Strategizing International Tax Best Practices – by Keith Brockman

Bloomberg Tax hosted a webinar on May 21st, featuring Dr. Achim Pross, Head of OECD Centre for Tax Policy and Administration.

The interview PDF features a discussion of the OECD Work on the Digitalised Economy, Pillar 1 and 2, COVID-19 tax issues, and the International Compliance Assurance Program (ICAP).  Dr. Pross acknowledged Pillar 1’s timeline is still this year, whereas Pillar 2 still has some issues to address, including the global minimum tax and U.S. GILTI provisions.

The second attachment featured tax executives and outside advisors, discussing the challenges of the OECD approach in addition to challenges thereto.

Each attachment is a valuable read, illustrating the goals and challenges for everyone.

Bloomberg Tax_The Brave New World of Global Tax_Dissecting Pillar 1 and 2 – FINALBloomberg Tax_The Brave New World of Global Tax_Keynote Interview – FINAL

Effective July 1, 2020 Indonesia will impose a 10% VAT on digital products sold by non-resident internet companies with a significant presence in the Indonesian market, including streaming services, applications and digital games.  The increase attempts to recoup some revenues resulting from COVID-19.

The government expects a 10% drop in state revenue this year due to the impact of the coronavirus pandemic and weak commodity prices, forecasting that economic growth will more than halve to 2.3%, from 5% in 2019. It foresees a fiscal deficit of 5.07% of GDP for 2020, the biggest in more than a decade.

https://www.reuters.com/article/us-indonesia-tax-digital/indonesia-to-impose-vat-on-streaming-other-digital-services-from-july-idUSKBN22R23V

Tax Executives Institute (TEI) recently provided comments in response to OECD’s Consultation Document for potential changes to the Country-by-Country (CbC) reporting process.

Highlights of comments:

  • Current reports should remain unchanged, as tax administrations have not yet had the experience to transform the data into an effective risk assessment tool.  Additionally, report changes are not easy to implement by multinationals (MNEs)
  • Multiple local filings are still required, which was not the intent of the legislation
  • There should not be additional jurisdictional requirements for a Master File, such data should reside in a Local File.  Additional requirements are not efficient for MNEs to provide
  • The definition of “control” should be over 50% to have availability for data collection
  • The reporting threshold should not be lowered
  • Examples of “revenue” would be helpful
  • TEI does not support providing legal entity information in Table 1
  • Consolidated, vs. aggregate, reporting presents many challenges for MNEs
  • Requests for additional details of reported amounts should be delayed
  • The OECD is currently developing a CbC reporting “Tax Risk Evaluation & Assessment Tool” (TREAT) to support tax authorities in reading and interpreting CbC reports. TEI recommends the OECD publish the TREAT to help MNEs in identifying indicators triggering questions from tax authorities (if the OECD is not otherwise planning on doing so)

    What is not mentioned is the trend toward transparency of tax data, which introduces additional issues as data becomes more granular and subject to interpretation by non-tax readers of such information. 

 

Click to access TEI%20Comments%20-%20OECD%20County-by-Country%20Reporting%20Review%20-%20FINAL%20to%20OECD%205%20March%202020.pdf

The Italian parliament has proposed relief from IRAP for 2020 relating to companies with less than EUR 250 million of sales.  Other incentives, business and personal, are also being proposed to restore some fiscal growth due to COVID.

Saudi Arabia has tripled its 2-year old VAT law, from 5% to 15%, as of July 1, 2020.

Does this represent a new trend for countries hungry for revenues due to shortfalls from COVID-19?

https://www.bbc.com/news/business-52612785

The Democratic House passed an extensive new CARES-19 bill, which is subject to Senate review and further amendments.  Most importantly, the effective dates are retroactive, thereby reversing / revising some provisions of the prior enacted CARES Act bill.

For multinationals, the NOL carry back period is restricted to years beginning 1/1/2018, thereby negating the positive rate arbitrage from 21% to 35% for 2016 and 2017.  Additionally, the Employee Retention Tax Credit provisions have been liberalized, from a change in the quarterly decline in gross receipts for year-over-year and increasing the amount of “qualified wages” eligible for the credit.

https://www.npr.org/2020/05/12/854707010/read-the-house-bill-calling-for-3-trillion-in-coronavirus-relief

In response to prior comments, including additional clarification, HMRC has issued draft guidance for which comments are to be received by May 15, 2020.

With regard to penalties, which are a significant concern re: implementation and reporting of DAC6 reportable arrangements, there will be a “reasonable excuse” guideline.  This guideline will be supporting by the governance and documentation principles established in the reporting process.

EY’s Alert provides additional details on this recent development.

https://www.ey.com/en_gl/tax-alerts/uk-hmrc-issues-draft-guidance-on-mandatory-disclosure-regime-regulations

In response to comments from countries, companies and tax advisors, the EU Commission has prepared a draft Council Directive to extend the DAC6 reporting deadlines by 3-months due to COVID-19 considerations.

The initial report, covering the period from June 25, 2018 to June 30, 2020 will be due by November 30, 2020 (currently August 31, 2020).  The 30-day reporting, currently commencing July 1, 2020, will be delayed until October 1, 2020, thereby the first 30-day report would include the period from July 1 to October 1, due 30 days thereafter.

The legal basis for this change is sourced from Articles 113 (indirect tax) and 115 (direct tax) of the Treaty on the Functioning of the European Union (TFEU).  Reportable cross-border arrangements may relate to both indirect and direct tax, thus both legal bases are relevant for the proposed rules.  As a result, a Directive is required to change the prior legislation.

Member States shall adopt and publish, by May 31, 2020, the laws and administrative provisions necessary to comply with the Directive, and communicate to the Commission accordingly.

The Directive will enter into force on the day following that of its publication in the Official Journal of the European Union. 

The extension will allow reporting parties additional time to collect supporting documentation for the initial reporting date, and develop sustainable processes for 30-day reporting thereafter.  

Click to access 08-05-2020-proposal_for_a_council_directive_amending_directive_201116eu.pdf

ERTC: IRS reversal

IRS has agreed to reverse its FAQ decision in which it denied the benefits of the Employee Retention Tax Credit for health care expenses of furloughed employees that were not receiving a salary for not working.

This is a welcome change, as it conforms to the intent of the Cares Act, Joint Committee on Taxation and Senate Finance Committee.

It is hopeful they will also revise their distinction of benefits for “essential” and “non-essential” businesses.

As a reminder, the FAQ’s do not have legislative authority and are at the lowest level of guidance, which begins with the Internal Revenue Code and Regulations.

https://www.finance.senate.gov/chairmans-news/following-bipartisan-request-treasury-modifies-employee-retention-tax-credit-eligibility-for-employers-providing-health-benefits-for-furloughed-employees

 

Effective July 1, 2020, regular payments subject to withholding, and fulfilling tax treaty requirements, will be subject to paying the withholding taxes and filing for a refund, which is estimated to be a 6-month lag.

Exceptions would be approval by the tax administration, also a 6-month process, or assertion by the board of directors that all requirements have been met which is subject to personal liability and therefore a personal deterrent.

As other countries generally follow such trends, will COVID-19 prompt such actions to preserve final cash flow?

EY’s Alert provides additional details on this development.

https://taxnews.ey.com/news/2020-1072-poland-to-impose-withholding-tax-on-cross-border-payments-as-of-1-july-2020

 

ERTC: IRS guidance

IRS has just published extensive Q and A guidance, including Form 7200 and instructions, with respect to the Employee Retention Tax Credit (ERTC).

The comprehensive guidance will be used as reference for claiming the credit, and attention to detail will be the key for documentation.  The interaction with deferral or employment taxes is included, as well as the definition of gross receipts for determining the quarterly reduction of gross receipts over the prior year corresponding quarter.

https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

DAC6: Penalty mitigation

Deloitte’s recent penalty mitigation survey summarizes the penalties and possible mitigation/appeal strategies to minimize such risks.

With COVID19, it will be more interesting as Member States will be looking for more monies to restore their fiscal growth.

Click to access DAC6%20country-specific%20penalties%20and%20penalty%20mitigation%20survey%20%28Deloitte%29.pdf

A recent TEI article urges the states to follow the lag procedures that IRS has put in place.    From a practical perspective, there may not be anybody to collect the mail, so why not extend the filing dates and audit dates?

The letter is succinct and builds a strong case for its positions, and a valuable read for state tax professionals.

Click to access State%20Tax%20Administration%20and%20Payment%20Relief-FTA-3-25-2020.pdf

UK:CCO & DAC6 risk

The attached article from National Law Review provides meaningful insight into a tax risk framework encompassing the UK Corporate Criminal Offenses (CCO) Act and EU Directive on Administration Cooperation (DAC6) requirements.

The approach to performing compliance with the CCO and DAC6 Acts should be an integrated risk framework approach.

https://www.natlawreview.com/article/how-cco-reasonable-prevention-procedures-can-help-you-mitigate-dac6-penalties

TEI has submitted comments to the OECD addressing potential changes to the current Country-by-Country (CbC) reporting regime.

Extract of some comments:

  • The cost/benefit of a high level risk analysis should be weighed against the costs and system of multinationals having to implement such recommendations.
  • Secondary filings are still required due to lack of signed bilateral agreements; additional the countries do not have consistent (e.g. XML) filing processes.
  • When countries finalize CbC legislation, the required report should be the following year, allowing time to review and design such requirements by multinationals.
  • The Master File is not consistent among countries; this leads to further costs and time to implement.  Proposed changes should be implemented for the local file.
  • The consolidated group revenue threshold should not be changed
  • OECD should postpone asking for more items such as related party interest, royalty, services, R&D expenses, etc.  This information duplicates the same items in the local tax returns.
  • Preparing country consolidate level reporting is significantly more complex to prepare, in part because of elimination entry tracing.
  • The definition of deferred taxes and other items should be further clarified.

Multinationals filing U.S. GAAP financials also face some of these same issues as FASB is considering similar data as part of the tax footnote, for example.  They are currently weighing the cost/benefit of such information, most importantly the level of insight gained by the reader of the financial statements.

Additionally, countries are still proposing the public disclosure of CbC reports, including a recent proposal by the U.S.

Tax practitioners should follow this trend, as one country is all that is required to prompt insight, and questions, into the underlying data.

Click to access TEI%20Comments%20-%20OECD%20County-by-Country%20Reporting%20Review%20-%20FINAL%20to%20OECD%205%20March%202020.pdf

%d bloggers like this: