Int'l Tax News

The role of the U.S. in negotiations over an international project to stem base erosion and profit shifting is to stop the Organization for Economic Cooperation and Development from adopting "blunt instruments" that might have adverse consequences for economic development, a Treasury Department official said April 8.

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Small, low-tax countries such as Ireland stand to benefit from the looming crackdown on tax avoidance by multinationals even though theywill no longer be able to route profits to tax havens, according to officials drawing up plans to overhaul the international tax system.

The Paris-based Organisation for Economic Co-operation said structures such as the "double Irish" that move profits from Ireland to countries like Bermudawere set to be dismantled.

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The news on Monday that Mallinckrodt, a Dublin drugmaker, has agreed to pay $5.6bn for US rival Questcor Pharmaceuticals marks the latest in a string of healthcare deals to hit the market since January.

The $44bnworth of global healthcare deals so far this year, by Dealogic's numbers, has been linked by a common theme: tax.

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The U.S.was the third least taxed country in the Organization for Economic Cooperation and Development (OECD) in 2011, the most recent year forwhich OECD has complete data.

For the report, go here.

Robert S. McIntyre disputes the idea that the comprehensive tax reform draft by Houseways and Means Committee Chair Dave Camp, R-Mich., is revenue and distributionally neutral in the long term.

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In economic analysis, Martin A. Sullivan discusses how a proposal to help domestic manufacturing by Rep. Ron Kind, D-Wis., might help business-only tax reform move forward.

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The current U.S. corporate income tax is deeply flawed because it relies on definitions of corporate residence and income sourcing that corporations can easily manipulate, causing economic distortions and erosion of the corporate tax base. Two structural reform options to address these problems are securing international agreement on betterways to allocate the corporate tax base among countries and replacing the corporate income taxwith full taxation of American shareholders' dividends and accrued capital gains on stock in publicly traded companies.

For the paper, go here.

The Delhi Tribunal has ruled against the taxpayer in another casewhich highlights the service permanent establishment (PE) clause of India's double tax treaties.

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The United States today has fewer peopleworking in manufacturing than it had in 1941 before the Japanese attack on Pearl Harbor and the rush to produceweapons. But not all U.S. manufacturers are shadows of their former selves. Case in point: New Balance, the Boston-based athletic shoe producer.

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The Indian government has released a revised version of the Direct Taxes Code (DTC) for public comment. One provision that stands out is aimed at bringing indirect share transfer transactions into the tax net.

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Cutting corporate income taxeswhile repealing deductions and simplifying the code to maintain revenue neutrality could reduce incentives for manufacturers and other companies to relocate outside the U.S. and reinvest foreign earnings overseas, according to an April 2 report produced for a project of the Center on Budget and Policy Priorities.

For the report, go here.

Speaking during an April 2webcast on recently released base erosion and profit-shifting discussion drafts and developments, Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, said thatwork on the BEPS action plan remains on schedule.

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A U.K. tax law that requires a link company between a U.K.-based subsidiary of a foreign-based parent company to be based in the U.K. for the subsidiary to be eligible for tax relief is a violation of the EU laws that gives all companies the fundamental right to set up a business in any of the 28 EU-member states.
The European Court of Justice decision (C-80/12) is a victory for the Hong Kong-based telecom conglomerate Hutchinsonwhampoa Ltd. The decision arose from an appeal by the company against a U.K.-tax tribunal that denied losses sustained by its subsidiary Hutchinson 3G UK Ltd. from investments in setting up a U.K.-based mobile phone network.

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A proposed country-by-country reporting templatewill not require multinational companies to break down financial details by legal entity, an officialwith the Organization for Economic Cooperation and Development announced.
Joseph Andrus, head of the OECD's transfer pricing unit, said March 31 thatworking Party No. 6 has tentatively "concluded that the CbC templatewill only require aggregate countrywide reporting of financial information as opposed to legal-entity-by-legal-entity reporting."

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The two-year anniversary of the United States having theworld's highest corporate tax rate should be a "call to action for leaders in both parties" to undertake tax reform thatwould create jobs by reducing the rate and improving simplicity and fairness, the Reforming America's Taxes Equitably (RATE) Coalition said in an April 1 release.

For the release, go here.

The European Commission has been busy reforming the EU's VAT system and trying to introduce a financial transaction tax (FTT). In an exclusive interviewwith Salman Shaheen, Algirdas Semeta, European Commissioner for Taxation, Customs Union, Audit and Anti-Fraud discusses the latest progress.

For the interview, go here.

Ending deferral of tax on foreign-source incomewould move the United States closer to a pureworldwide tax system and increase corporate tax revenue, remove the incentives to shift jobs and profit offshore, increase investment in the United States, and simplify the corporate tax system, the Economic Policy Institute said in a March 31 report.

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The OECDwill change its proposed country-by-country reporting (CbC) template to require aggregate countrywide reporting instead of entity-by-entity reporting,which should please taxpayers concernedwith the compliance burden that entity-by-entity reportingwould entail, an OECD official said March 31.
Speaking at the Bloomberg BNA and Baker & McKenzie Global Transfer Pricing Conference in Paris, Joseph Andrus, head of the OECD's transfer pricing unit, announced several changes the OECD is making to the proposed draft transfer pricing documentation rules and CbC template to make reporting less burdensome.

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A looming global crackdown on aggressive tax avoidance is set to stop internet companies slashing bills by routing profits to havens.

Plans to "restore taxation" in the countrieswhere digital companies make their sales and base their headquarterswere set out on Monday in the first international response to theworldwide political row over the sector's low tax payments.

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The Treasury has pledged its "full support" for a planned overhaul of global tax rules aimed at cracking down on multinationals butwarned theywould "not always increase UK revenues or taxing rights".

Its first public response to far-reaching reforms being drafted by the Paris-based OECD came as a leading tax expert described draft measures aimed at dismantling'hybrid' tax structures,which exploit differences between countries' tax rules, as "almost the taxworld's equivalent of Big Bang".

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Britain is facing fresh scrutiny from Brussels over its flagship tax break for intellectual property, because of concerns it could be an illegal state subsidy.

London is one of several capitals caught in a rapidly expanding probe by Europe's top competition authority intowhether tax sweeteners to multinationals broke rules on state support for companies.

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Companies have been putting money in low-tax countries, taking advantage of loopholes in the U.S. tax code. U.S.-based multinational companies have accumulated $1.95 trillion outside the country, up 11.8 percent from a year earlier, according to securities filings from 307 corporations reviewed by Bloomberg News. Three U.S.-based companies -- Microsoft Corp. (MSFT), Apple and International Business Machines Corp. -- added $37.5 billion, or 18.2 percent of the total increase.

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The discussion draft released by the OECD confirms the view that tax measures designed exclusively for the digital economy are likely to prove problematic, primarily because of the difficulties in identifying a specific "digital" sector. Rather, the potential use of modern information and communications technology by all businesses seems to raise "digital" tax issues. Nonetheless, the OECD clearly believes that the perceivedweaknesses in the territorial tax system and the international tax rules as awhole as require change in the tax rules in order to copewith modern business practices.

For the report, go here.

Tax planning in M&A transactions starts long before a transaction appears on the horizon and lasts long after the deal is completed. Key challenges for the tax function are explored by Christoph Huber and Napoleao Dagnese of OC Oerlikon, a traditional Swiss multi-industris conglomeratewith a footprint in 34 countries, 160 sites, andwith several M&A deals recorded. This is the first part of a two-part article.

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In part II of this article looking at M&A tax planning in light of recent BEPS developments, Napoleão Dagnese and Christoph Huber of OC Oerlikon analyse methods of allocating a global purchase price.

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A Senate investigative subcommittee is expected to have harsh things to say about Caterpillar Inc.'s offshore tax practices at an upcoming hearing, but the panel's top Republican is distancing himself from the Democratic chair's conclusions before they've been announced.
Sen. John McCain, R-Ariz., ranking minority member of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, told reporters March 25 that he may not see eye to eyewith subcommittee Chair Carl Levin, D-Mich., on the multinational manufacturer's international tax strategies.

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Senate Democrats plan to curb tax benefits forwealthy individuals and corporations that move jobs overseas as part of the 2014 legislative priorities that their leadership unveiled March 26.
Appearing alongside Reid, Senate Budget Committee Chair Patty Murray, D-Wash., criticized Republicans for protecting tax "loopholes" benefiting corporations that move jobs overseas.

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This article reviews the progress of the BEPS project and its compatibilitywith the fundamental principles for reform set by the OECDwith a view to influence the discourse and the outcome of the project. This article focuses on the importance of the paradigm shift from the current emphasis on competitiveness and the perfection of competition to a collaborative international tax regime, demonstrating the desirability of such a shift and suggesting how the OECD should go about making that shift.

For the paper, go here.

International and regional organizations are playing an increasingly important role in the taxworld. Yet few outside a small group of government officials understand the structures and roles of these organizations
or how to interactwith them. This article tries to answer three questions:
•who are the main players in the international tax arena?
•what are their structures and areas ofwork, andwho are their contact points?
• How can business and civil society interactwith different groupings?

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Responding to discussion drafts recently released as part of the OECD's ongoing base erosion and profit-shifting project, Robert Stack, Treasury deputy assistant secretary (international tax affairs), on March 25 identified areas of agreement and conflictwhen comparing the U.S. positionwith the positions of some participants.
In a luncheon address at the Tax Executives Institute's midyear conference inwashington, Stack said that both U.S. multinationals and the U.S. government are responsible for the heightened interest in BEPS.

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The Organization for Economic Cooperation and Development has released a discussion draft addressing tax challenges linked to digital businesses, including proposals for modifying existing permanent establishment rules and creating new rules.
Published March 24, the draft, "BEPS Action 1: Address the Tax Challenges of the Digital Economy," gathers observations and proposals from the task force the OECD created in October 2013 to identify base erosion and profit shifting issues related to the digital economy andways to address them.
David Ernick of PricewaterhouseCoopers inwashington, told Bloomberg BNA on March 24 that the draft echoes earlier OECDwork and fails to make a case that dramatic changes are needed in current rules to account for the digital economy.

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The U.S.will continue to focus on clear and administrable rules, maintaining the U.S. tax base and protecting the interests of American companies as the base erosion and profit shifting project goes forward in the Organization for Economic Cooperation and Development, a top Treasury Department official said.
Deputy Assistant Secretary for International Tax Affairs Robert Stack said March 25 that the U.S.will remain committed to the arm's-length standard as part of the process.

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This PwC Insight summarizes the US inbound-specific provisions of the Camp discussion draft and the Administration's FY 2015 budget proposal. Some of the more noteworthy proposals include new restrictions on US interest deductibility, aswell as new restrictions on deducting interest and royalties in certain types of hybrid arrangements.

For the Insight, go here.

To avoid a stagnant, low-productivity future, the United States and many other countries need perhaps more than anything else to nurture the talent that drives productivity growthÔøΩtalent in all industries, not just information technology and manufacturing but all theway to entertainment and the arts aswell.

For the report, go here.

America is in a period of relative economic calm.
Thus is there awindow of opportunity (the noun) today for America to craft and enact policies aimed at strengthening its economy. For Americanworkers and their families,what should a stronger economy entail? A preponderance of evidence indicates thatwhat Americans need more than anything is more … opportunity (the adjective).

For the report, go here.

This paper sets out the government's priorities for the ongoingworkwith G20 and OECD partners in taking forward the 15 point Action Plan to counter Base Erosion and Profit Shifting (BEPS).
It includes proposals for new international rules to address cross-border business structures or finance transactions, a disclosure scheme for international tax schemes, and the creation of a single Large Business Directoratewithin HMRC.

For the paper, go here.

An OECD discussion draft released March 24 on the tax challenges raised by the digital economy appears to reject the view that policymakers should create special rules for the digital economy and instead suggests that those challenges should be addressed through existing international tax rules.
The discussion draftwas developed by the Task Force on the Digital Economy, a subsidiary body that the OECD Committee on Fiscal Affairs established in September 2013 to tackle action 1 of the OECD's base erosion and profit-shifting action plan. Action 1 calls for countries to "identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation."

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Executives from construction equipment manufacturer Caterpillar Inc.will appear before the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI) April 1 to discuss the company's offshore tax strategies, according to a subcommittee announcement.
A Caterpillar spokesperson said in a prepared statement March 24 that the company has voluntarily agreed to testify before the subcommittee to discuss its international business operations.

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Caterpillar Inc. began defending its international tax maneuvers as a Senate investigative panel set an April 1 hearing to examine the company's "offshore tax strategy."
Representatives from Caterpillar and PricewaterhouseCoopers LLPwill testify, according to the hearing notice posted March 24 by the Senate's Permanent Subcommittee on Investigations.
"We are a leading U.S. exporter and pay U.S. income tax on sales in the United States aswell as on export sales," Rachel Potts, a Caterpillar spokeswoman, said in a statement March 24 thatwas the company's first comment on the hearing. "Caterpillar's effective tax rate averages about 29 percent,which is relatively high for a companywith substantial earnings generated from business activities outside the United States."

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Taxpayers craved certainty from the UK budget lastweek and that is broadlywhat they got. George Osborne, the chancellor of the exchequer, even resisted the temptation to increase the bank levy, a regular measure in recent budgets, though the charge itself is set for a redesign.

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Brussels has stepped up its probe into alleged illegal sweeteners offered to multinationals by expanding the investigation to cover arrangements for patent-holders and ordering Luxembourg to reveal its promises to specific companies.

The case opens a new front in the global clampdown on tax evasion through enforcing the EU's rule book on state aid – a unique regime that bans serious distortions of competition through tax breaks to favoured private groups.

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Public comments are invited on a discussion draft on the Tax Challenges of the Digital Economy.
In July 2013, the OECD published its Action Plan on Base Erosion and Profit Shifting. The Action Plan identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions. Action 1 of the Action Plan is "Address the tax challenges of the digital economy."
Interested parties are invited to send comments on this discussion draft,which includes the preliminary results of thework carried out in relation to Action 1 of the BEPS Action Plan.
Comments on this discussion draft should be submitted electronically (inword format) before 5.00pm on 14 April (no extensionwill be granted) to CTP.BEPS@oecd.org.

For the discussion draft, go here.

The two draft reports released on 19 March 2014 by the OECD call for the introduction of both domestic rules and amendments to the OECD Model Tax Convention to neutralize the effect of hybrid mismatch arrangements. The recommendations of the OECD on hybrid mismatch arrangements result from Action 2 of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan).

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Estimates based on historical data suggest that approximately three-quarters of the income of foreign subsidiaries of U.S. multinationalswill be subject to a new minimum tax under the tax reform discussion draft from Houseways and Means Committee Chair Dave Camp, R-Mich.
The February 26 draft creates a new category of subpart F income called foreign base company intangible income (FBCII). FBCIIwould not get the benefit of the new participation exemption that the draft provides. In effect, FBCIIwould be subject to a minimum U.S. tax of 15 percent if it is related to foreign sales or the provision of services outside the United States. FBCII related to the sale of products or the provision of services in the United Stateswould be taxed at 25 percent.

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Fifty-four percent of CFOs of foreign firms operating in the United States said the corporate tax rate is the most important factor in their investment decisions, according to a March survey by PricewaterhouseCoopers LLP and the Organization for International Investment.

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Foreign corporations are increasingly optimistic about investing into the U.S., yet many say tax overhaul is needed to lower the corporate rate, according to a survey of 101 U.S. chief financial officers of "insourcing" companies.
Released March 20 by PricewaterhouseCoopers LLP and the Organization for International Investment (OFII), the survey results show "about a 20 percent uptick in CFO confidence,"Joelwalters, U.S. inbound tax services leader at PwC, told Bloomberg BNA March 20. At the same time, there is significant concern that the U.S. corporate tax rate is too high,walters said.

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A Senate investigative subcommittee is examining Caterpillar Inc. andwhether the company improperly avoided U.S. taxes by moving profits outside the country, said three people familiarwith the inquiry.
The Senate's Permanent Subcommittee on Investigationswill hold a hearing in early April, said two of the people. They spoke on condition of anonymity before an official announcement of the hearing.
Rachel Potts, a spokeswoman for Caterpillar, declined to comment, as did two staff members for the subcommittee.

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The Organization for Economic Cooperation and Development issued a discussion draft recommending that countries adopt new domestic rules to address the mismatch in tax outcomes of hybrid mismatch arrangements and a second draft recommending related changes to the OECD Model Tax Treaty.
The draft, "BEPS Action 2: Neutralise the Effects of Hybrid Mismatch Arrangements (Recommendations for Domestic Laws)," issued March 19, recommends that countries adopt "linking rules" to target hybrid financial instruments, hybrid entity payments, and reverse hybrid mismatches.
The second draft, "BEPS Action 2: Neutralise the effects of Hybrid Mismatch Arrangements (Treaty Issues)," proposes amending Article 1 of the OECD Model Tax Convention to prevent dual resident entities from obtaining inappropriate benefits.

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This article summarizes the 11 articleswritten by Stephen Shay, Robert Peroni, and J. Clifton Fleming,which are mostly about the merits and demerits of shifting to a territorial or exemption system for not taxing foreign-source income. Shay, Peroni, and Flemingwere not the first to identify the current deferral system as sometimesworse (or better, depending on your viewpoint) than full exemption of foreign income, but they have most forcefully explainedwhy deferral, and certainly exemption, is inconsistentwith the underlying theory of the income tax: taxing based on ability to pay.

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The OECD on March 19 issued two discussion drafts in response to action 2 of its base erosion and profit-shifting action plan,which aims to prevent base erosion resulting from cross-border mismatches in the treatment of hybrid entities and instruments.
The drafts recommend changes to domestic law and the model tax convention to address circumstances inwhich a hybrid arrangement leads to double deductions or a deduction in a transaction that does not also result in an income inclusion. The drafts follow the March 14 release of a discussion draft on changes to the model tax convention to prevent treaty shopping.

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