Strategizing International Tax Best Practices – by Keith Brockman

Italy’s EU DIV WHT; S. Court’s inconsistent position

February 6, 2019

This recent case underscores the reluctance to assume all EU Member States will interpret the EU Directive in accord with its meaning.

The Lux parent had a dividend exemption regime, thus Italy claims there is really not a dividend, thus withholding tax applies despite the EU Directive and similar court cases.  This reasoning may point to advance planning/rulings for similar transactions, or look for options to otherwise accomplish the cash planning objectives.

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

Click to access 2019G_000316-19Gbl_Italian%20SC%20denies%20WHT%20exemption%20under%20EU%20Parent-Subsidiary%20Directive.pdf

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Final Sec 965 Reg’s

February 4, 2019

The first set of final Regulations were recently issued; some changes include:

  • Stock basis flexibility
  • Right to have some changes in methods of accounting as “regarded”
  • Clarification of ordering rules
  • Elect to not disregard payments between SFC’s between measurement dates
  • Including only actual Sec 956 inclusions for the “without” calculation

As the Regulations were issued in January, this set of Reg’s, as well as others to be issued by June 22, 2019, will be treated as having retroactive effect to the enactment date of December 22, 2017.

https://www.ey.com/Publication/vwLUAssets/Alert:_US_Final_Section_965_regulations_largely_follow_proposed_regulations_-_but_include_significant_changes/$FILE/2019G_012895-18Gbl_US%20-%20Final%20Sec.%20965%20regs%20largely%20follow%20proposed%20regs.pdfFinal

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US int’l developments

January 7, 2019

The US legislative docket continues to be busy in the New Year.  Democrats have taken control of the House, with a Republican majority in the Senate, so tax cut legislation bills will be vigorously contested.

EY’s Global Tax Alert highlights the political scene re: tax legislation.

Click to access 2019G_012733-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%204%20Jan%202019.pdf

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EC: Tax Policies in the EU

January 1, 2019

The European Commission has published a 2018 survey of tax policies.

The “Tax Policies in the EU survey” examines how Member States’ tax systems help to promote investment and employment, how they are working to reduce tax fraud, evasion and avoidance, and how tax systems help to address income inequalities and ensure social fairness.

It substantiates the priorities outlined in the Annual Growth Survey  in the area of taxation and presents in a clear and accessible fashion the most recent reforms in Member States and the main indicators used by the European Commission to analyse tax policies in the context of the European Semester . It also presents reform options to improve efficiency and fairness in tax systems.

New elements of this year’s edition include a summary of important business taxation reforms in third countries, an analysis on taxation as an environmental policy instrument, a focus on the implications of new forms of work for labour taxation, an analysis of the influence of the overall tax mix on progressivity, and an overview of recent EU tax initiatives.

Tables starting at page 111 include EU Member State summaries, including sections re: employer social security contributions, corporate / other income taxes, VAT, environmental related taxes, transaction taxes and other taxes.  The summaries also refer to the actual bill that was enacted for further reference. 

This publication is a valuable summary of tax policies, trends, and tax reforms in 2018.

Click to access tax_policies_survey_2018.pdf

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France: Happy New Year bill

December 31, 2018

The French bill has approved the Finance Bill for 2019, subject to constitutional review for enactment generally effective 1/1/19.  Some important provisions include:

  • Interest deductibility, 30% EBITDA/debt-to-equity, limitaitons
  • Favorable rate of 10%, vs. 15%, for patent related activities, aligning with the DEMPE/nexus provisions of BEPS Action Item 5.
  • Royalty deduction limitation for beneficiaries with less than a 25% effective tax rate and it is listed as a harmful tax regime by the OECD
  • For FYs beginning on or after 1 January 2019, a new anti-abuse provision will be applicable as a result of the transposition of article 6 of the ATAD.  The main purpose, or one of the main purposes, anti-abuse test re: the EU ATAD will be used to determine if the anti-abuse rule applies for corporate income tax
  • A new anti-abuse provision for all other taxes than CIT will allow the FTA to disregard acts which, by seeking to benefit from a literal application of provisions or decisions, against the initial objective sought by their authors, were driven by the main purpose of avoiding or reducing the tax burden which would have normally been borne by the taxpayers, due to their situation or their real activities, if those acts had not been entered into.  This provision is effective in 2020
  • French GAAR rule is retained (allowing flexibility to combat perceived abuse)
  • The Finance Bill for 2019 transposes into French domestic law the provisions of the Directive 2017/1852 dated 10 October 2017 as regards mechanisms to settle double taxation arising as a result of the application of double tax treaties concluded between EU Member States.
  • French tax consolidation group rules are modified

France is known for its proactivity in enacting anti-abuse legislation, and especially interesting is the royalty deduction limitation which  a two-prong test, whereas Germany is also considering a harsher test to combat the US FDII benefit.  

EY’s Global Tax Alert provides detailed summaries of the above provisions, among others.

https://www.ey.com/Publication/vwLUAssets/French_Parliament_approves_Finance_Bill_for_2019/$FILE/2018G_012550-18Gbl_French%20Parliament%20approves%20Finance%20Bill%20for%202019.pdfFranc

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MLI: A New Year

December 30, 2018

As time for implementation of the Multilateral Instrument (“MLI”) draws near, it may be time to refresh the history and current status of this instrument.

Reference links are provided for The Multilateral Convention, Guidance for the Development of Synthesised Texts published by the OECD in November 2018,  and Status of the Parties to a MLI as of December 21, 2018.  An extract from the

An extract from the Synthesized Texts is provided as context:

This Guidance has been prepared to provide suggestions to Parties to the MLI for the development of documents they could produce to help users of the MLI to understand its effects on tax agreements it covers and modifies (the “Covered Tax Agreements”). The objective is to present in a single document and for each covered tax agreement: the text of a Covered Tax Agreement, including the text of relevant amending instruments; the elements of the MLI that have an effect on the Covered Tax Agreement as a result of the interaction of the MLI positions of its Contracting Jurisdictions; and information on the dates on which the provisions of the MLI have effect in each Contracting Jurisdiction for the Covered Tax Agreement. Such documents would be referred to as “synthesised texts”.

To ensure clarity and transparency for the application of the MLI, Parties that intend to develop documents setting out the impact of the MLI on their Covered Tax Agreements should be as consistent as possible. This Guidance sets out a suggested approach for the development of synthesised texts. The Guidance also suggests sample language that could be included in the synthesised texts. At this stage, the sample language includes: a sample general disclaimer on the synthesised texts; a sample disclaimer on the entry into effect of the provisions of the MLI; for each MLI Article, “sample boxes” of the provisions of the MLI that could modify the covered tax agreements; and sample footnote texts on the entry into effect of the provisions of the MLI.

As the New Year draws near from a personal perspective, it is also a New Year for birth of the MLI and its impact on worldwide tax treaties.

 

Click to access multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf

Click to access beps-mli-signatories-and-parties.pdf

Click to access beps-mli-guidance-for-the-development-of-synthesised-texts.pdf

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Finland: Mr Scrooge

December 24, 2018

The Finnish Tax Administration (FTA) recently issued a reminder notice stating that the common practice of hiring Santa Claus to give presents are required to be reported         (> EUR 1,500 this year).

Let’s not forget: Santa Claus must report the value of gifts distributed on his tax return, this year and next, less travel expenses!  Does this mean he should keep his list, checking it twice?

Merry Christmas & Happy Holidays to all!  

 

 

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US: The BEAT goes on

December 16, 2018

Complex new guidance continually is rolling off the press for scrutiny, especially for year-end compliance.  EY’s Global Tax Alert provides a summary of recent developments,  references to IRS Notice 2019-01, IRS FAQ’s, and Proposed Regulations for BEAT are provided for reference.

Highlights:

  • Proposed BEAT Regulations provide certainty re: Service Cost Method payments and the mark-up component that would be includable. BEAT is not limited to cash payments, and would also include amounts paid or accrued using any other form of consideration including property, stock or the assumption of a liability.
  • Notice 2019-01 was issued to address the rules for repatriations, generally arising from Sec. 959(c)(1), (2) and (3) in that order based on a LIFO approach.  Compliance complexity has expanded significantly, demanding more time from multinational tax departments that will require added resources, technology demands and external advisor costs.
  • A new House Ways and Means tax package was introduced Dec. 10th, preserving the (correct) notion that tax year 2017 overpayments would not exclusively be attributed to the deemed repatriation tax without offset to 2018 regular tax liability.    The package would also provide technical guidance for downward attribution rules.
  • IRS FAQ’s have been updated, attached for reference.
  • The IRS on 13 December issued proposed regulations (REG-132881-17) under Code Sections 1471–1474 (FATCA) and Sections 1441–1461.
  • The Organisation for Economic Co-operation and Development (OECD) will release a major update on its work on the taxation of the digital economy at the end of January 2019, according to Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration.

Click to access 2018G_012449-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2014%20Dec%202018.pdf

Click to access n-19-01.pdf

Click to access reg-104259-18.pdf

https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns

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GILTI Reg’s: TEI’s response

December 10, 2018

The Tax Executives Institute (TEI) provided insgihtful comments to the recently issued GILTI Proposed Regulations, addressing the following main points:

  • Proposed regulation section 1.951A-3(h)(1) (the “temporarily held property rule”) provides that temporarily held property acquired with “a principal purpose” of reducing a U.S. shareholder’s GILTI inclusion will be disregarded
  • Basis adjustment rule for tested losses
  • Only used tested losses should increase Subpart F E&P
  • Basis reductions should only apply to actual transfers of stock
  • Deemed Sec. 367(d) expense should reduce tested income
  • Prop. Reg. § 1.951A-2(c)(5) anti-abuse rule (and authority to issue such rule)

TEI’s comments are well reasoned and should be reviewed to further understand the complexities, and need for added clarification going forward.

 

Click to access TEI%20Comments%20-%20Proposed%20GILTI%20Regulations%20Section%20951A%20-%20FINAL%2026%20November%202018.pdf

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Proposed FTC Reg’s: Not simple

December 9, 2018

Links to the proposed Foreign Tax Credit Regulations, and EY’s detailed Global Tax Alert, are provided for reference.

To the extent there are perceived favorable items, (i.e. including GILTI income and stock as subject to exemption rules), there are unfavorable items (i.e. exemption rules also affecting the FDII calculation and overall complexity).

From a multinational company perspective, these complex rules require almost immediate application for financial statement purposes while regular tax compliance/provision systems struggle to catch up.  Thus, new technology will be required to prepare non-intuitive calculations that are still uncertain for many to fully comprehend and apply.

Click to access 2018G_012314-18Gbl_US%20Treasury%20issues%20highly-anticipated%20proposed%20foreign%20tax%20credit%20regs.pdf

Click to access reg-105600-18.pdf

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US Sec. 163(j): Guidance/complexity

December 2, 2018

The IRS recently released Proposed Regulations on Section 163(j): an interest limitation that is applicable for the calculation of Global Intangible Low-Taxed Income (“GILTI”) under the US Tax Act (“TCJA”).  A copy of the Proposed Regulations are provided for reference, highlighting some areas of clarity/surprise.  Comments are due within 60 days of publication in the Federal Register, with a public hearing set for Feb. 25, 2019.

  • Former Proposed Regulations for Sec. 163(j), never finalized, are withdrawn
  • Proposed Regulations may be elected for 2018
  • General rule-Same as C corp; election (alternative method) for a CFC group
  • One limit for a consolidated group (affiliated, non-cons. group, or partnership n/a)
  • Adjusted Taxable Income (“ATI”) requires an adjustment for:
    • Capitalizable Sec. 263A costs re: inventory/sales  
    • sales/dispositions of certain property
    • Sec. 78 gross-up, Sec. 951(a) Subpart F, Sec. 951A GILTI, Sec. 250(a)(1)(B) deduction, without regard to Sec. 250(a)(2) limitation, related to GILTI
  • Upper tier CFC members include “excess interest” of lower tier CFC’s
  • Further guidance re: ordering of Code provisions, including BEAT, will be issued
  • A “new” definition of interest is provided, including:
    • Sec. 1275(a) and Reg. Sec. 1.1275-1(d) instruments
    • Factoring income
    • OID
    • Accrued market discount
    • Guaranteed payments of Sec. 702(c)
    • Income/loss re: hedges of interest-bearing assets/liabilities
    • Swaps, separated into a loan and payment swap (collateralized swap n/a)
    • Commitment fees
    • Debt issuance costs
  • Anti-avoidance rule
  • Sec. 382 attribution for pre/post-change periods
  • Sec. 381 includes the attribute for disallowed interest expense carryovers
  • No effect on E&P
  • Sec. 163(j) limit at partnership level
  • Intercompany CFC debt is included as interest income and expense, thus resulting in a net -0-; other debt will be a net adjustment to be allocated to separate CFC’s
  • New Form 8990 will be required

The most contentious items, as noted in recent days, are the adjustment of Sec. 263A depreciation (thus a factory does not add back depreciation in EBITDA), add back of Sec. 78, Sec. 951(a), Sec. 951A as reduced by the relevant Sec. 250 amount, complexity including excess ATI adjustments, and the new definition of interest, which includes interest equivalent instruments/transactions that will be included as a potential limitation.

The 439 pages require several readings for a general comprehension, aided by webinars and summaries from various advisory firms.

Click to access REG-106089-18-NPRM.pdf

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Poland: WHT cash leakage

November 21, 2018

Effective 1/1/2019, dividends, interest, and royalty payments from Poland will meet higher tax rates, and timing/permanent differences based on a “pay and refund” system.

Statutory tax rates of 19%/20% will be applicable, unless certain pre-conditions are applied for, which may not be certain or provided timely.

These provisions will impact current cash flows with potential adverse consequences on the annual ETR, resulting in additional proactive actions (i.e. providing statements for lower withholding no later than early January, etc.) to mitigate such actions to the extent possible.

EY’s Global Tax Alert provides additional insight on this significant development for multinationals.  Hopefully, other countries will not “follow the leader” by enacting similar actions.

Click to access 2018G_011959-18Gbl_Poland%20-%202019%20tax%20reform%20including%20strict%20withholding%20tax%20regime.pdf

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US Sec. 163(j): Proposed Reg’s to apply a look-through approach

November 12, 2018

The review of these regulations by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) review is progressing, with over 500 pages of proposed regulations to be released publicly this week.

Lafayette G. “Chip” Harter III, Treasury deputy assistance secretary for international tax affairs, provided comments on Nov. 9 at the Federal Tax Conference sponsored by the University of Chicago Law School.

The business interest expense limitation, currently applied by many at the individual CFC level, would be determined on a look-through method, with net external interest calculated at the CFC group level and allocated to CFC’s, with a tiering-up approach.

The proposed Reg’s will be very complex and long, with over 500 additional pages of BEAT, FTC, etc. also to be issued later this month.

 

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US Section 956 Proposed Reg’s: Traps & Opportunities

November 5, 2018

IRS recently published proposed regulations under Section 956 (deemed dividend provision), with both good and bad news in further alignment with the US Tax Act enacted at the end of 2017.  At that time, it was hoped that Section 956 would be abolished, but a late-breaking change in the final law was put in place for Section 956 to remain.  This update achieves parity with the participation exemption system provided for dividend distributions.

  • Good news: Corporate US shareholders are excluded from the application of Section 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and effective repatriations.  Thus, the amount otherwise determined under Section 956 is reduced to the extent that the US shareholder had received a distribution qualifying for a Section 245A deduction from the CFC in an amount equal to the Section 956 amount.  (i.e. the distribution still needs to be a dividend)
  • Bad news: Section 956 is still in the Code, along with potential direct/indirect tax consequences from guarantees, loans, etc.  To the extent such amount is not a “dividend” for US tax purposes, there are traps still present to warily avoid.

There are planning opportunities (i.e. tax consequences from a loan vs. an actual dividend, etc.), however there are also traps to avoid, so it is safe to assume that diligence is still required for this Code section. 

A reference to the proposed Regulations are provided for reference.

Click to access reg-114540-18.pdf

 

 

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Hybrid arrangements: ATO guidance

October 29, 2018

The Australian Tax Office (ATO) has published guidelines addressing general anti-avoidance rules (GAAR) for restructures of hybrid arrangements.

This guidance is a valuable reference for taxpayers not only operating in Australia, although having hybrid arrangements that may need restructuring.

Click to access 2018G_011633-18Gbl_Australia%20-%20Guidance%20on%20GAAR%20and%20hybrid%20mismatches.pdf

https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FPCG20187%2FNAT%2FATO%2F00001%22

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