2013

The Business and Industry Advisory Committee (BIAC) to the Organization for Economic Cooperation and Development raised doubts that a shift to country-by-country reportingwould generate enough useful data to justify the burden on taxpayers.

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I just read the Action Plan on Base Erosion and Profit Shifting (BEPS) issued by the Organization for Economic Cooperation and Development (OECD); there is much to think about in the report and I commend the OECD on its speedy initial effortÔøΩI alsowholeheartedly agreewith the need for concerted governmental action in this area.

From my standpoint, the key term there is "concerted," because I view the current environment as a patchwork of disparate but aggressive enforcement activities by tax authoritiesÔøΩegged on by politicians and mediaÔøΩthat put businesses at risk for both the cost of unrelieved double taxation and the very significant cost and distraction of tax controversy.

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Multinational manufacturers could potentially have much to lose if international tax reform proceeds under the outline proposed by Houseways and Means Committee Chair Dave Camp, R-Mich., in his discussion draft on the topic, according to a senior tax executive.

Senior tax executives of multinational corporations expressed differing opinions about the Camp discussion draft at a roundtable discussion at the University of San Diego School of Law-Procopio International Tax Institute annual conference.

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Brazilian multinational companieswant their country to use its participation in the Organization for Economic Cooperation and Development's base erosion and profit shifting (BEPS) project as an opportunity to better align Brazil's transfer pricing ruleswith international standards, but that looks unlikely to happen quickly, practitioners told Bloomberg BNA.

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Lawmakers might encourage companies to bring overseas earnings home to generate tax revenue, a member of the congressional budget conference committee said.

Rep. Tom Cole (R-Okla.) said hewas open to revenue from repatriation, inwhich U.S.-based multinational corporationswould deposit some of the estimated $2 trillion they have parked abroad domestically, and also suggested that expanding energy operations might bring in revenue.

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A few months after strongly rejecting claims by US senators that it is a "tax haven", Dublin moved on Thursday to close a legal loophole that enabled Apple to save billions of dollars in corporate taxes.

The policy shift follows investigations by the US Senate, UK parliament and the media,which pinpointed how multinationals use Irish registered companies as part of complex tax avoidance schemes. Last month the Netherlands also pledged to review its tax policies, underlining how political support from the G20 for an OECD plan to reform global tax rules is having some impact.

"Ireland's move is a very important signal from an important country in this area. Dublin recognises thingswill change and it is better to participate in the change than resist it," says Pascal Saint-Amans, director of the OECD centre for tax policy.

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If the 29 federal budget conferees reach an agreement by December 13, it is reasonable to expect the dealwould include some modest tax increases. And it is likely that those tax increaseswould consist mainly of cuts to business tax breaks popularly described as loopholes. On October 16 the Joint Committee on Taxation issued a 30-page document that explained how it has updated its reporting of business tax changes.

For the report, go here.

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A headline in a publication readwidely by tax experts (subscription only) this morning screamed "PwC Study: Effective Corporate Tax Rate Topped Statutory Rate From 2004 to 2010."

The actual report,whichwas published in a rival publication thisweek (subscription only), provides three differentways of measuring effective corporate tax rates, and only one tells us anything about how our corporate tax system isworking. That measure ÔøΩ the percentage ofworldwide profits paid inworldwide taxes for corporations thatwere profitable from 2008 through 2010,was 22 percent, the study concludes.

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Google Inc. (GOOG), Facebook (FB) Inc. and LinkedIn Corp. (LNKD)wound up in Ireland because they could reduce their tax bills. Their success is leading European and U.S. politicians to label the country a tax haven that must change itsways.

The grand architect of much of that success: Feargal O'Rourke, the scion of a political dynastywho heads the tax practice at PricewaterhouseCoopers in Ireland. He advises both multinational companies and the government on tax policy and has emerged as his country's leading defender.

"Under no circumstances is Ireland a tax haven," O'Rourke said recently at his corner office on the River Liffey in Dublin, a ritual stop for many tech companies in their Irish quest. "I'm a player in this game andwe play by the rules."

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editorial fromwall Street Journal

Our readers know that the statutory U.S. corporate tax rate of 35% (plus another 4.1% average state rate) is the highest among developed nations. Yet the myth persists that most American companies somehow pay little or no tax. Now comes a new study showing that the tax burden is as punitive as advertised.

The tax evasion fable got new legs in Julywhen the Government Accountability Office released a study concluding that the effective U.S. corporate tax rate is only 12.6%. The effective rate iswhat corporations actually pay after deductions and credits.

For the editorial, go here.

"New Corporate Tax Shelter -- A Merger Abroad," blared The New York Times a fewweeks ago. The paper reported that there have been 20 inversions by means of mergers over the past year or so. Many of the merging companies are inverting into Ireland. (See The New York Times, Oct. 9, 2013.)

"Many companies that have recently moved their domicile for tax reasons have chosen European countrieswith low tax rates, like Ireland and the Netherlands, rather than be tarred by relocating to Bermuda or a Caribbean tax haven," said the Times. Neither transaction described in the article has been consummated.

Inversions are not impossible, but they are more difficult.

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For information, go here.

For the call for applications to join the expert group, go here.

The European Commission said the regime contravenes certain provisions in the EU's Code of Conduct on Taxation. The code is voluntary, but if the UK does not acknowledge the opinion (delivered to finance ministers on Tuesday) itwould be the first time a member state's government has ignored a commission opinion.

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The National Foreign Trade Council has submitted comments to the OECD on the OECD's revised discussion draft on transfer pricing aspects of intangibles and on the OECD'swhite paper on transfer pricing documentation.

For the comments, go here.

European Commission President Jose Barroso promoted his plan for squeezing more revenue from technology companies, foreshadowing a possible clash on the proposal at a summit beginning tomorrow.

Barrosowants Internet-based companies such as Amazon.com Inc. (AMZN) to contribute more to state coffersweakened by a sluggish European economy and the euro-area debt crisis.

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U.S. corporationswere taxed at a higher average rate than prescribed by law from 2004 through 2010, according to a private sector analysis of taxes on companies' financial statement income.

By three different measures, U.S. corporations paid more than the top U.S. statutory tax rate of 35 percent over that period, said the study's author, Andrew Lyon, a principal in the National Economics and Statistics group of PricewaterhouseCoopers LLP.

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Andrew B. Lyon argues that a recent report by the Government Accountability Office understatedworldwide effective tax rates of U.S. corporations, and he offers a multiyear extension of the GAO analysis to better represent estimatedworldwide effective tax rates over the long term.

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European Union member states failed to agree onwhether to back a European Commission conclusion that a U.K. "patent box" tax scheme violates the EU Code of Conduct on harmful corporate taxation.

Despite this, the EU member state representatives to the EU Code of Conduct group, at a meeting in Brussels, asked the European Commission to investigate similar patent box tax schemes in Belgium and Cyprus.

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Citing problemswith tax evasion and aggressive tax planning by digital-economy-oriented companies, the European Commission has set up a specialworking group to devise a new taxation framework that it hopeswill be more appropriate for the era of electronic commerce.

Under pressure from France,which is pushing a new digital tax on companies such as Google Inc. and Apple Inc., the new expert groupwill be part of a larger strategy due to be backed Oct. 24 at a meeting of European Union leaders. The meetingwill draw up a plan designed to boost European competitiveness in the digital economy relative to companies in the U.S.

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On October 16th, TEI submitted a second letter to the OECD commenting on the OECD's Action Plan on Base Erosion and Profit Shifting. TEI's comments addressed issues under the 15 individual items of the Action Plan, including transfer pricing aspects of intangible assets, changes to the OECD model treaty, and improvements to the mutual agreement procedure.

For the letter, go here.

Pascal Saint-Amans, the OECD's director for tax policy, lastweek affirmed the base erosion and profit shifting (BEPS) action planwill be completed in two years,while European Commission tax head Philip Kermode said he backs the plan as long as it does not interferewith member states' EU treaty obligations.

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We need a new economics.

Until the tech revolution of the 1990s, economists' conceptualization of production portrayed reality reasonablywell. Businesses hired labor and purchased capital to make the things that improved consumers'well-being. To promote employment, productivity, and economic growth, itwas necessary to increase capital formation. Intellectual propertywas relegated to a supporting role. It gave firms a competitive edge. And for the economy as awhole it generated residual growth that could not be explained by capital and labor. Spending more on research and advertisingwas theway to increase intellectual property.

A new 362-page OECD report "Supporting Investment in Knowledge Capital, Growth and Innovation" provides a fascinating and useful overview of the new face of theworld economy. It also is full of (admittedly preliminary) policy ideas to promote growth in a knowledge-based economy. Needless to say, many of them are very different thanwhatwould have been needed during the Reagan administration.

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The G-20 mandate to revise international tax rules is moving at an unprecedented pace and is likely to focus on targeted measures to realign value creation and taxing rights, curtail aggressive tax planning, and respond to demands for greater transparency,while also recognizing that countries compete for tax dollars.

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Israel's state comptroller sharply criticized the government's corporate tax policies, including preferential loan repayment terms for multinational companies, in a report to the Knesset.

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Our corporate tax ratewas not so uncompetitivewhen President Clinton raised it to 35 percent two decades ago. But now it is entirely out ofwhack, especiallywhen you factor in an additional 4.1 percentage points for state corporate taxes. The average of the other members of the G-7 is 29.7 percent and falling. The average for 33 members of the OECD (excluding the United States) is 25.1 percent. And since Japan lowered its rate in April 2012,we have the highest corporate tax rate of the bunch. By the laws of tax gravity, profits and investment are slipping away from the United States.

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"APB 23 exists because of the tax law -- not the otherway around," said Mark Bielstein of KPMG LLP at the October 16 meeting of the International Tax Institute (ITI) in New York. It's the accounting rules' attempt to dealwith the tax law's deferral for active foreign earnings.

Let's change the debate about repatriation. Some of theworld's largest companies are not paying any tax anywhere, yet they've managed to twist the national debate about their tax bills into a tacit agreement among thewashington establishment to lower their rates, convert to territoriality, and consider relief for the repatriation of their deferred foreign earnings.

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Frequently at bar association meeting discussions, the client is an abstraction. But participants at the recent International Bar Association (IBA) annual conference in Bostonwere treated to comments from a real live, flesh-and-blood client in the form of Tim M. Barns from Sankaty Advisors, the distressed-asset division of Bain Capital.
A panel at the IBAwas devoted to restrictions on deductions for acquisition interest. The latest crop of rules and proposals don't askwhether interest expenses are meritorious or not -- they just disallow some or all of the deductions.

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Practical information reporting is the holy grail of tax enforcement. Taxpayerswant to minimize compliance costs,while tax administratorswant useful information to allow them to determine compliance risks. Finding a happy medium is rarely easy.when that process is transferred to a global scale, aswith the recent OECD proposal, the search for middle ground becomes even harder.

Action 13 of the OECD's base erosion and profit-shifting plan calls for a reexamination of transfer pricing documentation and a shift to country-by-country reporting. Transparency and certainty are the themes of actions 11 through 14,which encompass information monitoring, improving dispute resolution mechanisms and information flow, and disclosure requirements. The goals are to provide predictability to taxpayers and to counteract BEPS by giving tax authorities the information they need for enforcement.

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A corporate tax scheme adopted in the U.K. in 2013 that provides tax exemptions on royalties from intellectual property rights in order to attract innovative companies, especially those in the information technology sector, contains measures that violate the European Union code of conduct against harmful taxation.

According to a decision reached by the European Commission and to be presented Oct. 22, the U.K.'s "patent box" corporate tax scheme violates two important principles of the EU corporate code of conduct designed to eliminate harmful tax competition. In addition, the EU executive body has concluded that itwould be best for the U.K. to repeal the scheme instead of trying to adjust it. The U.K. patent box tax scheme took effect in April.

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The Swiss town of Baar boasts clean air, easy access to ski slopes and some of Europe's lowest personal taxes. London? Traffic and perpetual drizzle.

Yet executives at Noble Corp. (NE), a provider of deepwater oil drilling rigs, are in the process of moving headquarters from Baar to the British capital, citing the talentedworkforce and easy airline connections from Heathrow, Europe's busiest international airport. On top of that, the U.K. tax rate is now competitivewith Switzerland's historically corporate-friendly tax regime.

Noble is part of awave of overseas companies moving head offices to London, lured in part by the country's declining corporate taxes. The relocations underscore Prime Minister David Cameron's efforts to make the country more attractive to foreign companies -- and may help London become less dependent on the financial services industry,which has been retrenching since the 2008 crisis.

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The Swiss town of Baar boasts clean air, easy access to ski slopes and some of Europe's lowest personal taxes. London? Traffic and perpetual drizzle.

Yet executives at Noble Corp. (NE), a provider of deepwater oil drilling rigs, are in the process of moving headquarters from Baar to the British capital, citing the talentedworkforce and easy airline connections from Heathrow, Europe's busiest international airport. On top of that, the U.K. tax rate is now competitivewith Switzerland's historically corporate-friendly tax regime.

Noble is part of awave of overseas companies moving head offices to London, lured in part by the country's declining corporate taxes. The relocations underscore Prime Minister David Cameron's efforts to make the country more attractive to foreign companies -- and may help London become less dependent on the financial services industry,which has been retrenching since the 2008 crisis.

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Energy multinational Cairn's Delhi High Courtwin gives certainty for non-residents claiming the concessional tax rate of 10% on long-term capital gains arising on the disposal of listed securities in India.

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Harm Oortwijn, director of international tax and reporting at Paramount Pictures and owner/director of EA Tax Services, looks at trends regarding international tax transparency including the role of tax treaties, and analyseswhy greater cooperation via information exchange mechanisms is necessary.

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Politicians are now driving the effort to tackle base erosion and profit shifting,which is different than before, a panel of tax executives and practitioners have told a conference in London.

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The Irish government is targeting a maneuver that Apple Inc. and other companies have used to minimize taxesÔøΩa move aimed at countering international criticism but one that some accounting experts say may have little effect onwhat companies actually pay.

Ireland,whose low corporate income-tax rate figures in many big companies' tax strategies, plans to change rules that businesses use to become "stateless" for tax purposes, the finance ministry said.

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Irish Finance Minister Michael Noonan promised to amend the country's corporate tax laws, trying to calm a controversy over how U.S. companies use the nation to lower their tax bills.

"Iwill be bringing forward a change to ensure that Irish registered companies cannot be 'stateless' in terms of their place of tax residency," Noonan said in Dublin as part of the 2014 budget today. "Irelandwants to be part of the solution to this global tax challenge, not part of the problem."

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The Irish government plans to enact legislation banning "stateless" companiesÔøΩmultinational entities that are incorporated in Ireland, but don't have a tax residence anywhere on the globe.

Michael Noonan, Ireland's Minister of Finance, said the provisionwould be includedwith the Finance Bill, expected to accompany the annual budget later this year, but gave few details on how itwouldwork.

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This report reviews proposals by Houseways and Means Committee Chair Dave Camp, R-Mich., and Senate Finance Committee member Michael B. Enzi, R-Wyo., to shift the United States from its current system of deferring taxation of active foreign income to a system thatwould exempt foreign business income from U.S. tax.

In a recent article, the authors described how a principled exemption system should be designed so as to protect the U.S tax base. It is possible to modify the Camp and Enzi proposals to address theirweaknesses inways consistentwith a principled exemption system. The authors recognize that those changeswould make the proposals unattractive to many in the multinational corporate community; however, that likely is true of any exemption system thatwould be a material improvement over current law. In the authors' view, unless a shift to an exemption systemwould constitute a material improvement over current law, the likely revenue losses and transition costs of that changewould outweigh the benefits.

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Google funnelled ÔøΩ8.8bn of royalty payments to Bermuda last year, a quarter more than in 2011, underlining the rapid expansion of a strategy that has saved the US internet group billions of dollars in tax.

By routing royalty payments to Bermuda, Google reduces its overseas tax rate to about 5 per cent, less than half the rate in already low-tax Ireland,where it books most of its international sales.

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European Union leaders should tell technology companies that on tax issues, "we have a problem," said Angel Gurria, head of the Organization for Economic Cooperation and Development.

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Writing about cricket might be easier. Joseph Andrus, head of the OECD transfer pricing unit, isworking on the transfer pricing aspects of the OECD base erosion and profit-shifting action plan. He appeared at the International Bar Association annual meeting in Boston on October 10. There he fielded questions about his role in implementing the plan and transfer pricing generally. He suggestedwewrite about the obscure rules of cricket scoring,which are as esoteric as transfer pricing.

Askedwhether the arm's-length methodwas doomed, Andrus replied that itworkswell in many contexts, but that solutions need to be found for situationswhen it doesn't. The G-20 doesn'twant the OECD to be constrained by "theological" arguments, he said. The arm's-length method doesn't require all activity outside Asia to be priced at cost plus 5 percent, he said. Butwhile the OECD is thinking more freely about solutions, formulary apportionment is not on the table, having been rejected by national representatives.

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The scope of thework on permanent establishments set forth in the Organization for Economic Cooperation and Development's action plan to combat base erosion and profit shifting (BEPS) is likely to expand, according to awashington, D.C, practitioner.

Steve Nauheim of PricewaterhouseCoopers LLP said Oct. 8 that thework of Action 7 of the BEPS plan,which calls for changes to Article 5 of the OECD Model Tax Treaty, is likely to be expanded beyond commissionaires.

Action 7 tasks the OECDwith decidingwhether to treat commissionaires as dependent agents that bind their principals, a treatment that creates a PE of the principal in the jurisdictionwhere the commissionaire operates.

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Transfer Pricing Associates has submitted comments on the OECD's revised discussion draft on the transfer pricing aspects of intangibles.

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With some tax administrations already taking steps to address base erosion and profit shifting, ahead of the OECD's BEPS action plan recommendations, it is important for businesses to reassess and potentially realign their structures to ensure that theywill be effectivewhen new substance-based guidelines are adopted.

Speaking during an October 8 PricewaterhouseCoopers LLPwebcast focusing on the sections of the BEPS action plan dealingwith substance and permanent establishment, David Ernick of thewashington office of PwC said the OECD's BEPS project has magnified the importance of questions of substance in cross-border transactions.

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OECD officials and representatives of OECD member countrieswho participated in an October 1 "business dialogue" on the base erosion and profit-shifting action planwere receptive to the business community's concerns and expressed awillingness to take those concerns into account as they develop measures to implement the BEPS plan, according to meeting attendees.

The meeting, held at OECD headquarters in Paris,was organized by the Business and Industry Advisory Committee (BIAC), the official consultative body to the OECD. Attending the meeting (whichwas closed to the press)were about 100 members of BIAC; members of the OECD secretariat; the heads of OECDworking parties 1 and 6; and government representatives from Australia, France, Germany, Italy, Mexico, the Netherlands, and Spain. Robert Stack, Treasury deputy assistant secretary (international tax affairs),was scheduled to attend for the United States but canceled his appearance.

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"Without U.S. support, therewill be no BEPS action plan," declared Raffaele Russo, senior adviser, OECD Centre for Tax Policy and Administration, on October 8 at the International Bar Association meeting in Boston.

Participantswere given the opportunity to voice their objections to the base erosion and profit-shifting action plan . Those that screamed the loudestwere from countries that have their own currencies andwhose governments are least likely to adopt all action plan prescriptions. Reeves C.westbrook of Covington & Burling LLP speculated that the U.S. governmentwould resist most BEPS advice although it supports the plan.

"BEPS is not about bashing business," said Russo. "It is a recognition, from the highest political levels, that there is something to be done."

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Executives at a California chip maker, Applied Materials, highlighted a number of advantages in announcing a merger recentlywith a smaller Japanese rival, but an important onewas barely mentioned: lower taxes.

The merged companywill save millions of dollars a year by moving -- not to one side of the Pacific or the other, but by reincorporating in the Netherlands.

From New York to Silicon Valley, more and more large American corporations are reducing their tax bill by buying a foreign company and effectively renouncing their United States citizenship.

''It's almost like the holy grail,'' said Andrew M. Short, a partner in the tax department of Paul Hastings,which advises a number of American corporations on deals. ''We spend all of our timeworking for multinationals, thinking about howwe're going to expand their business internationally and keep the taxation of those activities offshore,'' he added.

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Business is concerned that unilateral tax and transfer pricing measures recently proposed or adopted by some jurisdictions to address base erosion and profit shifting could jeopardize the coherence of internationalwork on BEPS before it even gets off the ground, practitioners told Bloomberg BNA following the Organization for Economic Cooperation and Development's Oct. 1 consultation on the project.

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Harvard Law School professor Stephen E. Shay, a former Treasury deputy assistant secretary (international tax affairs), said the anti-base-erosion proposal, dubbed "option C," floated by Houseways and Means Committee Chair Dave Camp, R-Mich., has broad exceptions and that "its characterization as an anti-base-erosion provision seems to me utterly misleading."

Option Cwould "essentially create a U.S. tax advantage for intangible income earned directly or through a [controlled foreign corporation] from foreign markets," Shay said, adding that "there is almost no policy justification for this rule." He spoke October 4 at a New York Law School symposium celebrating the 100th anniversary of the U.S. individual income tax system.

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The victors ofworldwar I did notwant multinationals to allocate profits to their former colonies. The developing nations protested that they needed revenue. And, in fact, two-sided methods that spread profits across the footprint of multinationals' operationswere already inwidespread use. But the powers that be beat back the opposition, and the League of Nations consecrated transfer pricing methods that directed the flow of income to corporate headquarters.

Under these one-sided methods, presumably unsophisticated affiliateswould be assigned modest levels of profit for the routine functions they performed. And thenwithout any further check on the reasonableness, the often enormous residual profitswould be assigned to headquarters. According to a recent paper by Brettwells at the University of Houston Law Center and Cym Lowell of McDermottwill & Emery, this is the "fundamental mistake" of our transfer pricing rules that has contributed to the problem of base erosion and profit shifting. (Seewells and Lowell, "Tax Base Erosion: Reformation of Section 482's Arm's Length Standard," University of Houston Law Center No. 2013-W-6, Aug. 15, 2013.)

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