Strategizing International Tax Best Practices – by Keith Brockman

The Thailand Revenue Department (TRD) has published a new transfer pricing (TP) form for taxpayers with revenue of THB 200 million, effective as of 1/1/19 and due by May 29, 2020 for calendar-year taxpayers.  The form delineates different forms of intercompany transactions for separate disclosure.

The disclosure form will be used for TP analysis and potential audits.

This risk analysis technique is becoming more the norm for countries, vs. trying to review the tax return for which such information is not readily apparent.

Accordingly, the tax return review process, via regionally, globally or external advisors, should be reviewed to ensure this form is prepared in advance with the relevant governing controls for accuracy.  

https://www.ey.com/Publication/vwLUAssets/Thailand_publishes_transfer_pricing_disclosure_form/$FILE/2019G_005392-19Gbl_TP_Thailand%20publishes%20transfer%20pricing%20disclosure%20form.pdf

OECD Pillar I: Transform ALP

The Organisation for Economic Co-operation and Development (OECD) held a public consultation on the Secretariat Proposal for a “Unified Approach” under Pillar 1 of the BEPS 2.0 project on 21-22 November 2019 in Paris at the OECD Conference Centre.

The OECD Secretariat laid out the timeline for meetings of the Inclusive Framework for the end of January 2020 and in June/July 2020, and suggested that, at a minimum, a high-level political agreement on the Pillar One framework must be achieved by the January meeting.

One commonality voiced at the meeting was that the existing global transfer pricing system, based on the arm’s-length principle, needs to be changed and should at least be augmented by some more formulaic rules.

This common voice is expressed in terms of Pillar One re: digital tax, although this concept has also been trending for international tax in general.  It will be interesting to watch this development as the meetings address Pillar Two and a global minimum tax.

Videos of the meeting and other details can be referenced in the EY Global Tax Alert.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_27_November_2019/$FILE/2019G_005349-19Gbl_Report%20on%20recent%20US%20intl%20tax%20developments%20-%2027%20Nov%202019.pdf

Critical Audit Matters (CAM)

US and international accounting standards have introduced the CAM process into the audit process, some of which include income tax accounts as a selected disclosure due to their materiality and the nature of being especially complex, challenging, subjective or complex auditor judgment (which is increasingly the norm for international tax rules)

For each CAM communicated in the auditor’s report, the auditor must:

Identify the CAM, describe the principal considerations that led the auditor to determine that the matter is a CAM,

Describe how the CAM was addressed in the audit, and

Refer to the relevant financial accounts/disclosures that relate to the CAM

As income taxes become more complex and subjective, including the effect of the Tax Cuts and Jobs Act (TCJA), MLI amendments to double tax treaties including permanent establishment (PE), OECD guidance and tax audit issues, a tax CAM may become more significant going forward, as it is an annual determination.

To the extent income tax is a CAM, there will be specific disclosures, preceded by more diligent review of the tax accounts, subjective determinations, etc. as part of the normal tax provision process.

PCAOB summary guidance and the relevant guidance links are referenced.

 

https://pcaobus.org/Standards/Documents/Implementation-of-Critical-Audit-Matters-The-Basics.pdf

https://pcaobus.org/Standards/Auditing/Pages/AS3101.aspx

 

US: TCJA Reg chronology

Pending developments this year are focused on the Tax Cuts and Jobs Act (TCJA).

This week expectations – Final FTC Regs, final and proposed BEAT Regs

This year (maybe) – Final and proposed Sec. 163(j) Regs (currently at 550 pages)

This year/January 2020 – Sec 267A final and proposed Regs, Sec 863(b) sourcing proposed Regs

by June 30, 2020 – Final FDII regulations, GILTI high-tax exclusion, Sec 250 participation exemption

EY’s Global Tax Alert provides further details, including OECD developments reported on previously

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_15_November_2019/$FILE/2019G_005186-19Gbl_Report%20on%20recent%20US%20intl%20tax%20developments%20-%2015%20Nov%202019.pdf

OECD Pillar II: GloBE

The OECD has released a public consultation document on Global Anti-Base Erosion (GloBE), providing novel new rules to address a global minimum tax structure.  Comments are due by 02 December 2019, which will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.

Comments are requested specifically in three areas: (i) use of financial accounts for tax tax base/timing differences, (ii) combining high-tax and low-tax income, and (iii) carve-out and threshold mechanisms.

The document is well worthy to read, as it shows the new direction (worldwide minimum tax), although the EU and others are yet to be completely convinced.  

The document is referenced for review.

https://www.oecd.org/tax/beps/public-consultation-document-global-anti-base-erosion-proposal-pillar-two.pdf.pdf

  • The Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) completed its review of final and temporary foreign tax credit (FTC) regulations on 29 October, including R&D expense allocation.  These rules are imminent.
  • Final Sec. 385 regulations were issued, removing the final documentation requirements
  • Sec. 385 Advance Notice of Proposed Rulemaking was issued re: Distribution Regulations
  • The Congressional Joint Committee on Taxation staff released the General Explanation of Certain Tax Legislation Enacted in the 115th Congress (JCS-2-19) on 31 October. Colloquially known as the Blue Book, the publication includes a description of all tax legislation enacted in the 115th Congress, with the exception of the 2017 Tax Cuts and Jobs Act (Public Law 115-97), which was covered in a separate General Explanation released in December 2018.
  • A Brexit extension was approved this week, with the UK’s Article 50 period (after which the UK will leave the EU) legally extended by the EU until 31 January 2020.

EY’s Global Tax Alert provides more details, with a reference link.

The FTC regulations, to be issued in final and proposed form, will be complex, long and will provide certainty, as well as more questions into this complex area.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_1_November_2019/$FILE/2019G_004918-19Gbl_Report%20on%20recent%20US%20intl%20tax%20developments%20-%201%20Nov%202019.pdf

UN: Practical Manual on TP

As the OECD ventures forth in digital transactions and global minimum tax standards, it is always helpful to keep in  mind the UN Practical TP Manual for Developing Countries, which adheres to the arm’s-length principle.  Links to the Manual and the Committee of Experts on International Cooperation in Tax Matters are provided for reference.

In April 2019, a new chapter was added on Financial Transactions, Profit Splits and revised text on establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits.

  • Attachment A: the proposed new Chapter B on Financial Transactions. The draft discusses the importance of corporate financing decisions within multinational groups and how those decisions could lead to tax base erosion. The Chapter discusses interaction with rules and measures against base erosion; common types of intra- group financial transactions and of group financing departments; the process of actual delineation and relevant characteristics of financial transactions; the process and system of credit rating; potential transfer pricing methods, including the use of simplification measures/safe harbours; different types of intra group loans and relevant characteristics; determining the arm’s length nature of intra-group loans; different types of intra group financial guarantees and relevant characteristics; determining the arm’s length nature of intra-group financial guarantees; and available methods. The chapter also discusses cash pooling practices and captive insurance, without getting into further detail on the delineation and arm’s length pricing of those specific transactions. Different types of intra-group loans are mentioned, and the draft identifies four steps to determine the arm’s length nature of intra-group loans: (i) analyse economically relevant characteristics; (ii) accurately delineate the entire transaction undertaken as well as (iii) selection and (iv) application, of the most appropriate transfer pricing method. 
  • Attachment B: Revision to the guidance contained in the Manual on the transactional profit-split method (Chapter B.3.3.) with the main focus being on seeking consistency of this guidance with the work done in the context of the Inclusive Framework on BEPS, while providing more practical examples.
  • Attachment C: A progress draft of the work on sections C.2. Establishing Transfer Pricing Capability in Developing Countries (previously C.5.); C.4. Risk Assessment (Previously part of C.3.) and C.5. Transfer Pricing Audits. The purpose is mainly to streamline the sequences of presentation and to eliminate overlaps in the current text.

https://www.un.org/esa/ffd/wp-content/uploads/2019/04/18STM_CRP1_Update-UN-Practical-Manual-on-Transfer-Pricing.pdf

https://www.un.org/esa/ffd/tax-committee/about-committee-tax-experts.html

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