Int'l Tax News

Our corporate tax ratewas not so uncompetitivewhen President Clinton raised it to 35 percent two decades ago. But now it is entirely out ofwhack, especiallywhen you factor in an additional 4.1 percentage points for state corporate taxes. The average of the other members of the G-7 is 29.7 percent and falling. The average for 33 members of the OECD (excluding the United States) is 25.1 percent. And since Japan lowered its rate in April 2012,we have the highest corporate tax rate of the bunch. By the laws of tax gravity, profits and investment are slipping away from the United States.

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"APB 23 exists because of the tax law -- not the otherway around," said Mark Bielstein of KPMG LLP at the October 16 meeting of the International Tax Institute (ITI) in New York. It's the accounting rules' attempt to dealwith the tax law's deferral for active foreign earnings.

Let's change the debate about repatriation. Some of theworld's largest companies are not paying any tax anywhere, yet they've managed to twist the national debate about their tax bills into a tacit agreement among thewashington establishment to lower their rates, convert to territoriality, and consider relief for the repatriation of their deferred foreign earnings.

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Frequently at bar association meeting discussions, the client is an abstraction. But participants at the recent International Bar Association (IBA) annual conference in Bostonwere treated to comments from a real live, flesh-and-blood client in the form of Tim M. Barns from Sankaty Advisors, the distressed-asset division of Bain Capital.
A panel at the IBAwas devoted to restrictions on deductions for acquisition interest. The latest crop of rules and proposals don't askwhether interest expenses are meritorious or not -- they just disallow some or all of the deductions.

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Practical information reporting is the holy grail of tax enforcement. Taxpayerswant to minimize compliance costs,while tax administratorswant useful information to allow them to determine compliance risks. Finding a happy medium is rarely easy.when that process is transferred to a global scale, aswith the recent OECD proposal, the search for middle ground becomes even harder.

Action 13 of the OECD's base erosion and profit-shifting plan calls for a reexamination of transfer pricing documentation and a shift to country-by-country reporting. Transparency and certainty are the themes of actions 11 through 14,which encompass information monitoring, improving dispute resolution mechanisms and information flow, and disclosure requirements. The goals are to provide predictability to taxpayers and to counteract BEPS by giving tax authorities the information they need for enforcement.

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A corporate tax scheme adopted in the U.K. in 2013 that provides tax exemptions on royalties from intellectual property rights in order to attract innovative companies, especially those in the information technology sector, contains measures that violate the European Union code of conduct against harmful taxation.

According to a decision reached by the European Commission and to be presented Oct. 22, the U.K.'s "patent box" corporate tax scheme violates two important principles of the EU corporate code of conduct designed to eliminate harmful tax competition. In addition, the EU executive body has concluded that itwould be best for the U.K. to repeal the scheme instead of trying to adjust it. The U.K. patent box tax scheme took effect in April.

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The Swiss town of Baar boasts clean air, easy access to ski slopes and some of Europe's lowest personal taxes. London? Traffic and perpetual drizzle.

Yet executives at Noble Corp. (NE), a provider of deepwater oil drilling rigs, are in the process of moving headquarters from Baar to the British capital, citing the talentedworkforce and easy airline connections from Heathrow, Europe's busiest international airport. On top of that, the U.K. tax rate is now competitivewith Switzerland's historically corporate-friendly tax regime.

Noble is part of awave of overseas companies moving head offices to London, lured in part by the country's declining corporate taxes. The relocations underscore Prime Minister David Cameron's efforts to make the country more attractive to foreign companies -- and may help London become less dependent on the financial services industry,which has been retrenching since the 2008 crisis.

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The Swiss town of Baar boasts clean air, easy access to ski slopes and some of Europe's lowest personal taxes. London? Traffic and perpetual drizzle.

Yet executives at Noble Corp. (NE), a provider of deepwater oil drilling rigs, are in the process of moving headquarters from Baar to the British capital, citing the talentedworkforce and easy airline connections from Heathrow, Europe's busiest international airport. On top of that, the U.K. tax rate is now competitivewith Switzerland's historically corporate-friendly tax regime.

Noble is part of awave of overseas companies moving head offices to London, lured in part by the country's declining corporate taxes. The relocations underscore Prime Minister David Cameron's efforts to make the country more attractive to foreign companies -- and may help London become less dependent on the financial services industry,which has been retrenching since the 2008 crisis.

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Energy multinational Cairn's Delhi High Courtwin gives certainty for non-residents claiming the concessional tax rate of 10% on long-term capital gains arising on the disposal of listed securities in India.

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Harm Oortwijn, director of international tax and reporting at Paramount Pictures and owner/director of EA Tax Services, looks at trends regarding international tax transparency including the role of tax treaties, and analyseswhy greater cooperation via information exchange mechanisms is necessary.

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Politicians are now driving the effort to tackle base erosion and profit shifting,which is different than before, a panel of tax executives and practitioners have told a conference in London.

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The Irish government is targeting a maneuver that Apple Inc. and other companies have used to minimize taxesÔøΩa move aimed at countering international criticism but one that some accounting experts say may have little effect onwhat companies actually pay.

Ireland,whose low corporate income-tax rate figures in many big companies' tax strategies, plans to change rules that businesses use to become "stateless" for tax purposes, the finance ministry said.

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Irish Finance Minister Michael Noonan promised to amend the country's corporate tax laws, trying to calm a controversy over how U.S. companies use the nation to lower their tax bills.

"Iwill be bringing forward a change to ensure that Irish registered companies cannot be 'stateless' in terms of their place of tax residency," Noonan said in Dublin as part of the 2014 budget today. "Irelandwants to be part of the solution to this global tax challenge, not part of the problem."

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The Irish government plans to enact legislation banning "stateless" companiesÔøΩmultinational entities that are incorporated in Ireland, but don't have a tax residence anywhere on the globe.

Michael Noonan, Ireland's Minister of Finance, said the provisionwould be includedwith the Finance Bill, expected to accompany the annual budget later this year, but gave few details on how itwouldwork.

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This report reviews proposals by Houseways and Means Committee Chair Dave Camp, R-Mich., and Senate Finance Committee member Michael B. Enzi, R-Wyo., to shift the United States from its current system of deferring taxation of active foreign income to a system thatwould exempt foreign business income from U.S. tax.

In a recent article, the authors described how a principled exemption system should be designed so as to protect the U.S tax base. It is possible to modify the Camp and Enzi proposals to address theirweaknesses inways consistentwith a principled exemption system. The authors recognize that those changeswould make the proposals unattractive to many in the multinational corporate community; however, that likely is true of any exemption system thatwould be a material improvement over current law. In the authors' view, unless a shift to an exemption systemwould constitute a material improvement over current law, the likely revenue losses and transition costs of that changewould outweigh the benefits.

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Google funnelled ÔøΩ8.8bn of royalty payments to Bermuda last year, a quarter more than in 2011, underlining the rapid expansion of a strategy that has saved the US internet group billions of dollars in tax.

By routing royalty payments to Bermuda, Google reduces its overseas tax rate to about 5 per cent, less than half the rate in already low-tax Ireland,where it books most of its international sales.

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European Union leaders should tell technology companies that on tax issues, "we have a problem," said Angel Gurria, head of the Organization for Economic Cooperation and Development.

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Writing about cricket might be easier. Joseph Andrus, head of the OECD transfer pricing unit, isworking on the transfer pricing aspects of the OECD base erosion and profit-shifting action plan. He appeared at the International Bar Association annual meeting in Boston on October 10. There he fielded questions about his role in implementing the plan and transfer pricing generally. He suggestedwewrite about the obscure rules of cricket scoring,which are as esoteric as transfer pricing.

Askedwhether the arm's-length methodwas doomed, Andrus replied that itworkswell in many contexts, but that solutions need to be found for situationswhen it doesn't. The G-20 doesn'twant the OECD to be constrained by "theological" arguments, he said. The arm's-length method doesn't require all activity outside Asia to be priced at cost plus 5 percent, he said. Butwhile the OECD is thinking more freely about solutions, formulary apportionment is not on the table, having been rejected by national representatives.

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The scope of thework on permanent establishments set forth in the Organization for Economic Cooperation and Development's action plan to combat base erosion and profit shifting (BEPS) is likely to expand, according to awashington, D.C, practitioner.

Steve Nauheim of PricewaterhouseCoopers LLP said Oct. 8 that thework of Action 7 of the BEPS plan,which calls for changes to Article 5 of the OECD Model Tax Treaty, is likely to be expanded beyond commissionaires.

Action 7 tasks the OECDwith decidingwhether to treat commissionaires as dependent agents that bind their principals, a treatment that creates a PE of the principal in the jurisdictionwhere the commissionaire operates.

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Transfer Pricing Associates has submitted comments on the OECD's revised discussion draft on the transfer pricing aspects of intangibles.

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With some tax administrations already taking steps to address base erosion and profit shifting, ahead of the OECD's BEPS action plan recommendations, it is important for businesses to reassess and potentially realign their structures to ensure that theywill be effectivewhen new substance-based guidelines are adopted.

Speaking during an October 8 PricewaterhouseCoopers LLPwebcast focusing on the sections of the BEPS action plan dealingwith substance and permanent establishment, David Ernick of thewashington office of PwC said the OECD's BEPS project has magnified the importance of questions of substance in cross-border transactions.

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OECD officials and representatives of OECD member countrieswho participated in an October 1 "business dialogue" on the base erosion and profit-shifting action planwere receptive to the business community's concerns and expressed awillingness to take those concerns into account as they develop measures to implement the BEPS plan, according to meeting attendees.

The meeting, held at OECD headquarters in Paris,was organized by the Business and Industry Advisory Committee (BIAC), the official consultative body to the OECD. Attending the meeting (whichwas closed to the press)were about 100 members of BIAC; members of the OECD secretariat; the heads of OECDworking parties 1 and 6; and government representatives from Australia, France, Germany, Italy, Mexico, the Netherlands, and Spain. Robert Stack, Treasury deputy assistant secretary (international tax affairs),was scheduled to attend for the United States but canceled his appearance.

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"Without U.S. support, therewill be no BEPS action plan," declared Raffaele Russo, senior adviser, OECD Centre for Tax Policy and Administration, on October 8 at the International Bar Association meeting in Boston.

Participantswere given the opportunity to voice their objections to the base erosion and profit-shifting action plan . Those that screamed the loudestwere from countries that have their own currencies andwhose governments are least likely to adopt all action plan prescriptions. Reeves C.westbrook of Covington & Burling LLP speculated that the U.S. governmentwould resist most BEPS advice although it supports the plan.

"BEPS is not about bashing business," said Russo. "It is a recognition, from the highest political levels, that there is something to be done."

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Executives at a California chip maker, Applied Materials, highlighted a number of advantages in announcing a merger recentlywith a smaller Japanese rival, but an important onewas barely mentioned: lower taxes.

The merged companywill save millions of dollars a year by moving -- not to one side of the Pacific or the other, but by reincorporating in the Netherlands.

From New York to Silicon Valley, more and more large American corporations are reducing their tax bill by buying a foreign company and effectively renouncing their United States citizenship.

''It's almost like the holy grail,'' said Andrew M. Short, a partner in the tax department of Paul Hastings,which advises a number of American corporations on deals. ''We spend all of our timeworking for multinationals, thinking about howwe're going to expand their business internationally and keep the taxation of those activities offshore,'' he added.

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Business is concerned that unilateral tax and transfer pricing measures recently proposed or adopted by some jurisdictions to address base erosion and profit shifting could jeopardize the coherence of internationalwork on BEPS before it even gets off the ground, practitioners told Bloomberg BNA following the Organization for Economic Cooperation and Development's Oct. 1 consultation on the project.

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Harvard Law School professor Stephen E. Shay, a former Treasury deputy assistant secretary (international tax affairs), said the anti-base-erosion proposal, dubbed "option C," floated by Houseways and Means Committee Chair Dave Camp, R-Mich., has broad exceptions and that "its characterization as an anti-base-erosion provision seems to me utterly misleading."

Option Cwould "essentially create a U.S. tax advantage for intangible income earned directly or through a [controlled foreign corporation] from foreign markets," Shay said, adding that "there is almost no policy justification for this rule." He spoke October 4 at a New York Law School symposium celebrating the 100th anniversary of the U.S. individual income tax system.

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The victors ofworldwar I did notwant multinationals to allocate profits to their former colonies. The developing nations protested that they needed revenue. And, in fact, two-sided methods that spread profits across the footprint of multinationals' operationswere already inwidespread use. But the powers that be beat back the opposition, and the League of Nations consecrated transfer pricing methods that directed the flow of income to corporate headquarters.

Under these one-sided methods, presumably unsophisticated affiliateswould be assigned modest levels of profit for the routine functions they performed. And thenwithout any further check on the reasonableness, the often enormous residual profitswould be assigned to headquarters. According to a recent paper by Brettwells at the University of Houston Law Center and Cym Lowell of McDermottwill & Emery, this is the "fundamental mistake" of our transfer pricing rules that has contributed to the problem of base erosion and profit shifting. (Seewells and Lowell, "Tax Base Erosion: Reformation of Section 482's Arm's Length Standard," University of Houston Law Center No. 2013-W-6, Aug. 15, 2013.)

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The other day, Exxon Mobil Corp. announced that itwould recognize gay marriage for its employees. Thiswas front-page news, right up therewith a New Jersey Supreme Court judge telling the state it had to do the same.

Why? Because Exxon is a politically conservative oil company that makes most of its political donations to Republicans? No, because Exxon is such a huge non-state actor that anything it does is tantamount to a government action. In The Power Elite, C.wright Mills cogently explained how giant multinational corporations had escaped thewrit of national governments.

Exxon is one of theworld's 10 largest multinational corporate groups measured by market value. At the time of thiswriting, nine companies on that listwere American, alongwith half of the top 50. Some of theworld's largest companies pay very little tax anywhere in theworld. But to their home governments, they are often national champions.

Someone else's multinationals are unfairly skipping out on their corporate tax obligations to OECD member and observer countries. Thatwas the genesis of the OECD base erosion and profit-shifting project,which has produced an action plan that is designed to repair and preserve the fragile international consensus in the short run, but may end up upsetting it in the long run. In the long run, the international consensus is dead, and everyone knows it, but BEPS has to be tried and allowed to fail first.

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The Organization for Economic Cooperation and Development has asked the business community for input on how to draft aworkable country-by-country reporting template that requires companies to report their income in each country inwhich they operate.

In a memorandum on transfer pricing documentation and country-by-country reporting, issued Oct. 3, the OECD said taxpayers should be prepared to discuss "which approaches to the reporting of incomewould be most useful to governments and most readily available from existing accounting records" at the organization's Nov. 12-13 consultation in Paris.

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Despite massive investment in international tax planning designed to flatten difference in taxes across countries, the location of a multinational corporation's headquarters continues to be a major factor in determining itsworldwide effective tax rate, a corporate tax specialist said.

"There appears to be no doubt that there is an enormous amount of tax planning going on, and there also appears to be no doubt that there has not been enough of it towipe out the difference across countries," Doug Shackelford, director of the University of North Carolina's Tax Center in Chapel Hill, N.C., said Oct. 3 at a National Bureau of Economic Research conference on tax policy and the economy.

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A group of U.S.- and foreign-based multinationals,while vigorously objecting to the proposed concept of "intangible related returns" in the Organization for Economic Cooperation and Development's 2013 revised intangibles discussion draft, has told the organization that adopting such a radical conceptwould require "special measures."

In an Oct. 1 letter, the Transfer Pricing Discussion Group said adopting the concept of intangible-related returnswould "shift" the OECD transfer pricing guidelines to emphasize functions and de-emphasize contracts, funding and risks, thus requiring countries to adopt new legislation and to negotiate new provisions in their tax treaties.

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With international tax rules firmly in the spotlight, Mirna Screpante, invited tax researcher at the Max Planck Institute for Tax Law and Public Finance, takes another look atwhy a new approach for taxing companies is needed, and how this might look.

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More than 300 senior tax officials from more than 100 jurisdictions and international organisations met in Paris on September 26 and 27 to discuss solutions to unintended double non-taxation caused by base erosion and profit shifting (BEPS).

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France's 2014 draft Finance Bill has been released.with revenue-raising a clear objective, anti-abuse measures dominate, and companies face a higher tax bill.

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Japanese Prime Minister Shinzo Abe said Japan is considering corporate tax reductions and the elimination of a special reconstruction tax, and is continuingwith plans to implement a consumption tax hike starting next year.

At an Oct. 1 Tokyo news conference, Abe said his updated tax plan is part of economic changes aimed at getting Japan out of its severe deflationary state.

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3M Co.'s challenge to regulations under section 482 holds the promise of a major development in the evolution of the rules on blocked income. Although the fundamental controversy has been around for several years, 3M's case is the first to address the 1994 revision to the regulations. Over 40 years, the government has lost three cases, including one at the Supreme Court, on related issues.

The controversy in 3M Co. v. Commissioner, No. 005816-13 (T.C. 2013), involves a Brazilian restriction on the payment of royalties from 3M Brazil to 3M. The IRS asserts that those restrictions cannot be taken into account because the requirements of reg. section 1.482-1(h)(2)were not met.

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A new survey announced at EY's 32nd Annual International Tax Conference today brings to life the conference theme "Success under pressure" and explores
the combination of external pressures and internal corporate plans for growth that international
tax and finance executives are managing.

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Multinational companiesÔøΩboth U.S. and foreignÔøΩare major performers of industrial research and development (R&D) in the United States. For U.S. multinational companies, U.S. parent companies play a dominant role in U.S. R&D activity, accounting for about three-quarters of the domestic R&D performed by all U.S. businesses. Through their U.S. affiliates, foreign multinational companies also play a major role: majority-owned U.S. affiliates account for about 15 percent of U.S. industrial R&D, triple their share of production or employment by all U.S. businesses.

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The European Union reached a major milestone in the second quarter of 2013when it officially emerged from its year-and-a-half recession. According to Eurostat, the European Union's statistics office, the 17 countries that use the euro saw economic output grow by 0.3% in Q2 compared to the previous quarter.

Now that the EU's economic output has started to grow, (hopefully) multinational businesseswill get some economic relief. Companies that have been seeing earnings from their European operations decline for the past several months are starting to turn the corner,with growth thatwill drive profitably in these regions again.we're crossing our fingers that the trend continues … but it may not be time to celebrate just yet.

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A rented office overlooking a dusty rail track near Madrid's airportwas until recently theworkplace ofwhatwould appear to be the most productiveworker in all of Spain.

From here a single employee presided over a company that from 2009 to 2011 made ÔøΩ9.9bn of net profits, allwhile earning an annual salary of only ÔøΩ55,000.

The personwasworking for ExxonMobil Spain SL, a holding company for theworld's largest oil group by value,which for several years used a relatively unknown part of Spanish tax law to transfer billions of euros from foreign subsidiaries to the US, helping to significantly reduce its tax bill.

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Review & Outlook (Wall Street Journal)

The $29 billion merger that America's Applied Materials AMAT +2.21% and Japan'sTokyo Electron 8035.TO -0.73% announced on Tuesday is a rare trans-Pacific marriage inwhich a U.S. firm seems to be the dominant player. As eye-catching, the companies say that their merged entitywill be incorporated not in Japan or in North AmericaÔøΩbut in the tax-friendly Netherlands.

Among OECD countries, the U.S. ranks at the bottomwith a combined statutory federal and state corporate income tax rate of 39.1%, and Japan is next on the dishonor roll at 37%. America is also, er, exceptional for taxing overseas profits,which dissuades companies from bringing back and reinvesting this capital at home.

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BMC Software Inc. is appealing a decision by the U.S. Tax Court that the IRS properly reduced a section 965 dividends received deduction the company receivedwhen it repatriated $721 million from outside the U.S. during its 2006 tax year.

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