The latest US / OECD developments are detailed in the referenced EY Global Tax Alert, highlighting a potential second tax bill (apart from technical corrections), status on the “Blue Book: by the Congressional Joint Committee on Taxation, Q&A IRS release re: Section 965 including how to pay the first estimate and report on the US federal income tax return, anti-corporate inversion regulations, and OECD’s Interim Report of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), titled “Tax Challenges Arising from Digitalisation.” Additionally, OECD released the third batch of peer reports – Certainly an exciting and challenging time!
There are still many areas of debate and room for reasonable interpretation on major aspects of the US Tax Act, especially as the 2018 provisions of BEAT, FDII and GILTI are not encased within the one-year measurement period of SAB 118. For companies subject to Q1 reporting, these uncertainties should be aligned with the auditor to avoid last-minute debates for material items.
The Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures contained in the referenced report were approved by the Committee of Fiscal Affairs (CFA) on 8 March 2018. These represent Best Practices.
15 July 2014 the OECD published the Standard for Automatic Exchange of Financial Account Information in Tax Matters, also known as the Common Reporting Standard or CRS. Since then 102 jurisdictions have committed to its implementation in time to commence exchanges in 2017 or 2018.
The report includes CRS disclosure rules and related penalty requirements.
One of the most discussed aspects of the new report is the following:
Rule 2.7: Disclosure of Arrangements entered into after 29 October 2014 and
before the effective date of these rules
- (a) A Promoter shall disclose a CRS Avoidance Arrangement within 180 days of the effective date of these rules where:
- (i) that Arrangement was implemented on or after 29 October 2014 but before the effective date of these rules; and
- (ii) that person was a Promoter in respect of that Arrangement;
irrespective of whether that person provides Relevant Services in respect of that Arrangement after the effective date.
Most importantly, “jurisdictions implementing these model rules would need to take into account domestic specificities in their own CRS Legislation and the interaction of these model rules with existing anti-avoidance rules.”
The hallmark for a CRS Avoidance Arrangement captures any Arrangement where it is reasonable to conclude that it has been designed to circumvent, or has been marketed as or has the effect of circumventing CRS Legislation.
To the extent such rules may be applicable, this new report should be reviewed in its entirety to understand potential disclosure requirements in a timely manner.
EY’s Global Tax Alert summarizes recent US developments, including (expected) pushback by the EU from the Tax Act’s FDII legislation. The pushback is based upon WTO rules and OECD’s Article 24 on non-discrimination.
One elemental argument against the Foreign Derived Intangible Income (FDII) legislation is that it violates the World Trade Organization (WTO) rules.
“The tax press is reporting that the EU has requested that the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices conduct a “fast track” review of certain of the TCJA’s provisions. The request reportedly came after a meeting of EU Finance Ministers in which the Ministers discussed how to react to the tax reform law and whether to take action in the WTO. According to the report, a recent EU document states that the new base erosion and anti-abuse tax may contravene the OECD Model Tax Convention’s Article 24 on non-discrimination.”
To the extent that the FDII is found to violate the WTO rules, the timing for this benefit is a short-term (i.e. 3-5 years) period. Accordingly, relevant restructuring may avail this benefit in the next few years with a long-term strategy based on its revocation.
On October 19, 2017, Tax Executives Institute (TEI) filed a letter with the Platform for Collaboration on Tax, a joint initiative of the World Bank, OECD, International Monetary Fund, and United Nations, regarding the Platform’s draft toolkit on the taxation of offshore indirect transfers. TEI’s comments focused on the need for the Platform’s toolkit to educate and provide options to nations considering taxing offshore indirect transfers, rather than prescribing a preferred approach, among other things.
The Platform for Collaboration on Tax (the Platform), a joint initiative of the Organisation for Economic Co-Operation and Development, International Monetary Fund, United Nations, and World Bank, released a document entitled The Taxation of Offshore Indirect Transfers – A Toolkit (the Draft Toolkit or Toolkit) on 1 August 2017. The Draft Toolkit was designed to help developing countries address the complexities of taxing offshore indirect transfers of assets, which the Platform states is a practice by which some multinational corporations try to minimize their tax liability.
The toolkit and TEI’s submission paper are referenced herein for review
Highlights of TEI’s comments include the following points:
- There should be symmetry and neutrality as compared to direct asset transfers
- Status of toolkit is unclear, and is not a source of authoritative guidance
- The goal of the draft toolkit is unclear
- A capital gains tax can distort economic transactions
- Gains and losses should be the subject of the toolkit
- Most indirect transfers are made for economic, not tax, reasons
- The general treaty definition of immovable property seems to have been abandoned with no reason
The toolkit can be applauded for launching a multi-organizational approach with some good ideas, although such ideas should be further challenged and developed prior to an overall vision and detailed rules promulgated
The South African Revenue Service (SARS) released its final notice re: requirements for filing the Country-by-Country (CbC) report, Master File and Local File, in alignment with OECD BEPS Action Item 13.
It is interesting that, pursuant to minimum thresholds, both a Master File and Local File are required to be filed, rather than only the Local File. This may become more of a norm, versus an exception, as the global transfer pricing and risk environment will need to be reviewed in alignment with local business operations. Hopefully, the review will encompass confidential limitations on the information received and will only encompass transfer pricing practices of the local operations rather than extend CbC presumptions or Master File analogies against the local data.
EY’s Global Tax Alert provides the relevant details of the SARS requirement.
OECD has published new handbooks, one of which relates to country-by-country (CbC) reports and how tax administrations can incorporate this information into their tax risk processes, inclusive of risk tools and governance processes.
Other reports/handbooks have also been issued that will be a valuable reference:
- Tax Administration 2017
- The Changing Tax Compliance Environment and the role of audit
- Shining Light on the Shadow Economy
- CbC: Handbook on effective implementation