Strategizing International Tax Best Practices – by Keith Brockman

Not awaiting the OECD’s proposals for which a Workplace will be delivered in 2020, implementation following that several years later, New Zealand seeks to propose a 2-3% Digital Services Tax (DST) in the interim.  Public comments will be accepted by July 18th. The Government discussion document and EY’s Global Tax Alert provide details, as referenced herein.

Discussion document highlights:

The Government is committed to ensuring everyone pays their fair share of tax, including digital multinationals. Achieving this will require changes to the current tax rules. There are two options for this:

  • The first option is to apply a separate digital services tax (DST) to certain digital transactions. A DST taxes at a low rate (for example, 2% to 3%) the gross turnover of certain highly digitalised businesses that are attributable to the country.
  • The other option is to change the current international income tax rules, which have been agreed to by countries (usually referred to as “the international tax framework”).

In summary, New Zealand is not patient to wait for OECD rules, wishes to implement a transition tax in the interim and plans to repeal this tax with the OECD solution when it becomes effective.

https://www.ey.com/Publication/vwLUAssets/New_Zealand_Government_to_seriously_consider_a_Digital_Services_Tax/$FILE/2019G_002780-19Gbl_Indirect_New%20Zealand%20considers%20Digital%20Services%20Tax.pdf

http://taxpolicy.ird.govt.nz/sites/default/files/2019-dd-digital-economy.pdf

On 31 May 2019, the Organisation for Economic Co-operation and Development (OECD) released its document Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy (the Workplan).

The Workplan describes the planned approach for addressing the tax challenges of the digitalization of the economy that has been agreed upon by the 129 jurisdictions participating in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Workplan was approved at the 28-29 May plenary meeting of the BEPS Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer organizations.

A final report is envisioned for 2020, including:

Pillar One focuses on the allocation of taxing rights, and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules;

Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

Under Pillar One, the first option (i) Modified Residual Profit-Split method would allocate to market jurisdictions a portion of an MNE group’s non-routine profit that reflects the value created in markets that is not recognised under the existing profit allocation rules, or (ii) the fractional apportionment method involves the determination of the amount of profits subject to the new taxing rights without making any distinction between routine and non-routine profit, or (iii) distribution-based approached that would provide a baseline profit attributable to marketing, distribution, and user-related activities.  The concept of losses is also to be recognized in the relevant model.

 

As stated in the workplace, the real risk is that “A further issue is the recognition that if the Inclusive Framework does not deliver a comprehensive consensus-based solution within the agreed G20 time frame, there is a risk that more jurisdictions will adopt uncoordinated unilateral tax measures.”

Additionally, the current workplace is focused on digital tax, although some concepts may creep into discussions of income tax.

A reference to the Workplan is provided for reference.

 

https://www.oecd.org/tax/beps/programme-of-work-to-develop-a-consensus-solution-to-the-tax-challenges-arising-from-the-digitalisation-of-the-economy.pdf

Final Section 956 Reg’s have been issued, reducing the Section 956 inclusion by an equivalent amount that would have been eligible for the Section 245 dividends received deduction.

Final GILTI Regulations will be issued by June 22, thereby providing retroactivity to the effective date of the TCJA.

Final BEAT Regulations will also be issued by the end of summer, although not soon enough for retroactive effect.

EY’s Global Tax Alert provides additional details, for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_23_May_2019/$FILE/2019G_002538-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2023%20May%202019.pdf

As Final Regulations are in process, TEI’s practical and thoughtful comments were submitted re: the proposed Section 250 Regulations.  A copy of the comments are provided for reference, with highlights including:

  • Determination of domestic and foreign use are impractical rules for which a multinational company will find difficult to effectively implement.  A seller’s shipping address would be an alternative solution
  • Long-term supply contracts may be difficult to obtain new documentation annually, thus such documentation of the initial contract should suffice
  • Business Service provisions have rules that will prove difficult to obtain, workable rules should be designed and implemented
  • Effective date of the final regulations should be tax years beginning at least one year after the date of publication, to allow time for system changes
  • Final section 250 regulations should provide that the exploitation of manufacturing and supply chain IP is a foreign used service, consumed at the place of manufacture, if it meets the physical transformation and proximity requirements outlined in the regulations
  • Advance payments of section 451 are to be related to the timing for related cost of goods sold amounts to prevent distortion
  • Final regulations clarify where the charitable contribution deduction limitation fits in the ordering rule, along with sections 163(j), 172, and 250.

  • Prop. Treas. Reg. § 1.250(b)-1(d)(2) provides that the exclusive apportionment rules in Treas. Reg. § 1.861–17(b) do not apply, this provision is a disincentive and should be changed

     

    TEI’s comments are informative, especially due to the inclusion of suggested alternatives to the proposed rules and therefore worth reviewing.   

    https://www.tei.org/sites/default/files/advocacy_pdfs/tei_comments_-_proposed_section_250_regulations_-_final_to_irs_treasury_6_may_2019.pdf

Alot of regulation activity is taking place, in advance of the June 22nd date that would allow provisions of the Tax Act to be retroactive to date of enactment.  Additionally, the regulations will clarify tax return reporting for calendar year US-based multinationals.  

The IRS issued final regulations (T.D. 9857), effective 13 May 2019, that address the recognition and deferral of foreign currency gain or loss with respect to qualified business units (QBUs) subject to Section 987 (Section 987 QBUs) in connection with certain QBU terminations and other transactions involving partnerships.

The IRS released, on 17 May, proposed regulations under Sections 954 and 958 on the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). The IRS also released proposed regulations that provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business in computing foreign personal holding company income.

Eagerly-anticipated final GILTI regulations moved closer to release this week, having been received for review by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) on 16 May.

Proposed regulations under Sections 951(b) and Section 951A were also sent to OIRA for review on the same day.

In addition, interim final regulations under Sections 91 and 245A were received by OIRA on 15 May.

EY’s Global Tax Alert provides details on the above actions, for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_17_May_2019/$FILE/2019G_002432-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20May%202019.pdf

As expected, the European Commission has sent a letter this week to US Treasury commenting that: the Foreign Derived Intangible Income (FDII) deduction violates international trade law.  “The design of the FDII deduction is incentivizing tax avoidance and aggressive tax planning by offering a possibility to undercut local tax rates in foreign economies.”  The Commission further described the FDII is an “incentive for foreign economies to lower corporate tax rates in a ‘race to the bottom.’” The letter included a statement that the European Commission was “ready to protect the economic interest of the European Union in light of discriminatory rules and practices.”

EY’s Global Tax Alert is provided for added reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_10_May_2019/$FILE/2019G_002276-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2010%20May%202019.pdf

India’s Central Board of Direct Taxes has published a report for comments, due by May 18th.

The Committee has recommended a mixed or balanced approach (“fractional apportionment”) that allocates profits between the jurisdiction where sales take place and the jurisdiction where supply is undertaken.  India’s position is that such approach is acceptable in other tax treaties.  However, the risk of double taxation is present if this approach is not adopted by other countries.  Additionally, the approach differs from the OECD approach, which then introduces more complexity for all multinationals with Indian operations.  

India is known for its long appeals, and different approaches to its fisc.  Accordingly this report should be reviewed, with a possibility to comment, prior to further actions.  This report, and methodologies, will also be closely followed by other countries in this complex and subjective area of PE profit allocations.

EY’s Global Tax Alert provides additional details, for reference.

https://www.ey.com/Publication/vwLUAssets/Indian_Tax_Administration_invites_public_comments_on_proposal_to_amend_rules_on_profit_attribution_to_permanent_establishment/$FILE/2019G_001978-19Gbl_TP_India%20-%20Proposal%20to%20amend%20PE%20profit%20attrib%20rules.pdf

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