International Tax Update - Grant Thornton

International Tax Update

Thursday, November 30, 2017

Brandon Joseph – Senior ManagerGrant Thornton's Year End Tax Event

© Grant Thornton LLP. All rights reserved. 2

Presenters

Brandon JosephSenior Manager

[email protected] 602 8156


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


1 The Modern International Tax Environment

2 U.S. Tax Reform – International Edition

3 Regulatory & Administrative Developments

Agenda

4 Global Tax Reform

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


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.


• 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)

OECD BEPS

The Starting Point of Global Tax Reform


Themes of Change – Globally Implemented

Consistent Approach

• MLI• Hybrids• Tax Treaty Rules• Financing• PE• CFC

Substance and Location of People• Transfer Pricing is a

key point• Digital Economy

Transparency

• Country by Country Reporting

• Exchange of Information

• Master File / Local File

• Action 2 – Hybrid Mismatches

• Action 3 – CFC• Action 4 – Financing• Action 6 – Treaties• Action 7 – PE

• Action 1 – Digital Economy

• Action 5 – Harmful Tax Practice

• Action 8-10 – Transfer Pricing: Intangibles, Capital Risk, High Risk Transactions

• Action 13 – Reporting• Action 11 – Data Analysis for

BEPS• Action 12 – Disclosure of

Aggressive Tax Planning• Action 14 –Dispute Resolution• Action 15 – Multilateral

Instrument BEPS 2015 UK, ATAD,

GAAR 2016MLI 2017 US Tax

Reform 2018Local Country Adoption 2020


OECD BEPS Action Item 13Promotes taxpayer transparency by requiring enhanced transfer pricing documentation (master file and local file) and CbC reporting.

Master File

• 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.

Local File

• 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.

CBC• 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..


• 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 CbCreports 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.

Country-by-Country ReportingRecent Developments


• 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 ratex

• 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

Country-by-Country ReportingRecent Developments The Handbook suggests several “indicators” guiding local tax authorities to more in-depth inquiry including


• 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.

Preparing to Successfully NavigateThe New Global Tax Environment

Tax Reform: The International Proposals


• 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

International overview


• 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

Dividends Received Deduction (DRD)


• Rate of tax:- 14% (House)/10% (Senate) on cash and

cash equivalents- 7% (House)/5% (Senate) on

illiquid/depreciable assets

• 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

• Election available to preserve NOLs

One-time tax on unrepatriated earnings of CFCs

The Measurement DateGreater of E&P balance on:

November2, 2017

December31, 2017ORHouse

Senate November9, 2017

PotentialOtherDates

OR


• 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

Foreign High Return Income (House)

+

-

Short-Term AFR + 7%

CFC basis in depreciable

property

Routine return

Interest ExpenseThe 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


• 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

• Allows deduction of 37.5% of "foreign-derived intangible income" plus global intangible lot-taxed income (subject to taxable income limit)

Global Intangible Low-Taxed Income (Senate)

X

10 percentCFC basis in depreciable

property

Routine return

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


Both bills include significant inbound base erosion provisions

Base erosion tax

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 mark-up


Industry comparison –Minimum tax

$0

Manufacturing industry

Captial asset intensive indsury. Earns income

from product sales. Assumes $10,000 of tangable assets and

20% foreign ETR

General assumptions: $2,000 of tested income, and no tested losses.

U.S

. min

tax

liabi

lity

$130

Technology industryLimited captial assets, majority of assets are

intagibles.Earns income from services & royalties. Assumes

$200 of tangable assets and 9% foreign

ETR

$80

Retail industryModerate amount of capital assets, but

rents locations. Earns income from product

sales. Assumes $1,500 of tangable

assets and 12% foreign ETR


Industry comparison – BEPS min tax

$7024%

Manufacturing industryRelated party paymentsDepreciation*

500Royalty 100Interest

2,500*Asset purchased from related party

General assumptions: $2,000 of taxable income, no general business credits, foreign owned multinationals, and no payments are subject to withholding tax

Add

ition

al U

.S. t

ax/

U.S

. ETR

on

TI $65053%

Technology industryRelated party paymentsRoyalty 6,000Interest 2,500

$020%

Retail industryRelated party paymentsPurchases 50,000


Limits on net interest expense

Issue House Senate

General

Deduction for domestic corporation's net interest expense limited to its share of the group's external debt

Deduction for domestic corporation's net interest expense limited to its share of the group's external debt

Application

Applies to multinationals with:• Consolidated financial

statements • $100 million in average annual

global gross receipts over 3 years

Applies to Multinationals which are:• Members of an "affiliated group"

(substituting 50% for 80% and including foreign corporations)

• No gross income limitation

Approach Income statement approach (based on EBITDA)

Balance sheet approach (based on a global debt-to-equity ratio)

Carryforward Disallowed interest carried forward 5 years

Disallowed interest carried forward indefinitely


• Makes the "look-thru" exclusion from foreign personal holding company income permanent

Look-thru rule for related CFCs

made permanent(Both bills)

Sec

tion

Sum

mar

y

• Amends section 958(b).

• Allows stock of a foreign corporation owned by a foreign person to be attributed to a USP

Modification of stock attribution

rules for determining status

as a CFC(Both bills)

Modification to existing Subpart F rules

• 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)

Modification of definition of U.S.

shareholder(Senate 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

• Eliminates the "uninterrupted period of 30 days" requirement for Sub F

Elimination of requirement that

CFC must be controlled for 30

days before sub F applies(Both bills)


• 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

Industry InsightWhat are Companies Doing w/ the Prospect of Tax Reform


Focus on Earnings & Profits

In General• Financial statement implications

• Characterization of the distribution (i.e., dividend, return of capital and capital gain) (§301(c))

• Potential nimble dividend (§316(a)(2))

Importance of E&P

U.S. Shareholders and Foreign Corporations• Limits Subpart F income inclusion (§952) and investment in U.S.

property income inclusion (§956)

• Deemed paid FTC (§902, §960)

• Sale of CFC shares (§1248)

• Certain reorganizations and liquidations (§367)

• Interest expense apportionment (§864(e))

• Filing requirements (§6038)

But why now:• E&P continues to be an underappreciated tax attribute.

• With tax reform on the horizon, E&P of foreign corporations (and ancillary items – e.g., FTCs) may become particularly relevant regardless of a company's tax history or profile.

• In general, under the House Republican's Blueprint, taxpayers with unremitted foreign earning which have not been previously subject to taxation will be deemed to have repatriated those earnings.

• Under the terms of the deemed repatriation, the taxpayer will be subject to tax on those earnings.

• Acting now could provide permanent benefits if earnings and be deferred until after tax reform (e.g., switch to territorial).

The News: Current events and other items of interest


Treasury ReportDetails 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 13789 where the President tasked Treasury with reviewing all significant regulations issues on or after Jan. 1, 2016.

• Report followed Notice 2017-38 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)



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.




• 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.




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.


Treasury ReportLB&I Campaign (January 2017)• Related Party Transactions Campaign

• Repatriation Campaign

• Form 1120-F Non-Filer Campaign

• Inbound Distributor Campaign


Treasury ReportLB&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

Questions?

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Documents

International Tax Update - Grant Thornton