Strategizing International Tax Best Practices – by Keith Brockman

OECD: Tax statistics/CbC

The OECD Corporate Tax Statistics, Second Edition, published this year reveals interesting trends, including the results of the anonymized and aggregated Country-by-Country (CbC) data which includes statistics from 26 countries for the 2016 tax year.

Tax administrations are moving toward more data analysis as an audit tool, and multinationals should be aware of this data which is used as a risk assessment tool, among others.

https://www.oecd.org/tax/tax-policy/corporate-tax-statistics-database.htm

ICAP & CbC

The OECD International Compliance Assurance Programme (ICAP) is a voluntary programme for a multilateral co-operative risk assessment and assurance process.

ICAP uses Country-by-Country (CbC) data as part of its risk assessment analysis and includes potential benefits for participating taxpayers re: certainty and avoiding double taxation, among other benefits.

ICAP is still fairly new in practice, although the process should be understood as a tool in pro-active compliance.

https://www.oecd.org/tax/forum-on-tax-administration/international-compliance-assurance-programme.htm

BEAT Regs: One-way street

The IRS and Treasury have released Final Regulations (T.D. 9910) on base erosion and anti-abuse tax (BEAT), with a controversial provision of not allowing the ability to decrease previously waived deductions on an amended return or during an exam.

The Regulations, however, do provide the benefit to waive deductions to avoid BEAT.

A new era of Faceless Tax Assessment, and tax transparency is being introduced to provide a non-adversarial or soft-touch regime.

Taxpayers with operation in India should review this new development, especially as other countries will also be watching this update for learnings going forward.

https://economictimes.indiatimes.com/topic/Faceless-appeal

IRS issued new regulations for translation in Sec. 986(c)

The IRS also issued new LB&I guidance addressing computation of Sec. 986(c) computations, attached for reference.

US T.D. 9909, Final Regulations, in coordination with the issuance of proposed regulations, REG-124737-19, addressing Sec. 245A and the exception to subpart F income under Sec. 954(c)(6). The final regulations address extraordinary dispositions and reductions.

The UK will drop its Digital Service Tax (DST) initiative, knowing it would only increase its stimulus by several hundred million dollars , while COVID-19 has set the country back hundreds of billions of dollars in stimulus. It will be interesting how other countries, who have adopted or are thinking about a unilateral DST, will react prior to the OECD Project addressing this in Pillar One.

ATO: arm’s length debt

The Australian Tax Office (ATO) has recently issued guidance on thin capitalization arm’s length debt and outbound interest-free loans.

The guidance is especially valuable as it provides a risk assessment framework outlining their compliance approach to arm’s length debt.

The ATO is known for its reference to risk assessment frameworks, as this trend will continue in other countries and is a valuable read.

https://www.ato.gov.au/law/view/document?DocID=COG%2FPCG20207%2FNAT%2FATO%2F00001

https://www.ato.gov.au/law/view/document?DocID=TXR%2FTR20204%2FNAT%2FATO%2F00001

UN: Digital service tax

The UN tax committee members have issued a proposal re: taxation of digital service income.  The proposal will be discussed in meetings later this year, making their way to become a part of the UN Model Tax Convention.

This will be an interesting dynamic, as the OECD is working diligently to finish their digital tax project this year.  It is hopeful that  both proposals will have a similar framework, avoiding a natural clash in methodology prone to dispute.

In summary, the UN and OECD digital tax proposals should be monitored to watch the progress, and changes prior to finalization envisioned by the end of this year.

Click to access TAX%20TREATY%20PROVISION%20ON%20PAYMENTS%20FOR%20DIGITAL%20SERVICES.pdf

The OECD provided this guidance in April, 2020, although the PE issue remains in many countries due to the COVID-19 crisis.  The guidance revisits OECD PE guidelines and commentary, and also represents opportunities to revisit potential PE issues for employees working from home as companies adopt regional and global work from home policies.

The document highlights the fact that temporary COVID-19 interruptions should not change a permanent establishment (PE) determination, although tax administrations should publish more guidance on their domestic PE laws and determinations.

Home offices, agency PE and construction site PE situations are addressed.  Summaries are also provided for place of effective management (POEM)/dual residence, income tax considerations for cross-border workers, and treaty residence issues.

The guidance is a valuable read, especially as countries are now starting to address these issues with more focus.  The diminished fiscal growth may also change the direction of penalty abatement, especially in areas that may subject to interpretation.

https://read.oecd-ilibrary.org/view/?ref=127_127237-vsdagpp2t3&title=OECD-Secretariat-analysis-of-tax-treaties-and-the-impact-of-the-COVID-19-Crisis

The final legislation was recently enacted, although silent on the optional 6-month DAC6 deferral period.  Additionally, some highlights include:

  • Domestic arrangements are included, withThe guidance VAT
  • Additional hallmarks from draft legislation have been removed
  • Hallmark E1, unilateral safe harbors, does not include those specified in the OECD guidelines
  • Specified penalty amounts are provided

The DACD6 guidelines for Member States are emerging rapidly, and taxpayers/intermediaries will need to react accordingly.

https://www.ey.com/en_gl/tax-alerts/portugal-publishes-final-legislation-to-implement-mandatory-disclosure-rules

 

As the Mandatory Disclosure Rules of DAC6 are still being interpreted by Member States, practitioners and advisors, the European Commission has adopted a new package of initiatives, including

  • 25-step Action Plan to be implemented between now and 2024, addressing a fair and simple tax system with a focus on technology,
  • DAC7, exchange of information by sellers on digital platforms, and
  • Tax Good Governance in the EU and beyond, including a review of the EU list of non-cooperative jurisdictions

The tax package is well worth reading, especially the introduction of DAC7, which provides context for the manner in which tax rules and parliamentary procedures must be met prior to formal adoption.

EY’s Tax Alert provides a detailed summary, including links to the initiatives.

https://taxnews.ey.com/news/2020-1815-european-commission-adopts-package-for-fair-and-simple-taxation?uAlertID=Sd%2FG8rua1oj6%2Fl58EZ2AiA%3D%3D

Proposed and Final Regulations were issued addressing Section 163(j) interest.

Links are attached for reference

td_9905_reg_106089_18

nprm_reg_107911_18td_9905_reg_106089_18

DAC6 guidance: UK & NL

Several Member States have started to issue additional guidance, as they prepare for implementation.  The UK and Dutch administrations have issued new guidance, although they have both adopted the 6-month reporting deferral.

Examples in both sets of guidance are informative, and may also serve as a trend for other Member States that are in the process of implementation.

However, Germany, among others, remains fairly silent in this guidance as they have not adopted the deferral period, with reporting deadlines at the end of July and August 2020. 

 

 

 

 

Pursuant to Final and Proposed Regulations recently published, the high-tax exception would be a “unitary” election for both GILTI and Subpart F.

The election is made annually, and can apply retroactively to post-TCJA years.

In summary, Treasury has adopted some taxpayer comments favorably, while delivering an unexpected result in their guidance.

EY’s Alert provides additional background, with links to the Regulations.

https://www.ey.com/en_gl/tax-alerts/us-final-and-proposed-gilti-regulations-deliver-few-benefits-and-more-than-a-few-surprises

US FDII Final Regs

The Final Reg’s for Section 250, used in FDII and GILTI calculations, have been finalized.  These Reg’s are now undergoing analyses in trying to understand the complexities and nuances.  Some highlights include:

  • The Final Reg’s are effective for tax years beginning on or after 1/1/2021, although they can be applied retroactively in their entirety
  • General relaxation of the FDII documentation requirements
  • Formal ordering rules for interaction with other Code sections are reserved in the Final Reg’s
  • Final Reg’s require deductions to be apportioned to gross DEI and gross FDDEI without regard to the limitations in Sections 163(j), 170(b)(2), 246(b) and 250k, that may cause a mismatch in the deductions allowable for taxable income
  • Final Reg’s apply the exclusive geographic apportionment rule of Treas. Reg. Section 1.861-17(b) for purposes of apportioning R&E expenses to gross DEI and gross FDDEI

The Final Reg’s provided additional clarity, although a taxpayer will have to consider  if the Proposed Reg’s or Final Reg’s will be favorable for tax years prior to 2021.

EY’s Tax Alert provides additional details, as referenced.

https://www.ey.com/en_gl/tax-alerts/us-final-fdii-regulations-retain-proposed-regulations-structure-but-reduce-documentation-burden-defer-effective-date-and-make-important-substantive-changes-to-the-computation-of-section-250-deduction

DAC6: Germany out

The German ministry has advised that they will not delay the optional 6-month reporting obligation, thus the reporting dates revert to the end of July 2020 for 30-day reporting, and 31 August for historical arrangements.

It is interesting to note that Germany has retreated from their prior 30-day delay, citing system setup obstacles.  Additionally, this last-minute retreat of position did not affect the delay of FATCA and CRS reporting.  The exchange of DAC6 with other Member States by Germany will be delayed due to the positions taken to delay such reporting.

Everyone is awaiting further background on this position, which would align with Finland’s refusal to also adopt the 6-month deferral period.

 

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