Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

France: Bonjour DST, Rates.. merci

On 24 July 2019, French President Emmanuel Macron signed the bill introducing the Digital Services Tax (DST) and the partial freeze of the corporate income tax rate decrease.  The DST consists of a 3% levy applied to revenue derived from specific digital activities by companies with a qualifying revenue of more than €750 million worldwide and €25 million in France.

The bill was published in the Journal Officiel on 25 July 2019, leading to the entry into force of the bill.

This formal action is expected to be met with repercussions, as well as similar unilateral initiatives, in other countries.  

Instead of benefiting from a 31% CIT rate on their taxable income exceeding €500,000, as stated by the Finance Bill for 2018,2these “large” companies will still be taxed at the former 33.1/3% rate for the 2019 timeframe noted above. However, the 28% CIT rate will still apply on the first €500,000 of their taxable income.

For FYs starting on or after 1 January 2020 and onwards, the progressive decrease of the French CIT rate (down to 25%, by 2022), as stated by the Finance Bill for 2018,3 should remain unchanged. Yet, according to a recent statement made by the French Economy and Finance Minister, Mr. Bruno Le Maire, for 2020, companies with revenue equal to, or higher than €250 million, may be taxed at a rate of 31% instead of 28%, as initially announced (for 2020, all other companies would still benefit from the 28% CIT rate). This remains to be confirmed by the next Finance Bill.

 

Category:

Tax Risk Management

French tax credits: Favorable treaty interpretation

IRS indicated that it will no longer assert that taxpayers are precluded from claiming foreign tax credits for the contribution sociale généralisée (CSG) and the contribution pour le remboursement de la dette sociale (CRDS).

As a result, US citizens and resident aliens who pay the CSG and CRDS in France may now claim foreign tax credits to offset their US income tax. Additionally, they potentially may file claims for refund of US income tax by claiming foreign tax credits for CSG and CRDS paid in the last 10 years under Internal Revenue Code Section 6511.

The appeals court indicated the text of the Totalization Agreement required consideration of French law in evaluating whether CSG and CRDS amended or supplemented the French social tax laws in the Agreement.the US Government, represented by the Department of State, and the French Government now have a shared understanding that the laws enacting CSG and CRDS do not amend or supplement the French social tax laws listed in the Totalization Agreement. As a result, the IRS will no longer disallow foreign tax credits for CSG and CRDS.

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

Click to access 2019G_003135-19Gbl_US%20IRS%20-%20French%20CSG%20and%20CDRS%20are%20creditable%20taxes.pdf

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Spain: Mandatory disclosure +

On 20 June 2019, the Spanish Government published draft legislation and draft guidance addressing the implementation of the European Union (EU) Directive on the mandatory disclosure and exchange of cross-border tax arrangements (referred to as DAC6 or the Directive). Under DAC6, taxpayers and intermediaries are required to report cross-border reportable arrangements from 1 July 2020. However, reports will retrospectively cover arrangements where the first step is implemented between 25 June 2018 and 1 July 2020.

Comments are requested by July 12, 2019.

Key highlights

  • The scope of taxes covered is not broader than the Directive.
  • The definition of reportable arrangements does not include domestic arrangements.
  • In addition to Hallmarks A-E included in DAC6, Spain’s draft guidance also includes additional information on the interpretation and application of these hallmarks.
  • The definition of intermediaries is not broader than the definition in DAC6.
  • The Spanish draft legislation includes an annual reporting obligation, detailing the use of reportable cross-border arrangements that have already been reported before any tax authority. This obligation is not required under the Directive. The draft legislation includes a list of nexus thresholds with Spain which give rise to this obligation.
  • Penalties for failures to report are expected to apply and will range between €3,000 and up to the maximum of the fees received/agreed or the value of the tax impact of the arrangement.
  • Intermediaries are exempt from the obligation to report where the reporting obligation would breach legal professional privilege (LPP). LPP is foreseen both for lawyers and other intermediaries, but only in limited cases. If there are no EU intermediaries which can report, the obligation will shift to the taxpayer.
  • The Spanish Tax Authority will publish on its website, for information purposes, the most relevant reported cross-border arrangements as well as the tax information related to the applicable regime or characterization of such cases.

Multinationals with cross-border transactions subject to such reporting should review Spain’s proposals, as well as monitor other EU Member States for additional obligations not required under the Directive. 

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

Click to access 2019G_003011-19Gbl_Spain%20issues%20draft%20mandatory%20disclosure%20regime%20legislation.pdf

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Tax Risk Management

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Euro tax update

KPMG’s Euro Tax Flash is attached for reference, highlighting:

  • ECOFIN Financial Transactions Tax
  • Revised EU Blacklist, including: American Samoa, Belize, Fiji, Guam, the Marshall Islands, Oman, Samoa, Trinidad and Tobago, the United Arab Emirates, the US Virgin Islands, and Vanuatu

Click to access etf-406-ecofin-financial-transaction-tax-dominca-eu-blacklist.pdf

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Tax Risk Management

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Singapore/Korea DTT

A revised Double Tax Treaty (DTT) has been signed by Singapore and Korea, to be effective after ratification by both countries, including:

  • 5% royalty withholding tax rate
  • Article 26: New anti-abuse provision

The reduction in withholding tax rate is a welcome revision, among other details, as outlined in EY’s Global Tax Alert

Click to access 2019G_002898-19Gbl_Singapore%20and%20Korea%20sign%20revised%20income%20tax%20treaty.pdf

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S. Africa: Anti-tax avoidance

Corporate tax amendments have been proposed in the Draft Taxation Laws Amendment Bill 2019, referred to as “initial 2019 TLAB.”  The primary change is to address potential dividend stripping schemes, with comments due by 25 June 2019.  Draft legislation is expected in July 2019.

To the extent that corporate reorganizations/dividends are envisioned in S. Africa, this legislation should be reviewed, with valuable comments provided to ensure fairness in the final legislation.

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

Click to access 2019G_002864-19Gbl_South%20Africa%20-%20Prop%20corp%20tax%20rules%20-%20anti-tax%20avoidance%20measures.pdf

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Tax Risk Management

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ERM: Tax risk

The Enterprise Risk Management (ERM) process should be a coordinated process envisioning a multinational’s tax risks around the world.

The evolution with BEPS, ongoing developments re: digital taxation, multilateral instruments (MLIs) becoming effective, permanent establishment (PE) changes, and countries enacting unilateral legislation inconsistent with international norms are some examples why international tax/transfer pricing should be among the top ten risks of most multinationals.

Legacy ERM procedures may not be as effective in the current tax world as they were recently.  However, have multinationals really incorporated these changes into the ERM process re: uncertainty and risk management?

Members of the Board of Directors, responsible for ultimate risk, should also be asking this question as a reminder/refresher for the ERM process.  Tax executives, knowledgeable of such risks, should also be proactive in this process to educate others about recent global changes that may impact their organization.

Questions and challenges for ERM should be developed as new tax legislation is becoming more complex and uncertain in countries around the world.

 

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New Zealand DST: In play

Not awaiting the OECD’s proposals for which a Workplace will be delivered in 2020, implementation following that several years later, New Zealand seeks to propose a 2-3% Digital Services Tax (DST) in the interim.  Public comments will be accepted by July 18th. The Government discussion document and EY’s Global Tax Alert provide details, as referenced herein.

Discussion document highlights:

The Government is committed to ensuring everyone pays their fair share of tax, including digital multinationals. Achieving this will require changes to the current tax rules. There are two options for this:

  • The first option is to apply a separate digital services tax (DST) to certain digital transactions. A DST taxes at a low rate (for example, 2% to 3%) the gross turnover of certain highly digitalised businesses that are attributable to the country.
  • The other option is to change the current international income tax rules, which have been agreed to by countries (usually referred to as “the international tax framework”).

In summary, New Zealand is not patient to wait for OECD rules, wishes to implement a transition tax in the interim and plans to repeal this tax with the OECD solution when it becomes effective.

Click to access 2019G_002780-19Gbl_Indirect_New%20Zealand%20considers%20Digital%20Services%20Tax.pdf

Click to access 2019-dd-digital-economy.pdf

Category:

OECD, Tax Risk Management

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TEI comments: Proposed 250 Reg’s

As Final Regulations are in process, TEI’s practical and thoughtful comments were submitted re: the proposed Section 250 Regulations.  A copy of the comments are provided for reference, with highlights including:

  • Determination of domestic and foreign use are impractical rules for which a multinational company will find difficult to effectively implement.  A seller’s shipping address would be an alternative solution
  • Long-term supply contracts may be difficult to obtain new documentation annually, thus such documentation of the initial contract should suffice
  • Business Service provisions have rules that will prove difficult to obtain, workable rules should be designed and implemented
  • Effective date of the final regulations should be tax years beginning at least one year after the date of publication, to allow time for system changes
  • Final section 250 regulations should provide that the exploitation of manufacturing and supply chain IP is a foreign used service, consumed at the place of manufacture, if it meets the physical transformation and proximity requirements outlined in the regulations
  • Advance payments of section 451 are to be related to the timing for related cost of goods sold amounts to prevent distortion

  • Final regulations clarify where the charitable contribution deduction limitation fits in the ordering rule, along with sections 163(j), 172, and 250.

  • Prop. Treas. Reg. § 1.250(b)-1(d)(2) provides that the exclusive apportionment rules in Treas. Reg. § 1.861–17(b) do not apply, this provision is a disincentive and should be changed

     

    TEI’s comments are informative, especially due to the inclusion of suggested alternatives to the proposed rules and therefore worth reviewing.   

    Click to access tei_comments_-_proposed_section_250_regulations_-_final_to_irs_treasury_6_may_2019.pdf

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Tax Risk Management, TJCA

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US Reg update: 987/954/958/PTI/GILTI

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.

Click to access 2019G_002432-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20May%202019.pdf

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Tax Risk Management, TJCA

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US int’l update: EC contests FDII

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.

Click to access 2019G_002276-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2010%20May%202019.pdf

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India PE: Profit proposal

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.

Click to access 2019G_001978-19Gbl_TP_India%20-%20Proposal%20to%20amend%20PE%20profit%20attrib%20rules.pdf

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PE, Tax Risk Management

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Tariffs: China exclusions & Best Practices

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.  

Click to access 2019G_001932-19Gbl_Indirect_USTR%20publishes%20new%20exclusions%20for%20Chinese-origin%20products.pdf

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EU: Profit Split method

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.

 

Click to access report_on_the_application_of_the_profit_split_method_within_the_eu_en.pdf

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Tax Risk Management, Transfer Pricing

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US/OECD int’l developments

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.

Click to access 2019G_001616-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%205%20April%202019.pdf

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