2014

The head of Google Australiawants governments to clarify grey areas in the global tax system and end the shaming of individual companies for how they transfer profits around theworld.

Pressure around theworld is increasing on multinationals such as Google and Apple to pay more tax in the countries inwhich they operate and the issue is set to be high on the agenda of this year's Group of 20 finance ministers' summit in Cairns.

For the story, go here.

Apple issued $12 billion of U.S. debt in April,which gave the company a domestic cash infusion that allowed it to keep more earnings overseas. Last month Pfizer attempted to acquire AstraZeneca, a transaction thatwould have made Pfizer a subsidiary of the U.K.-based company. Thesewere useful examples in the taxation classes I teach at MIT's business school, but the real-world implications of these decisions are troubling. Evenworse, legislators have respondedwith proposals that seek to prevent companies from escaping the U.S. tax system.

For the story, go here.

On June 11, 2014, the European Commission opened a formal State Aid investigation procedure into the transfer pricing arrangements and corporate taxation of certain companies in Ireland, The Netherlands and Luxembourg.
In its press release, the Commission announced that itwill examinewhether three transfer pricing arrangements validated in tax rulings involve State Aid to the benefit of the beneficiary companies.

For the report, go here.

The new European Union probe into the tax deals of some multinational firmswith a handful of European countries shines a spotlight on a narrow element of international tax law: transfer pricing.

Transfer pricing is, at its root, a relatively simple method for determining inwhich country a multinational company makes its profit. To help them do that, companies set prices atwhich they transfer goods and services between entities they own.

For the story, go here.

Scratching their heads on how to encourage high-tech, export-led growth, the brightest minds in the U.K. government came upwith the "patent box" in 2010.

Under the rules, U.K. companies can apply a lower rate of corporation tax against profits earned from domestically developed and registered patentsÔøΩa tax rate of 10% versus the headline corporate rate of 21%. The new rules came into effect in April 2013.

Now, those tax breaks could be under threat. The European Union's antitrust chief, Joaquin Almunia, is looking into their use in the context of a bloc-wide tax probe, and has requested information from nine countries relating to the use of patent boxes.

For the story, go here.

Brussels ratcheted up the global crackdown on tax avoidance by multinational companies onwednesday by launching an investigation intowhether three EU stateswere offering improper tax breaks to companies including Apple and Starbucks.

The European Commission said that an in-depth probewould consider the tax affairs of three companies: Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade, the financial arm of the Fiat group, in Luxembourg.

For the story, go here.

European Union regulators are preparing to open a formal investigation into corporate-tax regimes in Ireland, Luxembourg and the Netherlands onwednesday, according to a person familiarwith the matter, amid concerns that multinational companies such as Apple Inc. enjoy sweeter tax deals than are permitted under EU law.
The probe by the European Commission, the EU's executive arm, follows criticism in Europe of low tax rates paid by global corporations such as Amazon.com Inc., Google Inc. and Starbucks Corp. at a time ofwidespread austerity on the continent.
For the story, go here.

After it completes a planned mergerwith Alliance Boots, a Swiss pharmacy chain,walgreens can take advantage of a tax loophole to reincorporate itself offshore. This may let the company avoid $4 billion in U.S. taxes over the next five years, leaving the rest of us to pick up the tab.
Walgreenswould still be controlled from the U.S. Itwould still benefit from our roads, bridges and infrastructure, and itwouldwill still have more than $70 billion in annual U.S. sales.

For the report, go here.

A temporary, 85 percent deduction for repatriated foreign earningswould cost $95.8 billion over 10 years, the Joint Committee on Taxation reported June 9.
Senate Finance Committee ranking minority member Orrin G. Hatch, R-Utah, commissioned the revenue estimate and released itwith a statement arguing that tax holidays for foreign earnings should be confined to tax reform.
For the statement and the JCT document, go here.

A temporary tax holiday for U.S. companies to repatriate offshore profitswould cost the government $95.8 billion in revenue over the next decade, according to the Joint Committee on Taxation.
Lawmakers occasionally address a repatriation tax break as away to pay for spending such as replenishing the Highway Trust Fund. The JCT estimates show the difficulty of making such an argument.
According to the revenue estimates, dated June 6, repeating the holiday enacted in 2004would generate $19.6 billion over the first two years and then start costing the government money.
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Pfizer Inc. has had a rough timewith its tax planning lately. First itwas publicly rebuffed multiple times by AstraZeneca PLC, and then itwas singled out by Congress and threatenedwith retroactive legislation and regulations to shut it out of an inversion party that many of its competitors have already taken advantage of.
Lawmakers do not need toworry about losing Pfizer to the United Kingdom in the short run because AstraZeneca has been clear that it believes Pfizer is undervaluing it. Itwould be safe to call a moratorium on memorializing bad ideas in actual bills. Unfortunately, Sen. Carl Levin, D-Mich., and 13 of his fellow senators have alreadywritten the bill. The proposal may not be going anywhere, but it raises some important underlying issues.
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In the bestseller Flash Boys, author Michael Lewis describes how entrepreneur Dan Spivey laid an 827-mile fiber-optic cable in a nearly straight line between New York and Chicago so hiswall Street clients could trade on information received a few microseconds faster than the rest of the market.with access to the limited number of lines through that cable, arbitrageurs could make billions. Andwithout access, they could be put out of business by their competitorswho got in early.
Like Spivey's cable, the opportunity to move a company's tax residence out of the United States provides a competitive advantage to firmswilling to move first. Subsequently, even businesses that initially objected to the practicewill feel compelled to follow the leader.
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Whatwould U.S. multinationals bewilling to pay to keep the euro together?
That is the bottom-line question raised by the OECD base erosion and profit-shifting initiative.whenwe say the BEPS initiative is a European project, tailored to European priorities,we are talking about the health of European national budgets.
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Debt between related parties may be a concern for base erosion, but it shouldn't be dealtwith by the Organization for Economic Cooperation and Development's group examining the transfer pricing of intangibles because ultimately it isn't a transfer pricing issue, an Internal Revenue Service official said.
Christopher Bello, chief of Branch 6 in the IRS Office of Associate Chief Counsel (International), said the nature of an intercompany loan itself isn't, in the U.S.'s view, an arm's-length issue beyond the amount of interest charged.
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The Tax Foundation has taken aim at a report claiming that the majority of Fortune 500 companies hold $1.95 trillion in offshore tax havens, saying the report's small sample size and data "paints a misleading picture of the tax burden corporations pay overseas."
Citizens for Tax Justice,who co-wrote the June 5 reportwith the U.S. Public Interest Research Group (USPIRG), fired back on June 6 by calling the Tax Foundation's claims "misleading" and said they failed towithstand scrutiny.
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The European Union may open a formal probe into tax breaks that Ireland and the Netherlands use to attract international companies theweek of June 9, according to people familiarwith the case.
The European Commission is scheduled to discuss the issue at a meeting June 11, said two people,who asked not to be identified because the matter is private. The probe into the Dutch tax breakswould include special treatment given to Starbucks Corp., theworld's biggest coffee-shop operator, said the people. Luxembourg may also face scrutiny, one of the people said.
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Did you know that United States companies earned $129 billion in 2010 in three small groups of islands?
That iswhat they told the Internal Revenue Service they earned in Bermuda, the Cayman Islands and the British Virgin Islands.
Those islands together had a population of 147,400 that year, about equal to that of Joliet, Ill.
Assuming you believe those figures, the productivity ofworkers in those countries is amazing. On average, United States companies had profits of $873,611 per person living in those islands.
For the story, go here.

The proposals under Action 13 of the international base erosion and profit shifting plan for a master file, local file and country-by-country reporting template are helpful, but insufficient, in seeking to tackle profit shifting, a Chinese State Administration of Taxation official said.
Liao Tizhong, director general of the SAT's International Taxation Department, said June 4 country-by-country reporting "will help, but not enough. That is my personal opinion."
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Claiming it is a common element in most of the tax plans being offered by both political parties, the chief tax counsel for the Senate Finance Committee's Democratic staff said a minimum tax for the foreign earnings of U.S. companies is likely to be part of a compromise on comprehensive tax overhaul.
"I do think that, clearly, at least among American policy makers, there seems to be a direction going toward some sort of minimum tax regime,"the Finance Committee's Todd Metcalf said during a panel discussion at a Bloomberg BNA/Baker & McKenzie transfer pricing conference.
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Corporate taxpayers that have ended up in the cross hairs of an international effort to fight base erosion and profit shifting (BEPS) got there by ignoring a simple realityÔøΩthat to the average person on the street, many complex transfer pricing deals make little sense, an Internal Revenue Service official said.
"Most common folks just can't understand how a multinational corporation doing business entirely or mainly in jurisdictionswith relatively high tax rates can end upwith a low global effective rate," Michael Danilack, deputy commissioner (international) for the IRS Large Business and International Division, said June 5.
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If the Organization for Economic Cooperation and Development's base erosion and profit shifting project ultimately produces new standards that the U.S. thinks depart significantly from how the arm's-length standard shouldwork, it is unlikely to implement them, an official from the Internal Revenue Service said.
"If the outcome of the BEPS project is that Chapter 6 says things that it should not, then Iwould assume the problem is, there's going to be a lot of countries doingwhat Chapter 6 now says they can do," said Christopher Bello, chief of Branch 6 in the IRS Office of Associate Chief Counsel (International). "I, for one,would not assume the U.S.would go down that path."
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As the OECD completes itswork on transfer pricing documentation under its base erosion and profit-shifting project, practitioners June 5 urged businesses to beginworking to ensure that theywill be able to "tell the story" of their business in the master file.
Speaking at a transfer pricing conference inwashington sponsored by Bloomberg BNA and Baker & McKenzie, panelists differed onwhether the increased documentation requirements proposed by the OECDwould be useful for legitimate purposes, but they stressed the importance of being ready for the new requirements.
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A recently published and closely followed survey of global business leaders conducted by A. T. Kearney, a management-consulting firm, shows that the global economy may be at a critical turning point.
The report titled "Ready for Takeoff," presents evidence that business leaders from around theworld are increasingly bullish on the global economic outlook. In this report, the U.S. not only ranks as the most attractive destination for foreign direct investment for the second year in a row, but the share of surveyed executiveswith a positive view of the U.S.was the highest ever recorded for any country in the survey's history.
For the report, go here.

The European Union may open a formal probe as soon as nextweek into tax breaks that Ireland and the Netherlands use to attract international companies, according to people familiarwith the case.

The European Commission is scheduled to discuss the issue at a meeting June 11, said two people,who asked not to be identified because the matter is private. The probe into the Dutch tax breakswould include special treatment given to Starbucks Corp., theworld's biggest coffee-shop operator, said the people.

For the story, go here.

Many large U.S.-based multinational corporations avoid paying U.S. taxes by using accounting tricks to make profits made in America appear to be generated in offshore tax havensÔøΩcountrieswith minimal or no taxes. By booking profits to subsidiaries registered in tax havens, multinational corporations are able to avoid an estimated $90 billion in federal income taxes each year. These subsidiaries are often shell companieswith few, if any employees, andwhich engage in little to no real business activity.
This study examines the use of tax havens by Fortune 500 companies in 2013. It reveals that tax haven use is ubiquitous among America's largest companies, but a narrow set of companies benefit disproportionately.
For the study, go here.

Some jurisdictions' interpretations ofwhen financial transactions implicate the arm's-length principle may be inappropriate and excessive, practitioners and officials said June 4 at a transfer pricing conference inwashington sponsored by Bloomberg BNA and Baker & McKenzie.
The view of the United States is that in a financial transaction involving controlled parties, only an arm's-length price needs to be determined, said Chris Bello, branch 6 chief, IRS Office of Associate Chief Counsel (International), and a member of OECDworking Party 6. Other countries believe that a determination must be made ofwhether the transactionwould have been entered into by unrelated parties, Bello said.
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Businesses' main concern regarding an OECD country-by-country (CbC) report is not confidentiality as much as it is how its contentswill be used and how disputeswill be resolved to avoid multiple layers of taxation, according to Karen Halby, senior vice president and head of global tax at Sony Corp.
Speaking June 3 at the OECD International Tax Conference inwashington, Halby said that initially therewere concerns over confidentiality, but because of the limited scope of the CbC report, these have diminished, particularly for companieswith multiple lines of business. The OECD proposed requiring CbC reporting by companies as part of its base erosion and profit-shifting project.
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The OECD'swork on the transfer pricing aspects of intangibles under the base erosion and profit-shifting projectwill be based on earlierwork on business restructuring included as Chapter IX of the OECD guidelines, according to Michael McDonald, financial economist (business and international taxation), Treasury Office of Tax Analysis.
Speaking June 4 at a transfer pricing conference inwashington sponsored by Bloomberg BNA and Baker & McKenzie, McDonald said that thework on intangibles,whichwill include revisions to Chapter VI of the OECD guidelines, is not being treated as a "do over" for the Chapter IX revisions to reallocate the returns. McDonald said he sees thework on intangibles as "standing on the shoulders" of the business restructuring guidance.
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Arrangements involving the transfer of ownership of intangibles to countries like Ireland, a low-tax jurisdictionwhere some labor functions take place, are flying under the radar of the OECD base erosion and profit-shifting project, Robert Stack, Treasury deputy assistant secretary (international tax affairs), said June 4.
Speaking at a transfer pricing conference inwashington sponsored by Bloomberg BNA and Baker & McKenzie, Stack said the OECD's intangibles proposals are not aimed at countries that simply decide to lower their tax rate, except maybe in caseswhen labor functions are not accurately valued. For that reason, Stack said, he finds the debate "a little bit intellectually unsatisfying."
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As an international project to combat base erosion and profit shifting drives increased demand for double-tax relief, the need for safe harbor agreementswill be even more urgent, a senior Internal Revenue Service official told Bloomberg BNA.
Staffing constraints, however, have forced the agency to pull back from its efforts to develop safe harbor agreements governing routine distribution functions, Samuel Maruca, director of transfer pricing for the IRS, said June 4.
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International Tax News is designed to help multinational organisations keep upwith the constant flow of international tax developmentsworldwide. Among the topics featured in this month's edition are:
Australia's reform of the thin capitalisation regime
Developments regarding the Canadian CFC anti-avoidance provision
Changes to thewithholding rate on financial income in Italy
China's clarification of the beneficial ownership assessment under entrusted investment arrangements

For this month's issue, go here.

The United States has traveled a unique tax policy path, avoiding value added taxes (VATs),which have now been adopted by every OECD country and 160 countriesworldwide. Moreover, many U.S. consumption tax advocates have insisted on direct personalized taxes that are unlike taxes used anywhere in theworld.

This article details a tax reform plan that uses revenues from a VAT to substantially reduce and reform our nation's tax system.

For the article, go here.

Bringing the right degree of flexibility to the multilateral instrument action item of the base erosion and profit-shifting project is key to the success of its implementation, Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said June 3.
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Our second quarter edition of 2014 covers:

• recent legislative proposals that can impact US inbound companies
• our 2014 survey of insourcing CFOs inwhich they share their insights and views, such as their confidence in the US economy andwhatwork is still needed
• Organization for International Investment (OFII) suggestions to change the OECD discussion draft on BEPS Action 6
• OFII's comments on the OECD's efforts to neutralize the effects of hybrid mismatch arrangements.

For the report, go here.

Members of an Organization for Economic Cooperation and Development committee taskedwith creating rules to combat hybrid mismatch arrangements indicated that the committeewill likely increase the threshold for companies to be considered related parties subject to the rules.
A discussion draft released March 19 suggests a threshold of 10 percent.
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Japan's ruling party on Tuesday cleared theway for a corporate tax cut to take effect next year, pushing forward a plan that Prime Minister Shinzo Abe hopeswill revive investment and keep production at home.
For the story, go here.

The U.S. government should oppose the use of the OECD's project on base erosion and profit shifting by some foreign governments to impose extraterritorial taxes on U.S. business income,which could increase barriers to cross-border trade and investment, Business Roundtable urged in a May 30 letter to Treasury Secretary Jacob Lew.

For the letter, go here.

Senate Finance Committee Chair Ronwyden, D-Ore., said June 3 hewould await OECD members' decisions on the organization's base erosion and profit-shifting project thisweek, but Sen. Carl Levin, D-Mich., told Tax Analysts he supported it.
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Negotiatorsworking on the OECD's base erosion and profit-shifting project should consider automating the exchange of country-by-country reporting data to avoid overburdening tax administratorswith the task of evaluating thousands of individual requests per year, IRS Commissioner John Koskinen said June 3.
In his luncheon address at the OECD International Tax Conference inwashington, Koskinen urged OECD tax negotiators to be mindful of the effects of their decisions not only on taxpayers, but also on tax administrations. The OECD's choices could have a significant impact on IRS administration,which is operatingwith 10,000 fewer employees and $850 million less funding than in fiscal 2010, the commissioner said.
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US multinationals face a threat of "unprecedented taxes on trade and investment" from efforts to close gaps in the international tax rules, according to the Business Roundtable, a US business lobby group.

The US Treasury is also at risk of losing tax revenues if it fails to stand firm against some of the proposals under discussion, according to the group representing chief executives of leading US multinationals.

The letter to Jack Lew, Treasury secretary, reveals the strength of the opposition felt by some US businesses to aspects of the planned crackdown on corporate tax avoidance by some governments.

For the story, go here.

The top Republican taxwriters in Congress and the biggest U.S.-based companies arewarning that global negotiations to limit businesses from shifting profits to low-tax countries could harm Americans.

Representative Dave Camp and Senator Orrin Hatch said in a joint statement that other governments may be using the talks at the Organization for Economic Cooperation and Development as away to "raid the American Treasury."

For the story, go here.

IRS Commissioner John A. Koskinen discussed international tax issues in a June 3 speech to the U.S. Council for International Business-OECD International Tax Conference inwashington.

For the text of the Commissioner's speech, go here.

The Organization for Economic Cooperation and Development'sworking Party No. 6ÔøΩwhich has been taskedwith examining transfer pricing issues related to intangiblesÔøΩwill release a discussion draft relating to recharacterization of arrangements allocating risk in late December or early January, an OECD official said.
Marlies de Ruiter, head of the OECD's transfer pricing, tax treaties and financial transactions division, said June 2 that the draft alsowould look at any possible changes to the commensurate-with-income standard, aswell as possible "special measures" that go beyond the arm's-length principle to combat perceived base erosion and profit shifting.
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Five European Union member stateswill have to adapt their corporate tax laws to complywith the Base Erosion and Profit Shifting project coordinated by the Organization for Economic Cooperation and Development, European Taxation Commissioner Algirdas Semeta said.
At a June 2 news conference following the commission's release of its tax policy recommendations, Semeta pointed to Cyprus, Ireland, Luxembourg, Malta and the Netherlands. "All fivewill have to make changes in order to come to termswith the BEPS project at the OECD," he said. "In the case of Ireland, some changes have been made and otherwork is underway but further changes are needed."
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Todayways and Means Committee Chairman Dave Camp (R-MI) and Senate Finance Ranking Member Orrin Hatch (R-UT) released the following statement on the 2014 Organisation for Economic Co-operation and Development (OECD) conference on Base Erosion and Profit Shifting (BEPS) taking place thisweek inwashington, DC.

For the statement, go here.

Although the OECD has made progress on its base erosion and profit-shifting project, more must be done and more stakeholder input needs to be obtained, according to Mikewilliams, director of business international tax at HM Treasury.
The OECD's BEPS action planwas released in July 2013, and at the end of June three reports and four draft recommendationswill be presented to the Committee on Fiscal Affairs, said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration,who spoke alongsidewilliams June 2 at the OECD International Tax Conference inwashington.
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Action 6 in the OECD base erosion and profit-shifting initiative is tax treaty abuse. The U.S. delegation insisted that the problem be addressedwith U.S.-style limitation on benefits clauses. Other countries find LOB clauses too complicated.
So the recent BEPS treaty abuse draft opted for a simpler LOB clausewith a backstop clause allowing tax administrators to disallow treaty benefits for a transactionwith a "main purpose" of taking advantage of the treaty.
Government officials and tax advisers on June 2 debated thewisdom of putting an LOB provision into the OECD model treaty as part of the OECD's BEPS action item on preventing treaty abuse.
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As U.S. multinationals' overseas cash pools grow, companies are increasingly being asked to substantiate claims of indefinite reinvestment, an assertion that allows them to avoid booking substantial deferred tax liabilities.

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In the OECD base erosion and profit-shifting project negotiations, the United Stateswanted pricing of transfers of intangibles kept pure and separate from "special measures" to prevent hiving of income from intangibles to tax havens. The U.S. negotiators have largely succeeded in that aim. The BEPS drafterswill deliver an intangibles pricing draft to the G-20 in the fall, and the special measureswill be pushed off to 2015.
The OECD released a revised intangibles discussion draft on July 30, 2013, 11 days after the BEPS action planwas released. The intangibles projectwill feed into thework being done as part of action 8 on ensuring that transfer pricing outcomes are in linewith value creation and intangibles. That is, the established intangibles project has been rolled into BEPS, but the special measures for transfers to tax havenswill be kept separate from the first round of BEPS.
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The top two Republican taxwriters in Congress on June 2 called the OECD's project on base erosion and profit shifting "away for other countries to simply increase taxes on American taxpayers" and said the project's schedule is too rushed to let the United States properly review its recommendations.
Houseways and Means Committee Chair Dave Camp, R-Mich., and Senate Finance Committee ranking minority member Orrin G. Hatch, R-Utah, made the comments in a joint release issued to coincidewith the OECD's international tax conference inwashington. The pair urged the Treasury Department "to aggressively represent American employers and theirworkers in the BEPS negotiations,while responsibly consultingwith Congress as its discussions in the BEPS context proceed."
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