Int'l Tax News

Achim Pross, head of the International Cooperation and Tax Administration division at the OECD, and architect of the new automatic exchange of information standard and the multilateral competent authority agreement (MCAA) discusses the progress made in 2014 and looks at opportunities and challenges ahead.

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by Ciaran McEvoy (Investors.com)

The Treasury Department's crackdown on tax inversions last year has slowed but not stopped the movement of U.S. headquarters abroad as American businesses try to reduce tax bills and foreign firms seek to grow.

Indeed,with U.S. companies now virtually barred from relocating overseas in order to trim taxes, the Obama administration's new rules may have turned corporate America into awell-stocked pond of bait for foreign sharks.

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This article develops a framework for the study of the unique effects of corporate inversions (meaning, a change in corporate-residence for tax purposes) in the jurisdictions fromwhich corporations invert ("home jurisdictions"). Currently, empirical literature on corporate inversions overstates its policy implications. It is frequently argued that in response to an uncompetitive tax environment, corporations may relocate their headquarters for tax purposes,which, in turn, may result in the loss of positive economic attributes in the home jurisdiction (such as capital expenditures, R&D activity, and high-quality jobs). The association of tax-residence relocationwith the dislocation of meaningful economic attributes, however, is not empirically supported and is theoretically tenuous. The article uses case studies to fill this gap.

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by Mike Godfrey (Tax News)

A repatriation holidaywould have a minimal economic impact andwould be thewrongway to pay for the Highway Trust Fund or any other project, according to a new report by the Heritage Foundation.

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The Treasury Department needs a new position - deputy undersecretary forwhac-a-Mole. Maybe thatwould allow the agency to figure out someway to stop American companies from inverting. That's the process underwhich companies get to stay in the United States and benefit from everything our society has to offer, but technically become subsidiaries of foreign companies,which lets them pay a lot less U.S. income tax that they otherwisewould.

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A strangely popular proposalwould give companies a temporary tax holiday, letting corporations bring back their money on paper, or "repatriate" it at an extremely low tax rate, thereby encouraging more corporate tax dodging in the future. The most ridiculous part? Some Members of Congresswant to use this tax break that costs money to "pay for" badly needed infrastructure investments. How does that even make sense?

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As many as two dozen jurisdictions that have failed to fully implement the international standard for tax information exchange on request could feel increased pressure to do so from theworld's biggest economies in 2015, the head of the OECD's tax transparency body said.

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A goal of tax reform is to make the U.S. tax code more neutral and to encourage economic growth. One step toward this goal is the elimination of the double tax on corporate income. Short of a complete overhaul of the tax code, integration of the corporate and individual income tax code is an option to eliminate double taxation.

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In a February 20 letter to US Senate Majority Leader Mitch McConnell (R – Kentucky), the National Foreign Trade Council and other leading business organizations urged action on pending bilateral double taxation agreements (DTAs) and protocols.

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Seychelles has become the 85th jurisdiction to sign a multilateral tax convention intended to ramp up tax transparency around theworld, the Organization for Economic Cooperation and Development accounced.

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Acknowledging disappointment from the business community over the OECD's base erosion and profit-shifting projectwork pertaining to dispute resolution in its action 14 draft, specifically mandatory binding arbitration, a Treasury official urged patience as the United States convinces more countries of the benefits of its style of arbitration.
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The Organization for Economic Cooperation and Developmentwill issue another version of its discussion draft on the transfer pricing aspects of intangibles "around April," an official told the annual Pacific Rim Tax Institute.
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The definition of fundamental economic attributes in the OECD consultation draft for action items 8-10 is a "surprising area ofweakness," a practitioner said February 19.
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The government in Indiawill announce its Budget (including tax and policy proposals) on February 28, 2015. As this is slated to be the first serious Budget for the new government after being elected 8 months ago, the government likelywill push through significant policy measures to revive economic growth and boost foreign investment. There is also high expectation from foreign investors and multinational companies for the government to address several long standing and pressing tax issues.

Join specialists from PwC's International Tax Services team to understand how the Indian Budget 2015 might impact foreign investors and multinational companies.

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Comments the OECD has received on its base erosion and profit-shifting transfer pricing discussion draft reveal that the draft seems to have struck four different "nerves," Andrew Hickman, head of the OECD's transfer pricing unit, said February 19.
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Uncoordinated implementation of OECD's base erosion and profit-shifting project raises the possibility of increased disputes, a senior IRS official said February 19.
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In a February 18 report, Senate Budget Committee ranking minority member Bernard Sanders, I-Vt., listed information on Business Roundtable members that use offshore tax havens, including location of headquarters, bailout money received, subsidiaries in tax havens, profits kept offshore, and potential taxes on repatriated profits.
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As outlined in the Tax Insight dated December 2, 2014, Italy has introduced a Patent Box regime based on the "nexus approach" set out by the Organisation for Economic Co-operation and Development (OECD). Only a month after the Italian Parliament approved the 2015 Finance Act (Law no 190 of December 23, 2014),which enacted the Italian Patent Box regime, the Italian Government has extended its scope through a Law Decree "Investment Compact",which is due to be converted into lawwithin 60 days of its publication in the Official Gazette on January 24, 2015.

For the PwC Insight, go here.

Old legislation aimed at offshore tax havens is on itsway back.
Senate Budget Committee ranking member Bernard Sanders (I-Vt.) plans to reintroduce a bill he has backed before to better ensure U.S. taxes get paid on corporate profits allegedly shifted to offshore tax haven subsidiaries. If enacted, it could help capture at least an estimated $280 billion in forgone tax revenue, according to a report Sanders released Feb. 18.
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The Obama administration has proposed a balanced solution that fairly addresses the problems of overseas cash trapped abroad, good jobs and income leaving the United States and an unreasonably high current corporate federal income tax rate. The recommendations also take into consideration the goal that U.S. companies not to be put in an untenable competitive tax disadvantagewith foreign rivalswhich are generally not taxed on income from sources outside their place of residence.
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The Senate Finance Committee's top Democrat called corporate tax inversions a "virus" on Thursday, saying they threaten to spread unlesswashington moves quickly to overhaul the U.S. tax code.
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Work on the G20 / OECD base erosion and profit shifting (BEPS) project has entered a new phasewith the presentation of implementation guidance to a meeting of G20 finance ministers thisweek.
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The OECD recognizes the shortcomings in its action 14 discussion draft on dispute resolution mechanisms andwill issue a "strengthened" follow-up draftwith more hard-hitting proposals to address the impediments to resolving mutual agreement procedure cases, said Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration.
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Uncertainty on policy and the chances of intense media focusÔøΩespecially over issues of international base erosion and profit shiftingÔøΩhave elevated tax issues from a compartmentalized concern to a key issue in corporate decision-making, according to two chief financial officers.
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Taking more and better cases to court is the best route for the Internal Revenue Service to advocate for its position on the transfer of high-value intangibles in cost sharing, the agency's former chief economist, R.william Morgan, told Bloomberg BNA.
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A discussion draft on risk, recharacterization, and special measures issued by the Organization for Economic Cooperation and Development could be made more clearwith the addition of direct language on the role of contracts, a U.S. Treasury official said.
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Do multinationals pay their fair share of taxes? The European Commission is not convinced; it has launched investigations targeting member states that in its view give multinationals preferential tax treatment. On 12 February, Parliament decided to conduct its own inquiry by setting up a special committee on tax rulings.

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The European Commission today launched itswork on its ambitious agenda to combat tax avoidance and aggressive tax planning. The College of Commissioners held a first orientation debate on possible key actions to ensure a fairer and more transparent approach to taxation in the EU.

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Industry groups have criticized a new law that caps access to a tax offset scheme designed to encourage corporate investment in research and development in Australia.

The Tax Laws Amendment (Research and Development) Bill, first introduced in 2013with the aim of scaling back the R&D incentive,was passed by parliament Feb. 12,when the House of Representatives, the lower chamber, accepted major amendments made by the Senate two days earlier.

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A U.S. parent corporation must increase its earnings and profits by the amount of its foreign income inclusionwith respect to a subsidiary regardless of the year of inclusion.

In an Internal Revenue Service Office of Chief Counsel advice memorandum (AM 2015-001) released Feb. 13, the IRS said that the appropriate time to increase a U.S. shareholders's earnings and profitswith respect to a foreign subsidiary is at the time of the foreign income inclusion under tax code Section 951, not at the time of a previously taxed income distribution from the subsidiary to the parent.

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Repatriation policy changes should be left as part of broad tax reform thatwould include a shift to a territorial system because otherwise such changeswould have questionable revenue effects and could make tax reform more difficult, Curtis Dubay of the Heritage Foundation said in a February 17 report.

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At a public consultation on the OECD's discussion draft on interest deductions, participants lamented the impracticality of a groupwide allocation approach and debated how a fixed ratio test could provide the flexibility needed to address base erosion and profit shiftingwithout hurting legitimate financing arrangements.

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While admitting there is no specific time frame for the release of the much-anticipated anti-inversion regulations, a Treasury official said February 17 that the regs could be released this year.

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Rather than adopt a fixed ratio or group-wide test to determine the deductibility of interest on related-party debt, the Organization for Economic Cooperation and Development should combine both tests, business delegates said at a public consultation in Paris.

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The Treasury Department dropped a heightened "substantial business activities" test from a legislative proposal to counteract inversions after receiving feedback from taxpayers that the rules could capture legitimate mergers, according to a Treasury official.

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The Treasury Department possibly could issue rules implementing its anti-inversions Notice 2014-52 by the end of 2015, a key agency official said.

"This is a priority of ours andwewill definitely be issuing regulations," Brenda Zent, a taxation specialist in Treasury's Office of International Tax Counsel, said at a Feb. 17 forum.

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The U.K.will continue strong support for the Organization for Economic Cooperation and Development's project on base erosion and profit shifting even as itworks to make the country attractive for business and investment, an official said.

"The U.K believes in low taxes, but taxes that are paid," Benedictwagner-Rundell, first secretary (economic) at the British Embassy inwashington, said Feb. 12. During the past five years, he said, alongwith a tax overhaul to help the business environment, there has been "a real effort to clamp down more on tax avoidance."

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When economist Jason Furman looks at the U.S. economy, he sees a bunch of distortionsÔøΩdecisions made for tax reasons, rather than business ones.

"I like to refer to our system right now not asworldwide, but as a stupid territorial tax system," Furman, chair of thewhite House Council of Economic Advisers, said at a Feb. 12 event hosted by the Tax Council Policy Institute.

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Deferral's day has passed, said Senate Finance Committee ranking member Ronwyden (D-Ore.).

The system needs change, he said in a speech to the Tax Council Policy Institute on Feb. 12.wyden said hewants to retain the credits multinational companies get for the taxes they pay overseas, but made no secret of his distaste for the same companies' ability to keep profits abroad to escape U.S. taxes.

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Treasury's 'Green Book,' released February 2, 2015, outlines the Administration's FY16 Budget proposals. It explains a new proposal for a 19% minimum tax on foreign income and a one-time 14% transition tax on previously untaxed foreign income. It also significantly changes some international tax proposals made in previous Budgets. The Budget reaffirms President Obama's support for 'business tax reform' thatwould lower the top US corporate rate to 28% (25% for domestic manufacturing income).

For the PwC Insight, go here.

On February 2, 2015, the Obama Administration released its fiscal year 2016 Budget (the Budget) and companion Green Book. This Tax Insight summarizes the US inbound-specific proposals in the Budget. Some of the more noteworthy proposals include restrictions on US interest deductibility generally, restrictions on deductibility of interest and royalties in certain hybrid arrangements, aswell as a broadened controlled foreign corporation definition.

For the PwC Insight, go here.

President Obama's proposed budget envisions a nearly half-trillion-dollar transportation construction spree thatwould seek to upgrade the nation's roads, bridges and ports by imposing new taxes on overseas earnings by American companies.

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American companies are happy to see President Barack Obama get the ball rolling on corporate-tax reform. They just don't likewhere it's going.

The president has proposed letting companies bring back the approximately $2 trillion of profits now held at overseas subsidiaries at a tax rate of 14%. His proposalwould then tax their ongoing foreign earnings at a minimum of 19% -- a discount to the 35% standard corporate rate, but still higher than zero.

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The U.S. supports a framework that allows multiple countries to examine one taxpayer simultaneously, but challenges remain, a top IRS official said.

"I think joint and multilateral audits make good sense," Large Business & International Division Deputy Commissioner Douglas O'Donnell told Bloomberg BNA Feb. 13 following a discussion of "cooperative compliance" at a global tax symposium hosted by the Tax Council Policy Institute.

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The Organization for Economic Cooperation and Development is more favorably disposed toward mandatory binding arbitration than a recent discussion draft on dispute resolution indicates, an OECD official said.

"This is one of the issues discussed extensively in the OECD," said Grace Perez-Navarro, deputy directorwith the Center for Tax Policy and Administration, speaking Feb. 13 on a panel at the Tax Council Policy Institute's annual symposium.

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The country-by-country reporting template now being developed by the Organization for Economic Cooperation and Development could be a vehicle for serious misjudgments, an Internal Revenue Service official said Feb. 13.

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Companies should anticipate that some countrieswill leak the country-by-country reporting template developed by the Organization for Economic Cooperation and Development to the press, three U.S. corporate tax officials said.

Ronald Dickel, vice president of global tax and tradewith Intel, said Feb. 13 that once the country-by-country reporting template is adopted, "we are just assuming that it is going to get leaked."

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The Organization for Economic Cooperation and Developmentwill continue to pursue an "aggressive timetable" for completingwork on the action plan for its base erosion and profit shifting project as more countries begin to take unilateral action, an OECD official said.

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The IRS and Treasury Department may lack authority under existing information reporting and collection mechanisms to implement country-by-country reporting, according to Michael Danilack, former deputy commissioner (international), IRS Large Business and International Division, nowwith PricewaterhouseCoopers LLP.

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Country-by-country reporting is "going to be a nightmare, a real game-changer" for corporate tax departments, said Ronald D. Dickel, vice president of finance and director of global tax and trade at Intel Corp., at a tax conference inwashington February 13.

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