2014

Agents from tax authorities around theworld are taking positions that may not be in linewith established rules because of influence from the political rhetoric surrounding reform efforts such as the base erosion and profit-shifting project, Michael Danilack, deputy commissioner (international), IRS Large Business and International Division, said January 30.

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Ten years ago, Congress passed a law intended to penalize chief executive officerswhose companies shift their legal addresses to tax havens.

It hasn'tworked out as planned. Companies have foundways around the law that create new rewards for executives.when Actavis Inc. changed its incorporation to Ireland in October 2013, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law's bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remainwith the company.

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On January 23, 2013, the Organisation for Economic Cooperation and Development (the OECD) held awebcast providing updates and insight into its ongoing Base Erosion and Profit Shifting (BEPS) project. The OECD's presentation follows the release of its Action Plan on Base Erosion and Profit Shifting on July 19, 2013,which addressed the perceived flaws in international tax rules thatwere discussed in the OECD's February 2013 BEPS Report. The OECD's presentation reiterated its commitment to developing guidance for counteracting BEPS, provided updates regarding the progress of specific portions of its Action Plan, and gave an opportunity for stakeholders to ask questions.

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President Francois Hollande has proposed a ÔøΩ30 billion ($40 billion) easing of the French business tax burden, but only if companies show a commitment to invest and hire.

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In Chief Counsel Advice 201349015, the Internal Revenue Service Office of Chief Counsel concluded that the noncompulsory payment rule in the regulations under Section 901 can applywith respect to disregarded entities or branches and implicate transfer pricing issues even though Section 482 doesn't apply.

Although the CCA suggests that "U.S. transfer pricing principles" might be relevant to the noncompulsory payment rule, taxpayers should instead ensure proper application of foreign transfer pricing rules in their transactionswith disregarded entities. Failing to do so could result in harsh U.S. tax consequences.

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In a remarkable and rapid series of developments, Panama on December 30, 2013, introduced aworldwide income tax system effective December 31, 2013. However, following immediate negative reaction, on January 10 Panama repealed the new system retroactively, returning to the territorial tax system.

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Comprehensive, revenue-neutral tax reform that simplifies the code, broadens the base, lowers individual and corporate rates, and reduces disparities in the effective tax rate for businesses in different industries should be one of the top priorities in 2014, the Coalition for Fair Effective Tax Rates said in a January 21 letter to President Obama.

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The active financing exception and controlled foreign corporation look-through rules,which incentivize U.S. companies to send profits and jobs offshore, should not be extended, the Financial Accountability and Corporate Transparency Coalition and other organizations urged in a January 22 letter to leaders of congressional taxwriting committees.

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The Senate Finance Committee discussion drafts on international tax reform and cost recovery and tax accounting rules need significant revisions focusing on increasing the competitiveness of U.S. companies domestically and abroad and achieving a 25 percent corporate rate, the Business Roundtable said in January 17 comments to the committee.

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In a January 17 submission to the Senate Finance Committee on the committee's international tax reform discussion draft, the Alliance for Competitive Taxation commented on the provisions for options Y and Z, transition tax on accumulated foreign earnings, interest expense allocation,withholding on paid interest, and foreign entity classification.

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Many of the changes in the international tax reform discussion draft released by Senate Finance Committee Chair Max Baucus, D-Mont.,would make it more difficult for U.S. manufacturers to compete both domestically and abroad, the National Association of Manufacturers argued in January 17 comments submitted to the committee.

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Algirdas Semeta, European Commissioner for Taxation and Customs Union, Audit and Anti-Fraud, has urged member states not towater down proposals for a financial transactions tax (FTT), arguing that present delays may be instead overcome by a phased implementation of the tax.

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Volvo sells cars online. Does that make a difference in the OECD's base erosion and profit-shifting action plan?
Yes. The difference between a pure digital player, like Google or Facebook, and a seller of goods that uses digital means, like Volvo and every other seller these days, is sufficiently nebulous that it is hard to define a digital economy player in a narrow or coherentway.
Sowhen the Financial Times implied that the OECD BEPS negotiators had given up on taxing the digital economy, the paperwas overstating the case. But yes, the BEPS negotiators are likely to give up on trying to define a digital permanent establishment.

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The tax credit for corporate research and development and 54 other breaks in the U.S. tax code expired Dec. 31; they've been replaced by confusion and frustration.

As U.S. corporations such as Intel Corp. and General Electric Co. report earnings this month, they'rewarning shareholders and analysts that they can't assume Congresswill reinstate lapsed breaks retroactively, although lawmakers have done just that four times in the past eight years.

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The Fed justified its recent taper on the basis of "cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions." But the economic road ahead remains quite foggy. U.S. unemployment has dropped to 7 percent, down from 7.9 percent in January, though a substantial portion of this decline came from discouraged people exiting the labor force and thus not counting in the unemployment statistics. Persistentlyweak features of the labor market like this help explainwhy the Fed now expects to keep interest rates low "well past the time" unemployment falls under 6.5 percent. This policy, coupledwith the reduced bond buying, is akin to drivingwith one foot on the brake and one on the gas.

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The international tax reform discussion draft released by Senate Finance Committee Chair Max Baucus, D-Mont.,would not raise revenue from the corporate and individual income taxes, make the tax code more progressive, or equalize the taxation of U.S. corporations' domestic and offshore profits, Citizens for Tax Justice said in a January 17 report.

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Some of Europe's biggest taxpayers are concerned about the increased risk of double taxation from Poland's proposed changes to its controlled foreign corporation (CFC) rules and thin capitalisation regime.

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Norbertwalter-Borjans, finance minister for North Rhine-Westphalia, has repeated his claim that Germany must act unilaterally to target multinational tax avoidance through BEPS (base erosion and profit shifting) if insufficient progress has been made through multilateral efforts by the time autumn arrives.

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A report from BUSINESSEUROPE reinforces the business community's claims that double taxation outside of the area of transfer pricing remains a significant problem. At the October meeting of the European Commission's Platform for Tax Good Governance, EU member states had claimed the issuewas no longer relevant.

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Yasutoshi Nishimura, Japan's Deputy Economy Minister, is the latest government figure to join the calls for a corporate tax rate reduction.

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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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