Int'l Tax News

New European Commission guidelines establish clear conditions regarding the availability of tax incentives to thosewho invest in small and medium-sized companies.

The incentives, adopted Jan. 15, are part of new rules on the use of state aid to spur companies to gain access to finance across the European Union.

The guidelines set out criteria underwhich the commissionwill assess aid schemes put in place by member states to support access to finance by European SMEs and companieswith a medium capitalization (midcaps). Since the financial crisis, SMEs and midcaps have faced significant funding difficulties due to their dependence on traditional bank lending,which is limited by the banks' refinancing capacity, risk appetite and capital adequacy.

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Mexico has invested in several changes to its tax information exchange system and stands ready to meet the Organization for Economic Cooperation and Development's base erosion and profit shifting plan, a government official said.

Speaking Jan. 14 at a Mexico City BEPS forum, Armando Lara, general manager of international treaties at the Secretariat of Finance and Public Credit (SHCP), said Mexico has modernized its information exchange know-how, infrastructure and technological capabilities, and signed a plethora of double-tax treaties. This process, he said, has enabled it to become the first non-European signatory of the Foreign Account Tax Compliance Act,which it is gearing up to meet in early 2015.

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A comprehensive overhaul of business-related income taxes has broad support in Congress, even as lawmakers appear unable to advance it, leaders at the Business Roundtable said.

At a breakfastwith reporters Jan. 15, Business Roundtable President John Engler said a business-tax revamp could pick up some momentum from President Barack Obama,whom he expects to call again in his State of the Union address for lowering corporate taxes and trimming deductions, as the president did in 2013.

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Transfer pricing documentation rules being developed through an international project to combat base erosion must be crafted to avoid imposing an undue burden on taxpayers, a U.S. Treasury official said.

Any rules on country-by-country reporting developed under the Organization for Economic Cooperation and Development's action plan on base erosion and profit shifting (BEPS) must not only be administrable for companies, but also "impose a burden commensuratewith the benefit" to the governments involved, Treasury International Tax Counsel Danielle Rolfes said Jan. 14.

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"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of featherswith the smallest possible amount of hissing."

Governments face a dilemma: Theywill alwayswant to maximize tax revenues (never more so than in testing economic times) but at the same time don'twant to be seen to discourage businesses from investing in their jurisdictions by increasing the tax burden. On the other hand, taxpayers are always keen to keep their tax liabilities as low as possible.

Against this background,we have seen an increasing focus on tax avoidance (actual and perceived). This article focuses on some of the actions that have been taken in the U.K. thatwill be of interest to U.S. and international companies.

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Expected guidance from the OECD onwhat constitutes a permanent establishment may create complications for some structures entered into by the financial services industry, practitioners said January 9.

"Transfer pricing in financial services is hard enoughwithout having to layer onto it PEs," said Humberto Reboredo of Credit Suisse, speaking on his own behalf at the Practising Law Institute's seminar on taxation of financial products and transactions in New York.

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Arguments that offshore corporate profits are trapped and cannot currently be invested in the U.S. are flawed because the money is already in banks and circulating domestically, but because of deferral the profits are going untaxed and failing to help the economy, the Center for American Progress said in a January 9 report.

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It is clear that the role of multinational enterprises (MNEs) in theworld has been constantly increasing since the OECD first addressed its concerns about intercompany transactions in its model tax convention.

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The European Commission's reported challenge to the UK's 'patent box' regime for the taxation of intellectual property (IP) appears to have been "kicked into the long grass", an expert has said, after it emerged that similar regimeswill be reviewed as awhole.

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U.S. companies are keeping a close eye on the Organization for Economic Cooperation and Development's project on base erosion and profit shifting, an official at the National Foreign Trade Council said.

Key areas being closelywatched by U.S. corporations include the project's focus on the taxation of intangibles, the digital economy and transfer pricing, said Catherine Schultz, NFTC vice president for tax policy.

There is likely to be "a lot of action" on the BEPS project in 2014, she said.

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Advocates of cutting corporate tax rates frequently make their argument based on the higher statutory rate in the United States as comparedwith the rest of theworld; they argue that cutting corporate taxeswould induce large investment flows into the United States,whichwould create jobs or expand the taxable income base enough to raise revenue. President Barack Obama has supported a rate cut if the revenue loss can be offsetwith corporate base broadening. Others have urged on one hand, a revenue raising reform, and, on the other, setting deficit concerns aside.

This report focuses on the global issues relating to tax rate differentials between the United States and other countries. It provides tax rate comparisons; discusses policy implications, including the effect of a corporate rate cut on revenue, output, and nationalwelfare; and discusses the outlook for and consequences of a revenue neutral corporate tax reform.

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Cutting corporate tax rates may not spur the economic benefits that proponents tout, according to a pair of reports released by the Congressional Research Service.

Many recent criticisms of higher corporate tax rates don't hold up to scrutiny, the CRS said in a Jan. 7 report, "Corporate Tax Reform: Issues for Congress."

Claims that lowering the corporate ratewould increase revenues provide little supporting evidence, the report said.

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A range of revised tax policies should spur growth and trim the share of federal debt relative to the size of the U.S. economy, according to a report released by a technology-focused think tank.

The recommendations in the report, "An Innovation and Competitiveness-Centered Approach to Deficit Reduction," centered on increasing the tax burden on individuals and reducing the load borne by corporations, said Robert Atkinson, president of the Information Technology and Innovation Foundation.

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The Japanese Cabinet in late December 2013 approved the 2014 tax reform proposal. The proposalwould adopt the Authorized OECD Approach (AOA) for calculating profits attributed to a US multinational corporation's permanent establishment under domestic Japanese tax law. As currently proposed, this changewould take effect for tax years commencing on or after April 1, 2016.

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France enacted the Finance Act for 2014 and the Amended Finance Act for 2013 on December 30, 2013. Most enacted measureswill apply immediately and in some cases retroactively.

The two acts contain revenue-raising and anti-abuse provisions thatwill affect entities operating in France. However, some major provisions, such as the measure targeting intra-group transfers of risks and functions, have been struck down by the Constitutional Court and thereforewill not take effect.

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Any claim to reduce net investment income tax (NIIT) liability byway of a foreign tax creditwill need to be based on a tax treaty provision.

The Section 1411 final regulations indicate that a Section 901 foreign tax credit cannot be taken against the NIIT. That should come as no surprise since Section 901(a) specifically restricts the use of this credit to offsetting tax charged by Chapter 1 of the Internal Revenue Code (the Code). The NIIT, in contrast, is charged under Chapter 2A of the Code.

The focus of this articlewill be to examine how the bilateral treaty network should allow the NIIT to be offsetwith foreign tax credits.

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In 2011, Jazz Pharmaceuticals, a California-based drug maker, acquired Azur Pharma, a small rival based in Ireland.

Because the stock deal transferred more than 20 percent ownership of the combined company to foreign holders, Jazzwas able to enact an "inversion" ÔøΩ relocating its corporate headquarters to Ireland and escaping the U.S. tax regime.

Jazz's deal for Azurwas part of a newwave of inversions that is occurring as U.S. companies look for tax reliefwherever they can find it.

In addition to the basic savings companies achieve by not paying taxes on their international profits, a big reason companies invert is so they can acquire companies on a tax-efficient basis. And on Friday, Jazz took full advantage of that benefit, agreeing to to buy Gentium, a U.S. drug maker, for about $1 billion.

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Italy's Parliament passed a new measure onweb advertising, the so-called Google tax,whichwill require Italian companies to purchase their Internet ads from locally registered companies instead of from units based in tax havens such as Ireland, Luxembourg and Bermuda.

The tax has stirred controversy,with some lawyers saying it probably violates European Union laws regarding nondiscrimination over commercial activity and could be subject to legal challenges.

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A Parliamentary report has accused tax authorities of avoiding sanctioning major multinationalswhile pursuing small businesses and individuals.
HM Revenue and Customs seems to "lose its nerve"when facedwith the prospect of taking legal action against global giants, and has fallen short on the unpaid tax it hoped to extract from Swiss bank accounts - collecting just £440 million so far this financial year, rather than the £3.12 billion forecast after a bilateral agreement.

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HM Revenue and Customs has been accused of failing to collect enough tax from big business and not using the powers at its disposal to do so by an influential committee of MPs.
The Public Accounts Committee (PAC), chaired by Margaret Hodge, accused the tax man of "not clearly demonstrating that it [HMRC] is on the side of the majority of taxpayerswho pay their taxes in full."

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In pursuing unpaid tax, HM Revenue & Customs (HMRC) has not clearly demonstrated that it is on the side of the majority of taxpayerswho pay their taxes in full. It does not use the full range of sanctions at its disposal to pursue vigorously all unpaid tax, and its measure of the tax gap does not capture all the avoided tax that it should be collecting. HMRC massively over-estimated how much itwould collect from UK holders of Swiss bank accounts, and in 2013-14 has so far collected only £440 million of the £3.12 billion predicted in the 2012 Autumn Statement. HMRC is not doing enough to collect tax credits debt or to tackle tax credit error and fraud.

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The 11 EU member states looking to adopt a financial transaction tax (FTT) have discussed proposals for a narrower version of the tax to get it past stalled negotiations.

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Delivering an address on the morality versus legality debate at the Foundation for International Taxation's December 5-7 conference in Mumbai, former Chief Justice of India SH Kapadia stated that in the Indian context, the discernible principles of law should prevail and not morality in a general sense.

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Revenue from reworking the U.S. tax codewould come from individuals rather than big businesses, remarks from a top Senate staffer suggested.
Revenue neutrality is the goal for overhauling all corporate income taxes, including taxes on international earnings, said Lily Batchelder, the chief tax counsel to Senate Finance Committee Chairman Max Baucus (D-Mont.). So, to increase revenuewhile comprehensively rewriting the tax code, as Baucus has said hewants to do, the burdenwould necessarily fall to individual taxpayers.

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As the debate over international tax reform continues, Mark Prater, minority deputy staff director and chief tax counsel, Senate Finance Committee, urged practitioners on December 16 to move beyond a focus on trade-offs in a revenue-neutral reform of the U.S. tax system and to instead look to the efficiencies the reformwould create.

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The OECD has recently come to recognize that the transfer pricing system does notwork as intended. In its report on Base Erosion and Profit Shifting, the OECD recognizes that BEPS results in revenue losses that affect all states, especially poorer ones; that systematic tax avoidance by the richest and most powerful companies in theworld undermines the general legitimacy of taxation; that it gives MNEs significant competitive advantages over purely domestic firms, resulting in inefficient allocations of investment and major distortions to economic activity; and that it skews the decisions of the MNEs themselves, resulting in overall economicwelfare losses.

This articlewill contrast three approaches to dealingwith the BEPS problem: adopting a unitary taxation regime; ending deferral; and adopting anti base erosion measures. It concludes thatwhile the first approach is the best long term option, the other two are more promising as immediate candidates for adoption in the context of US tax reform and the OECD BEPS project.

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The Internal Revenue Service is "thinking more critically" aboutwhich requests for private letter rulings itwill accept in the international area and the number it takeswill likely be reduced, an agency official said.
The IRS's Office of Associate Chief Counsel (International) is facing major resource constraints andwill have to be more picky, Anne Devereaux, deputy associate chief counsel (international field service & litigation), said Dec. 13.

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The IRS and Treasury hope to release several guidance projects concerning foreign tax credits in 2014, according to acting Treasury Deputy International Tax Counsel Ginny Chung.

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Practitioners should not expect section 7874 anti-inversion regulations that provide guidance on substantial business activities to be finalizedwithin the current business plan year,which ends June 30, but rather can expect finalization in the next business plan year, an IRS official said December 12.

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U.S. officials are urging taxpayers to provide detailed commentary on the Organization for Economic Cooperation and Development's action plan to combat base erosion and profit shifting (BEPS), particularly on the issue of hard-to-value transactions.
Working Party No. 6 of the OECD,which is chargedwith addressing transfer pricing issues, is still in a "brainstorming phase" for BEPS, said Brian Jenn, attorney adviser in the Treasury Department's Office of the International Tax Counsel.

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Chris Bello, branch 6 chief, IRS Office of Associate Chief Counsel (International), called on interested parties to actively engagewith the OECD on its intangibleswork under the base erosion and profit-shifting project to offer guidance on how difficult transactions can be priced.

Speaking at a December 12 session of the annual Institute on Current Issues in International Taxation, cosponsored by Georgewashington University Law School and the IRS, Bello said that some participants in the OECD discussions are inclined to disregard transactions they do not regard as having an arm's-length price. To counter that perception, he said, businesses need to participate in the process to offer solutions for pricing difficult transactions.

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At the heart of a report being prepared by the OECD's digital economy task forcewill be a discussion ofwhether special rules should be created to address the tax challenges raised by the digital economy, Robert Stack, Treasury deputy assistant secretary (international tax affairs), said December 12.

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The Organization for Economic Cooperation and Development's base erosion projectwill create "tremendous pressure" for officials chargedwith resolving cross-border tax disputes, an Internal Revenue Service official said.

The OECD's action plan to combat base erosion and profit shifting (BEPS) has brought together "every difficult issue that has ever existed" in international taxation, but the OECD has no authority to coordinate the response, said Michael Danilack, deputy commissioner (International)with the IRS. "We have to be mindful of the fact that the various BEPS initiatives maywell take place on a country-by-country basis"ÔøΩand thatwill create additional burdens for competent authorities around theworld.

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Cost recovery rules in the United States, Canada, Germany, Japan, and the United Kingdom vary as far aswhich industries they favor, but no system stands out as having more or less generous depreciation allowances overall than any of the others, the Joint Committee on Taxation said in an unreleased April 12 report obtained by Tax Analysts.

The JCT analyzed depreciation regarding specific business assets, namely commercial buildings, computer hardware and software, construction equipment, machinery and equipment, and tractor-trailers.

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The UK government recently released its annual Autumn Statement, focusing on growth and managing debtwhile maintaining the 'Britain is open for business' agenda. The Statement reaffirms the government's commitment to corporation tax reform, including the 20% corporate income tax rate effective in April 2015.

The government also announced a number of targeted anti-avoidance measures that are primarily aimed at UK PLCs but may impact US MNCs.

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George Osborne, UK Chancellor of the Exchequer, today unveiled his Autumn Statement. Anti-avoidance measures dominated,with Osborne promising theywill raise £9 billion ($15 billion) over five years.

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David Bradbury, Assistant Treasurer of Australia until the September 2013 election, and the driving force behind Australia's efforts to tackle base erosion and profit shifting (BEPS) over the past 12 months, discusses the progress he madewhile in office and outlineswhat the newly elected government must do to build on that.

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The UK House of Lords EU Subcommittee on Economic and Financial Affairs has declared that the financial transaction tax (FTT) could significantly damage the UK and the rest of the EU.

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Congressional taxwriters are paying close attention to the Organization for Economic Cooperation and Development's multicountry project on base erosion and profit shifting, butwill notwait for its outcome to push aheadwith overhauling the U.S. tax code, two top staffers said.

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Definitions important to the manufacturing exception in determining foreign base company sales income under Subpart F supply chain rules depend on the facts and circumstance of each case, not any "bright line" test, an Internal Revenue Service official said.

Speaking at a Dec. 9 International Fiscal Association seminar in New York, Jeffery Mitchell, chief of the IRS Branch 2 Office of Chief Counsel (International), said the Servicewill look to all the activities of all employees of a controlled foreign corporation (CFC) to seewhether the substantial contribution test under tax code Section 954 is met.

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There may be common ground between the tax overhaul drafts unveiled separately by Houseways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.), but differences remain, top advisers from the panels said.

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Proposals to change numerous business tax laws from Senate Finance Committee Chairman Max Baucus (D-Mont.) generally differ from overhaul ideas put forth by President Barack Obama in his fiscal year 2014 budget plan and other documents.

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The international discussion draft on tax reform released November 19 by Senate Finance Committee Chair Max Baucus, D-Mont., is "not set in stone," and the "higher-than-expected bracketed rates" are subject to change, Ronald Dabrowski, IRS deputy associate chief counsel (international), said December 9.

"Whatwe've set outwas intended to be conservative," said Dabrowski,who is on detail to the Senate Finance Committee majority. "We didn'twant to give promiseswe couldn't deliver on, but in any event,wherewe've started is notwherewewill end up."

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Senate Finance Committee Chairman Max Baucus has released a detailed proposal for international corporate tax reform,whichwe summarized earlier thisweek.while there are some improvements to current law, the proposal is mainly a step backward in terms of business competitiveness andwill harm investment, job creation, andwages.

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This article explains the basic mechanics of taxing foreign profits of U.S. multinationals under options Y and Z of the staff discussion draft released by Senate Finance Committee Chair Max Baucus, D-Mont., on November 22. The analysis here draws heavily from thework of professor Daniel Shaviro of New York University School of Law and concludes by suggesting an alternative to options X and Y.

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Onewould easily be forgiven for believing that, in recent years, tax competition has acquired pariah status in the global economy. The much-vaunted crackdown on multinational tax avoidance, the fresh attempt to regulate corporate transfer payments and the likely impact of rolling out the Foreign Account Tax Compliance Act mean that thosewhowish to evade their obligations by arbitraging the complex labyrinth of global tax networkswill find life much more difficult in the future.

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While America dawdles over tax reform, new evidence from Britain shows that cutting corporate tax rates is a tax revenuewinner.

Chancellor of the Exchequer George Osborne has cut Britain's corporate tax rate to 22% from 28% since taking office in 2010,with a further cut to 20% due in 2015. On paper, these tax cutswere predicted to "cost" Her Majesty's Treasury some £7.8 billion a yearwhen fully phased in. But Mr. Osborne asked his department to figure out how much additional revenuewould be generated by the higher investment,wages and productivity made possible by leaving that money in private hands.

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Curtailing corporations' tax breaks for their overseas operations should help lower the budget deficit, according to a pair of House Democratswho are backing new legislation to do just that.

Reps. Lloyd Doggett (D-Texas) and Rosa DeLauro (D-Conn.) proposed to use revenue fromwhat they called offshore tax haven abuse to replace the across-the-board sequestration budget cuts to discretionary programs for fiscal years 2014 and 2015. The resulting revenuewould also help partially reduce the sequester-mandated cuts for fiscal 2016.

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The Organization for Economic Cooperation and Development has announced that itwill release a discussion draft in February 2014 on transfer pricing documentation thatwill include a proposed template for country-by-country reporting.
A calendar posted on the OECD'swebsite Dec. 3 states that the deadline for comments on the discussion draftwill be 21 days after publication of the draft and cautions that the February date may change.

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