Introduc)on to Interna)onal Tax Issues Ques)ons that In- house Lawyers Need to Ask

Transcription

1 Introduc)on to Interna)onal Tax Issues Ques)ons that In- house Lawyers Need to Ask Globaliza(on brings opportuni(es for enterprises It also brings complexity and a maze of regula(on VAT and similar interna(onal tax issues pose several challenges for in- house counsel The complexity of these issues poses challenges and presents opportuni(es We ll discuss key concepts for the non- tax aborney. 1

2 Real World Interna)onal Tax Issues VAT Taxable Presence (Permanent Establishment) Transfer pricing Strategies to minimize tax exposure Reputa(onal & governance considera(ons 2

3 VAT: What it Is, How it Works, and Why it MaCers The Value Added Tax (a/k/a Goods & Services Tax (GST)) Taxes consump(on; is paid by the end user Taxes only the value added at each stage of produc(on It s not just a European tax: 140+ countries have it VAT rates vary (average rate in Europe is 20%; global average is 15%) 3

4 VAT Issues The key goal is to avoid VAT becoming a cost in cross- border trading. Although a large number of the ac(vi(es an enterprise engages in involve VAT- free cross- border supplies, there are many excep(ons. 4

5 VAT (Goods) Goods are generally taxed where supplied, or when they are imported. Accordingly an enterprise should not own assets outside its home territory by either impor(ng them or purchasing them in the overseas territory, even if for on- sale. Local VAT would be charged on the importa(on, which would not be recoverable, whilst the on- sale would mean the enterprise is engaging in taxable ac(vi(es in the overseas territory. Beware of supply and install contracts and reten(on of (tle clauses! 5

6 VAT (Services) These can be taxed under the following criteria: 1. They are taxed according to where the supplier belongs (standard position); 2. They are taxed according to where the recipient (customer) belongs; 3. They are taxed according to where they are actually performed (hands-on activities, e.g. installation, maintenance, repairs); or 4. They are taxed under special rules 6

7 VAT Issues As the purchaser: only pay taxes due in your country of residence in addi(on to the quoted price As the seller, try to charge all applicable taxes and regulatory and other fees and surcharges arising on the direct sale to the customer 7

8 VAT: Final Thoughts The place of taxa(on is very important in determining which VAT regime applies, if any, and whether it forms a cost or a compliance issue. When goods or certain other services, such as installa(on, repair or maintenance are provided overseas, it is always important to contractually supply such things using a local en(ty. Failure to do so will mean that locally charged VAT will become an addi(onal cost to your enterprise or the customer. Finally, ac(vi(es which give rise to a VAT presence overseas may well be taken as an indica(on of a presence for corporate tax purposes. 8

9 Transfer Pricing Transfer pricing is the price at which connected par(es transfer goods and/or services between themselves Connected par(es must trade on an arms- length basis Taxa(on authori(es scru(nize such transfers to make sure that they are not being used to shid profits out of their jurisdic(on. 9

10 Transfer Pricing For all cross- border transac(ons with connected par(es, ask: Is the price charged reasonable? In other words, is it and arms- length price? Has the transac(on been suitably documented? Is transfer pricing factored into the prices for all interna(onal transac(ons among connected par(es, and is there sound intercompany charging? If the answer is no, you risk having the taxman recalculate your figures and impose fines, penal(es, interest and costs of consultant (me. 10

11 The concept of permanent establishment in tax law: Its relevance to doing business across interna(onal borders Lee NuBall Solicitor, Partner and Head of UK Tax Gowling WLG UK LLP 11

12 Permanent establishment is an interna(onally recognised tool to determine a taxable presence in a host country What cons(tutes a PE? Its applica(on in prac(ce, with par(cular applica(on to doing business in the UK Comments and observa(ons what does the future hold for PE as a concept/tool? 12

13 A mere presence - v- a taxable presence: where is the threshold? Why is this relevant to you? Context: core concepts in interna(onal tax planning tax residence (and non- residence) the concept of source double taxa(on, and its relief 13

14 Context - tax compe))on Tax residence: when a foreign corporate is tax- resident in the host country for tax purposes The concept of "source": when income has a source in a host country Conflicts: residence- residence conflicts; source- source conflicts; and residence- source conflicts Double taxa9on: recognising the harmful effects of double taxa(on, and solving the conflicts by limi(ng the exercise of a country's taxing rights 14

15 Determining a permanent establishment (PE) Is there a fixed place of business in the host country or a dependent agent in the host country, determined under domes(c/local law? Are the ac(vi(es which are actually carried on in the host country merely "preparatory and auxiliary"? Is a business carried on through that PE and, if so, what taxable profit in abributable to it? If there is a double tax agreement, then can it help? 15

16 Domes)c law of host country Aim: Look for a connec(on between the foreign company and the host country, and assess whether or not that connec(on is strong enough to cross the threshold into being a PE and so invoke taxing rights in the host country United Kingdom: closely follows the OECD model, but is not precisely the same A company has a PE in the UK: if it has a fixed place of business in the UK through which the business of the company is carried on, or an agent ac(ng on behalf of the company has and habitually exercises in the UK authority to do business on behalf of the company 16

17 Fixed place of business in the UK A physical presence: A place of management; a branch; an office; a factory; a workshop; an installa(on or structure for the explora(on of natural resources; a mine, an oil or gas well, a quarry or any other place of extrac(on of natural resources; a building site or installa(on project A deemed presence: Oil and gas ac(vi(es (includes consul(ng services): deemed to have a UK PE where profits arise from explora(on and exploita(on ac(vi(es carried on in the UK or the UK sector of the con(nental shelf A building site or installa(on project: 6 or 12 months? Note changes enacted in the UK Finance Act 2016 A right or power to use a fixed loca(on can create a PE 17

18 through which the business is carried on Func9onality: A fixed place of business is not sufficient it must be func9onal to the carrying on of the business of the foreign company Who is carrying on the business? Entrepreneur, persons in paid employment (personnel), contractors engaged by the foreign company, a holding company or a group company 18

19 Agents A company cannot avoid a PE by using an agent An agent can be a PE - an independent agent (e.g., a broker) ac(ng in the ordinary course of its agency business cannot An agent ac(ng on behalf of the company must have and habitually exercise authority to do business on behalf of the company What factors are relevant? Examining the authority given: express or implied by omission? Look at the nature of the contract to be concluded by the agent: customers - v- landlords Frequency of contracts Nego(a(on of contracts Subsidiary company as agent of parent? Investment manager exemp(on 19

20 Preparatory or auxiliary ac)vi)es Whether through a fixed place of business or an agent, there is no PE if (in rela9on to the business as a whole) the ac(vi(es carried on in the UK are of a preparatory or auxiliary character Use of facili(es [solely] for storage, display or delivery of goods belonging to the company The maintenance of a stock of goods belonging to the company for the purposes of: Storage, display or delivery Processing by another person Purchasing goods or merchandise, or collec(ng informa(on, for the company " in rela(on to the business as a whole": the ac(vi(es must be remote from the main profit making apparatus of the business Of what might P or A consist? Market research/monitoring, and data collec(on; informa(on/financial analysis; client contact databases; financial analysis 20

21 ACribu)ng income and profits to the PE If there is a PE, then the next challenge is how income can be abributed to it and how much profit Deemed profits: what would it have made if it had been a company separate from the foreign company, engaged in the same business ac(vi(es under the same condi(ons and as if it had been dealing with an independent company? Royal(es paid to 'parent' Interest paid to 'parent' Alloca(on to PE of expenses of 'parent' Transfer pricing: sufficiency of equity and loan capital 21

22 Prac)cal stuff: avoiding crea)ng a PE Avoid owning or ren(ng or having the right to use host country real estate: limit access Avoid regular use of the same hotel room, conference room, booth or stand Avoid business cards, sta(onery, web- sites and adver(sing showing a host country address Avoid signing customer contracts in the host country Avoid pricing and other contractual decisions in the host country Avoid giving UK- based personnel authority to nego(ate or conclude contracts, and expressly restrict their ability to do so Consider dividing ac(vi(es between different en((es - those that cons(tute a PE in the host country and those that do not Do you need to avoid a PE? 22

23 Double tax trea)es Has the foreign company a PE in the host country for the purposes of the DTA? The '(e- breaker' clause What does the DTA say about sharing the tax? 23

24 Challenges to PE as a sa)sfactory threshold and source Applica(on of the concept of PE in a modern digi(sed/ e- commerce world OECD's Ac(on Plan on Base Erosion and Profit Shiding exercise: a "s(cking plaster"? 24

25 Concluding remarks The concept of PE remains a cornerstone to interna(onal tax: it has stood the test of (me, and has evolved and will con(nue to evolve It has interna(onal support It provides a large degree of certainty of approach to the interpreta(on of double tax trea(es and has been incorporated into many host country domes(c laws It provides a basis or threshold by which home and host countries can share taxing rights between them slicing up tax obliga(ons on the basis of residence of the corporate and the source of its income and profits 25

26 Transfer Pricing: Overview and Changing Landscape Elisabeth Loew Senior Tax Director, VMware, Inc. 26

27 What is transfer pricing? Transfer pricing broadly is the set of global tax rules that apply to require how much related par(es should pay one another for transfers of good, services and other items of value. How does it work? Basic concept is that transac(ons between related par(es should be priced on an arms length basis This arm s- length principle requires that compensa(on for any intercompany transac(on be the amount that would have been charged had the transac(on taken place between unrelated par(es, all other factors remaining the same. 27

28 Transfer Pricing in the United States Sec(on 482 of the Code is the core of the US transfer pricing rules. In any case of two or more organiza(ons, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, appor(on, or allocate gross income, deduc(ons, credits, or allowances between or among such organiza(ons, trades, or businesses, if he determines that such distribu(on, appor(onment, or alloca(on is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organiza(ons, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of sec(on 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income abributable to the intangible. 28

29 Cost Sharing Sec(on 482 permits two related companies to enter into a qualified cost sharing arrangement. Under such arrangements, cost share par(cipants can pool R&D costs and divide those expenses based on their respec(ve reasonably an(cipated benefits from the intangible rights placed into the cost share pool. These rights can take the form of exclusive or non- exclusive intercompany licenses. Once the geographic territories are set they must be respected in intercompany contracts and customer revenue and contrac(ng alloca(ons. 29

30 Transfer Pricing Globally Most major jurisdic(ons and OECD member countries have domes(c transfer pricing legisla(on. Key differences include methodologies by which transfer prices are determined and the defini(on of a related party. OECD BEPS Project proposes to radically reform these interna(onal standards. Revised standards for valuing the return for an IP holder and the value of capital as opposed to the market intangibles residing in local opera(ng subsidiaries are areas of core dispute. Among other reforms, BEPS Ac(on 13 requires enhanced transparency for tax administra(ons by providing them with adequate informa(on to assess high- level transfer pricing and other BEPS- related risks is a crucial aspect for tackling the BEPS problem. This has resulted in widespread adop(on of country by country repor(ng ( CbyC ) in many jurisdic(ons. Issues include whether tax authori(es can publicly release this financial and other data. Many countries have agreed to adopt the new Mul( Lateral Instrument standards into their tax treaty networks. This will result in a global adop(on of new standards for PE iden(fica(on and alloca(on of profits under applicable transfer pricing rules across jurisdic(ons. 30

31 CbyC Repor(ng Template (US) 31

32 Countries Par(cipa(ng in Mul( Lateral Instrument Andorra Canada Gabon Japan Mauri)us Romania Argen)na Chile Georgia Kazakhstan Mexico Russia Australia China Germany Kenya Moldova San Marino Austria Colombia Greece Korea Mongolia Saudi Arabia Azerbaijan Costa Rica Guatemala Latvia Morocco Senegal Bangladesh Côte d'ivoire Hai) Lebanon Netherlands Serbia Barbados Croa)a Hungary Liberia New Zealand Singapore Belgium Cyprus Iceland Liechtenstein Nigeria Slovak Republic Benin Czech Republic India Lithuania Norway Slovenia Bhutan Denmark Indonesia Luxembourg Pakistan South Africa Brazil Bulgaria Burkina Faso Cameroon Dominican Republic Fiji Finland France Ireland Israel Italy Jamaica Malaysia Malta Marshall Islands Mauritania Philippines Poland Portugal Qatar Spain Sri Lanka Swaziland Sweden Switzerland Tanzania 32 Thailand Tunisia

33 Transfer Pricing Considera)on in M&A Transac)ons Due Diligence Tax exposures due to lack of transfer pricing compliance and support are common. Special aben(on should be paid to targets with a deferral IP model and cost sharing if the years of the ini(al buy- in are open under applicable the statute of limita(ons. Impact on ETR of Deal Model A domes(c target that does not have its IP in a cost sharing arrangement may effec(vely have a full US ETR even if the integra(on plan is to incorporate the target IP into the acquirer's cost share pool. The integra(on buy- in under the commensurate with income standard will oden subject the NPV of the IP earnings to US tax and thus increase the ETR for the deal purchase model. Integra9on Transfer pricing rules globally will apply to the valua(ons used in integra(ons transac(ons for IP, opera(ons, workforce and assets. Tax costs of integra(on will largely be driven by these amounts. 33

34 SEC Disclosures related to Transfer Pricing Transfer pricing adjustments can apply to a broad variety of transac(ons, including the forma(on of a cost share pool and buy- in of IP rights by such par(cipants. Transfer pricing controversies oden turn on a factual examina(on of what an arms length price or reasonable return should be for a given transac(on. The valua(on analyses at issue are oden can be disputed even by well- informed experts The rapid rate of changes in tax law and the retroac(ve effect some of these changes have also creates uncertainty as to the amounts of liabili(es. As a result, transfer pricing tax exposures can be highly material and oden result in special SEC disclosures. 34

35 Facebook June Q On July 27, 2016, we received a Statutory No(ce of Deficiency (No(ce) from the IRS rela(ng to transfer pricing with our foreign subsidiaries in conjunc(on with the examina(on of the 2010 tax year. While the No(ce applies only to the 2010 tax year, the IRS states that it will also apply its posi(on for tax years subsequent to 2010, which, if the IRS prevails in its posi(on, could result in an addi(onal federal tax liability of an es(mated aggregate amount of approximately $3.0- $5.0 billion, plus interest and any penal(es asserted. We do not agree with the posi(on of the IRS and will file a pe((on in the United States Tax Court challenging the No(ce. If the IRS prevails in the assessment of addi(onal tax due based on its posi(on, the assessed tax, interest and penal(es, if any, could have a material adverse impact on our financial posi(on, results of opera(ons or cash flows. 35

36 Apple, June Q On June 11, 2014, the European Commission issued an opening decision ini(a(ng a formal inves(ga(on against Ireland for alleged state aid to the Company. The opening decision concerns the alloca(on of profits for taxa(on purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission s asser(ons are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflec(ve of the disallowed state aid. While such amount could be material, as of June 25, 2016 the Company is unable to es(mate the impact. 36

37 NetApp, Inc. January Q We receive significant tax benefits from sales to our non- U.S. customers. These benefits are con(ngent upon exis(ng tax laws and regula(ons in the U.S. and in the countries in which our interna(onal opera(ons are located. Future changes in domes(c or interna(onal tax laws and regula(ons could adversely affect our ability to con(nue to realize these tax benefits. We have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from future remibances of undistributed earnings of foreign subsidiaries. President Obama and the U.S. Congress have called for comprehensive tax reform which, among other things, might change certain U.S. tax rules impac(ng the way U.S. based mul(na(onals are taxed on foreign income. Addi(onally, on October 5, 2015, the Organisa(on for Economic Co- opera(on and Development (OECD), an interna(onal associa(on of 34 countries, including the U.S., released the final reports from its Base Erosion and Profit Shiding (BEPS) Ac(on Plans. The BEPS recommenda(ons covered a number of issues, including country- by- country repor(ng, permanent establishment rules, transfer pricing rules and tax trea(es. On October 21, 2015, the European Commission (EC) concluded its inves(ga(ons into tax ruling prac(ces of certain European Union (EU) member countries. The EC concluded that certain member countries had granted unlawful rulings that ar(ficially reduced tax burdens and has ordered the recovery of the unpaid taxes. Future tax reform resul(ng from these developments may result in changes to long- standing tax principles, which could adversely affect our effec(ve tax rate or result in higher cash tax liabili(es. We are rou(nely subject to income tax audits in the U.S. and several foreign tax jurisdic(ons. The U.S. and foreign tax authori(es have ques(oned our intercompany transfer pricing arrangements during these audits. In recent years, several other U.S. companies have had their transfer pricing arrangements challenged as part of Internal Revenue Service (IRS) examina(ons, which have resulted in material proposed assessments and/or li(ga(on with respect to those companies. If the ul(mate determina(on of income taxes or at- source withholding taxes assessed under the IRS audits or audits being conducted in any other tax jurisdic(on results in an amount in excess of the tax provision we have recorded or reserved for, our opera(ng results, cash flows and financial condi(on would be adversely affected. 37

38 Tax Advantages to Manufacturing in the USA and Selling the Final Product Outside the USA Charles F. Wilkinson Ashland, Inc. 38

39 Tax Advantages to Manufacturing in the USA and Selling the Final Product Outside the USA Non- US en(ty as selling party. Toll manufacture products in the USA. Delivery by US toll manufacturer directly to non- US selling party s non- US customers. Tax advantages. Regulatory challenges. 39

40 Non- US En)ty as Selling Party Absolutely no US presence. All ac(vi(es and management of the en(ty must be outside the USA. Arms- length contract rela(onship with US en((es producing final products. Does not sell to US customers. Objec(ve: take profits in lower tax jurisdic(on. 40

41 Toll manufacture products in the USA Non- US en(ty controls how the product is made. One approach: toll manufacturing. Contract specifica(ons and requirements. Control input and quality by buying and providing raw materials to toll manufacturer. Specify du(es of toll manufacturer with respect to complying with US laws and regula(ons. 41

42 Deliver Directly to Non- US Selling Party s Non- US Customers Non- US en(ty pays tolling fee for products and owns all raw materials, work- in- progress, and final products. US toll manufacturer ships directly to non- US en(ty s customers outside the USA. Non- US en(ty invoices to and is paid outside the USA by its non- US customers. US toll manufacturer does not get involved in sales ac(vi(es to non- US en(ty s non- US customers. 42

43 Tax Advantages Sale of final product is outside the USA. Taxes paid by US toll manufacturer are based upon fees paid for manufacturing the product. Taxes paid by non- US en(ty are based upon profit realized on sale price of final product (less cost of raw materials, G&A, tolling fees, etc.) 43

44 Regulatory Challenges Export of product from the USA: which party is the US Principal Party in Interest (USPPI)? US Census opinion: the toll manufacturer. It has the primary economic benefit of the US ac(vi(es. Which party controls movement of the product from origin to final des(na(on? Which party is responsible for answering to enforcement officials? 44