2015 International Tax Developments December 3, 2015

Transcription

1 2015 International Tax Developments December 3, 2015

2 U.S. International Tax Developments Foreign Tax Credits Subpart F Partnerships Section 367 Other Treaties Inversions 2016 Budget A New Approach to the IC-DISC Page 2

3 Foreign Tax Credits Page 3

4 Final Splitter Regulations Treasury and the IRS finalized the foreign tax credit splitter regulations related to August 2010 legislation Reverse Hybrid Splitter Arrangements Separation of income and taxes Loss-Sharing Splitter Arrangement A shared loss of a U.S. combined group that could be used under foreign law to offset the group s own income (in the current or previous year) Hybrid Instrument Splitter Arrangement Payments give rise to foreign income taxes paid or accrued by the owner of the instrument Payments are deductible by the issuer under the laws of its foreign jurisdiction Payments do not give rise to income for U.S. federal income tax purposes Page 4

5 Economic Substance Doctrine Still litigating matters related to tax shelters and tax motivated transactions Salem Financial, Inc. v. United States was generally affirmed on appeal Involved a STARS transaction $500 Million in FTCs denied and upheld Bank of New York Mellon v. Commissioner and American International Group v. United States BNY - $215 million deficiency asserted AIG - $300 million refund claim denied Court stated - purpose of the foreign tax credit is to facilitate global commerce by making the IRS indifferent as to whether a business transaction occurs in this country or in another, not to facilitate international tax arbitrage Page 5

6 Economic Substance Doctrine Lehman Brothers Case Case involved stock loan transactions Lehman borrowed stock in UK corporations from third party lenders over the dividend record date; 1-2 days later Lehman on-lent the shares to its UK subsidiary. Lehman s UK subsidiary received the dividends and paid a substitute dividend payment to Lehman and Lehman a substitute dividend payment to the original lender Example: Lehman generated $10 of taxable income and $10 of FTCs resulting in $6.5 of excess foreign tax credits. FTCs were denied under Section 901(k) Page 6

7 Subpart F Page 7

8 Branch Rule Branch Rules relevant in situations where there is a foreign holding company holiding CTB foreign entities The branch rules can cause Subpart F income inclusions AM , a Chief Counsel Advice ( CCA ), addresses the 954(d)(2) branch rule regulations and how to determine the effective foreign rates of tax under the tax-rate disparity test. Does a branch exist? How to determine the tax rate disparity test? CCA applies a 5 step analysis Page 8

9 956 Anti-Avoidance Rule Treasury issued Temp Regs. Prior Rule applied only if CFC funded a new CFC with a capital contribution or debt and new CFC made investment in US property New rule expands to funded with capital contribution, debt or other and also extends to partnerships controlled by a CFC Still need to fail the principal purpose test Page 9

10 Section 956 Proposed Regulations Obligations for Foreign Partnerships Is the obligation of a foreign partnership held by a CFC an obligation of the foreign partnership (foreign) or its partners (U.S.) Regs abandon the entity theory in favor of the aggregate theory. Concerns No consideration as to the use of the funds by the foreign partnership If CTB foreign entity with limited liability a US person has no liability for the obligation Pledges and Guarantees Rule expanded to include U.S. obligations and those treated as U.S. obligations such as obligations of a foreign partnership Obligations of DREs It is clear that obligations of DREs owned by US become US obligations under Section 956 But is it clear? Statute requires US to be liable for obligation Inconsistent with other provisions US partnership obligations are US property even if partners are foreign Page 10

11 Active Rents and Royalties Exception: Temporary Regulations Rents and royalties are generally included in a CFCs foreign personal holding company income Active rents and royalties received from unrelated parties are generally excluded from Subpart F income Active CFC involved in the development CFC involved in the marketing Regs. address cost sharing payments does not cause CFC to be considered involved Page 11

12 Partnerships Page 12

13 Transfers of Property to Partnerships with Related Foreign Partners Notice announced that Treasury and the IRS intend to issue regulations under 721(c) (transfers to partnerships) to ensure that, when a U.S. person transfers certain property to a partnership that has foreign partners related to the transferor, income or gain attributable to the property will be taken into account by the transferor either immediately or periodically. IRC 721(a) will not apply and the transfer will be fully taxable if 721(c) property is transferred (built in gain property that is not excluded property) unless the Gain Deferral Method applies in Excluded property is cash or cash equivalents, securities or proeprty with less than $20,000 of built in gain. There is a $1 million deminimis rule Page 13

14 Section 367 Page 14

15 New Proposed Regs. under 367(d) New Proposed Regs. under 367(d) Foreign goodwill and going concern value exceptions to 367(d) eliminated. Active trade or business assets exception also limited. Effective date September 14, 2015 The proposed regulation is impossible to reconcile, and is at odds, with the clear, relevant legislative history, as discussed by Treasury and the IRS in the regulation s preamble. Treasury and the IRS obviously have decided they don t like the foreign goodwill exception The Obama Administration has proposed to change the law to include goodwill, going concern value and workforce-in-place in 936(h)(3)(B) The new regulation effectively forces taxpayers to treat goodwill and going concern value as 367(d) assets, and precludes them from qualifying for the active trade or business exception The legislative history, as discussed in the regulation s preamble, is clear that no gain will be recognized on the transfer of goodwill and going concern value for use in an active trade or business. The proposed regulation obviously is contrary to the statute s legislative history Page 15

16 Section 367 GRAs Treasury and the IRS issued final regulations in November 2014 that amend the rules governing failures to file gain recognition agreements and related documents, or to satisfy other reporting obligations, associated with transfers of property to foreign corporations The 367(a) regulations provide exceptions to the general income recognition rule of 367(a) for certain transfers by a U.S. transferor of stock or securities to a foreign corporation. These exceptions generally require the U.S. transferor to file a GRA and other related documents. Under the terms of a GRA, the U.S. transferor must agree to include in income the gain realized but not recognized on the initial transfer of stock or securities and to pay interest on any additional tax due if a gain recognition event occurs during the five-year term of the GRA A failure to comply with the GRA rules can trigger gain recognition. An example is the failure to file an annual certification. The previous regulations provided that if there was a failure to comply with the GRA rules, the U.S. transferor would have to recognize the full amount of gain realized on the initial transfer of stock or securities unless the transferor could demonstrate that the failure was due to reasonable cause and not willful neglect under Treas. Reg (a)-8(p). Page 16

17 Section 367 GRAs In addition, a U.S. person who transfers property to a foreign corporation in certain nonrecognition transactions also is subject to the reporting requirements of 6038B. The U.S. transferor generally is required to file IRS Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. The form must identify the transferee foreign corporation and describe the property transferred. The penalty for failure to satisfy the 6038B reporting requirement is equal to 10% of the fair market value of the property at the time of the exchange, but not to exceed $100,000 unless the failure was due to intentional disregard of the reporting obligations. If the U.S. transferor demonstrates that the failure was due to reasonable cause and not willful neglect, however, no penalty is imposed. Treasury and the IRS were concerned that the previous reasonable cause standard might not be satisfied by U.S. transferors in many common situations even though the failure was not intentional and not due to willful neglect. Treasury and the IRS believe that full gain recognition under 367(a) should apply only if a failure to timely file an initial GRA or a failure to comply with a 367(a) GRA regulations with respect to an existing GRA is willful. They believe that the penalty imposed by 6038B generally should be sufficient to encourage proper reporting and compliance However, the previous reasonable cause standard continues to apply to U.S. transferors seeking relief from the 6038B penalty. Page 17

18 Other Developments Page 18

19 International Exam Capacity IRS intends to create more agile audit function by retraining domestic examiners to handle international issues Can get insight to the training slides being used at: -Practice-Units Page 19

20 E&P Final regulations under 312 that clarify the 312 regulations regarding the allocation of earnings and profits in tax free transfers from one corporation to another if the transferee corporation transferred all of the transferor corporation s assets to a controlled subsidiary following the reorganization transfer, then that controlled subsidiary would succeed to the transferor corporation s earnings and profits Treasury and the IRS subsequently proposed 381 regulations providing that only the direct acquiring corporation will succeed to the earnings and profits 381 Regulations eliminate the ability to electively create certain results Page 20

21 Tax Treaties Rand Paul has indicated he will continue to object to any treaties moving to the Senate floor by unanimous consent under 4 th Amendment privacy rights He is happy to have them advance but with amendments to the OECD exchange of information provisions No US Tax Treaty or Protocol has been approved over the past 5 years. Page 21

22 Inversions Page 22

23 Notice Issued by U.S. Treasury on November 19, 2015 Intent to issue regulations under Section 7874 Tighten the anti-inversion rules Reduce the potential U.S. tax benefits of an inversion Restricts ability to combine U.S. and foreign corporation if new foreign parent will be in a 3 rd jurisdiction. Requires that the ownership continuity percentage remain below 60%. If above 60% US denies use of tax attributes to shelter tax on asset transfers outside the U.S. If above 80%, foreign parent will be treated as U.S. corporation for all purposes. Effective Date of regulations will be November 19, 2015 Page 23

24 ADMINISTRATION S 2016 BUDGET HIGHLIGHTS Page 24

25 19-Percent Minimum Tax on Foreign Income Under the proposal, the foreign earnings of a CFC or a branch or from the performance of services would be subject to current U.S. tax at a rate of 19% less 85% of the per-country foreign effective tax rate (the residual minimum tax rate) The foreign effective tax rate would be computed on an aggregate basis with respect to all foreign earnings and the associated foreign taxes assigned to a country for the 60- month period that ends on the date on which the domestic corporation s current taxable year ends, or in the case of CFC earnings, that ends on the date on which the CFC s current taxable year ends. Taxes would be those eligible for FTC Minimum tax would apply with or without repatriation, but would create PTI Page 25

26 Reverse FATCA Reporting The proposal would require certain financial institutions to report the account balances for all financial accounts maintained at a U.S. office and held by foreign persons Page 26

27 14-Percent One-Time Tax on Previously Untaxed Foreign Income This is in conjunction with the 19 % minimum tax Tax payable over 5 years Page 27

28 OECD Base Erosion Profit Shifting Initiative BEPS lays the foundations of a modern international tax framework Profits will be taxed where Economic Activity Occurs Value is Created Page 28

29 Short Term Focus Time is now to focus on the upcoming challenges Supporting the implementation of the recommended changes in a consistent and coherent manner Monitoring the impact on double non-taxation and on double taxation Designing a more inclusive framework to support implementation and carry out monitoring Page 29

30 Applicable Timeframe Some initiatives can be applicable immediately Revisions to the Transfer Pricing Guidelines U.S. does not follow OECD Transfer Pricing Guidelines Other countries may have to change their transfer pricing laws Some will require changes to tax treaties Some will require domestic law changes Hybrid mismatches CFCs Interest Deductibility Country by Country Reporting Mandatory Disclosure Rules Preferential IP regimes will need to be aligned with the harmful tax practices criteria Page 30

31 Developmental Challenges Some countries have enacted unilateral measures Some countries are more aggressive than others Practitioners have spoken negatively Page 31

32 Action #1 Digital Economy Understanding how to tax the digital economy is highly confusing. Sale of Goods? License? Service? Combination? The answer impacts character and sourcing of income More guidance is needed The Digital Economy Final Report is the second-longest of the BEPS reports at 285 pages. The Digital Economy is Becoming the Economy The Digital Economy and its business models present key features that are relevant in determining how to tax global profits Page 32

33 Action #1 Digital Economy Modify the list of exceptions to the definition of permanent establishment ( PE ) to ensure that each of the exceptions included therein is restricted to activities that are otherwise of a preparatory or auxiliary character, and to introduce a new anti-fragmentation rule to prevent the use of these exceptions through the fragmentation of business activities among closely-related enterprises Page 33

34 Example #1 Under existing tax treaties, storing goods in a warehouse by itself generally does not create a PE, however Action #1 changes the game. The maintenance of a very large warehouse in which a significant number of employees work for purposes of storing and delivering goods sold online to customers of a foreign online seller of physical products (whose business model relies on proximity to customers and quick delivery to clients) would constitute a PE of the seller under the new standard. Page 34

35 Example #2 The definition of PE also was modified to address circumstances in which artificial arrangements relating to the sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts, such that the sales should be treated as if they have been made by that company. Thus, if the sales force of a local subsidiary of a foreign online seller of tangible products or an online provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective large clients for those products or services, and these contracts are routinely concluded without material modification by the parent company, this activity would result in a PE for the parent company. Page 35

36 Digital Economy CFC Rules The controlled foreign corporation ( CFC ) proposals also would treat income that is typically earned in the digital economy as subject to taxation in the jurisdiction of the ultimate parent company (i.e., like Subpart F income), with the aim of eliminating so-called stateless income. Page 36

37 Abandoned Approaches Withholding taxes on digital transactions A significant economic presence nexus rule An equalization levy to tax a non-resident s economic presence in a country Although not part of Action #1, countries are still free to implement any of these to present profit shifting and base erosion Subject to tax treaty provisions Page 37

38 Action #2 Hybrids The report explaining the proposed new hybrid rules is an incredible 454 pages in length Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double nontaxation, including long-term deferral This has been the focus of international tax planning for the past years. These arrangements result in significant tax base erosion around the world Page 38

39 Action #2 Hybrids The rules apply automatically, and there is a primary rule and a secondary, or defensive, rule. This prevents more than one country from applying the rule for the same arrangement and avoids double taxation Primary rule: Deny deduction to the extent the amount is not included in the taxable income of the recipient, or deny deduction if recipient can also deduct the payment If the primary rule does not apply, then the counterparty jurisdiction can generally apply a defensive rule, requiring the deductible payment to be included in income or denying the duplicate deduction, depending on the nature of the mismatch Page 39

40 Action #2 Hybrids Part 2 addresses rules designed to ensure that hybrid instruments and entities, as well as dual resident entities, are not used to improperly obtain the benefits of tax treaties and that tax treaties do not prevent the application of the changes to domestic law recommended in Part 1 Part 2 proposes to limit the ability to use tax treaties when neither entity claims the income Page 40

41 Action #3 - CFC Rules Designed to ensure that jurisdictions that choose to implement them will have rules that effectively prevent taxpayers from shifting income to foreign subsidiaries Building blocks only Options presented show that no consensus reached by the drafters Page 41

42 Action #4 Interest Final Report does not differ significantly from the earlier discussion draft, which presented a number of choices and left restrictions up to individual countries It analyzes several best practices and then provides a suggested approach The recommended approach is based on a fixed ratio (10% to 30%) rule that limits an entity s net deductions for interest and payments economically equivalent to interest to a percentage of its earnings before interest, taxes, depreciation and amortization (EBITDA) Sounds similar to US Section 163(j) limitation. In addition to fixed ratio, also a worldwide group ratio Page 42

43 Action #5 Harmful Tax Practices Profits should be aligned with the substantial activities that generate them Action #5 developed in relation to IP regime sand allows a taxpayer to benefit from an IP regime only to the extent that the taxpayer itself incurred qualifying research and development ( R&D ) expenditures that gave rise to the IP income This nexus approach will ultimately limit the toxicity of patent boxes in the eyes of the OECD Page 43

44 Action #5 Harmful Tax Practices In the area of transparency, there was an agreement regarding the exchange of rulings that could give rise to BEPS concerns. There will be a compulsory spontaneous exchange of rulings related to: (1) preferential regimes; (2) cross-border unilateral advance pricing agreements or other unilateral transfer pricing rulings; (3) a downward adjustment to profits; (4) permanent establishments; and (5) conduits. Other categories of rulings can be added to the list if the OECD s Forum on Harmful Tax Practices agrees that the absence of an exchange would give rise to BEPS concerns The Report includes a review of 43 preferential regimes, 16 of which are IP regimes. In respect of substantial activity, the IP regimes reviewed were all considered inconsistent, either in whole or in part, with the nexus approach described in the report. Countries with these regimes will now need to review them for possible changes to conform. Page 44

45 Action #6 Treaty Abuse Taxpayers engaged in treaty shopping and other treaty abuse strategies undermine tax sovereignty by claiming treaty benefits in situations in which these benefits were not intended to be granted, thereby depriving countries of tax revenues. The BEPS participant countries have therefore agreed to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping Page 45

46 Action #6 Treaty Abuse LOB Provisions Limitation on benefits based on meeting certain conditions PPT Provisions Principal Purpose Test More general anti-abuse rules U.S. will not follow PPT provisions in its treaties, however US practitioners will need to be familiar with these rules as they may encounter foreignto-foreign situations Page 46

47 Action #7 PE Status Preventing the Artificial Avoidance of Permanent Establishment Status Limit or eliminate protection of commissionaire structures where the activities that an intermediary exercises in a country are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, that enterprise should be considered to have a taxable presence in the country unless the intermediary is performing these activities in the course of an independent business Expand 5(5) and 5(6) of the model treaty to habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise from habitually concludes contracts Depending on the circumstances, activities previously considered to be merely preparatory or auxiliary in nature may today correspond to core business activities. In order to ensure that profits derived from core activities performed in a country can be taxed in that country, Article 5(4) will be modified to ensure that each of the exceptions included therein is restricted to activities that are otherwise of a preparatory or auxiliary character. Page 47

48 Action #11 Measuring and Monitoring BEPS The report is the third-longest of the BEPS reports at 268 pages The report acknowledges this will be difficult but gives little specifics. Page 48

49 Action #12 Mandatory Disclosure Rules Mandatory disclosure regimes should be clear and easy to understand, should balance additional compliance costs to taxpayers with the benefits obtained by the tax administration, should be effective in achieving their objectives, and should accurately identify the schemes to be disclosed. In a word Deterrence. Page 49

50 Action #14 Dispute Resolution Mechanisms The BEPS countries have agreed to important changes in their approach to dispute resolution, in particular by having developed a minimum standard with respect to the resolution of treaty-related disputes, committed to its rapid implementation and agreed to ensure its effective implementation through the establishment of a robust peer-based monitoring mechanism that will report regularly through the committee on fiscal affairs to the G20 Page 50

51 Actions #8-#10 and #13 These actions deal with Transfer Pricing Guidelines and the already much discussed Country by Country Reporting Page 51

52 Action #15 Multilateral Instrument Action 15 provides for an analysis of the tax and public international law issues related to the development of a multilateral instrument to enable countries that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. Interested countries will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution Page 52

53 A New Approach to the IC-DISC Page 53

54 A New Approach to the IC-DISC Value generated from understanding the client s business combined with understanding the tax domain Challenges Specialty firms are good at their specialties Local and regional firms are very good at the day to day The Approach Cross Firm Collaboration Challenges Geography Information Flow Ownership Fees Page 54

55 A New Approach to the IC-DISC Objective: Provide a flexible model to allow local & regional CPA firms the ability leverage specialized processes to deliver additional value to their clients Page 55

56 A New Approach to the IC-DISC The Model The 85/15 Full-Outsourcing Model The Hybrid Model The 15/85 Licensing Model Exportal IC-DISC Entity Formation IC-DISC Management Transactional Calculation Engine Entity Management White Labeled Page 56

57 A New Approach to the IC-DISC Exportal Entity Formation Interview Style Approach to Set-Ups Generates a Sample SS-4 for Getting an Employer Identification Number from the IRS Generates a Sample 4876(a) Election to be Treated as an IC-DISC Generates Sample; Corporate By-Laws Related Supplier Agreements Dividend Policy Stock Subscription Documents Stock Subscription Certificates Archival of Signed Documents E-Signature Coming Soon! Page 57

58 A New Approach to the IC-DISC Page 58

59 A New Approach to the IC-DISC Page 59

60 A New Approach to the IC-DISC Page 60

61 A New Approach to the IC-DISC IC-DISC Management Manages All Aspects of the IC-DISC Process Communication of Results to Client and CPA Firm IC-DISC Estimates 60 Day Rule 90 Day Rule Data Requests Page 61

62 A New Approach to the IC-DISC Page 62

63 A New Approach to the IC-DISC Page 63

64 A New Approach to the IC-DISC Transactional Calculation Engine Import and mapping mechanism Credit memo matching Data cleansing algorithm Product hierarchy creation Sec. 861 allocation and apportionment Overall Profit Percentage Computations Combined Taxable Income Computations Loss Optimization Grouping Options Page 64

65 A New Approach to the IC-DISC Transactional Calculation Engine (Cont d) Form 1120 IC-DISC Form 1120 IC-DISC Schedule Ps Form 1120 IC-DISC Schedule K Reporting Documentation & Archival Page 65

66 A New Approach to the IC-DISC Page 66

67 A New Approach to the IC-DISC Page 67

68 A New Approach to the IC-DISC Page 68

69 A New Approach to the IC-DISC Page 69

70 A New Approach to the IC-DISC Page 70

71 A New Approach to the IC-DISC Page 71

72 A New Approach to the IC-DISC Page 72

73 A New Approach to the IC-DISC Page 73

74 A New Approach to the IC-DISC Page 74

75 Questions? Brian Schwam Principal Office: Jim Fyhrie Principal Office: Website: wtpadvisors.com Page 75