Strategizing International Tax Best Practices – by Keith Brockman

The Council of the European Union (ECOFIN) has published its list of uncooperative tax jurisdictions, numbering 17:

American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates

The listing criteria are focused on three main categories: tax transparency, fair taxation and implementation of anti-BEPS measures.

 

There are potential counter-measures that could be employed by other jurisdictions, and there is the possibility of other countries aligning such countries on a comparable list.  This list will be reviewed annually, thereby expanding or diminishing accordingly.

EY’s Global Tax Alert provides historical context for development of this list.

http://www.ey.com/Publication/vwLUAssets/Council_of_the_European_Union_publishes_list_of_uncooperative_jurisdictions_for_tax_purposes/$FILE/2017G_06895-171Gbl_Council%20of%20the%20EU%20publishes%20list%20of%20uncooperative%20jurisdictions%20for%20tax%20purposes.pdf

Senate tax bill

Amid the last-minute penciled-in amendments and heated discussions, the Senate Bill was narrowly passed by a vote of 51-49, with the text referenced herein.

The bill now moves to a reconciliation phase between the House and Senate, with such bill potentially forwarded to the President for signature before Christmas.

Several amendments were passed, including a phase-out of the corporate property expensing provision after 2022, reinstatement of corporate AMT and an increase of the deemed repatriation tax for accumulated foreign earnings (thereby achieving greater tax revenues for passage).

The 479-page bill is still incredibly complex, in effect layering upon the present US tax rules in many areas, and the final reconciliation stage will produce additional changes.  However, it is expected that the Senate’s provisions will largely remain in place as the votes are more critical for passage and major shifts in an already contentious bill may point to possible defeat of the bill, which President Trump is not willing to accept.

Next stage after passage: A review, starting now, of earnings and profits, etc. that will drive the relevant tax accounting adjustments required for year-end closing of the books for calendar-year taxpayers due to “enactment” of the bill prior to Dec. 31st.

https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rXqXuQfYbRas/v0

UK: Post Brexit Customs

As the UK prepares for a post Brexit deal with the EU, details are emerging re: the customs rules that are being contemplated.  Needless to say, it will not be as simple as the EU framework that accommodates this system currently.

EY’s summary provides details and highlights to think about re: current supply chains and routes to market for goods entering or leaving the EU via the UK.

http://www.ey.com/Publication/vwLUAssets/UK_Government_introduces_new_Customs_Bill/$FILE/2017G_06713-171Gbl_Indirect_UK%20Government%20introduces%20new%20Customs%20Bill.pdf

France: Budget retribution

Due to the unconstitutionality of the 3% tax on dividend distributions outside the French group based on the equality principle, the French Parliament has imposed an additional surtax to rectify its budget deficit.

This legislation will increase, for large companies, the effective tax rate to 39.4% or 44.4%  depending on the size of the turnover.  Unfortunately, this additional tax will be imposed on the relevant large companies that did not make a prior distribution subject to the 3% tax that will now be refunded.

This tax increase was necessitated by the unconstitutionality of the original 3% tax; which imposes a learning that such taxes that may be unconstitutional should be claimed as a refund early in the process notwithstanding the final developments.  

Deloitte’s summaries provide further details on this development for reference.

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-alert-france-6-october-2017.pdf

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dtt-tax-worldtaxadvisor-171124.pdf

Poland’s Corporate Income Tax Law will be formally amended, effective 1/1/2018.

  • One of the most important provisions is the limitation in intercompany royalty and service payments, using an absolute limitation and EBITDA basis.  (Note, a corollary offset does not provide matching offsets for the income inclusion by intercompany affiliates.)

This limitation goes beyond the OECD’s guidelines, and extrapolates interest deductibility  that is veiled as a “base erosion” device.

Multinationals need to review and plan accordingly for this limitation, which provides some APA safe harbors obtained with the Polish Ministry of Finance.  To the extent an APA is not possible and the limitation is exceeded, a company’s effective tax rate will be increased by this legislation.  

EY’s summaries of this important development are included for reference:

http://www.ey.com/Publication/vwLUAssets/Poland_-_Advanced_Pricing_Agreement_to_remove_new_limitation_on_tax_deductibility_of_intra-group_charges/$FILE/2017G_06049-171Gbl_Poland%20-%20APA%20to%20remove%20tax%20deductibility%20limitation.pdf

http://www.ey.com/Publication/vwLUAssets/Alert:_Poland_passes_2018_corporate_income_tax_reform/$FILE/2017G_06726-171Gbl_Poland%20passes%202018%20corporate%20income%20tax%20reform.pdf

Climate change: Disclosures

Katharine Blue, U.S. sustainability services leader for KPMG, highlights the necessity for disclosing the risks of climate change, which many companies are not yet adequately disclosing.

The KPMG Survey of Corporate Responsibility Reporting 2017 found that three-quarters of the largest companies worldwide by revenue (the G250) don’t acknowledge climate change as a financial risk. And nearly half of the largest 100 U.S. companies by revenue (the N100) don’t acknowledge financial risks of climate change in annual reports.

In 2015, Mark Carney, chairman of the Financial Stability Board (FSB) and chair and governor of the Bank of England, formed the Task Force on Climate-related Financial Disclosures (TCFD), the first international initiative to examine climate change in the context of financial stability.

There are two types of risk: physical and transition risks that should be reviewed for disclosure.

The referenced article provides valuable insight into this ever-growing issue, for which the lack of attention poses disclosure gaps/risks.  

http://ww2.cfo.com/risk-management/2017/11/companies-struggle-quantify-climate-risk/

The 2017 World Intellectual Property Report was recently issued by the World Intellectual Property Organization (WIPO), a biennial report, and provides some interesting findings that are important to understand as US tax reform and other countries are now focusing on the taxation of intangibles and the income resulting therefrom:

First-ever figures reveal that nearly one third of the value of manufactured products sold around the world comes from “intangible capital,” such as branding, design and technology, according to a WIPO study of the global value chains companies use to produce their goods.

Some WIPR 2017 findings

  • Intangible capital accounted, on average, for 30.4 percent of the total value of manufactured goods sold throughout 2000-2014.
  • The intangible capital share rose from 27.8 percent in 2000 to 31.9 percent in 2007, but has remained stable since then.
  • Overall, income from intangibles increased by 75 percent from 2000 to 2014 in real terms, amounting to USD 5.9 trillion in 2014.
  • Three product groups – food products, motor vehicles and textiles – account for close to 50 percent of the total income generated by intangible capital in the manufacturing global value chains.

References to the Report and summaries are provided for reference:

http://www.wipo.int/pressroom/en/articles/2017/article_0012.html

http://www.wipo.int/edocs/pubdocs/en/wipo_pub_944_2017-intro1.pdf

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