Int'l Tax News

While acknowledging the inevitable end to the kind of international tax planning rules that have given rise to double nontaxation, some tax practitioners -- nervous aboutwhat may come out of the OECD's base erosion and profit-shifting project -- are advocating a narrower but equally challenging fix: that member countries agree on and implement strong, functionality-based controlled foreign corporation rules.

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The Organization for Economic Cooperation and Developmentwill tackle the transfer pricing action items outlined in the agency's base erosion and profit shifting action plan in six separate steps, startingwithwork on intangibles, an OECD official said.

"There are really five transfer pricing-related action items.we, in looking at those, did not think that structureworked verywell," said Joseph Andrus, head of transfer pricingwith the OECD, during a Nov. 13 public consultation in Paris.

Rather than proceed through the action items in the order presented in the action plan, the OECD'sworking Party No. 6 came upwith a structure that tackles the items according to related issues.

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An Internal Revenue Service official asked delegates to the Organization for Economic Cooperation and Development's transfer pricing consultation to considerwhether the organization's proposed new comparability concept of "deliberate concerted [group] action" can apply to a transaction that occurs between unrelated parties aswell as related parties.

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A senior Internal Revenue Service official offered no apologies for the agency's 2012 bright-line test for demonstrating substantial business activity in a foreign jurisdiction in regulations on potentially abusive corporate inversions.

John Merrick, special counsel to the IRS associate chief counsel (International), said Nov. 8 that the Service has been criticized for the bright-line test determiningwhether expanded affiliated groups have a substantial foreign presence for the purposes of Section 7874.

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Brazil's government Tuesday altered rules on the repatriation of overseas profits in order to boost companies' competitiveness and reduce court tax disputes, officials from the finance ministry said.

The officials said that under a new executive decree, company profits abroadwill be taxed on an accrual basis,with payment allowed over a six-year period.

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The recent revelation that many multinational enterprises (MNEs) pay very little tax to the countries they operate in has led to various proposals to change theways they are taxed. Most of these proposals, however, do not address the fundamental flaws in the international tax regime that allow companies like Apple or Starbucks to legally avoid taxation. In particular, the Organization for Economic Cooperation and Development (OECD) has beenworking on a Base Erosion and Profit Shifting (BEPS) project and is supposed to make recommendations to the G20, but it is not clear yetwhether thiswill result in a meaningful advance toward preventing BEPS. This paperwill advance a simple proposal thatwill allow OECD member countries to tax MNEs based in those countrieswithout impeding their competitiveness.

For the paper, go here.

The Spanish government recently passed laws in an effort to support entrepreneurs and encourage economic activity. Among other measures, the laws renew the 'patent box' regime and restrict the impairment deduction for shareholding in other companies.

This newsalert summarizes the measures most relevant to US multinational corporations (MNCs).

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One of the commitments in the base erosion and profit shifting (BEPS) action plan is to counter harmful tax practices. Jeffrey Owens believes negotiators should look for some clues for how to do this in the OECD's 1998 report on harmful tax competition.

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The United Nations Committee of Experts on International Cooperation in Tax Matters decided at its annual meeting in October to revise the Commentary to Article 9 of the UN Model Tax Convention,which refers to Organization for Economic Cooperation and Development guidelines, according to a UN tax official.

Michael Lennard, chief of the UN's international tax cooperation unit, didn't discuss the nature of changes to the Commentary, but told Bloomberg BNA Nov. 6 that the committee expects to have a draft revision for approval next October.

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Technology, health care and utilities are among the industry groups represented on the S&P 500 that might be hit the hardest by proposals for rewriting the tax code, according to a study by investment research firm ISI Group.

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Tax practitioners participating in a panel discussion on cloud-based computing said the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting (BEPS) projectwould force nations to reconsider their tax treatment of cross-border software and electronic commerce transactions.

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The Government Accountability Office (GAO) has issued a report titled, "Corporate Tax Deferrals: Evaluation of Tax Expenditures and Graduated Tax Rates."

For the report, go here.

Berkeley Research Group released a new report today that examines the likely effects of a change in the U.S. corporate tax system from the currentworldwide approach to a territorial approach similar to those used by other developed countries. The report, Implications of a Switch to a Territorial Tax System in the United States: A Critical Comparison to the Current System,was authored by Dr. Laura Tyson, Dr. Eric Drabkin, and Dr. Kenneth Serwin.

The report finds that a switch to a territorial tax systemwould increase the repatriation of foreign earnings by U.S. multinational companies, generate economic growth and jobs in the United States, enhance the international competitiveness of many U.S. companies, and increase corporate tax revenues, at least in the short run.

For the report, go here.

Internal Revenue Service Transfer Pricing Director Samuel Maruca said hewants examiners to take a "big picture" approach to developing transfer pricing cases, focusing on the facts and the economic outcome rather than a mechanical application of the regulations.

Speakingwith Bloomberg BNA Nov. 7, the official said auditors need to ask, "What is the most probative analysis?" and notwhether the facts of a case fit into "some prescriptive rule in the regulations that's going to give you the right answer every time."

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Countries participating in the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting project may be considering a multilateral approach to address hybrid entities, a U.S. Treasury Department official said.

"There could be some kind of multilateral agreement," Doug Poms, senior counsel in the Office of the Treasury International Tax Counsel, said Nov. 6. "That's new territory."

Speaking at the American Institute of CPAs Fall Tax Division Meeting, Poms said itwould require "the coming together of a number of countries," but the idea is under discussion. "Countrieswould all agree to adopt the same principles and then itwould be much harder to have these hybrid mismatches," he said.

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In a recent private letter ruling, the Internal Revenue Service ruled that income from payments received for manufacturing and selling services qualified for the "Subpart F" manufacturing exception.

The ruling clarifies that a controlled foreign corporation (CFC) isn't required to own or pass title to the products manufactured and sold to qualify for the manufacturing exception.

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The U.K.will make a registrywith the beneficial owners of all corporations formedwithin its borders publicÔøΩa move thatwon praise from Sen. Carl Levin (D-Mich.), chairman of the Senate Permanent Subcommittee on Investigations, as away to fight tax evasion and otherwrongdoing.

U.K. Prime Minister David Cameron made "a groundbreaking decision" to make the registry public, Levin said in a Nov. 1 news release, calling it "the biggest blow struck in years against the hidden ownership of corporations."

Levin said hewould continue to push for his own legislation (S. 1465) thatwould require U.S. states to obtain the identities of the beneficial ownerswho form corporations under their laws. The Michigan Democrat introduced the measure Aug. 1with Senate Judiciary Committee ranking member Charles Grassley (R-Iowa).

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Practitioners should expect to see discussion drafts soon about revenue procedures on competent authority and advance pricing agreements, according to Samuel Maruca, transfer pricing director, IRS Large Business and International Division.

Maruca, speaking November 5 during the High Technology Tax Institute conference sponsored by the Tax Executives Institute and San Jose State University in Palo Alto, Calif., said the IRSwas "very, very close" to issuing those discussion drafts.

According to Maruca, the anticipated guidance is only one issue that LB&I's transfer pricing operations has beenworking on. The staff has greatly improved its advance pricing mutual agreement case processing times and is seekingways to further streamline safe harbor memoranda of understanding, he said.

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Everybody knows that in the 21st century, profit shifting and intangibles go together like bagels and cream cheese. But few have ventured to ask the question that looms like a dark cloud over federal tax reform and the OECD's base erosion and profit-shifting effort: If governments succeed in their quest to stop the shift of intangible profits to tax havens,will they stifle the creation of knowledge-based capital in their domestic economies?

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The Organization for Economic Cooperation and Development's action plan for curbing base erosion and profit shifting offers a "coordinated and comprehensive approach," the Congressional Research Service said in a new report.

The action plan came in response to concerns that the current global tax structure allows companies to pay little or no tax in some cases, CRS said in the report, released Oct. 31. Increasing globalization is raising tough issues on perceived gaps in the tax rules and friction between countries over tax revenues, tax compliance, tax sovereignty and tax fairness, it said.

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For the CRS report, go here.

There is a long history of politicians accusing US MNCs of "shipping jobs overseas"when they invest outside the US. President Obama, for example, has proposed special support for US firms that stay at home, and criticised those that move abroad. This line of attack implicitly assumes that expansion abroad by US firms substitutes for domestic expansion, harming USworkers. It is equally possible that foreign expansion increases the productivity and market share of firms in away that benefits USworkers. Empirical studies on this topic have come to different conclusions.

We take a fresh and up-to-date look at the extent towhich MNC activity at home and abroad are substitutes or complements.

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In an exclusive interview, Algirdas Semeta, EU Commissioner for Taxation, Customs Union, Audit and Anti-Fraud discusses progress on VAT reform, plans for the financial transactions tax (FTT) in the face of opposition from some member states, efforts to tackle tax avoidance and his priorities for 2014,which include taxation of the digital economy.

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The internet has made international borders inconsequential for e-commerce and business transactions, leaving countrieswith the challenge of developing aworkable tax policy for those online dealings.

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Businesses must be proactive in finding solutions to address base erosion and profit shifting, and they need to build trustwith governments and the public if they desire favorable outcomes from the OECD's BEPS project, European and U.S. tax leaders said October 29 at the annual Tax Executives Institute conference in New Orleans.

Consultationswith the business community have become a bit predictable, said Harry Roodbeen, director for international tax policy and legislation at the Dutch Ministry of Finance. Multinationals detail all the dangers of the possible changes to come from the implementation of the BEPS action plan but provide few suggestions for potential changes, he said. Roodbeen said that officialswould like to receive more actionable comments, adding that coming upwith ideas togetherwould be in the mutual interest of businesses and governments.

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Public perception that companies are participating in aggressive tax structuring is creating significant impetus for the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting project, tax officials from the U.K., the Netherlands and France said.

Speaking Oct. 29 at the Tax Executives Institute 68th Annual Conference in New Orleans, they said pressure continues to mount.

"I think there's a great concern among the public that everyone should pay their fair share of tax, and a concern about businesses paying their fair share of tax," said Mikewilliams, director for business & international tax at HM Treasury in the U.K.

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A Bloomberg Government analysis of options for lawmakers as they consider an overhaul of the international tax system includes the possibility that action on tax treaties and major changes to the Subpart F active financing exemption could be coming.

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The Business and Industry Advisory Committee (BIAC) to the Organization for Economic Cooperation and Development raised doubts that a shift to country-by-country reportingwould generate enough useful data to justify the burden on taxpayers.

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I just read the Action Plan on Base Erosion and Profit Shifting (BEPS) issued by the Organization for Economic Cooperation and Development (OECD); there is much to think about in the report and I commend the OECD on its speedy initial effortÔøΩI alsowholeheartedly agreewith the need for concerted governmental action in this area.

From my standpoint, the key term there is "concerted," because I view the current environment as a patchwork of disparate but aggressive enforcement activities by tax authoritiesÔøΩegged on by politicians and mediaÔøΩthat put businesses at risk for both the cost of unrelieved double taxation and the very significant cost and distraction of tax controversy.

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Multinational manufacturers could potentially have much to lose if international tax reform proceeds under the outline proposed by Houseways and Means Committee Chair Dave Camp, R-Mich., in his discussion draft on the topic, according to a senior tax executive.

Senior tax executives of multinational corporations expressed differing opinions about the Camp discussion draft at a roundtable discussion at the University of San Diego School of Law-Procopio International Tax Institute annual conference.

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Brazilian multinational companieswant their country to use its participation in the Organization for Economic Cooperation and Development's base erosion and profit shifting (BEPS) project as an opportunity to better align Brazil's transfer pricing ruleswith international standards, but that looks unlikely to happen quickly, practitioners told Bloomberg BNA.

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Lawmakers might encourage companies to bring overseas earnings home to generate tax revenue, a member of the congressional budget conference committee said.

Rep. Tom Cole (R-Okla.) said hewas open to revenue from repatriation, inwhich U.S.-based multinational corporationswould deposit some of the estimated $2 trillion they have parked abroad domestically, and also suggested that expanding energy operations might bring in revenue.

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A few months after strongly rejecting claims by US senators that it is a "tax haven", Dublin moved on Thursday to close a legal loophole that enabled Apple to save billions of dollars in corporate taxes.

The policy shift follows investigations by the US Senate, UK parliament and the media,which pinpointed how multinationals use Irish registered companies as part of complex tax avoidance schemes. Last month the Netherlands also pledged to review its tax policies, underlining how political support from the G20 for an OECD plan to reform global tax rules is having some impact.

"Ireland's move is a very important signal from an important country in this area. Dublin recognises thingswill change and it is better to participate in the change than resist it," says Pascal Saint-Amans, director of the OECD centre for tax policy.

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If the 29 federal budget conferees reach an agreement by December 13, it is reasonable to expect the dealwould include some modest tax increases. And it is likely that those tax increaseswould consist mainly of cuts to business tax breaks popularly described as loopholes. On October 16 the Joint Committee on Taxation issued a 30-page document that explained how it has updated its reporting of business tax changes.

For the report, go here.

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A headline in a publication readwidely by tax experts (subscription only) this morning screamed "PwC Study: Effective Corporate Tax Rate Topped Statutory Rate From 2004 to 2010."

The actual report,whichwas published in a rival publication thisweek (subscription only), provides three differentways of measuring effective corporate tax rates, and only one tells us anything about how our corporate tax system isworking. That measure ÔøΩ the percentage ofworldwide profits paid inworldwide taxes for corporations thatwere profitable from 2008 through 2010,was 22 percent, the study concludes.

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Google Inc. (GOOG), Facebook (FB) Inc. and LinkedIn Corp. (LNKD)wound up in Ireland because they could reduce their tax bills. Their success is leading European and U.S. politicians to label the country a tax haven that must change itsways.

The grand architect of much of that success: Feargal O'Rourke, the scion of a political dynastywho heads the tax practice at PricewaterhouseCoopers in Ireland. He advises both multinational companies and the government on tax policy and has emerged as his country's leading defender.

"Under no circumstances is Ireland a tax haven," O'Rourke said recently at his corner office on the River Liffey in Dublin, a ritual stop for many tech companies in their Irish quest. "I'm a player in this game andwe play by the rules."

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editorial fromwall Street Journal

Our readers know that the statutory U.S. corporate tax rate of 35% (plus another 4.1% average state rate) is the highest among developed nations. Yet the myth persists that most American companies somehow pay little or no tax. Now comes a new study showing that the tax burden is as punitive as advertised.

The tax evasion fable got new legs in Julywhen the Government Accountability Office released a study concluding that the effective U.S. corporate tax rate is only 12.6%. The effective rate iswhat corporations actually pay after deductions and credits.

For the editorial, go here.

"New Corporate Tax Shelter -- A Merger Abroad," blared The New York Times a fewweeks ago. The paper reported that there have been 20 inversions by means of mergers over the past year or so. Many of the merging companies are inverting into Ireland. (See The New York Times, Oct. 9, 2013.)

"Many companies that have recently moved their domicile for tax reasons have chosen European countrieswith low tax rates, like Ireland and the Netherlands, rather than be tarred by relocating to Bermuda or a Caribbean tax haven," said the Times. Neither transaction described in the article has been consummated.

Inversions are not impossible, but they are more difficult.

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For information, go here.

For the call for applications to join the expert group, go here.

The European Commission said the regime contravenes certain provisions in the EU's Code of Conduct on Taxation. The code is voluntary, but if the UK does not acknowledge the opinion (delivered to finance ministers on Tuesday) itwould be the first time a member state's government has ignored a commission opinion.

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The National Foreign Trade Council has submitted comments to the OECD on the OECD's revised discussion draft on transfer pricing aspects of intangibles and on the OECD'swhite paper on transfer pricing documentation.

For the comments, go here.

European Commission President Jose Barroso promoted his plan for squeezing more revenue from technology companies, foreshadowing a possible clash on the proposal at a summit beginning tomorrow.

Barrosowants Internet-based companies such as Amazon.com Inc. (AMZN) to contribute more to state coffersweakened by a sluggish European economy and the euro-area debt crisis.

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U.S. corporationswere taxed at a higher average rate than prescribed by law from 2004 through 2010, according to a private sector analysis of taxes on companies' financial statement income.

By three different measures, U.S. corporations paid more than the top U.S. statutory tax rate of 35 percent over that period, said the study's author, Andrew Lyon, a principal in the National Economics and Statistics group of PricewaterhouseCoopers LLP.

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Andrew B. Lyon argues that a recent report by the Government Accountability Office understatedworldwide effective tax rates of U.S. corporations, and he offers a multiyear extension of the GAO analysis to better represent estimatedworldwide effective tax rates over the long term.

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European Union member states failed to agree onwhether to back a European Commission conclusion that a U.K. "patent box" tax scheme violates the EU Code of Conduct on harmful corporate taxation.

Despite this, the EU member state representatives to the EU Code of Conduct group, at a meeting in Brussels, asked the European Commission to investigate similar patent box tax schemes in Belgium and Cyprus.

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Citing problemswith tax evasion and aggressive tax planning by digital-economy-oriented companies, the European Commission has set up a specialworking group to devise a new taxation framework that it hopeswill be more appropriate for the era of electronic commerce.

Under pressure from France,which is pushing a new digital tax on companies such as Google Inc. and Apple Inc., the new expert groupwill be part of a larger strategy due to be backed Oct. 24 at a meeting of European Union leaders. The meetingwill draw up a plan designed to boost European competitiveness in the digital economy relative to companies in the U.S.

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On October 16th, TEI submitted a second letter to the OECD commenting on the OECD's Action Plan on Base Erosion and Profit Shifting. TEI's comments addressed issues under the 15 individual items of the Action Plan, including transfer pricing aspects of intangible assets, changes to the OECD model treaty, and improvements to the mutual agreement procedure.

For the letter, go here.

Pascal Saint-Amans, the OECD's director for tax policy, lastweek affirmed the base erosion and profit shifting (BEPS) action planwill be completed in two years,while European Commission tax head Philip Kermode said he backs the plan as long as it does not interferewith member states' EU treaty obligations.

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We need a new economics.

Until the tech revolution of the 1990s, economists' conceptualization of production portrayed reality reasonablywell. Businesses hired labor and purchased capital to make the things that improved consumers'well-being. To promote employment, productivity, and economic growth, itwas necessary to increase capital formation. Intellectual propertywas relegated to a supporting role. It gave firms a competitive edge. And for the economy as awhole it generated residual growth that could not be explained by capital and labor. Spending more on research and advertisingwas theway to increase intellectual property.

A new 362-page OECD report "Supporting Investment in Knowledge Capital, Growth and Innovation" provides a fascinating and useful overview of the new face of theworld economy. It also is full of (admittedly preliminary) policy ideas to promote growth in a knowledge-based economy. Needless to say, many of them are very different thanwhatwould have been needed during the Reagan administration.

For the story, go here.

The G-20 mandate to revise international tax rules is moving at an unprecedented pace and is likely to focus on targeted measures to realign value creation and taxing rights, curtail aggressive tax planning, and respond to demands for greater transparency,while also recognizing that countries compete for tax dollars.

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Israel's state comptroller sharply criticized the government's corporate tax policies, including preferential loan repayment terms for multinational companies, in a report to the Knesset.

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