Strategizing International Tax Best Practices – by Keith Brockman

Tax disclosures: Global / BEPS incentivized

January 15, 2016

Jurisdictions are legislating global tax disclosure statements as a separate filing requirement or included with the respective local corporate income tax return.  Recent examples seem to highlight this new initiative, including France and Chile.  Examples of information requested include entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies), etc., irrespective of intercompany transactions with the local entity.

These new disclosures have added additional risks for operational compliance, as well as a need to centralize such information.  Some multinationals (MNEs) have placed this compliance responsibility with a local / regional team for efficiencies.  However, this new reporting trend will require closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.

Answers to these dislosure questions will pose new audit risks as tax administrations will make further inquiries and/or initiate an audit to assess potentially high risk transactions. This emphasis will include a vigorous challenge to treaty based positions with holding companies, including any general anti-avoidance or anti-abuse rules within the treaty or domestic legislation.

Additionally, audit queries based upon global disclosures will require seamless coordination with headquarters or the individuals possessing this information.  Therefore, audit teams and ways of working will need to be strategized for information that is not generally retained by the local business team.

MNEs should monitor new disclosures and ensure there is an efficient governance process to accurately address the BEPS incentivized queries.  This may involve a shift in responsibilities within the transfer pricing documentation process.

The post BEPS era signifies a new way of thinking, including the respective documentation responsibilities and structure of an internal transfer pricing team.

 

 

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Tax Risk Management

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Chile: BEPS + disclosures

January 11, 2016

The Chilean Internal Revenue Service has implemented a 24 question disclosure based on BEPS, although going farther than the OECD’s Actions.  EY’s Global Tax Alert is provided for reference:

Highlights:

  • Percentage of related party revenues
  • EBITDA percentage of related party expenses
  • Foreign related parties with no staff or relevant assets, and identify those which participated in intercompany transactions
  • Corporate reorganizations, transfer of functions involving foreign companies.

  • Taxpayers listed in the Large Business Division (Grande Contribuyente) must file SS No. 1913, as well as those considered large companies by the Chilean IRS. SS No. 1913 must be filed annually from 2016 onwards before filing the corporate return (Form 22), which is due in April.

A careful reading of the new disclosures should be undertaken by those having Chilean operations; this is also a trend that will probably develop in other countries.

 

Click to access 2016G_CM6128_Chile%20creates%20new%20sworn%20statement%20linked%20to%20BEPS%20Actions.pdf

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Tax Risk Management, Transfer Pricing

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France’s Finance Act 2016:new trends

January 9, 2016

The French Parliament has adopted the Finance Act for 2016, in addition to amendments of the 2015 Finance Act.  A comprehensive summary by Bird & Bird is provided for reference:

http://www.twobirds.com/en/news/articles/2016/france/finance-act-for-2016-and-amended-finance-act-for-2015-company-taxation

Highlights:

  • Country-by-country (CbC) reporting, effective for the 2016 tax year, for French based MNE’s and other companies not subject to a CbC requirement.  (Note for US MNE’s: under the proposed Regulations, this would require CbC reporting in France, and other countries, for 2016 whereas the 2017 tax year would be reported to the IRS in the US)
  • Penalty up to EUR 100k if a CbC report is not filed.
  • In addition to current French regulations for transfer pricing information, a new requirement has been added: Identification of jurisdictions where intra-group transactions are conducted or where group members own intangible assets.
  • The 10.7% exceptional contribution on corporate income tax has not been extended, thereby lowering the total effective tax rate.  Calendar year taxpayers will not be subject to this charge for 2016.
  • Dividend distributions commencing in 2016 within a French fiscal group, or from an EU member, is subject to a 1% (vs. 5%) income inclusion, to bring its legislation into compliance with European law.
  • The EU Parent-Subsidiary Directive’s provisions are adopted: Anti-abuse de minimis clause including a “main purpose” or “one of the main purposes” test.  Additionally, “an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”
  • An advisory committee for the research tax cried and innovation tax credit has been created.

The new legislation highlights new trends that may be followed by other countries:

  1. Significant penalties for non-filing of required CbC reports.
  2. Additional subjectivity for anti-abuse provisions.
  3. Legislation that has been adopted to conform with the European Court of Justice determinations.
  4. Additional information reporting, including a focus on IP ownership.

All MNE’s should review these new provisions with a global perspective, not only with respect to companies operating in France.

 

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Transfer Pricing

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CbC: US timing issues

January 7, 2016

The timing for implementation of country-by-country (CbC) reporting for non-US jurisdictions is of significant importance to US multinationals, due to the wording of the Proposed Regulations (23 Dec 2015 post).

The Proposed Regulations would require CbC reporting by US MNE’s starting in 2017, thereby not having such requirement in 2016.  If there are no changes in the Final Regulations, US MNE’s will be required to submit CBC reports in many jurisdictions around the world.  Some countries, such as Mexico, that aim to provide additional reporting items beyond the OECD model would present additional complications for a US MNE.  Contemporaneous deadlines will also have to be met, that are prior to the US deadline.

Additionally, if an election provision is adopted in the Final Regulations, this may not solve the dilemma, as many countries are drafting legislation providing that if the parent jurisdiction does not require CbC reporting, then a separate CbC report has to be filed in their local jurisdiction.  A literal reading of such language would result in a required domestic filing, as an election is not a “per se” requirement.

Similar complications will arise in countries that do not adopt CbC reporting for the tax year 2016.

Monitoring of the timing implications for CbC reporting should be a high priority to be addressed currently, with timelines established for the preparation of back-up reporting plans around the world.

 

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OECD

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Argentina’s FX Controls eased

December 30, 2015

Argentina has eased its foreign exchange controls, effective this month.  The changes affect imports, services, repatriations and bank controls.  Deloitte’s International Tax Alert provides further details:

Click to access dttl-tax-alert-argentina-26-december-2015.pdf

Foreign exchange controls are important to monitor, as they affect transfer pricing, cash funding/repatriation, timing of reimbursements and contemporaneous documentation requirements for clearance.  Argentina’s announcement is good news for international business, and it is hopeful that other countries with similar controls follow their lead.

Tax and treasury practices should be integrated with respect to foreign exchange controls to gain maximum efficiencies in any organization.

 

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Tax Risk Management, Transfer Pricing

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Place of effective management: India’s creativity anew

December 28, 2015

India’s Ministry of Finance has issued draft guiding principles for determining the place of effective management (POEM).  The Finance Act of 2015 contained provisions providing for the significant change in determining POEM, to be effective April 2016.  The guidelines have a comment period until 2 January 2016; a link to the guidelines is provided:

Click to access POEM-note-for-uploading.pdf

The guidelines present subjective determinations of determining POEM based on substance over form and a recurring annual test.  There are presumptions, such as location for a majority of Board meetings, with exceptions based on facts and circumstances.

As drafted, the new guidelines present increased uncertainty for multinationals having any operations or services with Indian residents, thus this latest report should merit high priority due to the April 2016 effective date, as well as brief period provided for comments.

 

 

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PE, Tax Risk Management

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Brazil: Holding company test

December 25, 2015

Brazil has placed Dutch holding companies back on its list of privileged tax regimes, as it has determined that such companies that do not have “substantial economic activity” will be subject to adverse Brazilian tax consequences.  EY’s Global Tax Alert provides additional details:

Click to access 2015G_CM6098_BR%20places%20Dutch%20holding%20cos%20wout%20substantial%20eco%20activity%20back%20on%20PTR%20list.pdf

Best Practices: All multinationals should review not only Dutch holding companies, but all holding companies to test economic substance.  Russia has enacted recent rules on beneficial ownership, also looking at economic substance to determine the availability of treaty benefits.  Other countries are expected to be more active in this subjective determination, thus this will be a topic for disputes gong forward.

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Tax Risk Management

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A Holiday Wish

December 24, 2015

Merry Christmas and Happy Holidays to all: best wishes for a healthy, happy and joyous holiday season!

All the best,

Keith

 

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Tax Risk Management

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CbC: US proposed Reg’s – a question of timing

December 23, 2015

The US Treasury has released proposed Regulations setting forth details for country-by-country (CbC) reporting by US-based multinationals.  A link to the proposed Reg’s is provided:

Click to access 2015-32145.pdf

The proposed Reg’s have been issued for comment, and two significant timing issues arise in the current version:

  1. Final Regulations would not take effect until tax years beginning after publication in the Federal Register, which would be 2017 for calendar-year taxpayers.
  2. The CbC report would be submitted to IRS with the US corporate income tax return, due Sept. 15.

Although the proposed Reg’s are conformed to the OECD model and have been purposeful in its comments on confidentiality and the exchange of information provisions for CbC reporting, the timing mismatch for the 2016 tax year presents a complexity that hopefully will be overcome in the Final Regulations.  If no changes are made to the effective date, the 2016 tax year would be a dysfunctional method of reporting around the world, based on whom are considered surrogate entities or determining which countries have rules that provide for direct submission to their tax authorities absent a US requirement.  

Additionally, the submission of the CbC report by Sept. 15 accelerates the year-end timing envisioned by the OECD.  This acceleration should be expected by multinationals, thereby leaving less time to coordinate and review the information via developing an efficient and sustainable CbC reporting process.

 

 

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OECD, Transfer Pricing

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US int’l update

December 21, 2015

The US House and Senate have paved the way for the President’s signature on a bill that extends important international tax topics:

  • Subpart F active financing exception – permanent extension
  • 5-year extension of the CFC look-through rule (through 2019)

A summary of the bill is provided in EY’s Global Tax Alert:

Click to access 2015G_CM6082_Report%20on%20recent%20US%20international%20tax%20developments%20-%2018%20December%202015.pdf

Separately, the US has also indicated that regulations should be forthcoming before year-end for the country-by-country (CbC) reporting rules, which is good news for many.

These rules should provide some international tax certainty for US-based companies, notwithstanding the absence of significant reform for the worldwide tax system.

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Tax Risk Management

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France: New legislation

December 19, 2015

The French Parliament has approved the 2016 Finance bill, subject to constitutional review. A summary of the provisions are provided in EY’s Global Alert:

Click to access 2015G_CM6081_French%20Parliament%20approves%20Finance%20Bill%20for%202016%20and%20Amending%20Finance%20Bill%20for%202015.pdf

Key points:

  • Country-by-Country (CbC) reporting is adopted for French parented multinational companies, consistent with OECD Guidelines.
  • Compulsory e-filing.
  • Annual filing of transfer pricing documentation.
  • Effective 1/1/2016, intra-French distributions will be subject to a 1% taxable income inclusion, as well as distributions received from EU or EEA qualifying subsidiaries.
  • The general anti-abuse clause of the amended EU Parent-Subsidiary Directive is adopted.
  • The 2015 AFB amends the French participation exemption regime, as well as the withholding tax (WHT) treatment applicable to dividends distributed by French entities to EU resident entities, in order to comply with the EU Directive 2011/96/UE dated 30 November 2011.

The new rules pose additional burdens for distributions within a French tax group, while recognizing CbC reporting and being proactive with respect to the filing of transfer pricing documentation.  Accordingly, it should be followed as other countries adopt similar rules in the near future.

 

 

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Tax Risk Management

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France: CbC public reporting receives a last-minute “no” vote

December 18, 2015

Following up the post of 8 December, France’s National Assembly provided a last-minute “no” vote with respect to providing country-by-country (CbC) reports for the public domain.

This has incited an outcry by the enthusiasts behind the transparency measure for additional insight into a multinational’s global tax posture.

Notwithstanding the “no” vote in France, this scenario is expected to emerge in other countries as the OECD BEPS implementation of CbC reporting is established in the local legislative frameworks.

In summary, the premise of multinational organizations for public CbC reports should still be the framework behind the date gathering process that is commencing.

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OECD

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EU Council: New Directive

December 13, 2015

The EU Council has provided a Directive that would introduce legislation ensuring the EU maintains its leadership role in anti-BEPS recommendations, as well as providing good tax governance for the rest of the world.  EY’s summary of the Directive is provided for reference:

Click to access 2015G_CM6047_EU%20Council%20adopts%20directive%20on%20exchange%20of%20info%20on%20tax%20rulings,%20agrees%20on%20other%20corporate%20tax%20issues.pdf

Key points:

  • Automatic exchange of tax rulings would be effective 1/1/2017.
  • Changes would be introduced for the EU Code of Conduct.
  • EU anti-BEPS proposal to include the following BEPS Actions:
    • 2: Hybrid mismatches
    • 3: CFC rules
    • 4: Interest limitations
    • 6: General anti-abuse rule (noting its inclusion for the Royalty & Interest Directive, similar to the Parent-Subsidiary Directive)
    • 7: PE status
    • 13: Country-by-Country (CbC) reporting
  • Common Corp. Tax Base (absent later consolidation phase) proposal to be introduced in 2016

The EU continues its pace to maintain its global lead in addressing anti-BEPS concerns, which will impact non-EU countries around the world.  Thereby, it provides another set of rules that would be mandated to achieve EU conformity.

 

 

 

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OECD

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TAXE’s term ends; a new committee carries on

December 10, 2015

The term for European Parliament’s special committee on tax rulings and other measures (TAXE) has ended, and the European Parliament has introduced a similar committee for an additional six-month term.  The new committee shall also have 45 members.

As with TAXE, one of the powers of the new committee is “to analyse and assess aggressive tax planning carried out by companies established or incorporated in the Member States, also regarding the third-country dimension including the exchange of information with third countries in this respect.”

A link to the announcement is provided for reference:

Click to access 20151202RES05870.pdf

This new committee signifies EU’s continued focus on aggressive tax planning and transparency, with many countries following its lead.

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OECD / UN

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Public CbC reporting: France moves forward

December 8, 2015

France’s lower house of Parliament has approved an amendment that would require public reporting of country-by-country (CbC) information.  The amendment will need approval by the Senate, with final confirmation by the French National Assembly before being enacted.

This step represents another move forward, along with the EU proposals, to provide CbC information to the public domain.

Multinational companies should prepare today for public CbC reporting in the near future, as the cannon shots have been fired and they will soon land, resulting in a multitude of inquiries and perceptive conclusions.  Additionally, organisations should have a seamless process to receive, review and decide on communicative courses of action in response.

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OECD, Tax Risk Management

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