martes, 23 de mayo de 2017

China’s SAT issues new measures for special tax investigation adjustments and mutual agreement procedures

On March 17, 2017, the State Administration of Taxation (SAT) issued the Public Notice of the State Administration of Taxation Regarding the Release of the “Administrative Measures for Special Tax Investigation Adjustments and Mutual Agreement Procedures” (SAT Public Notice [2017] No.6, hereinafter referred to as the “Public Notice 6”). Public Notice 6 provides rules on risk management, investigations and adjustments, administrative review and mutual agreement procedures regarding special tax adjustments, and other relevant issues.

Public Notice 6 becomes effective from May 1, 2017. It supersedes the relevant provisions in Implementation Measures of Special Tax Adjustments (Trial Version) (Guo Shui Fa [2009] No.2) and certain other regulations.

Source & more info: PwC

lunes, 22 de mayo de 2017

Updated United Nations transfer pricing manual released

The United Nations has released the second edition of its Practical Manual on Transfer Pricing for Developing Countries. Eponymously, the U.N. manual focuses on transfer pricing in developing countries. It is intended to not only draw upon the experience of the first edition of the manual but also reflect the developments in the area of transfer pricing analysis and administration since the first edition was published in 2013.  

The update is based on the principles listed below:

  • Reflect the operation of Article 9 of the United Nations Model Convention, and the Arm’s-Length Principle embodied in it, consistent with relevant Commentaries of the U.N. model
  • Reflect the realities for developing countries, at their relevant stages of capacity development
  • Pay special attention to the experience of developing countries
  • Draw upon the work being done in other fora

The updated manual aligns with recent Organisation for Economic Co-operation and Development (OECD) guidance, including new chapters on intragroup services, intangibles and cost contribution arrangements. The manual also incorporates key concepts from base erosion and profit shifting action items eight, nine and 10, and discusses countries adopting the country-by-country reporting template developed by the OECD. The revised manual is more than 150 pages longer than the first edition.

The second edition also includes an additional transfer pricing method for consideration. This new method, referred to as the Sixth Method or Commodity Rule, is applicable for pricing commodity transactions. The manual indicates the method has been used in several countries, primarily in Latin America.

Application of the Sixth Method is further expounded in the manual, but it is not summarily defined as a preferred approach and leaves considerable room for interpretation. For example, the manual lists the Sixth Method with other profit-based methods, such as the comparable profits method, transactional net margin method and profit split methods. However, in application, the manual indicates the Sixth Method is akin to other transaction-based methods, such as the comparable uncontrolled price method.

As with the first edition, whether the second edition of the UN transfer pricing manual is seen as guidance for developing nations or precedential material defended with regulatory vigor remains to be seen. In total, the manual seems to be intended more as a repository of experiences from various countries than as a guideline for regulatory consideration, and any perceived inconsistencies within the document seem to indicate the same. Regardless, taxpayers should deliberately and consistently revisit their transfer pricing documentation to ensure it is appropriate in light of ongoing international tax initiatives.

Source: RSM

viernes, 19 de mayo de 2017

US 2016 APA report shows greater consistency with prior years after historic number of requests in 2015

The IRS Advance Pricing and Mutual Agreement Program (APMA) on March 27 issued its 18th Annual Statutory Report concerning Advance Pricing Agreements (APAs).  The Report reveals that APA applications for 2016 decreased to 98 filed requests, down from a record high of 183 requests filed in 2015.  The 2015 surge  was driven by the then impending effective date of the new APA procedural requirements and higher user fees announced in Rev. Proc. 2015-41.

While significantly decreased from 2015, the number of filed requests in 2016 is on par with pre-2015 levels, where APA applications in each of the five years preceding 2015 averaged about 100 requests.  These numbers indicate that APAs continue to be an attractive option for companies seeking to manage their tax risks and achieve certainty around their intercompany pricing issues.

Source: PwC

jueves, 18 de mayo de 2017

Mexico Publishes Modifications to Transfer Pricing Documentation Requirements

On April 3, 2017, Mexico’s Office of the Taxpayer Advocate (PRODECON) published a final report for presenting the master file, local file and country-by-country (CbC) report under Article 76-A of the Income Tax Law. These documentation requirements apply from January 1, 2016, with initial CbC reports due by December 31, 2017 for the 2016 tax year.

Through a public consultation, multinational companies, tax consulting firms and other organizations issued comments with respect to the rules. As a result of these comments, the following reporting rules were modified:

  • Local file – replaces local transfer pricing documentation requirements.
  • Local file – no longer a requirement to file financial statements and tax returns of foreign related parties.
  • CbC report – Mexican groups can file one report for the group.
  • Master file – should meet Action 13 requirements.
  • Master file – only five products/services or products/services representing more than 5% of group income should be reported.
  • Master file – clarification of terms, such as multinational business group, intangible assets and business restructuring.
  • Master and local file – English version of master file is acceptable, as well as for intercompany agreements and business descriptions of comparables in local file.
  • Local file – Description of intercompany transactions.
  • Master file and CbC report – Can be reported in foreign currency.
  • Local file – analysis may establish that intercompany transactions are in accordance with arm’s-length principle.
  • Local file – only advance pricing agreements available to the Mexican taxpayer should be provided.
  • Master file – can submit electronically.
  • Master file – all entities subject to filing master file must file only one document for the group.

Source: Thomson Reuters

miércoles, 17 de mayo de 2017

IRS issues draft instructions for Form 8975

The IRS on February 24 released draft instructions for draft Form 8975, Country-by-Country Report, and accompanying draft Schedule A, Tax Jurisdiction and Constituent Entity Information, that were issued in December 2016. These draft forms and instructions are based on Action 13 of the Base Erosion and Profit Shifting (BEPS) project undertaken by the Organization for Economic Cooperation and Development (OECD). The IRS is accepting comments on the draft forms and instructions, and plans to finalize them by June 2017.
The final country-by-country (CbC) reporting regulations, found in Treas. Reg. §1.6038-4 (TD 9773), provide the basic rules and definitions to be used when filling out Form 8975 and accompanying Schedule A. Nevertheless, gaps in the regulations persist, and these draft instructions, though not final or binding authority, appear to clarify some of those issues.

Source & more info: Deloitte

martes, 16 de mayo de 2017

Italy issues rules for implementation of country-by-country reporting

Italy on 8 March published a decree implementing a country-by-country (CbC) reporting requirement in the Official Gazette. The CbC reporting requirement had been introduced in the Budget Law 2016 (also known as the Stability Law) approved on 28 December 2015.
The Stability Law introduced a mandatory reporting requirement for multinational companies into Italian tax legislation, effective 1 January 2016. The 8 March decree was originally scheduled for publication in March 2016.
The CbC reporting requirement, as stated in par. 7 of the decree and paragraph 145, Article 1 of the Stability Law, will be used by the Italian tax authorities to assess the reasonableness of the transfer pricing model, as well as to evaluate other risks concerning the erosion of the taxable base in Italy, and represents an additional instrument to support the tax authorities in their risk assessment activities.
Paragraphs n. 145 and 146 of Art. 1 of the law introduce an obligation for multinationals that exceed certain size thresholds to prepare CbC reports, through which they will report to the tax authorities information for each country in which the group operates.
The CbC reporting obligation was enacted in response to the OECD project to counter the erosion of the tax base and the shifting of profits abroad through elusive practices – the base erosion and profit shifting, or BEPS, project – which consisted of 15 “actions,” including Action 13, Guidance on Transfer Pricing Documentation and Country-by-Country Reporting.
The CbC report must be prepared by parent companies of multinational groups resident within Italy for tax purposes, with a consolidated turnover of over EUR 750 million.
The entity responsible for the preparation of the document is the parent company, specifically the entity with the responsibility to prepare the consolidated financial statement.
Under the decree, the CbC report covers fiscal years beginning on or after 1 January 2016, and must be filed within 12 months from the end of the reference year. For example, for entities with calendar year reporting periods, the deadline for submission will be 31 December 2017 for fiscal year 2016.
Controlled entities resident in Italy for tax purposes that are part of multinational groups subject to the obligation to file the CbC report must notify in their tax return (due nine months from the fiscal year end) the details of the group entity in charge for the preparation of the CbC report, including its tax jurisdiction.
On the basis of the law and of the provisions of Art. 2 of the decree, the CbC report obligation will be extended to both Italian tax resident subsidiaries and permanent establishments of foreign entities, part of multinational companies that fall within the scope of the CbC reporting obligation set forth by the Stability Law, in the event that the “ultimate” parent company required to prepare consolidated financial statements is resident in a state that:

  • Has not introduced the obligation to file a CbC report, unless, as stated in art. 2 par. 7 of the decree, for the fiscal year beginning in 2016 only:
  • The parent company voluntarily files the CbC report in its state; and
  • The state has introduced, within the terms of presentation of the CbC report in Italy, an obligation to prepare the subject document, even if just for later periods (for example, United States consolidating entities, where the obligation applies to fiscal years beginning on or after 30 June 2016);
  • Does not have in force an agreement with Italy regarding the exchange of information related to CbC reporting; or
  • Defaults on its obligation to exchange information regarding CbC reporting, or in case the parent company fails to submit the CbC report in its state of residence.

Alternatively, the CbC report can be prepared by a company other than the consolidating entity, provided that its state of residence fulfills the above-mentioned requirements and that the Italian entity identified in the tax return the identity and residence of tax jurisdiction of that other company.
As indicated in the annex to the decree, the standard content of the CbC report will reproduce the same three sample tables included in the Action 13 final report.
The Stability Law, at Article 1, paragraph 145, provides for the imposition of an administrative penalty ranging from EUR 10,000 to EUR 50,000, if the CbC report is not filed or is submitted with incomplete or incorrect information.
The decree refers to a yet-to-be-issued specific order of the Revenue Agency that will provide information on how to file the CbC report.

Source: Deloitte

lunes, 15 de mayo de 2017

Canada’s country-by-country legislation comes into force, CRA releases Form RC4649

The Canada Revenue Agency (CRA) on February 3 released the prescribed form for reporting country-by-country (CbC) information, Form RC4649, Country-by-Country Report.
Form RC4649 is consistent with the model CbC report templates included in the Organisation for Economic Cooperation and Development’s (OECD’s) October 5, 2015, final report, and requires the following information to be provided for each tax jurisdiction: revenues (unrelated and related), income, taxes paid and accrued, stated capital, accumulated earnings, number of employees, tangible assets, and certain information about each of the so-called “constituent entities,” including their primary activities.
The Form RC4649 instructions provide useful guidance to assist Canadian taxpayers to understand the CRA’s expectations regarding the CbC information to be reported, including definitions and detailed filing instructions.
The form was released shortly after the passage of final legislation to implement CbC reporting requirements for Canadian multinational enterprises (MNEs) in Canada’s House of Commons on December 15, 2016. These requirements are in line with the recommendations of the OECD, as outlined in the October 5, 2015, final report in respect of Action 13 of the Base Erosion and Profit Shifting Action Plan, Transfer Pricing Documentation and Countryby-Country Reporting.

Source & more info: Deloitte

viernes, 12 de mayo de 2017

2016 US APA Report shows strong interest in agreements with India, Italy

The Internal Revenue Service on March 27 released the annual report covering the activities of the Advance Pricing and Mutual Agreement (APMA) Program during calendar year 2016. While the 2016 annual report reveals a significant decrease in APA applications compared to the record number of APA applications received in 2015, the decrease may be explained by taxpayers accelerating their APA requests to file under procedures that were superseded by new procedures at the very end of 2015.
Source & more infomation: Deloitte

jueves, 11 de mayo de 2017

Denmark enforcement efforts on TP documentation

The Danish Tax Authority, SKAT, published the first two court rulings on penalties for missing or inadequate transfer pricing documentation in March 2017.
Both cases involved a request for transfer pricing documentation for income years 2008-2012, and in both cases, the taxpayer received a penalty of DKK 250,000.
The two rulings are described below.

Lower court ruling
The first ruling regarding transfer pricing documentation penalties was published on 23 March. The case involved a taxpayer that had been asked to provide transfer pricing documentation covering income years 2008-2012 to the Danish tax authorities. As required by Danish tax law, the transfer pricing documentation had to be submitted within 60 days from the request.
The taxpayer, a Danish subsidiary of a large foreign-based multinational group, submitted a transfer pricing report that covered income years up to and including 2007. The report was submitted before the deadline, but covered the wrong income years, and did not include appendices, which were referred to in the report.
Five days after the 60-day deadline expired, the tax authorities sent a letter to the taxpayer notifying it that it would be penalized for not submitting adequate transfer pricing documentation within the 60-day deadline.
Through requests for additional material from SKAT, the company provided adequate transfer pricing documentation for income years 2008-2012 approximately four months after the 60-day deadline had expired.
Based on the above, the lower court imposed a penalty of DKK 250,000. The penalty guidelines call for the imposition of a penalty of DKK 250,000 per income year. However, the penalty may be lowered to 125,000 per income year if the taxpayer subsequently provides adequate documentation. In this case, because the taxpayer had provided adequate documentation after the 60-day deadline had expired, the court ruled that the taxpayer should not be subject to the full penalty. Instead, the court assessed a penalty of DKK 250,000.

High Court ruling
The second ruling regarding transfer pricing documentation penalties was published on 27 March.
Similar to the case in the lower court ruling, this case also involved a taxpayer that received a request for transfer pricing documentation covering income years 2008-2012. As required by Danish tax law, transfer pricing documentation must be submitted to the Danish tax authorities within 60 days from the request.
The taxpayer failed to submit any transfer pricing documentation within the 60-day deadline, because the letter from the tax authorities requesting the documentation had been misplaced internally within the group. The company ultimately provided adequate transfer pricing documentation and answered additional questions during the tax audit.
The lower court imposed a penalty of DKK 500,000, equal to DKK 125,000 for each of the four income years in question. The taxpayer appealed the ruling to the High Court.
The High Court upheld the lower court’s ruling, and thereby sentenced the taxpayer to a penalty for not submitting the transfer pricing documentation in time. Surprisingly, the High Court reduced the penalty to DKK 250,000, because the court treated the missing documentation for income years 2008-2012 as a single offense.

The Danish penalty regime includes penalties for late preparation and late filing of transfer pricing documentation.
These rulings are the first published Danish cases on penalties for late filling of transfer pricing documentation.
The rulings establish that in evaluating whether transfer pricing documentation has been filed in a timely manner, the courts also consider the content of the documentation and whether it complies with the Danish documentation rules.
In both cases, the courts applied a gentler approach in determining the amount of the penalty than the administrative guidance provides for. In other words, the courts reduced the amount of the penalty based on the specific facts and circumstances of the cases.
Companies that are subject to the Danish transfer pricing documentation requirements should carefully observe the formal requirements before submitting transfer pricing documentation to ensure penalty protection.
Taxpayers should also keep in mind that companies that are penalized for non-compliance with the Danish transfer pricing documentation requirements may be subject to an additional penalty of 10 percent of any potential income adjustment.

Source: Deloitte

miércoles, 10 de mayo de 2017

New Zealand issues BEPS consultation papers

New Zealand’s Minister of Revenue and the Finance Minister on 3 March released three BEPS consultation papers that address tackling concerns about multinationals booking profits from their New Zealand sales offshore, even though the sales are driven by New Zealand-based staff; preventing multinationals from using interest payments to shift profits offshore by strengthening the interest limitation rules; and implementing the multilateral instrument to align New Zealand’s tax treaties with the OECD recommendations.

Source & more info: Deloitte

martes, 9 de mayo de 2017

Germany publishes new draft legislation on transfer pricing documentation

The German Federal Ministry of Finance recently published draft amendments to the transfer pricing documentation decree (“GAufzV” from its German acronym). The transfer pricing documentation decree specifies what information must be included in a taxpayer’s transfer pricing documentation report, and as a decree-law, is binding on taxpayers and the tax authorities. The revised documentation decree – if it is enacted in the proposed form – would apply to all tax assessment periods from 2017 onwards.
The changes to the transfer pricing documentation decree are motivated by the German government’s desire to implement BEPS Action 13, incorporated into Chapter V of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. However, as outlined below, the German Ministry of Finance includes provisions in the draft transfer pricing documentation decree that go beyond the OECD guidance.
The proposed draft transfer pricing documentation decree corresponds primarily to the OECD guidance defining the relevant information to be included in the master file and the local file. However, it also includes the following special requirements:

  • A requirement to name the person who actually made the decisions regarding the intercompany transaction in question (Sec. 4 para. 1 no. 3 (b), draft TP documentation decree);
  • A requirement to present the information that was available at the time when the transfer price was determined (Sec. 4 para. 1 no. 4 (b), draft TP documentation decree);
  • A requirement that tax auditors must be provided access to any databases the taxpayer or its advisors used for a benchmarking analysis. Specifically, access must be provided to the version of the database used by the taxpayer/advisor at the time when the search was conducted. (Sec. 4 para. 3, draft TP documentation decree); and
  • A requirement to support the weighting of allocation factors with quantitative data when applying the profit split method or a contribution analysis. (Sec. 1 para. 3 sent. 4, draft TP documentation decree).

The draft decree also limits taxpayers’ ability to submit documentation such as the master file in languages other than German, by requiring a separate request by the taxpayer and approval by the tax authorities. This position contravenes the OECD’s consensus position on the possibility of submitting the master file in commonly used languages, such as English.
The draft transfer pricing documentation decree is expected to be promptly forwarded to the federal government for further discussion. Given that the proposed changes are intended to be effective for the 2017 assessment period, as well as the forthcoming German elections in the fall of 2017, the changes to the TP documentation decree may be finalized and adopted before the summer legislative break.

Source: Deloitte

lunes, 8 de mayo de 2017

IRS releases initial list of TP audit campaigns in the US

The IRS Large Business and International Division (LB&I) on 31 January announced the identification and selection of 13 “campaigns” that will be the focus of the agency’s enforcement efforts.
Last year, as part of its reorganization, LB&I announced that it would be implementing campaigns to identify the most serious tax administration risks, create specific plans to move toward expected compliance, and then deploy IRS resources accordingly. This initial wave of campaigns shows that LB&I is moving forward with its plan to focus on issue-based examinations and compliance. This approach is intended to make use of IRS knowledge and deploy the right resources to address those issues.
The initial 13 campaigns, as organized within LB&I’s five substantive practice areas, are as follows:

  • Treaty and Transfer Pricing Operations
  • Inbound Distributors
  • Cross-Border Activities
  • Repatriation
  • Form 1120-F non-filers
  • Withholding and International Individual
  • OVDP (Offshore Voluntary Disclosure Program) Declines – Withdrawals
  • Enterprise Activities
  • IRC §48C energy credit
  • Domestic production activities deduction, multi-channel video program distributors (MVPDs) and TV broadcasters
  • Micro-captive insurance
  • Related-party transactions
  • Deferred variable annuity reserves & life insurance reserves and Industry Issue Resolution (IIR) program
  • Basket transactions
  • Land developers – completed contract method (CCM)
  • Passthrough Entities
  • TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) Linkage Plan Strategy
  • S Corporation Losses Claimed in Excess of Basis

The announcement stated that these campaigns were identified through LB&I extensive data analysis, suggestions from IRS compliance employees, and feedback from the tax community. LB&I’s goal is to improve return selection, identify issues representing a risk of non-compliance, and make better use of limited resources.

Inbound Distributor Campaign
The initial campaign rollout includes the inbound distributor campaign. Sharon Porter, director of the Treaty and Transfer Pricing Operations Practice Area, will be the lead executive for this campaign. Its goal is to verify whether inbound distributors receive an arm’s length return rather than the losses or small profits some inbound distributors, especially in the middle market, have been earning. The IRS announcement describes the inbound distributor campaign as follows:
US distributors of goods sourced from foreign-related parties have incurred losses or small profits on US returns which are not commensurate with the functions performed and risks assumed. In many cases, the US taxpayer would be entitled to higher returns in arm’s-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue. The treatment stream for this campaign will be issue-based examinations.
This campaign grew out of a pilot program called the Inbound Distributor Project, whereby the IRS determined that there was a widespread practice of not adequately compensating inbound distributors in the middle market.

Other Campaigns
The other 12 campaigns relate to non-transfer-pricing issues, although the related-party transactions campaign should be mentioned. That campaign will be overseen by the Enterprises Activities Practice Area, which generally focuses on domestic issues, and is described as focusing on transactions that provide taxpayers a means to transfer funds from a corporation to related pass-through entities or shareholders. Based on this description, we do not believe the campaign will relate to transfer pricing, even though the transactions at issue involve commonly controlled entities.

As noted in the TIGTA Audit released 3 November 2016, transfer pricing issues account for approximately 46 percent of the LB&I’s international issues inventory and 71 percent of the potential total dollar adjustment amounts of all international tax issues. The focus on transfer pricing seems unlikely to change, even though only one transfer pricing campaign was announced in this initial rollout.

Source & more info: Deloitte

viernes, 5 de mayo de 2017

Dbriefs Bytes - 5 May 2017

UK amends country-by-country reporting rules

The UK’s Statutory Instrument 2017 (No. 497), published on 30 March, amends SI 2016 No. 237, which gives effect in the UK to the G20/OECD’s minimum standard for country-by-country (CbC) information to be provided to tax authorities. These amendments follow additional guidance on the Implementation of Country-by-Country Reporting released by the G20/OECD in June 2016 and updated in December 2016. In addition, the regulations ensure compliance with the amended EU Council Directive on Administrative Cooperation 2011/15/EU (DAC4).
The amendments enter into force on 20 April 2017, and affect all multinational enterprise (MNE) groups that meet the CbC threshold requirement and include at least one UK tax resident entity and/or an entity resident elsewhere with a permanent establishment in the UK. The key changes are as follows:

  • The application of the rules has been amended to include MNE groups whose ultimate parent entities are partnerships governed under UK law, including LLPs. The regulations will require the reporting partner of such partnerships to ensure compliance;
  • There are new annual notification requirements for UK entities, with the first notifications due on 1 September 2017 (and then by the end of the CbC reporting period thereafter); and
  • There is an additional information request requirement for UK entities whose ultimate parent does not file a CbC report that is adequate for UK reporting.

HMRC now estimate that about 300 UK-parented groups will need to file, together with up to 200 UK subsidiaries or branches of overseas groups (about half for just one year until the overseas parent files in its own jurisdiction).

Source & more info: Deloitte

jueves, 4 de mayo de 2017

China’s SAT issues new rules to improve administration of Special Tax Investigation and Adjustment and Mutual Agreement Procedures

China’s State Administration of Taxation has issued new regulations – Bulletin 6 – to improve the administration of Special Tax Investigations and Adjustments and Mutual Agreement Procedures. The new rules clearly show that the Chinese tax authorities are paying more attention to related-party transactions and transfer pricing policies of Chinese-headquartered companies that are expanding around the world.

On 17 March 2017, China’s State Administration of Taxation (SAT) issued new regulations – Bulletin 6 – to improve the administration of Special Tax Investigations and Adjustments and Mutual Agreement Procedures. These regulations largely complete the revision of the transfer pricing-specific clauses of Circular 2, and add to the transfer pricing framework set out in the previously issued Bulletin 421 and Bulletin 642.

The Bulletin enters into effect on 1 May 2017, and the corresponding sections of previous regulations are repealed.

Following the release of the three new regulations (Bulletins 42 and 64 in 2016 and Bulletin 6 in 2017) on Special Tax Adjustments, the regulatory framework for Transfer Pricing in China is now spread across a number of regulations.

Bulletin 6 has clarified certain key transfer pricing issues, as well as the methodology and procedures for special tax audits and adjustments. In making the changes, the SAT has generally incorporated positions taken in the discussion draft regarding intangible assets, related-party services and the monitoring of profit levels, as well as the guidance on mutual agreement procedures. Bulletin 6 puts more emphasis on a risk-oriented tax administration system that looks to improve cooperation between enterprises and tax authorities, and overall compliance with the regulations. In clarifying the technical positions, the regulation incorporates changes arising from the OECD’s Base Erosion and Profit Shifting (BEPS) Actions 8-10 and Action 14.

Another encouraging sign is that the SAT has given due consideration to comments provided by enterprises and the public, and has revised and clarified some points that were of concern to taxpayers, or were not entirely clear, for example:
  • Reinforcement of the arm’s length principle as the primary requirement for transfer pricing in China;
  • Removal of the controversial “secondary adjustment” provision, as well as similar provisions allowing tax authorities to deny or recharacterize related-party transactions; and
  • Permitting working capital adjustments when analyzing toll processing businesses, with the requirements of revisiting comparable companies when the adjustment to profit levels exceeds the acceptable range, that is, when working capital adjustments result in a profit level adjustment by more than 10 percent. 
Source & more info: Deloitte

miércoles, 3 de mayo de 2017

US Tax Court sides with Amazon in intangibles transfer case

The US Tax Court in its March 23 opinion, Inc. v. Commissioner, T.C., No. 31197-12, 148 T.C. No. 8, 3/23/17, found the IRS’s approach to valuing a cost sharing buy-in payment to be arbitrary, capricious, and unreasonable.

The Tax Court specifically addressed the following three issues under the 1995 cost sharing regulations: (i) the price of a buy-in payment; (ii) the price of other intangible transfers; and (iii) the subsequent allocation of certain intangible development costs (IDCs). All three issues arose in relation to a cost sharing arrangement (CSA) that was entered into as part of a 2004 restructuring by Inc. (Amazon US) and its Luxembourg subsidiary. Also at issue was whether a claw-back provision contained in the CSA for stock-based compensation (SBC) was operative in light of the Tax Court’s decision in Altera Corp. v. Commissioner, 145 T.C. 91. The years before the court were 2005 and 2006.

It should be noted that, on January 5, 2009, the IRS and Treasury redesignated the regulations at issue in the Amazon case as Treas. Reg. §1.482-7A, and at the same time promulgated new temporary cost sharing regulations that were designated as Treas. Reg. §1.482-7T (T.D. 9441, 74 Fed. Reg. 352). The IRS and Treasury later issued final regulations on December 22, 2011 (T.D. 9568, 76 Fed. Reg. 80090), which adopted the effective date of the temporary regulations. Therefore, the opinion of the Tax Court in Amazon is limited to transactions before January 5, 2009, and is not directly applicable to cost sharing transactions that are governed by the post-2009 temporary and final regulations.

Buy-in payment and intangible transfers

In this case, the IRS proposed to value the buy-in and other intangible transfers in the aggregate using a discounted cash flow analysis (DCF) with a perpetual life. The Tax Court held that the IRS’s approach to valuing the intangible transfers was arbitrary, capricious, and unreasonable. Affirming its decision in Veritas Software Corp. v. Commissioner, 133 T.C. 297, the Tax Court rejected IRS attempts to distinguish or overrule Veritas and held:

  • The intangibles at issue did not have a perpetual useful life;
  • The buy-in payment was not “akin to a sale”;
  • The workforce in place, goodwill, and going concern value should be excluded when determining the buy-in payment;
  • The intangibles at issue should not be valued in the aggregate; and
  • The transferred website technology decayed in value over its useful life.

The Tax Court rejected the IRS’s attempt to value the transferred intangibles in the aggregate. Under the aggregation principle, analyzing the combined effect of multiple transactions in the aggregate may be appropriate if combining the transactions provides the most reliable measure of an arm’s length result. The Tax Court rejected the use of aggregation in this case, because such an analysis would have effectively combined: (i) preexisting intangibles, which were the subject of the buy-in; and (ii) subsequently developed intangibles, which were co-owned by the cost share participants. In addition, the Tax Court found that aggregation would combine compensable intangibles (website technology, trademarks, and customer intangibles) and non-compensable residual business assets, such as workforce in place, goodwill, and going concern value.1

The Tax Court rejected the IRS’s contention that the “realistic alternatives” principle articulated in Treas. Reg. §1.482-1(f)(2)(ii)(A) supported the IRS’s application of the DCF. Under the realistic alternatives principle, the commissioner of the Internal Revenue Service is authorized to consider realistic alternatives to determine if the controlled transaction is arm’s length. The IRS contended that the realistic alternative for Amazon US was to keep ownership of the IP and develop it further. This view lends support to the “akin‑to‑a‑sale” position that the IRS argued. Based on the IRS regulations, the Tax Court concluded that the realistic alternatives considered must be consistent with the form of the transaction chosen by the taxpayer. In this case, assuming that Amazon US did not enter into the cost share arrangement was not a realistic alternative to the CSA.

The Tax Court also rejected the IRS’s use of a perpetual life, maintaining that this was incompatible with the CSA requirement to compensate the transferor for preexisting intangibles. The Tax Court held that the use of a perpetual life would include subsequently developed intangibles as well as preexisting intangibles. This, according to the Tax Court, was inconsistent with the applicable 1995 cost sharing regulations.

The Tax Court determined that the comparable uncontrolled transaction (CUT) method was the most reliable method to value the intangible transfers. Both Amazon US and the IRS presented CUTs to support their theories of the case. After adjusting the CUTs:

  • The court determined that the required buy-in payments for the website technology was a royalty of 3.05 percent of sales decayed over seven years and with a 3.5-year “tail” of 0.40 percent. The court based its decay function on detailed expert testimony concerning the life of Amazon US’s website technology.
  • The court valued the trademarks at 0.75 percent of sales over 20 years with no decay rate. The court took the following into consideration in determining the value of the trademarks:

  • The high recognition of the trademarks in Europe at the time of transfer;
  • The fact that the value of the trademarks over time would be dependent on the success of the Luxembourg investment in cost shared intangibles; and
  • The Luxembourg contribution to the value of the trademarks prior to the transfer.
  • Finally, the European customer information was valued at a relatively nominal amount given the churn of customers.

Intangible development costs

The IRS asserted that 100 percent of the costs attributable to certain cost centers were allocable to the CSA cost pool. At trial, Amazon US established that the employees in those cost centers engaged in substantial non-IDC activities. The Tax Court agreed that less than 100 percent of those cost centers were properly allocable to the CSA cost pool.

Stock-based compensation costs

The CSA executed by Amazon US and its Luxembourg subsidiary included SBC costs in the cost pool in accordance with the IRC §482 regulations governing the years at issue. Amazon US, like other taxpayers, included a provision in the CSA whereby those costs would be “clawed back” in the event the regulations were held to be invalid. However, that provision would take effect only if certain contingencies occurred, such as the regulation in question being invalidated by a “final decision in a court of law.” In Altera Corp. v. Commissioner, 145 T.C. 91, the Tax Court invalidated the SBC rule at issue, which was contained in Treas. Reg. §1.482-7(d)(2) (as amended in 2004).2 The Tax Court’s decision was appealed to the US Court of Appeals for the Ninth Circuit on February 19, 2016. Because that case remains pending on appeal, the court held the CSA’s claw-back provision was not operative by its own terms during the years at issue.


martes, 2 de mayo de 2017

United States: White House unveils largely familiar tax reform principles

The Trump administration released a one-page fact sheet on 26 April 2017, outlining principles for overhauling the US tax code that include, among other things, lowering the top income tax rate for corporations and passthrough entities to 15%, as well as shaving individual rates, compressing the rate brackets and significantly increasing the standard deduction.
Many of the principles resemble those that then-presidential candidate Donald Trump put forward on the campaign trail in 2016. The administration did not couch its principles in legislative language, nor did it provide technical descriptions explaining how specific provisions would operate. Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn explained at a 26 April press briefing that the administration would develop those details in consultation with congressional leaders and release a formal proposal later this summer.

Business provisions: Significantly lower rates and a territorial tax system
On the business side, the White House is continuing with Trump’s campaign pledge to lower the corporate rate down to 15% (from 35%).
Passthroughs: Also in keeping with previous campaign proposals, the plan calls for making the 15% rate available to businesses organized as passthroughs (that is, businesses without an entity-level tax, which currently are taxed as individuals).
Mnuchin assured reporters during the 26 April press briefing that the administration would work with Congress to develop anti-abuse rules to prevent wealthy individuals from “gaming” the tax code by recharacterizing wage income as more lightly taxed business income.
Territorial tax system: Significantly, the plan also calls for a transition to a territorial system of taxation, meaning domestic multinational businesses would only be taxed on their income connected with the US. Systems like these are much more common around the world, which explains why the fact sheet says the proposal would “level the playing field for American companies.” This was likely the biggest change from the Trump campaign proposals, which called for ending deferral but otherwise retaining the current worldwide regime for taxing offshore business income of US
Deemed repatriation: The plan repeats a call Trump made during the campaign for a one-time deemed-repatriation tax on previously untaxed earnings held overseas. The fact sheet does not cite a specific rate for the one-time levy. (The campaign proposal called for a rate of 10%.)
When asked about this at the 26 April press briefing, Mnuchin told reporters that the administration would work with the House of Representatives and Senate to determine the appropriate rate and that the rate would be “competitive.”
The plan also is silent on whether the repatriation rate would be bifurcated for cash and noncash assets, or if the tax would be paid all in one year or ratably over a longer period (as proposed in the House GOP tax reform blueprint released last June (for prior coverage, see tax@hand, 5 July 2016) and the comprehensive tax reform proposal introduced by then-House Ways and Means Committee Chairman Dave Camp in 2014.
No discussion of border adjustment tax: The plan does not address whether the administration embraces the destination-based cash flow tax included in the House Republican tax reform blueprint. That proposal, which is estimated to raise over USD 1 trillion to help offset the cost of a proposed corporate rate cut, provides for “border adjustments” through a not-yet-specified mechanism that would serve to eliminate US tax on products, services and intangibles exported abroad (regardless of their production location) and impose a 20% US tax on products, services and intangibles imported into the US (also regardless of production location). Rival taxpayer advocacy coalitions representing export-heavy and import-heavy interests have been active on Capitol Hill recently in an effort to rally
House and Senate members to their side, and there are a number of vocal skeptics of the proposal among Republicans in both chambers.
Trump, for his part, has yet to take a firm position on the proposal. In the past, he has criticized the border adjustment tax as “too complicated,” and at other times he has expressed interest in the notion of an as-yet undefined “reciprocal tax” on imports.
Corporate tax expenditures: The plan proposes – without elaboration – to “eliminate tax breaks for special interests.” (On the campaign trail, Trump made a similarly general call to broaden the tax base by repealing “most corporate tax expenditures.”)
No infrastructure proposals: The plan does not include proposals to use any one-time revenue from business tax reform to finance new infrastructure spending. (Reports had circulated ahead of the release that President Trump might include such a proposal as a way to win support from congressional Democrats, who so far have been united in their opposition to Republican tax reform efforts.)
Individual provisions: Lower rates, fewer incentives
On the individual side, the administration proposes to provide tax relief by compressing the seven income tax rate brackets under current law (ranging from 10% to 39.6%) to three brackets of 10%, 25% and 35%. (This is similar what Trump proposed on the campaign trail in 2016, although that plan called for a bottom rate of 12% and a top rate of 33%.) The fact sheet does not specify income thresholds for the rate brackets, however. Cohn and Mnuchin stated at the press briefing that those decisions would be finalized in consultation with congressional leaders.
Capital gains: The administration proposes to repeal the 3.8% tax on net investment income that was enacted under the Patient Protection and Affordable Care Act of 2010. Cohn indicated during the press briefing that the tax rate on capital gains would remain at 20%, as under current law.
Standard deduction: The plan calls for increasing the standard deduction to USD 24,000 for joint filers and USD 12,000 for individuals, similar to a proposal in the House Republican tax reform blueprint. (During the presidential campaign, Trump called for hiking the standard deduction to USD 30,000 for joint filers and USD 15,000 for individuals.)
Alternative minimum tax (AMT): The plan also repeats proposals made during the presidential campaign to repeal the estate tax and the individual AMT. The fact sheet does not mention changes to the corporate AMT.
New incentives for child care expenses: The plan includes a proposal to provide tax relief to families facing child and dependent care expenses. (Although the fact sheet does not go into specifics, Trump offered a series of proposals during the presidential campaign that called for an above-the line deduction for taxpayers facing certain child care and elder care expenses, a new tax-preferred savings account to encourage families to set aside funds for caregiving expenses and expanded incentives for employers who offer on-site child care to their employees.)
Many current incentives targeted for elimination: The administration also proposes to simplify the tax rules for individuals by eliminating “targeted tax breaks that mainly benefit the wealthiest taxpayers.” Although the fact sheet provides no details, Mnuchin and Cohn stated during their press briefing that the administration intends to snuff all current-law tax incentives except for those tied to the mortgage interest deduction and charitable giving. (During the campaign, Trump generally proposed to cap itemized deductions at USD 200,000 for joint filers and USD 100,000 for single filers.)
In response to a reporter’s question, Cohn confirmed that the deduction for state and local income taxes is among those that are proposed to be on the chopping block.
Next steps
Mnuchin and Cohn indicated during their press briefing that White House officials intend to spend the month of May holding “listening sessions” with stakeholders and working with House and Senate leadership to refine the plan, fill in many of the technical details that are currently missing and turn it into a formal legislative proposal. According to Mnuchin, the administration is “determined to move this as fast as we can, and get this done this year.”
In a joint statement, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Committee Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch characterized the principles put forward by the White House as “critical guideposts for Congress and the administration as we work together to overhaul the American tax system and ensure middle-class families and job creators are better positioned for the 21st century economy. …With an eye toward fairness and simplicity, we’re confident we can rebuild our tax code in a way that will grow our economy, better promote savings and investment, provide our job creators with a competitive advantage and bring prosperity to all Americans.”

Source: Deloitte

Japan enacts 2017 tax reform

Japan’s National Diet enacted the 2017 tax reform proposals on 27 March 2017, which include the following major corporate tax changes:

  • The R&D tax credit regime is revised to increase competitiveness.
  • The deductibility of director compensation is amended, including revisions to increase flexibility for companies to use profit-linked compensation.
  • Provisions related to corporate reorganizations are revised, including the expansion of the definition of a taxqualified horizontal-type corporate division to include certain horizontal-type corporate divisions via incorporation. The scope of tax relief for small and medium-sized enterprises will be limited for fiscal years beginning on or after 1 April 2019.
  • The controlled foreign corporation rules are fundamentally revised in accordance with the basic concepts of the OECD’s BEPS project. The new rules will  become effective for accounting years beginning on or after 1 April 2018 of the foreign related company. 

Source: Deloitte