Strategizing International Tax Best Practices – by Keith Brockman

US Sales & Use tax risk

I have linked a valuable reference took to assess US sales and use tax risk that will be helpful in understanding the differences between the “sales” and “use” components as well as the controls and systems necessary to control such risks in a Sarbanes Oxley “SOX” environment.

Most importantly, the tax function needs to be involved in monitoring contracts in which this risk may be evident, prior to execution of the document.  Sometimes, the sales/use tax function may not be a tax function, albeit within finance or the controllership area.  However, this area of tax is increasingly subjective, complex and requires the input of technical internal/external advisors to avoid large surprises and audit assessments across the country.

Additionally, foreign corporations may also want to review any inbound US activities, and related contracts, to assess potential US sales/use and state income tax obligations due to “nexus” within the borders of a state.

https://www.journalofaccountancy.com/issues/2017/apr/sales-and-use-tax-risk.html

The Joint Committee of Taxation (JCT) has published a valuable reference to the principles underlying tax reform that will be presented to the Senate Finance Committee on October 3, 2017.

This reference is a helpful document into understanding some of the rationale and intentions that will become a part of the legislative writing process, as it includes background context of the issues.

A link to the JCT site and document is provided.

https://www.jct.gov

US Tax Framework in print

The US Tax Framework was published Sept. 27, a notable date as this date is also used to mark the timeframe for expensing investments.

The main corporate tax points, and subtleties, include:

  • 20% corporate tax rate, but the tax rate and differential for one-time foreign earnings/cash is not specified.
  • Minimum tax on foreign profits to “level the playing field”
  • Territoriality system, exempting 100% of dividends (although the KPMG linked notes include the point that this is not equivalent to “distributions” thus a complicated Earnings and Profits tracking system may still apply)
  • Interest expense will be “limited” (EBITDA/other?)
  • R&D credit remains, although Sec. 199 US manufacturing incentive deduction is lost
  • Pass-through structures tax rate of 25%
  • Corporate AMT is gone.

The President has formally and forcefully announced his continued message for tax reform, as both the House and Senate Committees are now drafting language that will hopefully result in legislation enacted late 2017 or early 2018 with the political complexities / process.

Upon enactment, the US GAAP tax accounting will be complex and required results for public companies in the quarter of enactment.  Additionally, the timing for state enactment is also a separate complex issue that will need analysis.

The US Framework is repeatedly attempting to “level the playing field,” now the politicians, journalists, advisors and tax practitioners will all work with a little bit of fact to create a cocoon of fiction by which the impending tax reform can be measured.  

http://www.ey.com/Publication/vwLUAssets/US_tax_reform_framework_calls_for_reduced_tax_rates_a_territorial_system_and_level_international_playing_field/$FILE/2017G_05589-171Gbl_US%20tax%20reform%20-%20corporate%20and%20international%20provisions.pdf

https://www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf

US int’l developments

EY’s Global Tax Alert highlights several postulates for potential US tax reform, in which both the House and Senate are busily writing new language this month to push this reform effort by President Trump.

The OECD’s additional guidance on Country-by-Country reporting is also reiterated, and the short-term extension for the US debt limit is provided to further the tax reform process.

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_8_September_2017/$FILE/2017G_05086-171Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%208%20September%202017.pdf

EY’s Global Tax Alert outlines an excellent presentation of the verbiage contained in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), in addition to specificity re: China’s intent of each of the BEPS Action Items.

The MLI contains four types of provisions. Depending on the type of provision, the interaction with CTAs varies. A provision can have one of the following formulations: (i)”in place of”; (ii)”applies to”; (iii)”in the absence of”; and (iv)”in place of or in the absence of.”

A provision that applies ”in place of” an existing provision is intended ”to replace an existing provision” if one exists, and is not intended to apply if no existing provision exists. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.

 

A provision that ”applies to” provisions of a CTA is intended ”to change the application of an existing provision without replacing it,” and therefore may only apply if there is an existing provision. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.

A provision that applies ”in the absence of” provisions of a CTA is intended ”to add a provision” if one does not already exist. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that does not contain a provision within the scope of the relevant MLI provision.

A provision that applies ”in place of or in the absence of” provisions of a CTA is intended ”to replace an existing provision or to add a provision.” This type of provision will apply in all cases in which all the parties to a CTA have not reserved their right for the entirety of an article to apply to its CTAs. If all Contracting Jurisdictions notify the existence of an existing provision, that provision will be replaced by the provision of the MLI to the extent described in the relevant compatibility clause. Where the Contracting Jurisdictions do not notify the existence of a provision, the provision of the MLI will still apply. If there is a relevant existing provision which has not been notified by all Contracting Jurisdictions, the provision of the MLI will prevail over that existing provision, superseding it to the extent that it is incompatible with the relevant provision of the MLI (according to the explanatory statement of the MLI, an existing provision of a CTA is considered “incompatible” with a provision of the MLI if there is a conflict between the two provisions). Lastly, if there is no existing provision, the provision of the MLI will, in effect, be added to the CTA.

China’s intent with respect to its positions for each of the BEPS Actions are also outlined in the EY Global Tax Alert, as such intent would affect over 100 double tax treaties.  

http://www.ey.com/Publication/vwLUAssets/Mainland_China_signs_Multilateral_Convention_to_Implement_Tax_Treaty_Related_Measures_to_Prevent_BEPS/$FILE/2017G_04865-171Gbl_Mainland%20CN%20signs%20MC%20to%20Implement%20Tax%20Treaty%20Related%20Measures%20to%20Prevent%20BEPS.pdf

As countries become creative re: permanent establishment (PE) taxation, this scenario presented by the EY Global Tax Alert reminds all tax practitioners to be cognizant of what intercompany provisions are provided.

The Danish Tax Board referred to the contract between the Austrian company and the Danish company, according to which the Danish company would make offices and storage facilities available to the Austrian company. The Danish Tax Board was informed that the premises would be used by the subcontractor only. The Danish Tax Board ruled that according to the wording of the contract between the Austrian company and the Danish company, the Austrian company would have a place of business in Denmark at its disposal regardless of the fact that the services would be outsourced to a subcontractor.

Thus, providing for a storage closet (in literal terms) may impose PE liability, with the ensuing compliance and fees a significant factor for what was probably an inadvertent error by the drafters of the intercompany agreement.

The treaty had the same PE provisions as OECD’s Article 5 language, although noting that the OECD’s recommendations were looked to by the tax administration.

As a Best Practice, all intercompany agreements (anywhere in the world) need to be reviewed by an international tax practitioner prior to execution, whether in-house personnel or outside advisors.  

EY’s Alert provides additional details that should be reviewed to indicate the pervasiveness of the new PE rules, and the aggressiveness of tax administrations to literally interpret intercompany agreements.

http://www.ey.com/Publication/vwLUAssets/Danish_Tax_Authority_rules_subcontracting_of_services_by_foreign_company_to_non-related_foreign_entity_creates_a_permanent_establishment_in_Denmark/$FILE/2017G_04863-171Gbl_Danish%20Tax%20Authority%20ruling%20on%20creation%20of%20permanent%20establishment.pdf

New Zealand: OECD & beyond

New Zealand’s government has announced the introduction of new BEPS compliant rules that will be effective mid-2018.  Additionally, the government has taken this opportunity to expand upon the OECD’s rules, in an attempt to ensure that a “fair share of tax” is paid by multinationals doing business in the country.

Acknowledging the OECD’s intent to provide flexibility with its BEPS Actions and subjective language therein, New Zealand is looking for this legislation to impose rules above and beyond the BEPS Actions.  For example, anti-PE rules will be introduced that look to Australia’s provisions, which were initially introduced by the UK as diverted profit tax schemes to collect additional tax.

International tax practitioners should review these provisions and plan their tax strategies accordingly, knowing that New Zealand will introduce double taxation sooner vs. later in the global concept.

EY’s Global Tax Alert provides relevant details of New Zealand’s proposals.

http://www.ey.com/Publication/vwLUAssets/New_Zealand_to_implement_wide_ranging_international_tax_reforms/$FILE/2017G_04691-171Gbl_New%20Zealand%20to%20implement%20wide%20ranging%20international%20tax%20reforms.pdf

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