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European Partner Joins Tax in the City® for Last Seattle Event of 2018

On September 12, 2018, McDermott held the second Tax in the City® Seattle event this year and was pleased to welcome our partner Nina Siewert from our Frankfurt office to join US panelists Elizabeth Chao, Britt Haxton, Kristen Hazel, Sandra McGill and Diann Smith. The team’s key takeaways include:

  • Taxation of the Digital Economy – In March, the European Union proposed a 3 percent interim tax on digital services and a long-term expansion to the definition of a permanent establishment to include a “significant digital presence.” These proposals are unlikely to be passed during 2018. In the meantime, individual countries have passed or are considering unilateral measures to tax digital services.
  • Post-Wayfair – The Supreme Court’s Wayfair decision is good news for states, brick and mortar retailers and software compliance companies, and bad news for online retailers, start-ups and marketplace providers. Its impact on localities and foreign sellers remain to be seen.
  • Taxation of Multinationals: New Developments in US Tax Reform – Taxpayers should consider issues related to the new Base Erosion and Anti-Abuse Tax (BEAT), including whether royalties can be excluded from the BEAT, whether netting or a look-through concept should apply to BEAT; and how BEAT applies to cost-sharing agreements. The section 965 proposed regulations provide guidance about how basis adjustments apply to controlled foreign corporations (CFCs).
  • The Multilateral Instrument (MLI) – US taxpayers should be familiar with the MLI, which goes into effect in 2019. In order for the MLI to apply, both countries must sign the MLI and must opt into the same treaty provisions.

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Transfer Pricing Developments – A Year in Review

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.

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BEPS Multilateral Agreement

The most recent element of the ongoing global dispute resolution process is the late November 2016 release of the so-called multilateral instrument (MLI), a cornerstone of the base erosion and profit shifting (BEPS) project. It is an ambitious effort of the Organization for Economic Cooperation and Development (OECD) to impose its will on as many countries as possible. The explanation comprises 85 single-spaced pages and 359 paragraphs. The MLI draft itself is 48 similar pages. The purpose of the MLI is to facilitate implementation of the BEPS Action items without having to go through the tedious process of amending approximately two thousand treaties.

In essence, the MLI implements the BEPS Action items in treaty language. While consistency is obviously an intended result, the MLI recognizes the reality that many countries will not agree to all of the provisions. Accordingly, countries are allowed to sign the agreement, but then opt out of specific provisions or make appropriate reservations with respect to specific treaties. This process is to be undertaken via notification of the “depository” (the OECD). Accordingly, countries will be able to make individual decisions on whether to update a particular treaty using the MLI.

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