Int'l Tax News

Many economists are downgrading their expectations for U.S. growth. So naturally the ObamaTreasury thisweek rolled out a plan to discourage investment in America.
The regulations are ostensibly to prevent so-called corporate inversions, inwhich U.S. companies acquire foreign firms and then relocate their legal headquarters offshore for tax purposes. But the practical impactwill be to make it harder to make money overseas and then bring it back here.
For the editorial, go here.

The Obama administration's move to tighten rules on corporate inversions should discourage new deals, at least for awhile, by making them harder and less profitable, tax experts said. On Tuesday it alreadywas roiling some pending transactions.
Thisweek, Treasury officials used five sections of the U.S. tax code to launch an assault on inversions. They made it tougher for companies to access their overseas cashwithout having it taxed at U.S. rates, and they tightened standards for a merger to qualify as an inversion.
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New rules from the Treasury Department are likely to slow the offensive practice that allows American companies to avoid taxes by mergingwith foreign rivals. Known as corporate inversions, these are complex, modern variations on the practices of yesteryear,when companies dodged their taxes by moving their addresses to post office boxes in the Caribbean.
For the editorial, go here.

Inversions, the hottest deal structure onwall Street, appear to be safe for now. But they just became less profitable and more difficult to pull off.
Late Monday, the Treasury Department announced a series of measures intended to crack down on the deals, inwhich United States companies reincorporate abroad to lower their taxes.
But the consensus among corporate adviserswas thatwhile the new rules might make some deals less lucrative, theywould not halt the rush of companies seeking tax relief abroad.
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New Treasury guidance aimed at making inversions more difficult to accomplish aswell as substantially reducing the tax benefit from inverting includes several significant changes to existing rules, but only punishes yet-to-be completed inversions, a practitioner said September 23.
"The transactions that they are targeting are a significant part of post-inversion planning," Layla J. Aksakal of Miller and Chevalier said.
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Despite continued red flags raised by the financial services and banking industry, ItalyÔøΩin its rotating European Union presidency roleÔøΩsaid it expects an agreement by the end of 2014 on a "first step" financial transactions tax thatwill be imposed in 11 EU member states.
Speaking Sept. 23 before a European Banking Federation conference on taxation, Italian official Susanna Masi,who serves in the Cabinet of Italian Finance Minister Pier Carlo Padoan andwho is coordinating thework, said that negotiations are at a "very sensitive" stage as officials try to resolve issues related to the tax's scope. In particular, these issues include handling shares and derivatives, aswell aswhere to assess the levy and how to dealwith intermediary and collection concerns.
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With the participants in the OECD's base erosion and profit-shifting project having agreed on limiting returns to cash boxes, the focus in 2015will be on determiningwhere the displaced returns should be allocated, Robert Stack, Treasury deputy assistant secretary (international tax affairs), said September 23.
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Developing countries need specific guidance and tools to help them benefit from international efforts to fight tax evasion by big companies andwealthy individuals, according to a pair of Organization for Economic Cooperation and Development reports.
The Paris-based organization on Sept. 22 released a road map for helping developing countries participate in the OECD global standard for automatic exchange of information (AEOI) and also released the second half of its report on how base erosion and profit shifting affects developing economies.
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Calvin H. Johnson proposes increasing the repatriation tax in the future to induce corporations to repatriate their foreign earnings now.

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Treasury's proposed guidance against corporate tax inversions is an important first step toward making it harder for corporations to claim foreign status to avoid U.S. taxes, but only congressional action can put a stop to the practice, Citizens for Tax Justice Director Robert McIntyre said in a September 23 statement.

For the statement, go here.

The Treasury Department (Treasury) and Internal Revenue Service (IRS) issued Notice 2014-52 (the Notice) on September 22, 2014, addressing certain cross-border business combination transactions, termed 'inversions' in the Notice. Treasury and IRS view such transactions as motivated in substantial part by the ability to undertake certain post-transaction steps designed to
reduce US taxation that the IRS and Treasury believe represent tax avoidance transactions. The Notice announces the intention to issue regulations under Sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874.

For the Insight, go here.

Former President Clinton declined to call tax inversions "unpatriotic" on Tuesday, shying away from a term that President Obama has used repeatedly against companies that take advantage of the maneuver.

Speaking at the Clinton Global Initiative, hewas asked toweigh in on the practice bywhich a company moves its address to another country to avoid U.S. tax rates. The Democrats have been attacking inversions ahead of the midterm elections.

"Are corporate inversions unpatriotic?" CNBC's Becky Quick asked.

"Well,whether it is or not, companies ÔøΩ particularly those that are answering to shareholders ÔøΩ have a short-term perspective. A lot of these companies feel duty-bound to pay the lowest taxes they can pay," Clinton responded.

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Corporate America is scrambling to figure out how the Obama administration's new rules for offshore tax deals could affect their business plans ÔøΩ and their bottom lines.

Business leaders have to navigate a maze of highly technical new rules on the offshore tax deals known as inversions, on obscure maneuvers known as "hopscotch" loans and the "de-controlling" strategy.

With the Treasury Departmentwarning that it's laying the groundwork for even more administrative actions, some businesses might bewonderingwhether high-profile tax deals are evenworth the trouble.

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The Tax Foundation's International Tax Competitiveness Index ranks the United States tax code 32nd out of 34 OECD countries. An obvious question to ask, then, iswhy the U.S. remains sowealthy, and so successful at creating new businesses.
A report from Harvard Business School – a survey on U.S. competitiveness – helps answer this question.
For the blog post, go here.

Rivalry between governments to attract capital and labour can lead to pro-growth policies. That this comes from the power of people to "votewith their feet" has been known for long. For instance, itwas the palpable threat ofworkers and investors deserting them to choose more hospitable economies like the US and Europe that led countries like India to lower economic barriers. Yet public intellectuals have preferred to uphold governments' supposed "right to tax" over citizens' right to keepwhat they earn.

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America has taken its first concrete steps to stop US companies from moving their headquarters overseas, in a movewhich could scupper tens of billions of dollars-worth of deals already in the pipeline.
The clamp-down follows months of controversy over the so-called "tax inversion" schemes,which typically see an American company buy up a foreign firm and move their headquarters to the new country primarily so that it can take advantage of a lower rate of corporate taxation. President Barack Obama has denounced tax inversion deals as "unpatriotic" and has urged Congress to stop them.
For the story, go here.

Treasury Secretary Jacob J. Lew's crackdown on inversionswill get an immediate test as eight U.S. companieswith pending deals decidewhether to proceed -- and other companies contemplating a foreign address now have to think twice.
That's exactlywhat Lew had in mind.
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The OECD published a discussion draft in March 2014 on proposals for addressing perceived abuse of tax treaties.

A focal point of the discussion draftwas the proposal for a US-style limitation on benefits article (LoB) to provide an objective basis for entitlement to treaty benefits for companieswith a nexus in the resident country aswell as a subjective main purpose / anti-abuse rulewithin the LOB article.

In lieu of this singular combined LoB/Main Purpose Test approach, the OECD report on Action 6 now proposes a "minimum level of protection" to prevent treaty abuse, suggesting two alternatives to the combined approach that treaty partners may consider. Significantly, the LoB now includes a "derivative benefits test" provision allowing certain entities owned by residents of other States to obtain treaty benefits if these residentswould have obtained the same benefits had they invested directly.

For the Bulletin, go here.

On 16 September 2014, the OECD published its final and interim revisions in relation to Chapters I, II and VI of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. These revisions have been developed in connectionwith Action 8 of the Action Plan on Base Erosion and Profit Shifting that is focused on assuring that transfer pricing outcomeswith respect to intangibles are in linewith value creation activities.

For the Insight, go here.

Treasury Secretary Jacob J. Lew's crackdown on inversionswill get an immediate test as eight U.S. companieswith pending deals decidewhether to proceed -- and other companies contemplating a foreign address now have to think twice.

That's exactlywhat Lew had in mind.

"This actionwill significantly diminish the ability of inverted companies to escape U.S. taxation," Lew told reporters on a conference call yesterday. "For some companies considering deals, today's actionwill mean that inversions no longer make economic sense."

For the story, go here.

The OECD and its Global Forum on Transparency and Exchange of Information have today been mandated by the G20 to develop toolkits to support developing countries addressing base erosion and profit shifting (BEPS) and to launch pilot projects to assist them to move towards automatic exchange of information. This mandate comes in response to two reports:
a Report on the Impact of Base Erosion and Profit Shifting in Low Income Countries (Part 2); and
a Roadmap for developing country participation in the new global standard for the automatic exchange of information between jurisdictions.
The G20 communiqué issued yesterday sets out an ambitious agenda for developing countries to take advantage of the tax reforms that have taken shape in 2014.

For the release, go here.

The Obama administration took action Monday to discourage corporations from moving their headquarters abroad to avoid U.S. taxes, announcing new rules designed to make such transactions significantly less profitable.
The rules,which take effect immediately,will not block the practice, and Treasury Secretary Jack Lew again called on Congress to enact more far-reaching reforms. But in the meantime, he said, federal officials "cannotwait to address this problem,"which threatens to rob the U.S. Treasury of tens of billions of dollars.
For the story, go here.

The Treasury Department tightened tax rules Monday to deter U.S. companies from moving their legal headquarters to lower-tax countries, part of awhite House effort to slow awave of so-called corporate inversions that effectively reduce federal revenues.
Treasury officials took action under five sections of the U.S. tax code to make inversions harder and less profitable, removing some of the appeal that has made the transactions more common in recent years, particularly in the pharmaceutical industry.
For the story, go here.

Treasury Secretary Jacob J. Lew announced rules on Monday that are aimed at making it more difficult for American companies to lower their tax bills by relocating overseas and thatwouldwipe out the benefits for those that do. It is the administration's latest move to sidestep a paralyzed Congress and tackle a politically charged element of President Obama's agenda.
''While there's no substitute for congressional action, my administrationwill actwhereverwe can to protect the progress the American people haveworked so hard to bring about,'' Mr. Obama said in a statement after the regulations on the so-called corporate inversionswere announced.
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Steven M. Rosenthal proposes that Treasury curb inversions by issuing factor-based regulations under section 385 that identify situations inwhich corporate obligationswill be treated as stock.
In a recent Tax Notes article, Prof. Stephen Shay argued that Treasury couldwrite regulations to reduce the tax incentives for U.S. corporations to expatriate. Rosenthal agreeswith Shay and analyzes the legal support for regulations under section 385.
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The existing anti-inversion rules under section 7874 create several traps for foreign companies and individuals that could cause transactions to be treated as inversionswhen no inversion has taken place.
Under current guidance, there are several scenarios inwhich a non-inversion transactionwould be subject to the inversion rules, David G. Shapiro of Saul Ewing LLP and Joseph Calianno of Grant Thornton LLP noted during a U.S. Activities of Foreigners and Tax Treaties session of the American Bar Association Section of Taxation meeting in Denver on September 19.
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The G-20 finance ministers and central bank governors on September 21welcomed the "significant progress" made under the OECD's base erosion and profit-shifting action plan and committed to finalizing all action items in 2015.
The group also endorsed the OECD's final global common reporting standard (CRS) for automatic exchange of tax information on a reciprocal basis, saying their countrieswill begin exchanging information automatically between each other andwith other countries by 2017 or by the end of 2018, "subject to the completion of necessary legislative procedures."
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The smart money is against retroactive anti-inversion legislation. That seems to be the message from Illinois-based Horizon Pharma Inc.'s decision to proceedwith its acquisition of Vidara Therapeutics International PLC and invert to the latter's home jurisdiction of Ireland.

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In a much-anticipated notice, Treasury on September 22 took administrative action against companies that invert by substantially reducing the economic benefit to be gained from inverting and making inversions more difficult to accomplish.
According to an accompanying fact sheet, Notice 2014-52, under the authority of section 956(e), prevents inverted companies from accessing a foreign subsidiary's earningswhile deferring U.S. tax through the use of hopscotch loans,which involve a controlled foreign corporation making a loan to a new foreign parent instead of the U.S. parent. The notice provides that those loans are considered U.S. property for purposes of applying the antiavoidance rule. The provisionwould apply for 10 years after the inversion took place.
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The IRS and Treasury have announced (Notice 2014-52) that theywill issue regulations aimed at reducing the tax benefits of corporate inversions by significantly diminishing the ability of inverted companies to escape U.S. taxation.
Notice 2014-52, generally applicable to specified transactions completed on or after September 22, 2014, eliminates some techniques inverted companies use to access the overseas earnings of foreign subsidiaries of the U.S. company that invertswithout paying U.S. tax.
For the Notice, go here.

Finance ministers from the Group of 20 countries meeting in Cairns, Australia, unanimouslywelcomed the first seven components of the OECD's Action Plan on Base Erosion and Profit Shifting.
In a Sept. 21 communique, the 20 finance ministers highlighted "the significant progress" achieved by the Organization for Economic Cooperation and Development toward completing the two-year action planÔøΩa joint project between the G-20 and the OECDÔøΩand committed to finalizing all of the 15 BEPS action items in 2015.
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The Treasury Department may lack the ability to halt corporate inversions, but it can make them less appealing by blocking the use of "creative" intracompany loans, spin-offs and asset transfers to foreign subsidiaries.
In a series of actions announced Sept. 22, Treasury said new rules applying to future deals include a prohibition on "hopscotch" loans that let companies access foreign cashwithout paying U.S. taxes, aswell as language to stop inverted companies from restructuring a foreign subsidiary in order to access its earnings tax-free under Section 7701(l).
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We have more confirmation ofwhatwe've long suspected: the United States has an uncompetitive tax code. According to our new International Tax Competitiveness Index, the U.S. has the 32nd most competitive tax system in the developedworld.
But this shouldn't be a surprise. The recent string of corporate inversionsÔøΩwhere U.S. companies move their headquarters to a new homeÔøΩis a symptom of this problem.
The U.S.'s tax code,which is far out of linewith other nations', is driving investment overseas, reducing our economic potential.
For the commentary, go here.

OECD chief Angel Gurria yesterday handed the G20 recommendations on the biggest changes to international tax rules in more than a century in a bid to tackle corporate tax strategies that are costing countries billions.
The secretary general said the plan,which seeks to close international loopholes used by multinational firms to avoid paying large amounts of tax,was "the most prominent step towards the modernisation of the international tax system in a hundred years".
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European multinationals have launched a rearguard effort inwashington to prevent them becoming unintended victims of a US crackdown on tax-driven international mergers.
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Practitioners from Deloitte discuss the OECD's proposed new paradigm for transfer pricing documentation and suggest that companies rethink their current procedures.
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The Organization for Economic Cooperation and Development lastweek released its latest proposals to combat "base erosion and profit shifting," or the monster known as BEPS. The OECD and its masters at the G-20 are alarmed that large companies are able to use entirely legal accounting and corporate-organization strategies to shield themselves from the highest tax rates governments try to impose. They mean to stop it.
All ofwhich is great news for Ireland, the poster child for a low corporate tax rate. Allow us to explain.
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While discussing the seven progress and final reports released as part of the OECD's base erosion and profit-shifting project, practitioners on a September 19webcast hosted by KPMG LLP raised key business concernswith Robert Stack, Treasury deputy assistant secretary (international tax affairs).
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The publicity surrounding the OECD's release of seven reports and recommendations on September 16 ignores that the OECD has not yet begun to quantify base erosion and profit shifting. On August 4 the OECD released a request for input under action item 11 inwhich it asked for comments on the scale and economic impact of BEPS, including analysis of the effectiveness of actions taken to address it. Commentswere due September 19.
The discussion below highlights some of the challenges in quantifying BEPS and offersways to measure the success of the BEPS project.
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In economic analysis, Martin A. Sullivan examines different starting points for tax reform, their pros and cons, and the political challenges to achieving them. The following is based on a September 17 presentation to theworking group formulating the tax portion of the national strategic agenda for the No Labels Foundation.
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A U.S. Treasury official said there is "good support" among the countries participating in the international project to combat base erosion and profit shifting for tax administrations to share the forthcoming country-by-country reporting template via the bilateral tax treaty network.
Speaking on a KPMG LLPwebcast Sept. 19, Robert Stack, Treasury's deputy assistant secretary for international tax affairs, said, "The possibility that youwould just hand this stuff around on the country-by-country template seems to be a low probability right now."
The reporting templatewas developed under Action 13 of the BEPS plan,which addresses documentation and transparency.
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Treasury Secretary Jacob Lew delivered a speech on topics including tax reform and inversions at the G-20 conference on September 21.

For the speech, go here.

A publicly traded multinational corporation and other entities in itsworldwide groupwon't recognize any gain or loss in the spin-off of a business line operated by many members of the group, the IRS said in a private letter ruling.
The parent corporation and three of its subsidiaries in turn held foreign subsidiaries thatwere controlled foreign corporations and conducted the business in various countries, the IRS said in PLR 201438009, released Sept. 19.
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The chief executive officer of CVS Health Corp., Larry Merlo, said he hasn't lost hope that Congress can tackle a tax overhaul in 2015ÔøΩbefore corporate inversions further erode the U.S. corporate tax base.
"Chairmanwyden has beenworking diligentlywith Sen. Hatch," Merlo told Bloomberg BNA Sept. 19 after a speech at the National Press Club, referring to Senate Finance Committee Chairman Ronwyden (D-Ore.) and ranking Republican Orrin Hatch (R-Utah)."With all the gridlockwe've seen inwashington, D.C., I remain optimistic thatwe may be able to see action in early 2015."
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The government is considering expanding the types of transactions itwill consider covered asset acquisitions for purposes of denying the foreign tax credit under tax code Section 901(m), Treasury Department and IRS officials said.
Under that code section, taxpayerswon't get the foreign credit if they have used such acquisitions to exempt their foreign income from U.S. taxes, the officials said at the fall meeting of the American Bar Association in Denver. Currently, covered asset acquisitions include elections under tax code Section 338(h).
Both Brenda Zent, a taxation specialist in the Treasury Office of International Tax Counsel, and Douglas Poms, senior counsel in that office, said the government is thinking about including situationswhere taxpayers "bust" tax-free reorganizations under Section 351 so those transactionswill be purposely taxable.
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A senior official in the Treasury Office of International Tax Counsel said it is too soon to comment on any potential action the government may take on inversions, following indications thisweek by Treasury Secretary Jacob J. Lew that an announcement on such action may come soon.
"It's not appropriate for us to go out in front of the Secretary of the Treasury on that," Douglas Poms, senior counsel in that office, said Sept. 19 in response to an audience question at the fall meeting of the American Bar Association in Denver.
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Thisweek, the Organisation for Economic Co-operation and Development (OECD) released its first recommendations for combating international tax avoidance. The announcements,which form part of the multilateral organisation's Base Erosion and Profit Shifting (BEPS) initiative, mark a major change to the global tax and transfer pricing landscape andwill have an impact on multinational enterprisesworldwide.
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Verizon CFO Fran Shammo said yesterday thatwith the high corporate tax rate in the U.S. and the expiration of a tax incentive called bonus depreciation, "You don't even have incentive to invest anymore."
Well, maybe you don't. Be he does.
Mr. Shammo said Verizon,whose network building consistently ranks it among the nation's largest spenders on capex,will invest no matterwhat incentives the government puts in place.
Other companies, Mr. Shammo said,would base their investment decisions on tax incentives.
The comments underscore the mixed messaging that can arise around discussions of tax policy and investment. Executives often say that certain policies discourage investment. But they are less quick to say that their own investment is being discouraged.
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The Tax Executives Institute submitted comments September 17 on base erosion and profit-shifting action 11 regarding methods to collect and analyze data, saying that the OECD should define BEPS behaviors more clearly, determinewhether actions lead to double taxation, and safeguard the confidentiality of taxpayer information.

For the comments, go here.

U.S. companies that invert after September 18would have to pay taxes on unrepatriated foreign earnings that they held before completing inversion deals under legislation drafted by Senate Finance Committee member Sherrod Brown, D-Ohio, and Senate Democraticwhip Richard J. Durbin of Illinois.
According to bill text obtained by Tax Analysts, the Paywhat You Owe Before You Go Actwould add to section 7874 a subsection specifying that applicable accumulated deferred foreign income of specific inverting corporationswill be added to those companies' subpart F income in the last tax year ending before the date of acquisition by a foreign entity. One of the reasons U.S. companies are said to be seeking inversion opportunities is to access offshore cash.
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