International Tax Update. Friday, December 1, 2017 Grant Thornton's Year End taxguide Event Brandon Joseph Senior Manager, International Tax

Transcription

1 International Tax Update Friday, December 1, 2017 Grant Thornton's Year End taxguide Event Brandon Joseph Senior Manager, International Tax

2 Presenters Brandon Joseph Senior Manager International Tax Services Grant Thornton LLP. All rights reserved. 2

3 Learning Objectives Identify the key international components of the proposed legislation impacting multinationals Describe actions taken by multinational companies in the wake of tax reform Identify year-end reporting considerations Grant Thornton LLP. All rights reserved. 3

4 Agenda 1 The Modern International Tax Environment 2 U.S. Tax Reform International Edition 3 Regulatory & Administrative Developments Grant Thornton LLP. All rights reserved. 4

5 Global Tax Reform Navigating the New Global Tax Environment Focused on Base Erosion and Profit Shifting & Required Transparency of Operating Results

6 Global Tax Reform The US and many G20 countries have at times conflicting tax policy objectives: Attract, through low tax rates and incentives, investment in their countries and, Ensure multinational corporations(mncs) doing business in their country pay their fair share of tax especially in the case of intellectual property (IP) centric business models where the profits earned are more portable when compared to historical brick and mortar business Most tax authorities want greater transparency of taxpayer's transactions to ensure base erosion and profit shifting is not taking place The policy objectives are reflected through consistent and sometimes inconsistent new laws and regulations, such as, US tax reform, laws of foreign countries (i.e. UK anti hybrid rule), Organization for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) project, ATAD 1/2, and Illegal State Aid Failure to proactively plan for such changes may result in increased cash taxes, increased effective tax rate, and greater audit and financial statement risks. Grant Thornton LLP. All rights reserved. 6

7 OECD BEPS The Starting Point of Global Tax Reform The OECD's campaign against BEPS was initiated to combat perceived abuses by multinational companies as they sought to reduce their overall global tax liabilities by arbitraging differences in cross-border tax rules, incentives and rate structures. The resulting BEPS Action Plan includes 15 specific Action Items designed to establish minimum standards, suggest best practices and institutionalize transparency on a global basis. Examples of BEPS inspired rules and guidelines include: The Multilateral Instrument; Country Specific Anti-Hybrid Rules; ATAD 1/2; Illegal State Aid; GAAR; and Transparency (Country by Country Reporting/Disclosure) Grant Thornton LLP. All rights reserved. 7

8 Themes of Change Globally Implemented Consistent Approach MLI Hybrids Tax Treaty Rules Financing PE CFC Action 2 Hybrid Mismatches Action 3 CFC Action 4 Financing Action 6 Treaties Action 7 PE BEPS 2015 UK, ATAD, GAAR 2016 Substance and Location of People Transfer Pricing is a key point Digital Economy Action 1 Digital Economy Action 5 Harmful Tax Practice Action 8-10 Transfer Pricing: Intangibles, Capital Risk, High Risk Transactions MLI 2017 Transparency Country by Country Reporting Exchange of Information Master File / Local File Action 13 Reporting Action 11 Data Analysis for BEPS Action 12 Disclosure of Aggressive Tax Planning Action 14 Dispute Resolution Action 15 Multilateral Instrument US Tax Reform 2018 Local Country Adoption 2020 Grant Thornton LLP. All rights reserved. 8

9 OECD BEPS Action Item 13 Promotes taxpayer transparency by requiring enhanced transfer pricing documentation (master file and local file) and CbC reporting. Master File Local File CBC High-level overview regarding a MNC's business and transfer pricing. Including details on intangibles, transfer pricing policies, tax rulings, etc. Should be made available to tax authorities of all jurisdictions with operations. Transactional transfer pricing documentation specific to each country and an analysis of the transfer pricing determinations the MNC has made regarding the transactions. Including functional analysis, TP methods, descriptions of controlled transactions, etc. Maintained for each jurisdiction. High level information about MNC s jurisdictional allocation of revenue, profit, taxes, assets and employees to be shared with all tax authorities where MNE has operations.. Grant Thornton LLP. All rights reserved. 9

10 Country-by-Country Reporting Recent Developments Within the last two months, the OECD released its Country-by-Country Reporting: Handbook on Effective tax Risk Assessment (BEPS Action 13). First publically available information setting out how tax authorities receiving CbC reports and transfer pricing master and local file documentation may use such information in performing risk assessments. Specifically notes that this information has never previously been available to tax authorities and represents a great opportunity for tax authorities to understand the structure of MNC's business. Additional usage comments: CbC report is a powerful tool for high level risk assessment, but can never by itself represent conclusive proof that transfer prices are incorrect or that an MNE group is engaged in BEPS. Where a risk assessment using CbC reports identifies potential tax risks, it should trigger further reviews or requests for additional information by the tax authority and, if necessary, compliance action including, possibly, a tax audit. Grant Thornton LLP. All rights reserved. 10

11 Country-by-Country Reporting Recent Developments The Handbook suggests several indicators guiding local tax authorities to more indepth inquiry including High value or high proportion of related party revenues Results deviate from potential comparables (internal and external) Jurisdictions with significant profits but little substantial activity Jurisdictions with significant profits but low levels of tax Jurisdictions with significant activities but low levels of profit (or losses) Mobile activities located in jurisdictions where the group pays a lower rate There have been changes in a group s structure, including the location of assets Intellectual property (IP) is separated from related activities within a group A group has marketing entities located in jurisdictions outside its key markets A group has procurement entities outside its key manufacturing location Grant Thornton LLP. All rights reserved. 11

12 Preparing to Successfully Navigate The New Global Tax Environment What story does your data tell? Develop one version of the truth Understand how new and proposed changes will impact current planning and structure Evaluate alternatives within a commercially viable framework Successful navigation requires timely, quality data, facilitating high value planning coupled with better audit defense and the avoidance of surprises. Grant Thornton LLP. All rights reserved. 12

13 Tax Reform: The International Proposals

14 International overview Move to territorial with 100% dividends received deduction One-time tax on previously unrepatriated earnings as transition and pay-for 3 very significant anti-base erosion provisions: Minimum tax on "global intangible low-taxed income" Limit U.S. interest deductions based on global interest expense Base erosion payment minimum tax Grant Thornton LLP. All rights reserved. 14

15 Dividends Received Deduction (DRD) Who qualifies for the DRD? Domestic C-Corporations only What dividends qualify? Foreign subsidiaries in which taxpayers own at least 10% Disallows DRDs for hybrid dividends inclusions don't apply Subpart F inclusions do not qualify for the DRD What about foreign tax credits? Generally not available to the extent DRD applies Still available against Subpart F inclusions Current year inclusion attracts current year taxes only Grant Thornton LLP. All rights reserved. 15

16 One-time tax on unrepatriated earnings of CFCs Rate of tax: - 14% (House)/10% (Senate) on cash and cash equivalents - 7% (House)/5% (Senate) on illiquid/depreciable assets The Measurement Date Greater of E&P balance on: Foreign tax credits allowed after a haircut Election available for tax to be payable in equal installments (House) and escalating installments (Senate) over eight years Deficits taken into account House Senate November 2, 2017 November 9, 2017 OR OR December 31, 2017 Potential Other Dates Election available to preserve NOLs Grant Thornton LLP. All rights reserved. 16

17 Foreign High Return Income (House) Imposes a U.S. tax on 50% of excess of "foreign high return income" exceeding a routine return on tangible assets (ST AFR + 7%) Calculation done entity by entity and then aggregated, loss entities included U.S. effectively connected income, Subpart F and certain other income excluded Limited credit provided for foreign tax but only current year foreign tax with no carryover or carryback for unused taxes The calculation (by operation) would result in a full credit against U.S. tax if the effective rate is above ~14.3%. The table below illustrates the approx. U.S. effective tax rate based on the respective foreign effective tax rate Short-Term AFR + 7% Routine return + - Interest Expense CFC basis in depreciable property Grant Thornton LLP. All rights reserved. 17

18 Global Intangible Low-Taxed Income (Senate) Imposes a U.S. tax on excess of "global intangible low-taxed income" exceeding a routine return on tangible assets Calculation done entity by entity and then aggregated, loss entities included U.S. effectively connected income, Subpart F and certain other income excluded Limited credit provided for foreign tax but only current year foreign tax with no carryover or carryback for unused taxes 10 percent Routine return Allows deduction of 37.5% of "foreignderived intangible income" plus global intangible low-taxed income (subject to taxable income limit) The calculation (by operation) would result in a full credit against U.S. tax if the effective rate is above ~17.2%. The table below illustrates the approx. U.S. effective tax rate based on the respective foreign effective tax rate X CFC basis in depreciable property Grant Thornton LLP. All rights reserved. 18

19 Industry comparison Minimum tax General assumptions: $2,000 of tested income, and no tested losses. U.S. min tax liability $0 Manufacturing industry Captial asset intensive indsury. Earns income from product sales. Assumes $10,000 of tangible assets and 20% foreign ETR $80 Retail industry Moderate amount of capital assets, but rents locations. Earns income from product sales. Assumes $1,500 of tangable assets and 12% foreign ETR $13 0 Technology industry Limited captial assets, majority of assets are intangibles.earns income from services & royalties. Assumes $200 of tangible assets and 9% foreign ETR Grant Thornton LLP. All rights reserved. 19

20 Base erosion tax Both bills include significant inbound base erosion provisions House: 20% excise tax on foreign related party payments (from domestic corps or U.S. branches) Applies to groups with $100 million in average annual global covered related party payments over 3 years Several exceptions, including interest expense, services with no mark-up, payments subject to U.S. tax, etc. Allows the foreign payee to elect net basis tax in lieu of excise tax Senate: 10% minimum tax on modified taxable income (computed without base erosion payments, and certain related NOLs) of domestic members of multinationals engaged in excessive base erosion Applies to groups with $500 million in average annual global gross receipts over 3 years that engage in excess base erosion Exceptions for payments subject to withholding and services with no markup Grant Thornton LLP. All rights reserved. 20

21 Industry comparison BEPS min tax General assumptions: $2,000 of taxable income, no general business credits, foreign owned multinationals, and no payments are subject to withholding tax Additional U.S. tax/ U.S. ETR on TI $70 24% Manufacturing industry Related party payments Depreciation* 500 Royalty 100 Interest 2,500 *Asset purchased from related party $0 20% Retail industry Related party payments Purchases 50,000 $650 53% Technology industry Related party payments Royalty 6,000 Interest 2,500 Grant Thornton LLP. All rights reserved. 21

22 Limits on net interest expense Issue House Senate General Application Approach Carryforward Deduction for domestic corporation's net interest expense limited to its share of the group's external debt Applies to multinationals with: Consolidated financial statements $100 million in average annual global gross receipts over 3 years Income statement approach (based on EBITDA) Disallowed interest carried forward 5 years Deduction for domestic corporation's net interest expense limited to its share of the group's external debt Applies to Multinationals which are: Members of an "affiliated group" (substituting 50% for 80% and including foreign corporations) No gross income limitation Balance sheet approach (based on a global debt-to-equity ratio) Disallowed interest carried forward indefinitely Grant Thornton LLP. All rights reserved. 22

23 Modification to existing Subpart F rules Section Look-thru rule for related CFCs made permanent (Both bills) Modification of stock attribution rules for determining status as a CFC (Both bills) Elimination of requirement that CFC must be controlled for 30 days before sub F applies (Both bills) Modification of definition of U.S. shareholder (Senate only) Summary Makes the "lookthru" exclusion from foreign personal holding company income permanent Amends section 958(b). Allows stock of a foreign corporation owned by a foreign person to be attributed to a USP Eliminates the "uninterrupted period of 30 days" requirement for Sub F Expanded to include any U.S. person who owns 10% or more of the total vote or value of a foreign corporation (previously vote only) Under the Senate plan, stock attribution rules and U.S. shareholder definitional changes would be retroactively effective for all tax years beginning before 1/1/2018 Grant Thornton LLP. All rights reserved. 23

24 Industry Insight What are Companies Doing w/ the Prospect of Tax Reform Earnings and Profits & Tax Pools E&P Optimization vs. Compliance Tax Return Documentation Considering International Entity choice Post-Reform Pass-through vs. C-Corp what makes sense in the new world? DRD, Subpart F, Base Erosions taxes, Foreign Tax Credits Debt v. equity investment Limited ability to use leverage impacts on capital structure Financial Reporting Readiness Impact of One-Time tax Grant Thornton LLP. All rights reserved. 24

25 The News: Current events and other items of interest

26 Treasury Report Details next steps for controversial guidance projects On Oct. 4, 2017, Treasury released a Report to the President entitled "Identifying and Reducing Tax Regulatory Burdens." Report was issued as a follow on to the requirements of Executive Order where the President tasked Treasury with reviewing all significant regulations issues on or after Jan. 1, Report followed Notice which was issued in July 2017 and highlighted eight regulations which potentially imposed undue financial burden, added undue complexity, or exceeded statutory authority. Among the regulations discussed in the Report are: Section 385 Regulations (T.D. 9790) Section 987 Regulations (T.D. 9794) Section 367 Regulations (T.D. 9803) Grant Thornton LLP. All rights reserved. 26

27 Treasury Report Details next steps for controversial guidance projects Section 385 Regulations: Calls for potential revocation of the so-called Documentation rules (currently set to come into effect for instruments issued on or after Jan. 1, 2019) Calls to leave the so-called Recast rules in place pending the outcome of legislative activity around Tax Reform. Pledges to re-assess if issues not adequately addressed by legislation. Grant Thornton LLP. All rights reserved. 27

28 Treasury Report Details next steps for controversial guidance projects Section 987 Regulations: Report calls for substantial revisions, including simplified methodologies, revised rules regarding transitioning onto the new regulations and modification to the loss deferral provisions. Regulatory effective date currently delayed until 2019 for most taxpayers. Grant Thornton LLP. All rights reserved. 28

29 Treasury Report Details next steps for controversial guidance projects Section 367 Regulations: After considering the comments and studying further the legal and policy issues, Treasury and the IRS have concluded that an exception to the current regulations may be justified by both the structure of the statute and its legislative history. Thus, to address taxpayers' concerns about the breadth of the regulations, the Office of Tax Policy and IRS are actively working to develop a proposal that would expand the scope of the active trade or business exception described above to include relief for outbound transfers of foreign goodwill and going-concern value attributable to a foreign branch under circumstances with limited potential for abuse and administrative difficulties, including those involving valuation. Treasury and the IRS currently expect to propose regulations providing such an exception in the near term. Grant Thornton LLP. All rights reserved. 29

30 Treasury Report LB&I Campaign (January 2017) Related Party Transactions Campaign Repatriation Campaign Form 1120-F Non-Filer Campaign Inbound Distributor Campaign Grant Thornton LLP. All rights reserved. 30

31 Treasury Report LB&I Campaign (November 2017) Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign Corporate Direct (Section 901) Foreign Tax Credit ( FTC ) Section 956 Avoidance Individual Foreign Tax Credit (Form 1116) Foreign Earned Income Exclusion Campaign Verification of Form 1042-S Credit Claimed on Form 1040NR Grant Thornton LLP. All rights reserved. 31

32 Questions?

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