Wrapping up July—and Looking Forward to August

Tax Controversy Activities in August:

August 7, 2017: Elizabeth Erickson and Kristen Hazel will be representing McDermott Will & Emery at the 2017 US Captive Awards in Burlington, Vermont. McDermott has been shortlisted in the Law Firm category.

August 8, 2017: Tom Jones is presenting an update on Captive Insurance Tax in Burlington, Vermont, at the Vermont Captive Insurance Association Annual Conference “Mission: Possible”— the largest captive insurance conference in the US by number of paid attendees.

August 18, 2017: Todd Welty is speaking at the Texas Society of Certified Public Accountants Advanced Estate Planning Conference about:

  • Current developments in federal transfer taxes
  • Current state of federal tax reform
  • Proposed changes to state death tax laws and the impact of those changes on estate
  • Gift and trust planning
  • Consistent basis regulations
  • The state of valuation discounts
  • Recent rulings on defined value clauses and charitable gifts

August 23, 2017: Tom Jones is presenting an update on Annual Federal & State Tax at the North Carolina Captive Insurance Association Annual Conference in Charlotte, North Carolina.

Wrapping up July:

Our July 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

July 14, 2017: Tracking Tax Guidance and Court Cases

July 17, 2017: New IRS CbC Resource

July 18, 2017: Courts Rejects Challenge to OVDP Transition Rules

July 19, 2017: Tax Court Rejects IRS Reliance on “Cursory” Analysis in Revenue Ruling

July 21, 2017: John Doe Intervenes in Virtual Currency Summons Enforcement Case

July 24, 2017: BEWARE: Whistleblowers Can “Out” You to the IRS!

July 26, 2017: Virtual IRS Appeals – A New Frontier?

July 27, 2017: IRS Rules (Again) That Taxpayers Are Not Entitled to Claimed Refined Coal Credits

July 28, 2017: Tax Court Hands Eaton a Complete Victory on the Cancellation of its Advance Pricing Agreements

July 31, 2017: Senate Attempts to Repeal Chevron Deference

We have reported several times about the new Country-by-Country (CBC) reporting regime. Taxpayers and the tax bar have been desperate for clarity about the requirements for CbC reporting.  In response, today the Internal Revenue Service (IRS) announced the launch of its CbC resource on its www.IRS.gov website. The new information is designed to provide background on CbC, frequently asked questions and other information. One of the best features is a list of jurisdictions that have concluded Competent Authority Arrangements with the United States.

Adoption of the base erosion and profit shifting (BEPS) action items in specific countries can be expected to alter traditional multi-national enterprises (MNE) tax strategy processes. In this regard, it is appropriate to note that tax authorities and the Organization for Economic Co-operation and Development (OECD) often seem to overlook, or conveniently ignore, that MNE strategies are often a function of the rules established by countries to develop their own tax base (at the expense of other countries). In other words, countries, in their respective self-interests, grant incentives of various sorts to encourage economic investment. MNEs take advantage of these incentives to minimize their tax liabilities, which the BEPS process views as, somehow, inappropriate behavior of MNEs denuding the tax base of other countries.

Like water going downhill, MNE planning strategies will utilize the most efficient path to achieve desired objectives. This is a fiduciary duty to shareholders. Effective tax rates are a major expense of all MNEs, which need to be managed as effectively as possible in a competitive world. For example, if Country A offers an incentive such that MNE #1 makes an investment in Country A, as opposed to Country B which offers no such incentive, the net result is that jobs and economic activity are created in Country A not B. Country B may perceive that its tax has been eroded. But who has done this? Country A via its incentive or MNE #1?

International tax disputes arise when Country B challenges the activity of MNE #1 asserting that it should have been paying tax in Country B. If there is a treaty between Countries A and B, there could be a mutual agreement procedure (MAP) proceeding. If that proceeding stalls for whatever reason, then all parties would benefit from processes that would lead to resolution.

The transparency demanded by the Country-by-Country (CbC) package and related matters evolving on a unilateral country basis (seeking, once again, to attract tax base away from other countries) will create new opportunities and paradigms for MNE effective tax rate strategies. It may be that these evolutions will drive planning and acquisition strategies toward treaty or non-treaty protected corporate structures designed to: (i) take advantage of new opportunities created by the new  regimes; and (ii) minimize transfer pricing exposures, imposition of exit or other taxes on the movement of intangibles or other assets, and so on. As these strategies evolve, the net result may not be an outcome that was anticipated by organizers of the BEPS project. This was certainly the case with respect to design of our current international tax system just after World War I.

These evolutions in the international tax world reflect, not surprisingly, what is evolving in the global political world. The popular press regularly addresses what is often described as globalism vs. populism, which reflects an apparent trend of voters and governments to focus less on the global good and more on local needs. The same phenomenon appears to be evolving in the world of cross-border taxation, which may be evolving as it did in 1926: idealistic visions of a globalized tax order (BEPS) vs. realism-populism on a CbC basis. Countries seem to be reacting to the former (BEPS) as they did to the League of Nations (The League) in 1926. The League assumed there would be consistent adoption of tax policy throughout the world, but countries pursued agendas to achieve their respective objectives. In contrast to the policies incorporated in the BEPS final actions, countries seem to be pursuing their own policies. Several countries have adopted, or are considering, an incremental tax on what are deemed excessive profits in other countries (the diverted profits tax or its equivalents in the UK, India, France and so on), declaring that taxes so collected are not subject to treaty relief (it is up to other countries to provide relief from double taxation). The US may be seriously addressing border adjustability, territorial, and related elements, as the EU is evolving toward the formulary allocation mechanism (the “CCCTB”). These are all elements that will need to be framed in MNE effective tax rate (ETR) strategy evolution (including compliance and controversy realities).

In short, our global tax world is plainly in a state of transition. The ultimate reality may be far different than was anticipated by the BEPS process.

Transfer pricing, the allocation of income or loss between members of a controlled group, (TP) continues to be the critical taxation issue in the cross-border world (international, federal or state), whether in planning, controversy or other purposes. Why is this case? Because the tax consequences of each entity begins with its income or loss posture.

Continue Reading Transfer Pricing Developments – A Year in Review

Domestic implementation of the recommendations set out in the BEPS final reports from 2015 have the potential to significantly impact effective tax rate planning. The immediate issue flows from the new country-by-country transfer pricing documentation regime (CbC). The critical consequence of the CbC regime, as well as many of the other BEPS initiatives, will be an inevitably heightened focus of tax authorities on testing locally reported transfer pricing results on a profit split basis.

Read the full article here.