International Tax Update 2012 International Tax Series World Trade Center St. Louis

Transcription

1 International Tax Update 2012 International Tax Series World Trade Center St. Louis May 16, 2012 Mike Burgess, Senior Manager Dallas Will James, Principal St. Louis

2 International Tax Overview

3 International Tax Overview IRS has identified a number of areas of international tax as Tier I issues Tier I issues include transactions that are considered by IRS to be high risk posing highest compliance risk across multiple industries, having significant monetary value, involving substantial compliance risk or being of high visibility These Tier I issues are of strategic importance to IRS & represent its highest compliance priorities Penalties for noncompliance are significant (generally $10,000 per failure, increasing to up to $50,000 per failure) 3

4 International Tax Overview Examples of international issues Foreign Bank Account Reporting (Form TD F ) Foreign Financial Asset Reporting (new Form 8938) Foreign Information Reporting (Form 3520, Form 5471, Form 5472, Form 926, Form 8865, Form 8858) Proper inclusion of all income from international activities (e.g., interest and gains from foreign accounts, Subpart F income) 4

5 International Tax in U.S.

6 International Tax in U.S. Disclosure of Foreign Accounts & Assets

7 Disclosure of Foreign Accounts & Assets New IRC Section 6038D Specified individuals with interest in specified foreign financial assets during year where aggregate value of all such assets is greater than filing threshold must attach a disclosure statement to their income tax return Section 6038D applies to assets held during tax years beginning after March 18, 2010, by specified individuals 7

8 Disclosure of Foreign Accounts & Assets Assets reported on Form 8938, Statement of Specified Foreign Financial Assets. Specified individuals meeting the filing threshold must file the report for tax year 2011 Specified individual is: U.S. citizen U.S. resident alien for any portion of taxable year Nonresident alien who has elected under Code Sec (g) or (h) to be taxed as a U.S. resident Resident alien who elects to be taxed as a resident of a foreign country under a U.S. tax treaty s residence tie-breaker Nonresident alien who is a bona fide resident of Puerto Rico or American Samoa 8

9 Disclosure of Foreign Accounts & Assets Specified foreign financial assets include ownership of: Any financial account maintained by a foreign financial institution & Asset held for investment but to extent not held in an account at a financial institution: Any stock or security issued by a non-u.s. person Any financial interest or contract held for investment that has a non-u.s. issuer or counterparty Any interest in a foreign entity Foreign social security, foreign social insurance or other similar program of a foreign government is not a specified foreign financial asset 9

10 Disclosure of Foreign Accounts & Assets 10

11 Disclosure of Foreign Accounts & Assets Form 8938 filing is separate from Form TD F (FBAR) reporting. FBAR must still also be filed New reporting requirement is much broader than FBAR, so it is possible that individuals who do not have an FBAR filing obligation may be subject to new reporting requirement Form 8938 enforcement is under the IRC. FBAR enforcement is governed under BSA Future developments For tax year 2011, only specified individuals meeting filing thresholds are required to attach Form 8938 with their 1040 IRS may issue regulations in future to require any domestic entity which is formed or availed of for purposes of holding directly or indirectly, specified foreign assets to file Form

12 Disclosure of Foreign Accounts & Assets Section 6038D Penalty Minimum penalty for failing to submit required disclosure is $10,000 & it increases by $10,000 for each 30-day period following notification from Treasury, with a maximum penalty of $50,000 There is a 90-day grace period following notification from Treasury before additional $10,000 penalties accrue Penalty may be waived if taxpayer is able to demonstrate failure to file was due to reasonable cause 12

13 Disclosure of Foreign Accounts & Assets Section 6038D Penalty Accuracy-related penalty: 40% of underpayment of tax if underpayment of tax is a result of a transaction involving an undisclosed specified foreign financial asset Fraud: If underpayment of tax is due to fraud, one must pay a penalty of 75% of underpayment due to fraud Criminal charges: In addition to above penalties, one may be subject to criminal penalties for failure to report specified foreign financial assets or have an underpayment of tax 13

14 International Tax in U.S. Offshore Voluntary Disclosure Program

15 Offshore Voluntary Disclosure Program Background 2009 Voluntary Disclosure Program Announced March 26, 2009 Closed October 15, 2009 Allowed taxpayers with undisclosed offshore assets & financial accounts to come forward under a set penalty framework & avoid criminal prosecution Penalty equal to 20% of highest aggregate value of unreported assets during disclosure period Extremely successful 15,000 voluntary disclosures After program closed, more than 3,000 additional taxpayers came forward 15

16 Offshore Voluntary Disclosure Program Background 2011 Voluntary Disclosure Program Announced February 8, 2011 Closed September 9, 2011 Penalty framework somewhat higher than 2009 program but still allowed taxpayers to avoid criminal prosecution Penalty equal to 25% of highest aggregate value of unreported assets during disclosure period 12,000 voluntary disclosures fewer participants than 2009 program, though not unexpected due to higher penalties & many of most serious offenders presumably took advantage of 2009 program 16

17 Offshore Voluntary Disclosure Program New Extended Program Announced January 9, 2012 Similar to 2011 Voluntary Disclosure Program, but No set deadline to apply Penalty equal to 27.5% of highest aggregate value of unreported assets during disclosure period Reduced penalties apply in limited circumstances Details promised within the next month but have not yet been released Stay tuned! 17

18 Tax in China

19 Corporate Income Tax Basic rate: 25% Qualified small & thin-profit enterprises: 20% High-new tech enterprises (HNTES): 15% Thin capitalization requirements Caishui (2008) No.121 Prescribed debt/equity ratio: 5:1 for enterprises in financial industry; 2:1 otherwise Excessive interest disallowed (deductible only if enterprise can provide documentation that finance arrangement is arm's length or effective tax rate of borrowing enterprise is not higher than domestic lending enterprise) 19

20 Corporate Income Tax Filing Matters An enterprise shall, within 15 days after end of each month or quarter, file a CIT Return & make tax prepayment to tax authority An enterprise shall file an annual CIT Return with tax authority, perform reconciliation & settle tax payable within five months after end of each year 20

21 Business Tax Transactions to be subject to BT Provision of taxable labor services either service provider or service recipient is located in China Transferred intangible assets (not including land use rights) receiving party is located in China Relevant land that is for lease or land use right transferred is in China Immovable property is sold or leased in China 21

22 Business Tax Taxable activity - Transportation - Construction - Installation - Repairs - Decoration & others - Post & telecommunication - Cultural activities & sport Tax rate 3% - Entertainment 5% - 20% - Banking & other financial institutions - Professional service - Restaurant & hotel - Advertising - Leasing (exempt on movable property) - Warehousing - Transfer of intangibles - Transfer of immovable properties 5% 22

23 Value-Added Tax Transactions to be subject to VAT Sale of goods in China Provision of processing, repair or replacement services - Goods are tangible movable goods including electricity, steam & gas - Intangible & immovable goods are nontaxable Importation of goods into China Two categories of taxpayers: General VAT taxpayer ( 一般增值税纳税人 ) Small-Scale VAT taxpayer ( 小规模增值税纳税人 ) 23

24 Value-Added Tax General rate 17% Sales or imports of goods (other than those subject to reduced rate or zero rate) & on provision of processing, repair or replacement labor services Reduced rate 13% Food grains & edible vegetable oils Tap water, heating, air conditioning, hot water, coal gas, liquid petroleum gas, natural gas, methane gas & coal/charcoal products for household use Books, newspapers & magazines Feed, chemical fertilizers, agricultural chemicals, agricultural machinery & plastic film for agricultural purposes Zero rate 0% Export goods, except the following: - crude oil - goods prohibited from export by state, including natural bezoars, musk, copper & copper alloys, platinum, etc. & - sugar 24

25 Other Taxes Consumption Tax Real Estate Tax Resources Tax Stamp Tax Deed Tax Customs Duties City & Rural Area Maintenance & Construction Tax National Educational Surcharge & Local Educational Surcharge Dam Protection Fee 25

26 Tax in Brazil

27 Business Environment Most commercial initiatives tax regulated Quoted prices are deemed to contemplate all taxes Permanent Establishment (PE) concept is not clearly stated in current regulation Only local legal entities can import &/or export to/from Brazil Tax incentives & benefits are offered on underdeveloped geographic areas or associated to certain specific industries 27

28 Tax Law Levels: Federal, State & Municipal Imperative & not conceptual States what is allowed & what is not If a deal does not match literal wording of law, it does not exist for tax purposes Analogy is restricted to very few issues No tax ruling available Taxpayer not allowed to speak with tax authorities Negotiation is not available at any level Changes can only produce effect in following year 28

29 Tax Law Level Federal Tax Law State Tax Law Regulates Corporate Income Tax (IRPJ) Social Contribution on Net Income (CSLL) Social Contributions on Gross Turnover (PIS/COFINS) Economic Domain Intervention Contribution (CIDE) Import/Export duties (II/IE) Excise Tax (IPI) Financial Transactional Tax (IOF) Additional 44 contributions & duties VAT (ICMS) Heritage & property ownership transfer (ITBI) Additional 10 to 15 contributions & duties Municipal Tax Law Service Tax (ISS) Urban Property Tax (IPTU) Additional 3 to 10 contributions & duties 29

30 General Tax Law Concepts Any economic event is a taxable event unless otherwise stated List of exempt activities or events is an integral part of Tax Law Accrual basis is the standard, except when allowed in regard to certain specific activities or situations Expenses are deductible if: Are necessary to generate an income Amount is reasonable towards generated contribution It is standard or usual within industry Donations (with very few exceptions), promotions (social activities with clients as an example), managing directors fringe benefits, among some other regular expenses are not considered necessary for business 30

31 General Tax Law Concepts Physical evidence of services is mandatory to be filed together with posting (written report, printed survey, etc.) Tax audit does not exclude period from being audited again Look back period of five years for tax charge Election for taxation system is done with first payment of the year & cannot be changed within calendar year Withholdings are mandatory for services income & can be offset within same month of collection Payments to nonresident beneficiaries are treated as service imports 31

32 Taxation System Election Real Profit System Traditional taxation system based on adjusted accounting net income Basic rate of 15% Surplus rate of 10% on taxable income that exceeds R$20K per month Deemed Profit System Taxable base is determined as 32% of gross turnover (services) or 8% (trading), regardless actual profit margin of business 32

33 Social Contribution on Net Income Uses same taxable base & payment term as Corporate Income Tax (same taxation system must be used for both charges) Rate of 9% Loss carryover follows same rule of Corporate Income Tax 33

34 Indirect Taxes Service Tax ISS Rates may vary from 2% to 5% depending on city where service is rendered &/or nature of service Value-Added Tax ICMS Rates may vary from 7% to 19% depending on the state where seller & buyer are located Social Contributions PIS & COFINS Combined rates 3.65% (sales tax cumulative regime) 9.25% (VAT noncumulative regime) 34

35 Tax in India

36 Taxes in India Direct Taxes Income Tax Wealth Tax Indirect Taxes Excise Duty/Tax on Manufacturer Sales Tax/Value-Added Taxes Customs Duty/Import Duty Service Tax 36

37 Tax in India Overview Rates of income tax for corporations (domestic & foreign) are summarized below Legal Form Rate Remarks Domestic Company Wholly Owned Subsidiary % Base rate 30% + Surcharge of 5% + Education cess of 3% Foreign Company Branch % Base rate 40% + Surcharge of 2% + Education cess of 3% PE (in any other form) % Base rate 40% + Surcharge of 2% + Education cess of 3% LO - Not permitted to carry business and hence no income so no tax 37

38 Minimum Alternate Tax Minimum Alternate Tax (MAT) MAT is a tax on book profit of companies MAT applies to zero tax companies with high book profits where tax payable is lower than 18.5% of book profit Tax paid under MAT can be set off against tax payable as per normal provisions of Act for a period of 10 years The effective MAT rate is Domestic Company - 20% (Including surcharge & education cess) Foreign Company % (Including surcharge & education cess) 38

39 Company Setup & Registration Indian company will have to obtain an Indian tax registration number, i.e., Permanent Account Number (PAN) & file annual tax returns Permanent Establishment (PE): Presence of a subsidiary/associate company does not per se constitute a PE unless Foreign company's employees reside in India or Indian company's office/work place is used as a place of work Exposure of such presence (employees/fixed place) may be considered as a PE of the foreign company in India Indian company will have to comply with withholding tax provisions Obtain a Tax deduction Number (TAN) & Withhold tax as prescribed under Indian tax laws 39

40 Repatriation of Funds Repatriation of funds in form of dividends: There is a dividend distribution tax (DDT) at rate of % Dividend subject to DDT is exempt in hands of recipient Repatriation of funds in form of royalty/fees for technical services: Withholding tax at rate of 10.56% on gross basis or tax treaty whichever is beneficial provided foreign company has a PAN 20% Such WHT becomes final tax liability tax return to be filed in India Exit by the foreign company (investor): Capital gains tax to be paid Capital gains tax depends on various factors 40

41 Capital Gains on Exit If shares in Indian company are held for more than a year (Long-Term Asset): Traded on Stock Exchange & sold on market gains are exempt Not traded or traded shares sold off market gains are liable to tax at 21.02% If shares in Indian company are held for less than a year (Short-Term Asset): Traded on Stock Exchange gains are taxed at 15.76% Not traded or traded shares sold off market gains are liable to tax at 42.02% Above tax rates are subject to respective tax treaty beneficial provisions e.g., tax treaties with Mauritius, Singapore & Cyprus provide for no capital gains tax in India subject to fulfillment of certain conditions 41

42 Indirect Taxes Excise duty levy on manufacturer tax rate varies depending on product VAT/Sales tax levy on sale of goods tax rate varies from 4% to 12.5% Service tax levy on provision of services tax rate 12.36% Customs Duty levy on import tax rate ranges from 5% to 40% Indian company will have to obtain registrations under: Export-Import Code (IEC) this is required for import & export of any goods into & out of India Excise Laws - levy on manufacture of goods or articles VAT/Sales tax levy on sale of goods Service Tax levy on services provided by a service provider 42

43 Proposed Amendment GAAR Indian Finance Bill, 2012 has proposed to introduce General Anti- Avoidance Rules (GAAR) GAAR provisions are intended to be introduced with main objective of giving precedence to substance over form GAAR provides that any arrangement entered into by a taxpayer may be declared as an impermissible avoidance arrangement Where main objective or one of main objectives of such arrangement is to obtain a tax benefit & among other things Lacks or is deemed to lack commercial substance Most important aspect of GAAR provision is that it can override a tax treaty if conditions prescribed under GAAR are satisfied/ fulfilled 43

44 Proposed Amendment Capital Gains in India Proposals in relation to sale of shares of an Indian company (introduced retroactively 1/4/1962) are mainly to override Supreme Court ruling in Vodafone Vodafone Case - Supreme Court of India has held that transaction of alienation of shares of a foreign company (holding downstream shares in any Indian Company), by a nonresident to another nonresident outside India, is not taxable in India Capital asset (shares of an Indian company) is proposed to include any right in or in relation to an Indian company, including rights of management or control or any other rights whatsoever 44

45 Proposed Amendment Capital Gains in India Transfer (alienation of Indian shares) is proposed to also include transfer of controlling interests in an Indian company Income deemed to accrue or arise in India is proposed to be amended to clarify that any asset being shares/interest in a foreign company shall be deemed to be situated in India if share or interest derives, directly or indirectly, its value substantially from assets located in India 45

46 International Tax Summary

47 International Tax Summary Tax rules & requirements are getting more complex important to understand rules in each country Tax authorities are getting more aggressive; therefore, it becomes more important than ever to be in compliance with all tax rules Taxing regimes are unique, & local expertise is required when entering a new market Tax planning should be a key part of entering any new jurisdiction 47

48 Transfer Pricing Overview

49 Transfer Pricing Overview All intercompany transactions need to take place on arm s-length basis (i.e., as if parties were unrelated) Includes: Services (e.g., management services, R&D, technical, etc.) Transfer of tangible goods (e.g., finished goods, raw materials, work-in-process, etc.) Use of intangible property (e.g., technology, know-how, trademarks, trade names, contracts, processes, etc.) Financing (e.g., loans, guarantee fees, leases, etc.) 49

50 Transfer Pricing Overview Most developing & emerging markets have transfer pricing rules & documentation requirements Penalties are often assessed when a tax authority makes an adjustment to a taxpayer s transfer prices & taxpayer does not have proper documentation Transfer pricing adjustments also lead to double-taxation 50

51 Transfer Pricing Overview Enforcement of transfer pricing rules is on the rise Tax authorities around globe are using transfer pricing adjustments as a means of raising revenues 51

52 Transfer Pricing in U.S.

53 Transfer Pricing in U.S. Adherence to arm s-length standard? Yes taxpayers with crossborder transactions with affiliates are expected to adhere to arm s-length standard Do documentation requirements exist? Yes taxpayers are expected to maintain contemporaneous documentation, which must be submitted to Internal Revenue Services (IRS) within 30 days of request for said documentation Documentation must exist at time tax return is filed for that year 53

54 Transfer Pricing in U.S. What transfer pricing rules are in effect? U.S. has own set of transfer pricing regulations which slightly differ from rest of the world (Section 482 of Internal Revenue Code) Are there penalties for failure to maintain proper transfer pricing documentation? Yes 20% or 40% of additional tax, if an adjustment is made 54

55 Transfer Pricing in Brazil

56 Transfer Pricing in Brazil Adherence to arm s-length standard? No Brazil is one of few countries which does not adhere to arm s-length standard. Uses specific methods focusing on margins for imports & exports 56

57 Transfer Pricing in Brazil Do documentation requirements exist? Yes taxpayers are expected to affirm that they have proper documentation & must provide their computations of their transfer prices in an annual tax disclosure statement. Must also maintain extensive transfer pricing documentation No taxpayers that elect to be taxed under Deemed Profit System are exempt from transfer pricing documentation requirements (32% of gross revenues for services & 8% of gross revenues for trading companies) 57

58 Transfer Pricing in Brazil What transfer pricing rules are in effect? As stated above, Brazil has its own set of transfer pricing regulations, which significantly differ from rest of world & create potential for double-taxation Are there penalties for failure to maintain proper transfer pricing documentation? Yes Penalties are 50% to 75% for companies that maintain documentation but sustain an adjustment, increases to 112.5% in the case of noncompliance 58

59 Transfer Pricing in India

60 Transfer Pricing in India Adherence to arm s-length standard? Yes India adheres to arm s-length standard & has developed specific transfer pricing rules under Income Tax Act. Rules largely conform to OECD s Transfer Pricing Guidelines 60

61 Transfer Pricing in India Do documentation requirements exist? Yes taxpayers are expected to maintain extensive documentation. There are detailed disclosures in tax return (names of affiliates, transfer prices used, choice of method, etc.) which must be prepared by a Chartered Accountant. Transfer pricing studies & intercompany agreements are also required 61

62 Transfer Pricing in India What transfer pricing rules are in effect? As stated above, India largely adheres to OECD s Transfer Pricing Guidelines. However, it does not abide by an arm s-length range as taxpayer s prices must be plus or minus 5% of arm s-length prices 62

63 Transfer Pricing in India Are there penalties for failure to maintain proper transfer pricing documentation? Yes Penalty for concealment of income on account of a transfer pricing addition/adjustment 100 to 300% of tax sought to be evaded Penalty for failure to keep & maintain prescribed documentation 2% of value of international transaction Penalty for nonfurnishing of mandatory transfer pricing report INR 100,000 63

64 Transfer Pricing in India Are there penalties for failure to maintain proper transfer pricing documentation? Penalty for failure to furnish any information or document 2% of value of international transaction for each failure Penalties are 50% to 75% for companies that maintain documentation but sustain an adjustment, increases to 112.5% in the case of noncompliance 64

65 Transfer Pricing in China

66 Transfer Pricing in China Adherence to arm s-length standard? Yes China adheres to arm s-length standard Do documentation requirements exist? Yes There are detailed documentation requirements. Companies do not need to prepare documentation if purchases & sales are less then RMB 200 million (approximately U.S. $31.0M) & less than RMB 40 million for other related-party transactions (approximately U.S. $6.3M). However, tax authorities tend to ignore documentation safe harbor & all loss-making companies are required to have documentation 66

67 Transfer Pricing in China What transfer pricing rules are in effect? China largely adheres to OECD Transfer Pricing Guidelines. There are some minor differences, notably that China requires that a taxpayer use median or above of arm slength range 67

68 Transfer Pricing in China Are there penalties for failure to maintain proper transfer pricing documentation? Yes Penalties for failure to file related-party tax return disclosure form (RMB 2,000 10,000). Providing incomplete or false information is RMB 10,000 to 50,000. Transfer pricing adjustments are subject to a penalty based upon a People s Bank of China lending rate plus 5% interest 68

69 Transfer Pricing Summary

70 Transfer Pricing Summary Transfer pricing rules & requirements are getting more complex important to understand rules in each country Tax authorities are very aggressive; therefore, it becomes more important than ever to maintain proper documentation to avoid adjustments, double-taxation, penalties & interest Transfer pricing is an important form of tax planning &can lower your overall tax rate 70