Int'l Tax News

Definitions important to the manufacturing exception in determining foreign base company sales income under Subpart F supply chain rules depend on the facts and circumstance of each case, not any "bright line" test, an Internal Revenue Service official said.

Speaking at a Dec. 9 International Fiscal Association seminar in New York, Jeffery Mitchell, chief of the IRS Branch 2 Office of Chief Counsel (International), said the Servicewill look to all the activities of all employees of a controlled foreign corporation (CFC) to seewhether the substantial contribution test under tax code Section 954 is met.

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There may be common ground between the tax overhaul drafts unveiled separately by Houseways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.), but differences remain, top advisers from the panels said.

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Proposals to change numerous business tax laws from Senate Finance Committee Chairman Max Baucus (D-Mont.) generally differ from overhaul ideas put forth by President Barack Obama in his fiscal year 2014 budget plan and other documents.

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The international discussion draft on tax reform released November 19 by Senate Finance Committee Chair Max Baucus, D-Mont., is "not set in stone," and the "higher-than-expected bracketed rates" are subject to change, Ronald Dabrowski, IRS deputy associate chief counsel (international), said December 9.

"Whatwe've set outwas intended to be conservative," said Dabrowski,who is on detail to the Senate Finance Committee majority. "We didn'twant to give promiseswe couldn't deliver on, but in any event,wherewe've started is notwherewewill end up."

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Senate Finance Committee Chairman Max Baucus has released a detailed proposal for international corporate tax reform,whichwe summarized earlier thisweek.while there are some improvements to current law, the proposal is mainly a step backward in terms of business competitiveness andwill harm investment, job creation, andwages.

For the blog post, go here.

This article explains the basic mechanics of taxing foreign profits of U.S. multinationals under options Y and Z of the staff discussion draft released by Senate Finance Committee Chair Max Baucus, D-Mont., on November 22. The analysis here draws heavily from thework of professor Daniel Shaviro of New York University School of Law and concludes by suggesting an alternative to options X and Y.

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Onewould easily be forgiven for believing that, in recent years, tax competition has acquired pariah status in the global economy. The much-vaunted crackdown on multinational tax avoidance, the fresh attempt to regulate corporate transfer payments and the likely impact of rolling out the Foreign Account Tax Compliance Act mean that thosewhowish to evade their obligations by arbitraging the complex labyrinth of global tax networkswill find life much more difficult in the future.

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While America dawdles over tax reform, new evidence from Britain shows that cutting corporate tax rates is a tax revenuewinner.

Chancellor of the Exchequer George Osborne has cut Britain's corporate tax rate to 22% from 28% since taking office in 2010,with a further cut to 20% due in 2015. On paper, these tax cutswere predicted to "cost" Her Majesty's Treasury some £7.8 billion a yearwhen fully phased in. But Mr. Osborne asked his department to figure out how much additional revenuewould be generated by the higher investment,wages and productivity made possible by leaving that money in private hands.

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For the report, go here.

Curtailing corporations' tax breaks for their overseas operations should help lower the budget deficit, according to a pair of House Democratswho are backing new legislation to do just that.

Reps. Lloyd Doggett (D-Texas) and Rosa DeLauro (D-Conn.) proposed to use revenue fromwhat they called offshore tax haven abuse to replace the across-the-board sequestration budget cuts to discretionary programs for fiscal years 2014 and 2015. The resulting revenuewould also help partially reduce the sequester-mandated cuts for fiscal 2016.

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The Organization for Economic Cooperation and Development has announced that itwill release a discussion draft in February 2014 on transfer pricing documentation thatwill include a proposed template for country-by-country reporting.
A calendar posted on the OECD'swebsite Dec. 3 states that the deadline for comments on the discussion draftwill be 21 days after publication of the draft and cautions that the February date may change.

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The Bloomberg BNA staff provides a chart summarizing the "Technical Explanation of the Senate Committee on Finance Chairman's Staff Discussion Draft of Provisions to Reform International Business Taxation," as proposed by Sen. Max Baucus (D-Mont.) Nov. 19.

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The American Bar Association Section of Taxation in a December 3 letter to leaders of the Houseways and Means and Senate Finance committees proposed options for reforming inbound international tax provisions, including those for foreign bank account information reporting and taxation of foreign sovereigns, affiliated entities, and expatriates.

For the letter, go here.

On November 19, 2013, Senate Finance Committee Chairman Max Baucus (D-MT) released a comprehensive international tax reform discussion draft. Although the primary emphasis of the discussion draft is the modification of rules applicable to outbound investments by US multinationals, the discussion draft also includes certain proposals that may impact foreign multinationalswith US operations. This alert summarizes the US inbound-specific provisions of the discussion draft.

For the newsalert, go here.

Better formulas for apportioning corporate taxes across sub-jurisdictionswithin a country can reduce "excessive" inter-jurisdictional tax base mobility aswell as profit shifting by corporations, according to a report by the Organization for Economic Cooperation and Development.

The report, "Fiscal Federalism 2014: Making Decentralisationwork," said thatwhile tax competition among sub-central governments can produce lower rates for companies and other benefits, it can have negative effects for governments, for example by giving companies an incentive to shift profits to jurisdictionswith lower taxes.

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Here's some holiday cheer: 120 million American families no longer have to file income tax returns; the top individual rate is lowered 20 percent; the top corporate rate is cut by more than half; the government gets the same amount of revenue; and the tax system is slightly more progressive.

O.K., it's not a free lunch. Itwould be accompanied by a 12.9 percent value-added levy,which critics like to call a national sales tax.

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Andrew B. Lyon responds to Government Accountability Office officialswho rebutted his article's contention that the GAO's analysis of corporate effective tax rates has exclusions that make the analysis inaccurate.

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The U.S. Bureau of Economic Analysis (BEA) announces the following:
You can now access the November Survey of Current Business at

www.bea.gov/scb/index.htm

On November 25, 2013, the European Commission proposed amendments (2011/96/EU) to the Parent Subsidiary Directive (PSD) to address tax fraud and evasion aswell as aggressive tax planning and base erosion and profit shifting (BEPS) in the European Union. The proposal addresses hybrid financial mismatches under the PSD and introduces a general anti-abuse rule (GAAR) to protect the directive's functioning.

For the newsalert, go here.

Michael J. Graetz, Justus S. Hotchkiss Professor Emeritus of Law and Professorial Lecturer in Law at Yale Law School, presented his "Competitive Tax Plan" during lastweek's annual conference of the National Tax Association. The plan, he says, is "an update and an epilogue" to his book 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States,which advocated for a value-added tax (VAT) thatwould act as a national sales tax.

For the plan, go here.

The European Commission hopes to "significantly reduce tax avoidance in Europe" through proposed amendments to EU corporate tax legislationwhichwould shut down loopholes in the Parent-Subsidiary Directive.

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After the release of the Senate Finance Committee chairman's proposals for US corporate tax reform, Jim Ditkoff, senior vice president – finance and tax – at science and technology company Danaher Corporation, analyses the proposals and explainswhy companies like Apple and Google may regret some of their lobbying efforts.

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Max Baucus, chairman of the US Senate Finance Committee, has released a discussion draft outlining his proposals for US corporate tax reform, including provisions thatwould drastically alter the tax treatment of income earned by controlled foreign corporations. Business has reacted badly to the draft, having lobbied for greater repatriation relief than Baucus is offering.

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The Canada Department of Finance shares taxpayer concerns about the potential interplay between its efforts to combat treaty abuse andwork being done on the same problem through the Organization for Economic Cooperation and Development's BEPS project, a Canadian official said.

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Senate Finance Committee Chairman Max Baucus's draft international tax overhaul includes a one-time 20 percent transition tax on the more than $2 trillion of corporate profits "locked out" abroad, according to the latest Bloomberg Governmentweekly Tax Update.

This foreign income is categorized as "permanently reinvested,"which defers U.S. taxes until the income is repatriated. Companieswould pay the mandatory 20 percent tax on these permanently reinvested earnings during an eight-year period. Foreign tax credits and other deductionswould reduce the tax bill by about halfÔøΩcutting the actual tax paid by companies to an estimated $200 billion.

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A 20 percent levy on previously accumulated foreign earnings! A minimum tax on future foreign profitswith a rate in the mid-20s! Check-the-box rules declawed! Deductions for interest allocable to foreign profits deniedwith the suggestion that interest deductions may be limited aswell for purely domestic firms! All this means large tax increases over the next decade. And after that, just revenue neutrality. This is notwhat CEOs had in mind all these yearswhen theywerewriting checks to fund a big push for a territorial system.

So understandably, corporate America is more than a little upsetwith the chair of the Senate Finance Committee. Up until now, Montana Sen. Max Baucus had been one of business's most reliable allies in the Democratic Party. No more. His planwas universally panned by most business groupswithin hours of its release. Unless something miraculous happens, like House Democratswinning 17 more seats in 2014 than theywon in 2012, the Baucus international tax reform staff discussion draft has zero chance of becoming law.

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The OECD has made good progress against tax evasion and corporate tax avoidance becauseworld leaders now recognize that those issues undermine public trust, OECD Secretary-General Angel Gurría said during a November 25 International Bar Association livewebcast interview on economic policy issues.

"The perception that individuals are getting awaywith not paying taxes because they hide that money away in a tax haven, or that multinationals are not paying taxeswhen they make billions in profits, is becoming politically untenable," Gurría told interviewer Todd Benjamin, financial editor for CNN. Gurría said countries also have a common interest in recovering lost taxes because all are in dire need of revenue. "Therefore, they have decided they're going to address it and chose the OECD . . . to do that," he said.

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International efforts to address base erosionwill put more pressure on competent authoritiesworldwide to ensure that mutual agreement procedures are up to date at a timewhen MAP programs are facing restricted resources, a U.S. official said.
Michael Danilack, the U.S. competent authority and deputy commissioner (International)with the Internal Revenue Service, said Nov. 22 that item 14 of the Organization for Economic Cooperation and Development's action plan to combat base erosion and profit shifting (BEPS) is devoted to dispute resolution. It is designed to studywhether there may be barriers to efficient and effective competent authority procedures under the model treaty or the commentaries, he said.

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Although the prospects for tax reform in Congress have dimmed of late, the lobbying activity has not. The corporate community continues to put pressure on Congress to reduce the statutory corporate tax rate,which, at 39.1 percent including state and local taxes, is the highest among members of the Organization for Economic Cooperation and Development.

What tends to get lost in the debate is how much corporations actually pay in taxes once various deductions and credits are taken into account. A corporation's total tax bill divided by its profits is its effective tax rate. It's hard to imagine a corporation paying anywhere close to 39 percent of all its profits in taxes, as thatwould mean it has no deductions or creditswhatsoever.

For the article, go here.

A lot of us tax policy types seem to really enjoy discussing the more metaphysical aspects ofwhatwe call tax reform.what is it?when is it coming? Has it already arrived? Has the tax reform effort fizzled?was it ever here? Or – my personal favorite – havewe only just started to start a tax reform process?

This all must bore normal people to tears.

But since I clearly can't help myself, Iwill make a prediction.when tax reform does come, andwhatever it meanswhen it gets here, U.S. multinationalswill pay a price.

For the blog post, go here.

As tax authorities from around theworld gather in Jakarta to discuss how to monitor implementation of an automatic tax information exchange standard across the globe, multinationals should not delay adapting their tax planning strategies to prepare for application of that standard, a New York-based practitioner told Bloomberg BNA.

Taxpayers already need to be much more holistic in theway they view a transaction, to look at the global environment, Elan Keller of Caplin & Drysdale said.

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Companies that pay taxes in Central Asia and Eastern Europewill be pleased to find out their compliance burden has come down the most in the nine-year history of the Paying Taxes survey, according to this year's version of the research,whichwas compiled once again by PwC, theworld Bank and the International Finance Corporation (IFC).

For the article, go here.

Despite evaporating momentum for tax reform, Senate Finance Committee Chairman Max Baucus began unveiling specific options for overhauling the tax code Tuesday, arguing that the issue may yet have "political potency."
"Oncewe get the ball rolling, many are going to see, 'Hey, maybe there's something to this. Maybe there's an opportunity there to help the country create jobs and therefore an opportunity for political benefit here,'·" Baucus (D-Mont.) told reporters. "Because the goal here is to create jobs."

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The chairman of the powerful Senate Finance Committee on Tuesday released a long-awaited plan to overhaul the tax code for multinational corporations, trying to jump-start an effort to stem the flow of jobs and money abroad.
The legislation, offered by Senator Max Baucus, Democrat of Montana,would permanently exempt much of the profits earned by American corporate subsidiaries in foreign countries, but itwould immediately tax profits from goods and services sold to the American market from such subsidiaries.
The proposals "provide a path forward on tax reform," Mr. Baucus said. "Some are Democratic ideas. Some are Republican ideas. The common link is they are all ideasworth exploring."

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U.S. companieswould face a minimum tax on the income they earn around theworld under a plan released today by Senate Finance Chairman Max Baucus that marks his most significant proposal to revamp the tax code.
Baucus's plan to restructure the international tax systemwould lower the corporate rate by an unspecified amount, end a rule that has encouraged companies to accumulate about $2 trillion in earnings in their foreign subsidiaries and impose a 20 percent tax on those stockpiled profits.
"It's time to move; it's time to go," Baucus told reporters in his office inwashington, saying his tax planwould prove politically popular. "You can create your own destiny."

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A Senate committee chairman's proposal to overhaul the U.S. corporate-tax system, released Tuesday, exposed fault lines among big businesses and showed the challenge he faces in building a coalition to support the concept.

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Senate Finance Committee Chairman Max Baucus (D-Mont.) proposed a broad outline for revamping the U.S. tax code's international provisions, seeking to ease the overall tax bite on U.S. corporationswhile imposing a new minimum tax on income from services and goods they sell into foreign markets.

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Proposals included by Senate Finance Committee Chair Max Baucus, D-Mont., in an international tax reform discussion draftwould "put the U.S. tax system even more out of linewith the rest of theworld," put U.S. businesses at a competitive disadvantage, and cause job losses, the Alliance for Competitive Taxation said in a November 19 statement.

For the statement, go here.

The international tax reform discussion draft released by Senate Finance Committee Chair Max Baucus, D-Mont.,would decrease the ability of many U.S. businesses to compete in the global economy, the Business Roundtable said in a November 19 release, adding that it plans to provide the Finance Committeewith recommendations for improvement.

For the release, go here.

The international tax reform draft released by Senate Finance Committee Chair Max Baucus, D-Mont., underscores how tax reform can make the U.S. a more attractive place inwhich to hire and invest, Houseways and Means Committee Chair Dave Camp, R-Mich., said in a November 19 release praising Baucus for his ongoing commitment to tax reform.

For the release, go here.

The decision of Senate Finance Committee Chair Max Baucus, D-Mont., to release his tax reform discussion drafts before the budget conference concludes could result in tax reform becoming a "victim of partisanship," ranking minority member Orrin G. Hatch, R-Utah, said in a November 19 release.

For the release, go here.

From U.S. Senator Max Baucus

A Senate Finance Committee discussion draft on international tax reform outlines proposals to stimulate investment, reduce offshoring or tax haven incentives, and "help America overcome the competitiveness crisis that's driving businesses and jobs overseas," Finance Chair Max Baucus, D-Mont., said in a November 19 release.

For the release, go here.

The Joint Committee on Taxation has released a technical explanation (JCX-15-13) of the discussion draft on foreign-source income tax reform released by Senate Finance Committee Chair Max Baucus, D-Mont.

The discussion draft provisions include options for reforming the foreign income participation exemption system and subpart F; foreign tax credit limitations; the disallowance of the interest expense deduction; and subpart F-related provisions regarding the treatment of previously deferred foreign earnings, ending the 30-day requirement, and modifying the definition of a U.S. shareholder.

For the technical explanation, go here.

Senate Finance Committee Chair Max Baucus, D-Mont., is proposing two options for instituting a minimum tax on income from products and services sold into foreign markets and is suggesting that passive income and some U.S.-connected income be taxed annually at full U.S. rates, according to a summary of his international discussion draft released November 19.

Baucus also proposes eliminating the international aspects of the check-the-box rule and repealing the controlled foreign corporation look-through rules. Finance aides said the goal is to ensure that disregarded entities and hybrid entities are treated as corporations for U.S. tax purposes. The aides cited those types of entities as classic examples of the sort of tax planning that the draft seeks to curtail.

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Neutrality and horizontal equity are bedrock principles of tax policy. That has left generations of economists and legal scholarswith no choice but to advocate for eliminating the double taxation of corporate profits.

Beyond academia, however, there has never been much deep-rooted interest in integrating corporate and individual taxes. The chronic lack of enthusiasm for that brand of capital tax cutting is shared even by perennial capital tax cutters. Antitax conservatives and most of corporate Americawill never pass up an opportunity to highlight the unfair burden of double-taxed corporate income. But rather than systematically addressing the problem, they prefer to use it as a talking point in favor of other tax relief more to their liking.

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Determiningwhether a controlled foreign corporation's intellectual property is acquired or developed for use in the United States remains a source of disagreement for tax practitioners and attorneys, as a three-year-old legal memorandum elicited different interpretations from participants at a November 9 panel of the annual Federal Tax Conference.

Speaking at the conference, sponsored by the University of Chicago Law School, Rachel Cantor of Kirkland & Ellis LLP discussed the meaning of "U.S. property" under section 956. In ILM 201106007, the IRS concluded that the sale of software products by a CFC to U.S. end-user customers didn't constitute an investment in U.S. property. Rather, investment in U.S. property arose from the acquisition or development of the IP for intended use in the United States.

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On 12-13 November 2013, the Organisation for Economic Cooperation and Development (OECD) held the eagerly anticipated public consultation on transfer pricing. The OECD mandate under Base Erosion and Profit Shifting (BEPS) requires a swift finalization of thework on intangibles and documentation, and the 12-13 November 2013 consultation meetingwill be immediately followed by meetingswith thewP6 country representatives only. The tight timeline does simply not allow fundamental rewrites of the Draft papers, nor their foundation as laid down in Chapters 1-3 of the OECD Transfer Pricing Guidelines.

The OECD understands, however, that businesses are in need of further clarification and guidance.

For the report, go here.

A recent report by the GAO comments on the tax expenditures on the tablewith Congress's recent focus on tax reform. The report identifies corporate tax deferral on foreign earnings as one of these expenditures, and suggests it distorts investment decisions, and also provides multinationals a special benefit over U.S. corporationswho only operate domestically or exportwithout foreign subsidiaries. However, the report mischaracterizeswhy these problems existwith deferral.

For the blog post, go here.

U.S. income tax rules may encourage a U.S.-headquartered multinational corporation ("MNC") to adopt a tax-haven-parented structure. The authors study data from firms that conducted initial public offerings in the United States between 1997 and 2010 and offer evidence that U.S.-headquartered MNCs rarely incorporate in tax havens. Of the 918 U.S.-headquartered MNCs that they identify, only 27 are incorporated in tax havens. Others have pointed to the recent increase in the proportion of firms conducting U.S. IPOs that incorporate in tax havens as possible evidence that U.S.-headquartered MNCs increasingly make this decision. The authors show instead that Chinese-headquartered firms drive this increase. They list the U.S.-headquartered firms thatwe find have incorporated in tax havens and offer some analysis and ideas for further research.

For the paper, go here.