Strategizing International Tax Best Practices – by Keith Brockman

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.

https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/08/mesa-tax-guide.pdf

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.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_16_August_2019/$FILE/2019G_003793-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2016%20Aug%202019.pdf

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.

https://www.ey.com/Publication/vwLUAssets/EU_Mandatory_Disclosure_Rules_-_An_update_on_local_country_implementation_status_and_trends/$FILE/2019G_003690-19Gbl_EU%20Mandatory%20Disclosure%20Rules%20-%20Update%20on%20local%20countries.pdf

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.

https://www.ey.com/Publication/vwLUAssets/Finance_Canada_releases_draft_legislation_for_2019_budget_measures/$FILE/2019G_003652-19Gbl_Canada%20-%20Draft%20legislation%20for%202019%20budget%20measures.pdf

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.

 

As tax treaties become more important in the international tax landscape, for both developed and developing countries, it is important to review practical guidance provided to tax administrations to enforce such treaties.  This is a valuable primer for those involved in tax treaty interpretation and negotiation.  The recently released Manual is provided as a reference link.

The present publication, entitled United Nations Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (the Manual), aims at strengthening the technical expertise of developing countries’ tax officials as regards the negotiation of tax treaties.

It provides practical guidance to treaty negotiators in developing countries, in particular those who use the United Nations Model Double Taxation Convention between Developed and Developing Countries (the UN Model).

This Manual constitutes an introductory guide to tax treaty negotiations and, as such, provides general explanations on the way treaty negotiations are conducted and on the issues that are typically addressed during these negotiations. While it seeks to identify important issues that treaty negotiators should be aware of, it does not attempt to provide an exhaustive analysis of these issues. When preparing for treaty negotiations, the user of this Manual will therefore often need to go beyond the explanations provided in these pages and to further research the issues that are identified therein. keeping in mind that the detailed Commentaries on the provisions of the United Nations Model Double Taxation Convention between Developed and Developing Countries and of the OECD Model Tax Convention on Income and on Capital constitute the most authoritative source of information on the interpretation of these provisions.

https://www.un.org/esa/ffd/wp-content/uploads/2019/06/manual-bilateral-tax-treaties-update-2019.pdf

US int’l update

Monumental progress was recently made, in the form of 4 treaty protocols being approved; Luxembourg, Switzerland, Japan and Spain.  This will hopefully start a natural progression towards prompt treaty approvals/ratifications.

Additional Section 965, transition tax, FAQ’s were issued.  As you may recall, there was an infamous FAQ issued 13 April, 2018, whereby all overpayments from 2017 were deemed to be credited in their entirety to the 8 years, if elected, of transition tax liability. This important issue is still being contested, and am hopeful that HR 2985 calling for its proper reversal (i.e. IRS was wrong) will attract additional cosponsors and be an integral component of a tax technical corrections package that will be passed this year.

The 2019 United Nations (UN) tax treaty negotiation manual, attached for reference, was updated to reflect changes in the 2017 UN Model Treaty to include changes that resulted from the OECD’s base erosion and profit-shifting project.

Transfer pricing: IRS officials noted that completing the advance pricing and mutual agreement program’s (APMA’s) functional cost diagnostic model (FCDM) is a detailed process and taxpayers may want to submit the model form only in complex cases.

EY’s Global Tax Alert contains additional details, provided as reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_19_July_2019/$FILE/2019G_003420-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2019%20July%202019.pdf

https://www.un.org/esa/ffd/wp-content/uploads/2019/06/manual-bilateral-tax-treaties-update-2019.pdf

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