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International Tax Updates
www.pwc.com/il
Tzachi Schwartz, Tax Partner
Rafi Ganz, Senior Tax Manager
PwC Israel
November 28, 2019
PwC IsraelPwC Israel
1. United States
a. Digital and Cloud Transactions
b. Post Tax Reform Updates
I. GILTI – Final Regulations
II. FDII – Proposed Regulations
c. Attribution Rules – Recent Developments
2. OECD – Digital Economy
3. MLI – Current Status
4. Global Tax Updates by Jurisdiction
Agenda
2
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Seeking for a One-Stop Shop?
3
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United States
4PwC Israel
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Digital and Cloud Transactions
5
Cloud Transactions:transactions through which a
person obtains non de-minimis on-demand network access to computer hardware,
digital content, or other similar resources
Lease Services
All relevant Factors
Media Streaming
Mobile Apps
Access to Databases
SaaS, IaaS, PaaS
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Transactions via Digital and Cloud Mediums
6
Expansion of Existing Regulation – Downloaded Content:
Digital content protected by copyright law
“Digital Content”:
New Sourcing Rules Location of end-user’s device
Transfers for advertising: do not constitute a transfer of a copyright right
E-Books
Songs & Movies
Software
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Post Tax Reform Updates - GILTI and FDII
7
US Co
(US)
CFC
>50%
Disincentive
US Co
(US)
Foreign Subs
Incentive
Global Intangible Low-Taxed Income (GILTI)
Intended to discourage erosion of the US base that occurs as a result of locating IP outside the United States
GILTI = CFC income in excess of 10% return on tangible assets
The GILTI will be subject to an effective tax rate of 10.5%.
80% of foreign tax credit should be allowed (i.e., GILTI will be effective if the tax rate of the CFC in the foreign country is lower than 13.125%)
Foreign Derived Intangible Income (FDII)
An incentive to own IP in the United States
Lowering effective tax rate on foreign derived royalties and related income by virtue of partial income inclusion
Recap:
IP
IP
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Post Tax Reform Updates - GILTI
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No adoption of a
high tax exception
for GILTI
Final Regs.
Key Changes
Relaxed anti-
abuse rule
regarding held
property
Relief for
computing
certain interest
expenses
Aggregate
treatment for
domestic
partnerships
US Co
(US)
CFC
>50%
Disincentive
IP
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Post Tax Reform Updates - FDII
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Related Party Transactions
Sales – of general property(no intangibles) may qualify under certain conditions.
Services – Benefit & Price tests to determine qualification
Foreign Use
Definitions and requirement with respect to general, transportation & intangible property.
Documentation Requirements
Establishment of foreign use, foreign person & service recipient’s location.
Special rules for small businesses/transactions
Cannot be filed more than a year before the transaction.
‘foreign use’ clarifications
Related party rules: sales &
services
Documentation requirements
US Co
(US)
Foreign Subs
Incentive
ProposedChanges
IP
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Proposed Regs. Addressing §958(b)(4) Repeal
Unintended consequences, e.g., significantly increased risk of foreign corporations being treated as PFICs, especially in private equity and VC context
Recap – Downward Attribution Rules
IL Co
(Israel)
US Co
(US)Non-US Subs
IP
100%>50%
Base Case
IL Co
(Israel)
US Co
(US)
CFCs
IP
100%
>50%
Resulting
IL Startup
(IL)
10%
Non-US Fund
IL Co
(IL)
15%
US Co
(US)
>50%
Startups
>10% >10%
>10%
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Proposed Regs. Addressing §958(b)(4) Repeal
Corporation that is a CFC solely due to downward attribution – AKA ‘Foreign-Controlled CFC’
Not CFC for purposes of PFIC classification under the asset test.
Not a US payor, thus not subject to Form 1099 reporting requirement.
Main Relevant Implications
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Rev. Proc.
2019-40
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Rev. Proc. 2019-40
Additional relief for US Shareholders of Foreign-controlled CFCs:
Relief of certain Form 5471 requirement
Alternative information
Safe harbor:
CFC determination & inclusion
Penalty relief
IL Startup
(IL)
80%
US Co
(US)
>50%20%
US Shareholder
Non-US Fund
PwC Israel
OECD – Digital Economy
13PwC Israelhttp://www.coface-eu.org/wp-content/uploads/ 2016/06gpj.ymonoce_latigid/
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BEPS 2.0 - Two Pillar Approach
14
Allocation of Taxing Rights Global Anti-Base
Erosion – “GloBE”
Two Pillars
Taxing rights to market/users jurisdictions
Modification of transfer pricing rules: non routine returns
Deviation from physical presence taxation
Modification of permanent establishment thresholds
Income inclusion rules -
Identifying low-taxed profits: considering different accounting standards and bases for measurement (consolidated, entity, per jurisdiction, worldwide)
Carve-outs
Denial of CT deductions where receipt is not sufficiently taxed
Denial of tax treaty benefits where payment not sufficiently taxed
coordination vs. unilateral actions
I II
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The Unified Approach – Three-tier Mechanism
15
A Portion of the “deemed residual” profit would be allocated to market jurisdictions
“deemed residual” profit:profit less a deemed routine return
Fixed return for certain routine marketing & distribution activities
Taxable according to existing rules
An adjustment to Amount B, in cases where the marketing and distribution activities go beyond the baseline level
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The Unified Approach – Three-tier Mechanism
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After(Net profits of 100)
IL Co
(Israel)
US Distributor
(US)
IP
Before(Net profits of 100)
10
90
IL Co
(Israel)
US Distributor
(US)
IP
18
72
10
Amount ‘A’
Amount ‘B’
LRD Model
RoWcustomers
RoWcustomers
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Certain Recent Unilateral Actions
17
Digital Service Turnover Tax 2-3%
UK, France, Italy & New Zealand
French YouTube Tax - 2%
India’s Equalization Levy –Online Advertising 6% WHT
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Multilateral Instrument (MLI) – Current Status
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MLI and Israel
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Other Taxes:
entry into force on January
2020
Withholding Taxes:
entry into force on January
2019
Ratified on September
13, 2018
Signed on June 7,
2017
Signed in 2019: Albania, Belize, Morocco, Papua NewGuinea.Ratified in 2019: Belgium, Canada, Curacao, Denmark,Finland, Georgia, Guernsey, Iceland, India, Ireland,Luxembourg, Mauritius, Monaco, Netherlands, Norway,Russia, Switzerland, Ukraine, UAE.
• Application of a standalone PPT rule (minimum standard)
Other Countries
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PwC’s MLI Visualization Tool
20
Tracks 3,036 existing treaties
Status per country
MLI’s impact on a client’s treaty network
Potential impact of specific articles
Entry into force timeline per relevant article
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Global Tax Updates by Jurisdiction
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UK Brexit
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UK Brexit
23
January 31, 2020
New Brexit
Deadline
December 12, 2019
General Elections
October 28, 2019
EU extension to
UK bill
October 17, 2019
Brexit draft deal agreed with EU
Deal, No Deal or Revoke?
01
02
03
04
Application of EU Directives and tax treaties
Free movement of people
Supply chain / Customs Issues
Gradual implementation, uncertainty, foreign exchange effects
Issues to Monitor
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Economic Substance Requirement in Low-Taxed Jurisdictions
24
Adequately managed and directed from
within the jurisdiction
Relevant
activity
Level of relevant derived income
• Headquarters, distribution and service centres
• Financing
• Leasing
• Fund Management
• Banking
• Insurance
• Shipping
• Holding companies
• Provision of intangibles
• Adequate amount of operating expenditure
• Adequate physical presence
• Adequate number of full-time employees or other personnel with appropriate qualifications.
Substance
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Consequences
Economic Substance Requirement in Low-Taxed Jurisdictions
Reporting Requirements
Economic substance declaration.
Notification requirements
Penalties
Fines - ranging from USD 10,000 – 100,000
Penalties for failure to provide information, including monetary penalties and imprisonment.
Exchange of information with EU member states where the company is incorporated, formed, registered or resident
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Global Tax Updates By Jurisdictions
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• New free trade zone in Lingang area – with preferential tax treatment.
• Tax incentives to promote MNCs headquartering Shanghai –with preferential tax treatment.
• Fixed assets accelerated depreciation – all industry sectors.
China
• 15% Withholding tax on accrued interest - where the outstanding debt is used to reduce accounting losses of a Brazilian company via a ‘debit to shareholders account’.
• Disclosure of ultimate beneficial owners (UBOs) – new UBO definition and broader disclosure requirements.
• Guidance on US LLCs’ (that are composed of non-residents) classification as ‘privileged tax regimes’– the term ‘non-resident’ should be interpreted from a US (and not Brazilian) perspective.
Brazil
• Rosebud – Israeli CFC rules apply to foreign real estate companies controlled by Israeli shareholders.
• Greenfield – LLC’s losses cannot be offset against income of another LLC in the same group.
• New Tax Treaty with the UK – in force, effective from 1.1.2020.
• New Tax Treaty with Australia– signed 28.3.2019. Not yet ratified.
Israel
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Global Tax Updates By Jurisdictions
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• 2020 Budget Bill proposes the expiration of all tax rulings issued before 2015.
• Clarification of PE definition and provision of evidence – in cases of conflict between domestic law and treaty provisions. In general, to be concluded solely by the treaty provisions.
Luxembourg
• Transposition of ATAD articles 4 and 6– regarding interest limitations and general anti-abuse rules.
• Expansion of participation exemption on dividends – increased 99% exception, relief in eligibility.
• Limitation of deductibility of royalty payments – made to certain related entities benefiting from a harmful tax regime.
France
• Implementation of EU anti-tax avoidance package – including interest limitation rules, exit/entry taxation, CFC rules, criteria for ‘tax havens’ and anti-hybrid rules.
• Reduced CIT rate – on reinvested profits.
Italy
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Global Tax Updates By Jurisdictions
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• Swiss tax reform approved in public vote – the reform, which was introduced in 2017, will cause Switzerland to meet OECD and EU requirements, therefore avoiding possible blacklisting.
Switzerland
• 2020 Finance Bill Proposal
Adoption of EU directives ATAD2 & DAC6.
Withholding tax on interest and royalty payments to low-tax jurisdictions (statutory rate of 9% or less) or in other abusive situations (as of January 1, 2021).
CIT rate of 25%, reduced to 21.7% as of January 1, 2021.
Netherlands
©2019 Kesselman & Kesselman. All rights reserved.
In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers International Limited, each
member firm of which is a separate legal entity. Please see www.pwc.com/structure for further details.
This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. It does not
take into account any objectives, financial situation or needs of any recipient. Any recipient should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or
completeness of the information contained in this publication, and, to the extent permitted by law, Kesselman & Kesselman, and any other
member firm of PwC, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any
consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision
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Thank You!
Tzachi Schwartz, Tax Partner, PwC Israel [email protected]: 03-795-4811
Rafi Ganz, Senior Tax Manager, PwC Israel [email protected]: 03-795-4671
