by the Group (no safe harbor; general criteria)
  • Delisting certain non-cooperative jurisdictions
  • Monitoring implementation of commitments by jurisdictions
  • Identification of new preferential regimes
  • Further defensive measures for non-cooperative jurisdictions
  • Treatment of partnerships re: substance
  • The way forward; future monitoring, etc.

This is important guidance, as it provides transparency into the tax measures adopted, or not adopted, by various jurisdictions.  It also provides potential measures to incentivize non-cooperative jurisdictions.

Click to access 2019G_005707-19Gbl_EU%20Code%20of%20Conduct%20Group%20issues%20update%20report%20-%20new%20guidance.pdf

https://data.consilium.europa.eu/doc/document/ST-14114-2019-INIT/en/pdf

http://data.consilium.europa.eu/doc/document/ST-12284-2019-REV-1/en/pdf

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2019 BDO Board Survey

BDO’s 2019 Board of Directors survey is attached.

The 2019 BDO Board Survey, conducted by Market Measurement, Inc., an independent market research consulting firm on behalf of the Corporate Governance Practice of BDO USA, examined the opinions of 180 corporate directors of public company boards.

Respondents represent a distribution of organizations across industries and market value, from less than $200M to more than $10B.

Re: impact of the Tax Cuts and Jobs Act (TCJA), approx. 47% of the respondents were affected by the reduced Federal tax rate, although less than 20% were impacted by tax losses, foreign earnings impact or interest expense limitations.  This is very surprising with the TCJA GILTI provisions.

Almost two-thirds of directors (65%) report a high or moderate understanding of their company’s total tax liability.

Page 7 of the report is interesting, as it illustrates actions pursued as a result of tax reform.  These actions include MA&A, stock buy-backs, increased dividends and repatriation of cash to the US.

Click to access attachment.aspx

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Germany’s Research Allowance

Commencing in 2020, a new R&D incentive will be in place for German R&D activities.  This incentive was passed to stimulate its goal of raising R&D expenditures to 3.5% of GDP by 2025.

This incentive is worthy to review, especially as there is certainty re: certification of activities qualifying as R&D upfront, vs. a potential audit dispute years later.

Click to access 2019G_005410-19Gbl_German%20Federal%20Council%20approves%20Research%20Allowance%20Act.pdf

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CbCR: Not (yet) public for EU

Although this initiative did not receive a majority vote by the EU Competitiveness Council (COMPET), the real story is whether a unanimous (Tax Directive, Article 115 TFEU) or majority (Accounting Directive, Article 501(1) TFEU) vote is needed.

The Legal Service of the Council of the EU concluded on 11 November 2016, that the proposal must be based on Article 115 TFEU.  For the legal basis to be changed by the Council, nevertheless, unanimity is required.

Thereafter, the European Parliament’s Committee on Legal Affairs, pursuant to Rule 39(3) of the Rules of Procedure, decided of its own motion, to provide an opinion on the legal basis of the proposal amending the Accounting Directive. The Committee considered that there is a link between transparency and public scrutiny. It concluded on 12 January 2017 that the proposal must be based on Article 50(1) TFEU, instead of Article 115 TFEU. This opinion contradicted legal advice given to the Council of Member States in November 2016.

This contest will continue, with possible appeals depending on whether the Accounting or Tax Directive rules will be followed.  To date, several countries do not agree to public reporting, thereby other EU Members have envisioned using the Accounting Directive majority rule vote to pass this initiative.

 

Click to access 2019G_005555-19Gbl_EU%20-%20Public%20CbCR%20not%20approved%20in%20latest%20vote.pdf

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MNE Tax Policies: Examples

As year-end is approaching, many multinationals take this opportunity to review, and revise accordingly, their global tax policies/principles.  Additionally, UK also has an requirement to publish the company’s UK tax principles, which is usually a subset of the global policy.

Global tax policies/principles are generally approved by the Board of Directors, although not an express requirement, however it is a Best Practice.

Examples include Unilever, Siemens Gamesa, Siemens, Shell, Mars and Starbucks, which are all in the public domain.

https://www.unilever.com/sustainable-living/what-matters-to-you/tax.html

Click to access corporate-tax-policy.pdf

Click to access siemens-tax-code-of-conduct-and-tax-policy.pdf

https://www.shell.com/sustainability/transparency/shells-approach-to-tax.html#

https://gbr.mars.com/about/tax-strategy

Click to access 77CB10D4E6DD403A92D568DE90148166.pdf

 

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Global tax disputes survey

KPMG has issued a 2019 survey benchmarking tax disputes, linked for reference.

The report is divided into four sections:

  1. Tax audits and disputes-the changing environment
  2. Tax dispute management today
  3. Leveraging technology
  4. Tax dispute management of the future

Some observations in the report:

  • Tax authorities are becoming more aggressive, with less appetite to settle
  • Increased penalties
  • Cooperative compliance is still the highest rated tool to resolve disputes
  • More focus on international transactions
  • More information sharing by tax administrations
  • Dedicated resources in multinationals for dispute resolution, including global head of controversy
  • Hiring talent with dispute management experience
  • Internal process for handling audit disputes
  • Dispute management budget > 10% of tax budget
  • Tax dispute technology, apart from Excel, is still in its infancy
  • New trends: Global head of controversy, dedicated budget/staff/technology, escalation/communication processes and a global tax audit software platform

As audits escalate, disputes will likewise increase.  Accordingly, this issue warrants additional attention especially with respect to processes and talent.

Click to access the-global-tax-disputes-environment.pdf

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Critical Audit Matters (CAM)

US and international accounting standards have introduced the CAM process into the audit process, some of which include income tax accounts as a selected disclosure due to their materiality and the nature of being especially complex, challenging, subjective or complex auditor judgment (which is increasingly the norm for international tax rules)

For each CAM communicated in the auditor’s report, the auditor must:

Identify the CAM, describe the principal considerations that led the auditor to determine that the matter is a CAM,

Describe how the CAM was addressed in the audit, and

Refer to the relevant financial accounts/disclosures that relate to the CAM

As income taxes become more complex and subjective, including the effect of the Tax Cuts and Jobs Act (TCJA), MLI amendments to double tax treaties including permanent establishment (PE), OECD guidance and tax audit issues, a tax CAM may become more significant going forward, as it is an annual determination.

To the extent income tax is a CAM, there will be specific disclosures, preceded by more diligent review of the tax accounts, subjective determinations, etc. as part of the normal tax provision process.

PCAOB summary guidance and the relevant guidance links are referenced.

 

Click to access Implementation-of-Critical-Audit-Matters-The-Basics.pdf

https://pcaobus.org/Standards/Auditing/Pages/AS3101.aspx

 

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US protocols with Japan, Spain

The US tax treaty protocols will enter into force between US and the countries of Japan and Spain.

The Japanese protocol will have effect for withholding taxes (e.g., related to dividends and interest) for amounts paid or credited on or after the first day of the third month following the date on which the protocol enters into force — that is, 1 November 2019. For all other taxes, the Japanese Protocol will apply to tax years beginning on or after 1 January 2020.

For withholding taxes, the Spanish protocol generally will apply to amounts paid or credited on or after 27 November 2019, the date on which the protocol enters into force. For taxes determined by reference to a tax period, the protocol will apply for tax years beginning on or after 27 November 2019 (e.g., 1 January 2020, for calendar-year taxpayers). In all other cases, the protocol will apply on or after 27 November 2019.

The key features of the protocols are detailed in the EY Global Tax Alert, as reference. For the Spanish protocol, the new limitation on benefits requirements must be met timely for treaty-based withholding rates to apply.

Click to access 2019G_001059-19Gbl_US%20-%20Japan%20and%20Spain%20protocols%20entry-into-force%20dates.pdf

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French DST & Wine: US uncertainty

As the French digital services tax (DST) is in effect from 1/1/2019, with the first payment due in November, there is considerable uncertainty how this tax will be repealed/refunded when/if an OECD DST model takes its place.

The politicians see this as a potential remedy to put out the fire which started with implementation of this tax.  However, this issue becomes more complex from an international tax perspective as to how a refund/repeal would be treated: prospectively, retroactively, or some other method.

As this tax, similar to other provisions, was enacted unilaterally by the French administration anxious to improve their fisc, it is now shown to be disingenuous timing at the expense of multinationals which now have to pay this tax.  Hopefully, other countries do not follow this lead in advance of the OECD DST proposals.

Click to access 2019G_003927-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2029%20Aug%202019.pdf

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MESA Tax Guide

KPMG’s Middle East and South Asia (MESA) e-guide was recently published, providing a tax overview of GCC countries, wider Middle East countries and South Asian countries.

The reported countries include:

  • Bahrain
  • Kuwait
  • Oman
  • Qatar
  • Saudi Arabia
  • UAE
  • Egypt
  • Iraq
  • Jordan
  • Lebanon
  • Yemen
  • Bangladesh
  • Pakistan
  • Sri Lanka

The report provides a summary of Direct Taxes, including branches/permanent establishments, Tax Treaties, Indirect/Withholding taxes, Accounting rules including loss carryovers, and details about each country’s tax rules and requirements.

The guide is a handy reference, especially as the included countries are experiencing significant changes in their tax rules and guidance.

Click to access mesa-tax-guide.pdf

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US int’l developments

Proposed Regulations were issued for cloud computing and digital transactions; this is an especially important area re: sourcing of income, definitions, etc. especially in light of France and others looking to implement a digital services tax.

Publication 5188 was revised re: FATCA data reporting.

OECD released Peer 2 review reports re: re: BEPS Action 14 (dispute resolution).  Interestingly, some US treaties include a MAP provision, although not all are consistent with the minimum standard.

Click to access 2019G_003793-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2016%20Aug%202019.pdf

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EU Mandatory disclosure update

EU Directive 2018/822, adopted May 25, 2018, is in process of being adopted by Member States through the end of this year.  A summary of the status is as follows:

  • Adopted: Hungary, Poland, Lithuania, Slovenia
  • Published legislation: Austria, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Italy, Luxembourg, Netherlands, Portugal, Slovakia, Spain and UK
  • Formal consultation: Latvia and Sweden
  • Informal consultations: Belgium, France, Ireland, Malta, and Romania
  • No action yet; Bulgaria, Croatia and Greece
  • Under the Directive, cross-border reportable arrangements, where the first step of implementation is taken during the transitional period between 25 June 2018 and 30 June 2020, are required to be reported by 31 August 2020. As of 1 July 2020, reporting will be required within 30 days of a triggering event, e.g., the cross-border arrangement being ready for implementation.  However, Poland has earlier rules.

International tax professionals should be aware of the above rules, coordinating relevant reporting externally and internally.

EY’s Global Tax Alert has additional details, for reference.

Click to access 2019G_003690-19Gbl_EU%20Mandatory%20Disclosure%20Rules%20-%20Update%20on%20local%20countries.pdf

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Canada: Draft legislation

Canada’s Dept of Finance released draft legislative proposals, with comments due by 7 October 2019.

Canada has complex rules re: foreign affiliate dumping, etc. making it more complex to place subsidiaries under a Canadian holding company without proper planning for Paid Up Capital and other items, and these proposals appear to tighten those rules.

Cross border securities lending arrangements are included re: additional rules.

Tax professionals with Canadian operations should monitor this legislation accordingly.

EY’s Global Tax Alert provides additional details therein.

Click to access 2019G_003652-19Gbl_Canada%20-%20Draft%20legislation%20for%202019%20budget%20measures.pdf

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