Int'l Tax News

On November 29, the Centre for Business Taxation (CBT) convened a conference in London on The Future of the Arm's Length Principle (ALP)with speakers drawn from business, the OECD and academia. Thiswas also an opportunity to mark the publication of a new book by CBT Associate Fellow Richard Collier and a previous head of Transfer Pricing at the OECD, Joe Andrus, entitled Transfer Pricing and the Arm's Length Principle After BEPS (OUP).

U.S.-owned tech companies are among the targets of the proposed U.K. royaltieswithholding tax set out in a December 1 consultation,while several changes to U.K. corporation tax feature in a 184-page finance bill also published on December 1.

A last-minute decision to keep the corporate alternative minimum tax may undo several significant benefitswritten into the Senate's tax reform bill, including those related to international reform. "Everyonewas taken by surprise by the retention of the corporate alternative minimum tax," Eric Solomon of EY said. "Taxpayers have been scrambling to understand the implications for them," he said, adding that "questions that have never been asked before are being asked."

The Tax Cuts and Jobs Act has moved through Congress faster than mostwashington observers thought possible. Practitioners, taxpayers, and foreign governmentswill be attempting to understand ÔøΩ and complywith ÔøΩ fundamental changes to the international tax rules, many ofwhich have not undergone rigorous analysis by policymakers or the public.

In mid-November, the Republican majority in the US House of Representatives has passed its version of the Tax Cuts and Jobs Act bill. Last Saturday, the Senate has followed suit and has cast a 51:49 approval vote on the parallel tax reform bill introduced by its Republican members. Admittedly, it is still not entirely clearwhether the progress made so farwill allow President Trump to sign his signature reform project into law before Christmas. The two versions of the bill still need to be reconciled, and an eventual compromise requires the approval of both chambers of Congress. However, prospects for success have now improved considerably, not the least because stakes are high for Republican members of Congress facing re-election in 2018. The rest of theworld should therefore brace itself for massive implications that the reformwill have for global trade and the international tax system.

India's tax authority has relaxed its position on transfer pricing disputes, clarifying itwill permit multinational companies to invoke mutual agreement procedures and advance pricing agreements in countries that hold double tax treaties but lack provisions for settling disputes.

The U.S. is concerned about the growing measures around theworld for separately taxing the digital economy, especially regarding a digital permanent establishment. "The United States continues to be of the view that it is not appropriate to single out such a digital economy for a special regime or treatment," according to a U.S. Treasury Department official.

Japanese manufacturerswill benefit from the country's new corporate productivity-driven tax breaks. Prime Minister Shinzo Abe and his government unveiled a plan to extend a 5 percent to 10 percent tax credit to companies that have developed schemes to boost productivity by investing in "the internet of things" (IoT) and artificial intelligence (AI). Details of the planwill be announced on Dec. 14.

The European Union's leading business lobby groupwarned EU finance ministers against an equalization tax on internet companies, saying itwould breakwith international standards and tax turnover instead of profits. BusinessEurope issued itswarning as EU finance ministers Dec. 5 are expected to give the green light for the new tax on large internet companies such as Facebook Inc., Alphabet Inc.'s Google, and Amazon.com Inc., as part of part of upcoming digital taxation legislation.

The proposedtaxoverhaulwinding itsway through Congress could have significant consequences for the corporate-debt market, changing theway many companies raise capital and boosting the prices of existing bonds. Under the competing versions of the legislation that Congress needs to reconcile, multinationalswould pay a one-timetaxon their accumulated foreign earnings. But therewould be no extrataxon transferring that money across borders, giving them an immediate alternative to the bond market the next time theywant to invest or buy back shares.

The tax bill passed by Republicans in the U.S. Senate over theweekend may boost profits for industries from banking to retail to fossil fuels. It also could put the squeeze on hospitals and renewable energy firms. The centerpiece of the bill is to reduce the corporate income tax rate to encourage companies to bring back to the U.S. hundreds of billions of dollars in foreign profits. This article considers the following industries: asset managers, banks, pharmaceuticals, hospitals/insurers, private equity, real estate, tech, telecom, industrial, fossil fuels, renewables, retail, and agriculture.

The Senate-passed tax reform measurewould give U.S. multinationals more time than in an earlier Senate version before the full force of a limit on their cross-border interest deductions takes effect, according to practitioners. This measure gives U.S. multinationals more time to restructure their global debt.

Regardless ofwhat it ultimately contains, any tax reform legislation passed in the United Stateswill require concerted engagementwith treaty partners, and in multilateral forums like the OECD, to help the new U.S. rules fitwithin the international tax framework, according to Lafayette G. "Chip" Harter III, Treasury deputy assistant secretary for international tax affairs.

The arm's-length principle for international transfer pricing continues to havewidespread support, a senior OECD official told a London conference amid concerns about the effectiveness of the base erosion and profit-shifting project. A discussion on the future of the arm's-length principle on November 29was hosted by the Oxford University Centre for Business Taxation,whose director Michael Devereux noted that the BEPS project has "triggered a material hike in the complexity of applying the" principle. Richard Collier, a former PwC partnerwho is now an associate fellow at the Centre for Business Taxation,warned that "a continued vulnerability to avoidancewill present recurrent and profound difficulties."

The Treasury is not ready to issue any new guidance and is continuing to study President Trump's executive order requiring that two regulations bewithdrawn for each new one issued, but is identifying deadwood regulations that could potentially be revoked in the future, according to a Treasury official.

A provision in the GOPtaxplan giving U.S. companies a one-time cut for repatriation of earnings and cash held overseas could ripple through financial markets, including currencies, foreign savings vehicles and dollar funding for global banks. It could distort currency markets and squeeze funding for firms that benefit from the money held abroad.

Multinational corporations have a lot to like in both the House and Senate tax-overhaul proposals. Depending on a company's structure and operations, there could be a lot toworry about aswell. Companieswith bigger U.S. operations, big capital budgets and less debt stand to benefit more,taxexperts say. Those that have spent years shifting intellectual property and profits overseas are likely to see less benefit.

The pressures of peer review and the attention of G-20 finance ministries have already led to better collaboration and overall performance in tax authorities' administration of mutual agreement procedures, according to Achim Pross, head of the OECD's International Cooperation and Tax Administration Division.

Calculating the interest deduction limitations proposed in the House tax reform billwould be easier for multinationals than the alternative offered by the Senate. The House's version of the Tax Cuts and Jobs Actwould limit interest expense to the lesser of 30 percent of earnings before interest, taxes, depreciation, and amortization or, forworldwide groups, 110 percent of allocation of net third-party interest expense to the U.S. corporation, based on EBITDA. The Senate, by contrast,would limit interest to the lesser of 30 percent of earnings before interest and taxes or, forworldwide groups, or 110 percent of the amount of debt that the U.S. memberwould hold if the U.S. debt-to-equity ratiowere proportionate to theworldwide debt-to-equity ratio.

The OECD has published the 2017 update to the OECD model tax convention. The update, approved by the OECD Council on November 21, mainly comprises changes developed as part of the base erosion and profit-shifting project. Itwill be incorporated into a revised version of the model to be published in the coming months.

The OECD is planning to give countries policy direction on short-term individual tax measures for internet-based companies, according to a senior official.

EU finance ministerswill give the green light Dec. 5 for the European Commission to propose, in early 2018, an equalization tax on internet companies and also to make online marketplaces responsible for collecting VAT on sales by non-EU based online merchants to EU residents. On November 29th, EU member nations agreed on final terms for the digital taxation provisions and the VAT e-commerce legislation, and itwill be approvedwithout discussion, according to a spokesman for the Estonian presidency.

The European Union restrictions on member-nation aid in the form of company tax breakswhen applied to the export of goods are invalid because they violate EU fundamental freedom of free movement of goods in the single market, a senior legal adviser to the EU's highest court has said.

The government believes in the principle that a multinational group's profits should be taxed in the countries inwhich it generates value.And it has taken significant steps, at both a domestic and international level, to ensure that this principle is being delivered. It initiated the OECD-G20 Base Erosion and Profit Shifting (BEPS) project to tackle multinational tax avoidance, led the implementation of that project's outputs, and took bold unilateral actionwhere needed, including the introduction of the Diverted Profits Tax in 2015which is forecast to raise £1.35 billion by 2019.However, there is still more to be done. Countries must continue towork together to identify areaswhere the international tax framework still leaves them exposed to multinational tax planning, and consider how that framework is being challenged by changes in how global businesses are managed and structured.

Taxoverhaul proposalswinding theirway through Congress may look great for U.S. corporations. For foreign firms, not so much. Excise and base-erosion taxes create a border-based system thatwould be difficult for multinationals to navigate. For most foreign multinationals, the U.S. still represents one of theworld's biggest, most important markets--sotaxhits there can have outsize impact on global profit.

Australian Prime Minister Malcolm Turnbull and Federal Treasurer Scott Morrison have separately in recent days been drumming up support for the government's Enterprise Tax Plan and the long-standing proposal to reduce the corporate tax rate from 30 to 25 percent by the 2026-27 income year.

The IRS proposed regulations on how itwill treat some foreign tax credits, tax treaty-related issues, and foreign-corporation issues in the context of a forthcoming centralized partnership audit regime. The international regulations are the first of several proposed rules on the centralized audit regime expected over the next fewweeks.

The European Union is about to release a blacklist of uncooperative tax jurisdictions as part of the international effort to crackdown on tax avoidance. The blacklist has sparked speculation overwhich countries are most under threat.

The OECD has invited comments on issues regarding access to mutual agreement procedures (MAPs), clarity and availability of MAP guidance, and the timely implementation of MAP agreements; interested parties should respond by December 22.

Countries are pushing back the deadline for multinational companies to submit their first global reports in a sign that governments may be struggling to implement the required filing systems. Known ascountry-by-country reporting, the filings are the mostwidely adopted policy from the OECD's 15-action project to curb tax avoidance from multinationals.

With deferral eliminated under H.R. 1, any residual U.S. tax on foreign profitswould be due currently.we can cheer the demise of the lockout effect, butwith that comes accrual basis taxation for any foreign profits that don't fall outside the U.S. tax net. Many taxpayers expected corporate tax reform to involve a major paradigm shift, and they expected it to be the replacement of our rusty oldworldwide regimewith a shiny new territorial system. Under section 4301,what they seem to be getting is accrual treatment replacing deferral. Other commentators have questionedwhether the cross-border outcomes under H.R. 1 are properly described as a territorial system. This article attempts to explain how the tax on foreign high returnswould operate and hints at the possible factors that influenced its design elements.

On November 17, 2016 the House of Representatives passed the Tax Cuts and Jobs Act (the House bill). The House vote came a day after the Senate Finance Committee (SFC) approved a Senate version of tax reform legislation (the SFC bill). On November 20, 2017, the text of the SFC billwas released. Prior to the release of the SFC bill, the Joint Committee on Taxation (JCT) had released a description of the SFC bill. The full Senate is expected to consider the SFC bill during theweek of November 27, 2017. Both the House bill and the SFC bill (collectively the 'Proposed Legislation') if enacted,would represent the largest overhaul of the US tax code (the Code) since the Tax Reform Act of 1986. The Proposed Legislationwould lower corporate and individual tax rates, reform US international tax rules, and simplify the Code.

The Italian Senate is considering introducing a digital sales tax to tackle the problem of tax avoidance by tech companies. Thiswould take the form of an equalisation tax on the turnover of digitalised companies.

The Chancellor did not spring any major surprises but the government's "position paper" continues the focus on the digital economy. The budget includes proposals to impose awithholding tax on digital services provided to the U.K. from abroad, to the extent that these services are dependent on intellectual property held in a tax haven, to make online platforms jointly and severally liable for VAT on sales, and to abolish its indexation allowance for companies, among other things.

The U.K. Treasury is seeking public input on 11 measures for large corporations in the 2017 Autumn Budget, including a levy on earnings sent to tax havens that are linked to U.K. customers and on the taxation of internet-based companies.

U.S. multinationals are scrutinizing their global business operations to soften the blow of a "deemed repatriation" tax on offshore earnings theywould have to bring home under fast-moving House and Senate tax reform bills.

This Article focuses on a single organizing question, namely how should a dividend paid deduction regime be designed so that it achieves acceptable international tax outcomes. By focusing on the international tax implications attendantwith a dividend paid deduction regime, the author is not attempting to minimize the broader benefits of achieving shareholder-corporate integration. Acorporate integration proposal provides a broad spectrum of potential benefits, and so not surprisingly significant scholarship has been dedicated towards how to best achieve shareholder-corporate integration. But, in today's era, the overwhelming tax policy problem that must be solved rests on finding a solution to the systemic international tax challenges that face the country, and so that iswhere this Articlewill focus.

In this article, the authors discuss the revised transfer pricing guidelines developed alongwith the final reports on actions 8-10 of the OECD's base erosion and profit-shifting project, examine the interplay of the OECD's frameworkwith U.S. regulations, and consider how a hypothetical multinational enterprise could limit its transfer pricing risk.

German Chancellor Angela Merkel's failure to form a governing coalition has put Europe's strongman on shaky political ground as both it and the continent at large try to map out needed long-term fiscal reforms.with a booming economy and a sizable budget surplus, Germany is poised to implement sweeping tax reforms: abolishing the solidarity surcharge, adjusting income taxes, simplifying the tax code and making large-scale investments that could guarantee its financial security for years to come. However, the country's uncertain political future means such long-term plans have to be benched for now, according to a German economist.

Efforts by the Israel Tax Authority to assess the Israel-based earnings of digital multinationals are unlikely to proceed smoothly, local practitioners said, even as the authority's leader said hewas determined to issue demands to Alphabet Inc.'s subsidiary Google, Facebook Inc., and other internet giants.

China is set to expand corporate tax cuts and extend a duty-free policy for technology imports in an effort to encourage foreign technology investment and imports. The corporate tax on qualifying high-tech companieswill be reduced to 15 percent from a standard rate of 25 percent,while an exemption from tariffs and value-added taxes for purchases of technological equipmentwill be continued.

U.S. tax reform bills passed by the House (the Tax Cuts and Jobs Act (H.R. 1)) on November 15 and Senate take a uniquely U.S. approach to combating base erosion and profit shifting by U.S. multinationals. The legislation proposes the most dramatic changes to U.S. international tax rules since those ruleswere first enacted. For the most part, the bills offer a solution thatwill give the United States ÔøΩ rather than the many other countries that thought theywould profit from BEPS ÔøΩ the first cut at taxing the profits of both U.S.-headquartered companies, and foreign companies operating in the country.

The Coffey Reportwas carried out in response to increased international attention on Ireland's corporate tax regime following the Apple ruling. The Coffey Report is broadly supportive of the corporate tax system but sets out a number of key recommendations.

Italy is putting forward plans for adigitalsales levy as a European crackdown on how large U.S. internet groups pay tax gathers momentum. The measurewould force Italian buyers of services such as advertising on Google or Facebook ÔøΩ "intangible digital products" ÔøΩ towithhold 6 per cent of the value of the purchase and pay it instead to the Italian Treasury.

The private tax reports that global businesseswill send to governments this yearwill become public, according to Vodafone Group Plc's group tax director, John Connors,who assumes that the informationwill leak. The comments from Connors, a former U.K. tax official, come as U.K.-based multinational companies prepare to file their first global tax reports by the end of this year.

The House of Representatives passed a bill thatwould usher in the most far-reaching overhaul of the U.S. tax system in 31 years, a plan thatwould reduce the corporate tax rateto its lowest point since 1939 and cut individual taxes for most households in 2018.

Estimating the causal effect of offshoring on domestic employment is difficult because of the inherent simultaneity of multinational firms' domestic and foreign affiliate employment decisions. The authors conclude that greater offshore activity raises net employment by U.S. firms, albeitwith underlying job loss and reallocation ofworkers.

This paper investigates the influence of controlled foreign corporation (CFC) rules on cross-border merger and acquisition activity on a global scale. Using three different methods, the authors find that CFC rules distort ownership patterns due to a competitive advantage of multinational entitieswhose parents reside in non-CFC rule countries.

The European Commission has determined in preliminary conclusions that the United Kingdom's exemption of intragroup interest thatwould otherwise be taxable under its controlled foreign company rules violates EU state aid law.

By: Michael Devereux

When Margaret Hodge complained about how little tax Amazon paid in the UK, the tax cognoscenti rather patronisingly pointed out that the existing system does not generally give the right to tax profit to the country inwhich a sale in made. But since then the US House of Representativesways and Means Committee, the European Commission, and also the OECD have all put forward proposalswhich move the system in this direction