Strategizing International Tax Best Practices – by Keith Brockman

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.

https://www.ey.com/Publication/vwLUAssets/Australian_Taxation_Office_issues_guidance_on_GAAR_and_restructures_of_hybrid_mismatch_arrangements/$FILE/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

Alot of guidance is virtually rolling off the press!

  • PTI guidance for year-end financial statements
  • Foreign tax credits, including application of GILTI
  • Section 163(j) interest guidance
  • Proposed regulations on PTI application
  • BEAT
  • Section 250 guidance

The guidance will be complex and lengthy, and it represents only one step towards achieving more certainty into the complex nuances of the US Tax Act.  EY’s Global Tax Alert provides a summary for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_19_October_2018/$FILE/2018G_011433-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2019%20Oct%202018.pdf

The Tax Executives Institute (TEI) has provided numerous comments re: Sec 965 positions as written in the law, supplemented by additional guidance.

Summary of comments:

  1. Cash position definition
  2. Foreign Tax Credit, double-counting of Earnings & Profits
  3. Dividends paid from a CFC to another CFC or a third party
  4. Hovering deficit taxes
  5. Stock basis election should be extended to 180 days, vs. 90 days per IRS guidance
  6. Changes in methods of accounting
  7. Anti-abuse rules
  8. CFC attribute mismatches
  9. Foreign tax credit adjustment
  10. “Applicable percentage” guidance
  11. Average FX rate, vs. year-end spot rate, used for measurement
  12. 2017 overpayments applied automatically to transition tax (Still an issue!)
  13. Penalty protection

The letter provides background and examples related to the comment areas, and should be reviewed to gain a further understanding of the complex dynamics that will hopefully be mitigated via the suggestions.

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI-Comments-Proposed-Section-965-Regulations-9%20October-2018.pdf

US int’l tax update

The latest US tax updates are summarized in EY’s Global Tax Alert, with a referenced link

  • Tax Reform 2.0: House is moving forward with three separate bills, hoping at least one will pass, although Senate will not review prior to Nov. midterm elections
  • GILTI: Additional rules re: interaction of Foreign Tax Credit and GILTI by Dec. 31, 2018  (It is hoped that the calculation of Sec. 163(j) interest limitations will be addressed re: application on a separate CFC basis, consolidated basis, or other method)
  • GILTI: Final regulations June 2019
  • IRS plans to establish separate webpages for the major international tax provisions enacted by the 2017 tax reform to provide informal taxpayer guidance. The webpages will follow a similar format that was adopted by the IRS to offer informal information regarding the TCJA’s transition tax.
  • IRS: Restructuring the Advance Pricing and Mutual Agreement program (APMA) to consolidate resources and improve internal processes, including economists.

There is still significant uncertainty re: Sec. 965 repatriation tax, GILTI, FDII and BEAT provisions by taxpayers.  It is hopeful that meaningful guidance will be issued shortly.      

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_28_September_2018/$FILE/2018G_011226-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2028%20Sept%202018.pdf

OECD update: CbC reporting

OECD has updated guidelines for several aspects of Country-by-Country (CbC) reporting, including:

  • Dividends included in pre-tax book income
  • Definition of revenues and taxes paid
  • Aggregate data in one jurisdiction/eliminations
  • Accumulated earnings/loss
  • Treatment of major shareholdings / ownership by multiple groups
  • Short accounting periods
  • Parent surrogate filing

As the 2017 CbC report is almost due for US calendar-year taxpayers, it is imperative to review the OECD guidelines to ensure year-to-year consistency, with relevant statements attached for transparency.

A link to the guidelines is attached for reference.

http://www.oecd.org/tax/beps/guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.pdf

The proposed Reg’s provide some answers, such as calculating GILT on a consolidated approach, but has punted (subject to later guidance) on GILTI foreign tax credits, the Sec. 250 deduction which also is applicable for the FDII provision, definitive guidance on a separate GILTI basket (although noting its expectation) and application of Sec. 163j  re: interest expense.

Complex rules are set forth to determine a particular US shareholder’s portion of GILTI.  These rules were necessary as the separate shareholder approach was further clarified as a consolidated calculation which does alleviate unnecessary planning to accomplish that result.

Additionally, anti-abuse provisions were included to combat perceived abuse, some of which have already sparked heated controversy.  As an example, a CFC’s tested loss does not represent a loss carryover against future year’s tested income.  “Donut hole” planning initiated by many taxpayers has also been reversed by this guidance.

The guidance further confirms that each controlled foreign corporation (CFC)’s income calculation is to be based on the concept of a US tax return and principles approach.  Additionally, ADS depreciation is to be used regardless of the acquisition date of the foreign tangible property.

Practitioners will be absorbing this new complexity to change their calculations for Q3 Annual ETR calculations, while also finalizing the SAB 118 one-year period to finalize the Sec. 965 deemed repatriation tax provisions effective in Q4 2017 for a calendar-year taxpayer.   

Technical/practical articles and webinars have already started in earnest, as everyone is learning about these new rules simultaneously.

A reference to the proposed Regulations are included for reference.

https://www.irs.gov/pub/irs-drop/reg-104390-18.pdf

TP: France = OECD+

France has adopted transfer pricing “clarification” requirements, effective for 2018 tax years, that expand beyond OECD’s guidance (i.e. OECD+).

It is important to note that these additional requirements pose a significant burden to multinationals trying to achieve consistency in preparing transfer pricing reports for all countries simultaneously.  Thus, additional requirements will require additional processes, cost and compliance demands.

Summary of new items for Master File:

  • Description of the main services providers within the group, other than R&D services, re: related human capital, equipment, financial and logistic resources of the inter-company service providers
  • Intangible asset strategy, including information on transactions subcontracted to unrelated R&D sub-contractors
  • R&D transfer pricing policies

Summary of items for Local File:

  • Business objectives, including risks and financing
  • Reconciliation of statutory and management accounts used for transfer pricing

Some of the above items will prove to be controversial, especially if they would infer any information that would be confidential and strategic in nature. Hopefully, such concepts will not be a “copy and paste” exercise for transfer pricing requirements in other countries.   

PwC’s Tax Insights link provides additional context of this significant development.

 

https://www.pwc.com/gx/en/tax/newsletters/pricing-knowledge-network/assets/pwc-tp-france-tpdoc.pdf?elq_mid=13079&elq_cid=1272441

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