Strategizing International Tax Best Practices – by Keith Brockman

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.

 

Finland has provided additional guidance stating they have not elected to defer the COVID-19 6-month dates, thus the original dates of the end of July 2020 and August 2020 apply for reporting 30-day arrangements and historical arrangements, respectively.

Additionally, the guidance provides further clarity on hallmark definitions to apply for reportable cross-border arrangements between Finland and another country.

ey-finland-publishes-official-tax-guidelines-on-mdr.pdf

 

Finland has interpreted the “new” guidance for Financial Transactions as merely a clarification of prior law.

This interpretation is not novel, and is a position sometimes taken in an audit, rightly or wrongly, for which taxpayers should be aware.

In tax administration statement No. VH/3605/00.01.00/2020, published July 1, Finland’s tax agency explained the relevance of the newly added chapter 10 of the OECD transfer pricing guidelines on financial transactions. With the sole exception of the new guidance on the relevance of a parent company’s credit rating in determining the credit rating of another group member for purposes of pricing intercompany debt, chapter 10 will be applied both prospectively and retrospectively, according to the statement. This includes the guidance on cash pooling, guarantees, captive insurance, and determination of risk-free and risk-adjusted returns.

“The new chapter 10 of the OECD transfer pricing guidelines on transfer pricing for financial transactions does not, in the opinion of the tax administration, contain fundamental new interpretative guidance, except for [determining] the creditworthiness of a separate company. Therefore, the guidelines can otherwise be used as a source of interpretation for tax years ended before the guidelines were published,” the statement says.

The UK House of Commons Notice of Amendments, as of 29 June 2020, includes an interesting proposed amendment re: Country-by-Country (CbC) reporting.  A CbC report would be submitted as part of the UK group’s tax strategy for taxpayers subject to the DST.

The CbC public transparency initiative was included in proposed legislation in other countries, including France and the U.S.  These proposals were never finalized, and the UK proposal, for certain groups, may be nearing certainty.

The Australian Tax Office (ATO) has provided valuable guidance re: addressing the effects of COVID-19 and potential transfer pricing arrangements.

The main takeaway is to ascertain the financial effects before and after COVID-19, using objective data to provide a reasonable basis for reviewing transfer pricing risks and arrangements.

This guidance should represent a template to review transfer pricing arrangements in other countries.

https://www.ato.gov.au/Business/Business-bulletins-newsroom/General/COVID-19-economic-impacts-on-transfer-pricing-arrangements/

The UK has signified its intent to adopt the optional 6-month deferral of DAC6 reporting.

The UK joins Belgium and Luxembourg in this adoption, 25 Member States to go!

https://www.gov.uk/hmrc-internal-manuals/international-exchange-of-information/ieim800010

The Council of the EU has announced an optional 6-month deferral for adoption of DAC6 by each Member State, with an optional 3-month extension if approved unanimously.

Luxembourg and Belgium have already announced their intent to adopt such delay, hopefully the other Member States will signify their intent as soon as possible.

https://www.consilium.europa.eu/en/press/press-releases/2020/06/24/taxation-council-agrees-on-the-postponement-of-certain-tax-rules/

 

PE update

An update of recent PE developments:

  • BEPS Multilateral Instrument (MLI) updates for PE actions by several countries, as OECD MLI provisions for PE are not mandatory, thus these developments should be closely monitored
  • Home office PE’s are clarified in several countries, especially important for companies with no other business presence in that country and their job is a significant function of the company
  • US IRS Rev. Proc. 2020-30 re: COVID-19 guidance for possible PE situations
  • Denmark ruling, noting a significant home office employee performing a significant job function for the company was not preparatory or auxiliary
  • Malaysia’s clarification of “place of business”

PE will be a significant concern as the uncertainty of COVID-19 continues, with various cross-border travel restrictions.  Companies may want to consider planning alternatives and avoid this trap that some countries may want to exploit in their search for revenues.

EY’s summary highlights the above provisions in greater detail.

https://www.ey.com/en_gl/tax-alerts/pe-watch–latest-developments-and-trends–june-2020

DAC6 presentation

Attached is a co-presentation that I was honored to be a part of, and hope the insights are helpful in this ever- changing and subjective EU disclosure initiative.

TPA Global DAC6 17062020

The Court of Justice of the European Union (CJEU) has clarified a Romanian court request that a company cannot be required to verify that a VAT supplier has met its reporting obligations re: fraudulent conduct.  The judgment was provided on June 4th, SC CF SRL v. AJFPM, DGRFPC, C-430/19 (CJEU 2020).  The court stated that tax authorities cannot require that a company have supporting VAT compliance documentation, nor ensuring that the supplier has the goods and is able to provide them.

The CJEU has established a valuable EU precedent, stating that a taxpayers’ right to deduct VAT is a fundamental principle of the VAT system without limitations, absent evidence of fraud.  Additionally, Article 178(a) of Council Directive 2006/112/EC (the VAT Directive) does not require such additional documentation.  This would violate the principle of neutrality.

 

 

IRS office update

Several IRS offices are still at work-from-home status, impacting mail received, sent and phone communications.

The latest status is attached for reference.

https://www.forbes.com/sites/kellyphillipserb/2020/06/11/whats-open-and-whats-not-as-the-irs-begins-to-reopen/#717828a41b0a

%d bloggers like this: