2013

A 20 percent levy on previously accumulated foreign earnings! A minimum tax on future foreign profitswith a rate in the mid-20s! Check-the-box rules declawed! Deductions for interest allocable to foreign profits deniedwith the suggestion that interest deductions may be limited aswell for purely domestic firms! All this means large tax increases over the next decade. And after that, just revenue neutrality. This is notwhat CEOs had in mind all these yearswhen theywerewriting checks to fund a big push for a territorial system.

So understandably, corporate America is more than a little upsetwith the chair of the Senate Finance Committee. Up until now, Montana Sen. Max Baucus had been one of business's most reliable allies in the Democratic Party. No more. His planwas universally panned by most business groupswithin hours of its release. Unless something miraculous happens, like House Democratswinning 17 more seats in 2014 than theywon in 2012, the Baucus international tax reform staff discussion draft has zero chance of becoming law.

For the analysis, go here. (subscription required)

The OECD has made good progress against tax evasion and corporate tax avoidance becauseworld leaders now recognize that those issues undermine public trust, OECD Secretary-General Angel Gurría said during a November 25 International Bar Association livewebcast interview on economic policy issues.

"The perception that individuals are getting awaywith not paying taxes because they hide that money away in a tax haven, or that multinationals are not paying taxeswhen they make billions in profits, is becoming politically untenable," Gurría told interviewer Todd Benjamin, financial editor for CNN. Gurría said countries also have a common interest in recovering lost taxes because all are in dire need of revenue. "Therefore, they have decided they're going to address it and chose the OECD . . . to do that," he said.

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International efforts to address base erosionwill put more pressure on competent authoritiesworldwide to ensure that mutual agreement procedures are up to date at a timewhen MAP programs are facing restricted resources, a U.S. official said.
Michael Danilack, the U.S. competent authority and deputy commissioner (International)with the Internal Revenue Service, said Nov. 22 that item 14 of the Organization for Economic Cooperation and Development's action plan to combat base erosion and profit shifting (BEPS) is devoted to dispute resolution. It is designed to studywhether there may be barriers to efficient and effective competent authority procedures under the model treaty or the commentaries, he said.

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Although the prospects for tax reform in Congress have dimmed of late, the lobbying activity has not. The corporate community continues to put pressure on Congress to reduce the statutory corporate tax rate,which, at 39.1 percent including state and local taxes, is the highest among members of the Organization for Economic Cooperation and Development.

What tends to get lost in the debate is how much corporations actually pay in taxes once various deductions and credits are taken into account. A corporation's total tax bill divided by its profits is its effective tax rate. It's hard to imagine a corporation paying anywhere close to 39 percent of all its profits in taxes, as thatwould mean it has no deductions or creditswhatsoever.

For the article, go here.

A lot of us tax policy types seem to really enjoy discussing the more metaphysical aspects ofwhatwe call tax reform.what is it?when is it coming? Has it already arrived? Has the tax reform effort fizzled?was it ever here? Or – my personal favorite – havewe only just started to start a tax reform process?

This all must bore normal people to tears.

But since I clearly can't help myself, Iwill make a prediction.when tax reform does come, andwhatever it meanswhen it gets here, U.S. multinationalswill pay a price.

For the blog post, go here.

As tax authorities from around theworld gather in Jakarta to discuss how to monitor implementation of an automatic tax information exchange standard across the globe, multinationals should not delay adapting their tax planning strategies to prepare for application of that standard, a New York-based practitioner told Bloomberg BNA.

Taxpayers already need to be much more holistic in theway they view a transaction, to look at the global environment, Elan Keller of Caplin & Drysdale said.

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Companies that pay taxes in Central Asia and Eastern Europewill be pleased to find out their compliance burden has come down the most in the nine-year history of the Paying Taxes survey, according to this year's version of the research,whichwas compiled once again by PwC, theworld Bank and the International Finance Corporation (IFC).

For the article, go here.

Despite evaporating momentum for tax reform, Senate Finance Committee Chairman Max Baucus began unveiling specific options for overhauling the tax code Tuesday, arguing that the issue may yet have "political potency."
"Oncewe get the ball rolling, many are going to see, 'Hey, maybe there's something to this. Maybe there's an opportunity there to help the country create jobs and therefore an opportunity for political benefit here,'·" Baucus (D-Mont.) told reporters. "Because the goal here is to create jobs."

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The chairman of the powerful Senate Finance Committee on Tuesday released a long-awaited plan to overhaul the tax code for multinational corporations, trying to jump-start an effort to stem the flow of jobs and money abroad.
The legislation, offered by Senator Max Baucus, Democrat of Montana,would permanently exempt much of the profits earned by American corporate subsidiaries in foreign countries, but itwould immediately tax profits from goods and services sold to the American market from such subsidiaries.
The proposals "provide a path forward on tax reform," Mr. Baucus said. "Some are Democratic ideas. Some are Republican ideas. The common link is they are all ideasworth exploring."

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U.S. companieswould face a minimum tax on the income they earn around theworld under a plan released today by Senate Finance Chairman Max Baucus that marks his most significant proposal to revamp the tax code.
Baucus's plan to restructure the international tax systemwould lower the corporate rate by an unspecified amount, end a rule that has encouraged companies to accumulate about $2 trillion in earnings in their foreign subsidiaries and impose a 20 percent tax on those stockpiled profits.
"It's time to move; it's time to go," Baucus told reporters in his office inwashington, saying his tax planwould prove politically popular. "You can create your own destiny."

For the story, go here.

A Senate committee chairman's proposal to overhaul the U.S. corporate-tax system, released Tuesday, exposed fault lines among big businesses and showed the challenge he faces in building a coalition to support the concept.

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Senate Finance Committee Chairman Max Baucus (D-Mont.) proposed a broad outline for revamping the U.S. tax code's international provisions, seeking to ease the overall tax bite on U.S. corporationswhile imposing a new minimum tax on income from services and goods they sell into foreign markets.

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Proposals included by Senate Finance Committee Chair Max Baucus, D-Mont., in an international tax reform discussion draftwould "put the U.S. tax system even more out of linewith the rest of theworld," put U.S. businesses at a competitive disadvantage, and cause job losses, the Alliance for Competitive Taxation said in a November 19 statement.

For the statement, go here.

The international tax reform discussion draft released by Senate Finance Committee Chair Max Baucus, D-Mont.,would decrease the ability of many U.S. businesses to compete in the global economy, the Business Roundtable said in a November 19 release, adding that it plans to provide the Finance Committeewith recommendations for improvement.

For the release, go here.

The international tax reform draft released by Senate Finance Committee Chair Max Baucus, D-Mont., underscores how tax reform can make the U.S. a more attractive place inwhich to hire and invest, Houseways and Means Committee Chair Dave Camp, R-Mich., said in a November 19 release praising Baucus for his ongoing commitment to tax reform.

For the release, go here.

The decision of Senate Finance Committee Chair Max Baucus, D-Mont., to release his tax reform discussion drafts before the budget conference concludes could result in tax reform becoming a "victim of partisanship," ranking minority member Orrin G. Hatch, R-Utah, said in a November 19 release.

For the release, go here.

From U.S. Senator Max Baucus

A Senate Finance Committee discussion draft on international tax reform outlines proposals to stimulate investment, reduce offshoring or tax haven incentives, and "help America overcome the competitiveness crisis that's driving businesses and jobs overseas," Finance Chair Max Baucus, D-Mont., said in a November 19 release.

For the release, go here.

The Joint Committee on Taxation has released a technical explanation (JCX-15-13) of the discussion draft on foreign-source income tax reform released by Senate Finance Committee Chair Max Baucus, D-Mont.

The discussion draft provisions include options for reforming the foreign income participation exemption system and subpart F; foreign tax credit limitations; the disallowance of the interest expense deduction; and subpart F-related provisions regarding the treatment of previously deferred foreign earnings, ending the 30-day requirement, and modifying the definition of a U.S. shareholder.

For the technical explanation, go here.

Senate Finance Committee Chair Max Baucus, D-Mont., is proposing two options for instituting a minimum tax on income from products and services sold into foreign markets and is suggesting that passive income and some U.S.-connected income be taxed annually at full U.S. rates, according to a summary of his international discussion draft released November 19.

Baucus also proposes eliminating the international aspects of the check-the-box rule and repealing the controlled foreign corporation look-through rules. Finance aides said the goal is to ensure that disregarded entities and hybrid entities are treated as corporations for U.S. tax purposes. The aides cited those types of entities as classic examples of the sort of tax planning that the draft seeks to curtail.

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Neutrality and horizontal equity are bedrock principles of tax policy. That has left generations of economists and legal scholarswith no choice but to advocate for eliminating the double taxation of corporate profits.

Beyond academia, however, there has never been much deep-rooted interest in integrating corporate and individual taxes. The chronic lack of enthusiasm for that brand of capital tax cutting is shared even by perennial capital tax cutters. Antitax conservatives and most of corporate Americawill never pass up an opportunity to highlight the unfair burden of double-taxed corporate income. But rather than systematically addressing the problem, they prefer to use it as a talking point in favor of other tax relief more to their liking.

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Determiningwhether a controlled foreign corporation's intellectual property is acquired or developed for use in the United States remains a source of disagreement for tax practitioners and attorneys, as a three-year-old legal memorandum elicited different interpretations from participants at a November 9 panel of the annual Federal Tax Conference.

Speaking at the conference, sponsored by the University of Chicago Law School, Rachel Cantor of Kirkland & Ellis LLP discussed the meaning of "U.S. property" under section 956. In ILM 201106007, the IRS concluded that the sale of software products by a CFC to U.S. end-user customers didn't constitute an investment in U.S. property. Rather, investment in U.S. property arose from the acquisition or development of the IP for intended use in the United States.

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On 12-13 November 2013, the Organisation for Economic Cooperation and Development (OECD) held the eagerly anticipated public consultation on transfer pricing. The OECD mandate under Base Erosion and Profit Shifting (BEPS) requires a swift finalization of thework on intangibles and documentation, and the 12-13 November 2013 consultation meetingwill be immediately followed by meetingswith thewP6 country representatives only. The tight timeline does simply not allow fundamental rewrites of the Draft papers, nor their foundation as laid down in Chapters 1-3 of the OECD Transfer Pricing Guidelines.

The OECD understands, however, that businesses are in need of further clarification and guidance.

For the report, go here.

A recent report by the GAO comments on the tax expenditures on the tablewith Congress's recent focus on tax reform. The report identifies corporate tax deferral on foreign earnings as one of these expenditures, and suggests it distorts investment decisions, and also provides multinationals a special benefit over U.S. corporationswho only operate domestically or exportwithout foreign subsidiaries. However, the report mischaracterizeswhy these problems existwith deferral.

For the blog post, go here.

U.S. income tax rules may encourage a U.S.-headquartered multinational corporation ("MNC") to adopt a tax-haven-parented structure. The authors study data from firms that conducted initial public offerings in the United States between 1997 and 2010 and offer evidence that U.S.-headquartered MNCs rarely incorporate in tax havens. Of the 918 U.S.-headquartered MNCs that they identify, only 27 are incorporated in tax havens. Others have pointed to the recent increase in the proportion of firms conducting U.S. IPOs that incorporate in tax havens as possible evidence that U.S.-headquartered MNCs increasingly make this decision. The authors show instead that Chinese-headquartered firms drive this increase. They list the U.S.-headquartered firms thatwe find have incorporated in tax havens and offer some analysis and ideas for further research.

For the paper, go here.

While acknowledging the inevitable end to the kind of international tax planning rules that have given rise to double nontaxation, some tax practitioners -- nervous aboutwhat may come out of the OECD's base erosion and profit-shifting project -- are advocating a narrower but equally challenging fix: that member countries agree on and implement strong, functionality-based controlled foreign corporation rules.

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The Organization for Economic Cooperation and Developmentwill tackle the transfer pricing action items outlined in the agency's base erosion and profit shifting action plan in six separate steps, startingwithwork on intangibles, an OECD official said.

"There are really five transfer pricing-related action items.we, in looking at those, did not think that structureworked verywell," said Joseph Andrus, head of transfer pricingwith the OECD, during a Nov. 13 public consultation in Paris.

Rather than proceed through the action items in the order presented in the action plan, the OECD'sworking Party No. 6 came upwith a structure that tackles the items according to related issues.

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An Internal Revenue Service official asked delegates to the Organization for Economic Cooperation and Development's transfer pricing consultation to considerwhether the organization's proposed new comparability concept of "deliberate concerted [group] action" can apply to a transaction that occurs between unrelated parties aswell as related parties.

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A senior Internal Revenue Service official offered no apologies for the agency's 2012 bright-line test for demonstrating substantial business activity in a foreign jurisdiction in regulations on potentially abusive corporate inversions.

John Merrick, special counsel to the IRS associate chief counsel (International), said Nov. 8 that the Service has been criticized for the bright-line test determiningwhether expanded affiliated groups have a substantial foreign presence for the purposes of Section 7874.

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Brazil's government Tuesday altered rules on the repatriation of overseas profits in order to boost companies' competitiveness and reduce court tax disputes, officials from the finance ministry said.

The officials said that under a new executive decree, company profits abroadwill be taxed on an accrual basis,with payment allowed over a six-year period.

For the story, go here.

The recent revelation that many multinational enterprises (MNEs) pay very little tax to the countries they operate in has led to various proposals to change theways they are taxed. Most of these proposals, however, do not address the fundamental flaws in the international tax regime that allow companies like Apple or Starbucks to legally avoid taxation. In particular, the Organization for Economic Cooperation and Development (OECD) has beenworking on a Base Erosion and Profit Shifting (BEPS) project and is supposed to make recommendations to the G20, but it is not clear yetwhether thiswill result in a meaningful advance toward preventing BEPS. This paperwill advance a simple proposal thatwill allow OECD member countries to tax MNEs based in those countrieswithout impeding their competitiveness.

For the paper, go here.

The Spanish government recently passed laws in an effort to support entrepreneurs and encourage economic activity. Among other measures, the laws renew the 'patent box' regime and restrict the impairment deduction for shareholding in other companies.

This newsalert summarizes the measures most relevant to US multinational corporations (MNCs).

For the article, go here.

One of the commitments in the base erosion and profit shifting (BEPS) action plan is to counter harmful tax practices. Jeffrey Owens believes negotiators should look for some clues for how to do this in the OECD's 1998 report on harmful tax competition.

For the story, go here.

The United Nations Committee of Experts on International Cooperation in Tax Matters decided at its annual meeting in October to revise the Commentary to Article 9 of the UN Model Tax Convention,which refers to Organization for Economic Cooperation and Development guidelines, according to a UN tax official.

Michael Lennard, chief of the UN's international tax cooperation unit, didn't discuss the nature of changes to the Commentary, but told Bloomberg BNA Nov. 6 that the committee expects to have a draft revision for approval next October.

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Technology, health care and utilities are among the industry groups represented on the S&P 500 that might be hit the hardest by proposals for rewriting the tax code, according to a study by investment research firm ISI Group.

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Tax practitioners participating in a panel discussion on cloud-based computing said the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting (BEPS) projectwould force nations to reconsider their tax treatment of cross-border software and electronic commerce transactions.

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The Government Accountability Office (GAO) has issued a report titled, "Corporate Tax Deferrals: Evaluation of Tax Expenditures and Graduated Tax Rates."

For the report, go here.

Berkeley Research Group released a new report today that examines the likely effects of a change in the U.S. corporate tax system from the currentworldwide approach to a territorial approach similar to those used by other developed countries. The report, Implications of a Switch to a Territorial Tax System in the United States: A Critical Comparison to the Current System,was authored by Dr. Laura Tyson, Dr. Eric Drabkin, and Dr. Kenneth Serwin.

The report finds that a switch to a territorial tax systemwould increase the repatriation of foreign earnings by U.S. multinational companies, generate economic growth and jobs in the United States, enhance the international competitiveness of many U.S. companies, and increase corporate tax revenues, at least in the short run.

For the report, go here.

Internal Revenue Service Transfer Pricing Director Samuel Maruca said hewants examiners to take a "big picture" approach to developing transfer pricing cases, focusing on the facts and the economic outcome rather than a mechanical application of the regulations.

Speakingwith Bloomberg BNA Nov. 7, the official said auditors need to ask, "What is the most probative analysis?" and notwhether the facts of a case fit into "some prescriptive rule in the regulations that's going to give you the right answer every time."

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Countries participating in the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting project may be considering a multilateral approach to address hybrid entities, a U.S. Treasury Department official said.

"There could be some kind of multilateral agreement," Doug Poms, senior counsel in the Office of the Treasury International Tax Counsel, said Nov. 6. "That's new territory."

Speaking at the American Institute of CPAs Fall Tax Division Meeting, Poms said itwould require "the coming together of a number of countries," but the idea is under discussion. "Countrieswould all agree to adopt the same principles and then itwould be much harder to have these hybrid mismatches," he said.

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In a recent private letter ruling, the Internal Revenue Service ruled that income from payments received for manufacturing and selling services qualified for the "Subpart F" manufacturing exception.

The ruling clarifies that a controlled foreign corporation (CFC) isn't required to own or pass title to the products manufactured and sold to qualify for the manufacturing exception.

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The U.K.will make a registrywith the beneficial owners of all corporations formedwithin its borders publicÔøΩa move thatwon praise from Sen. Carl Levin (D-Mich.), chairman of the Senate Permanent Subcommittee on Investigations, as away to fight tax evasion and otherwrongdoing.

U.K. Prime Minister David Cameron made "a groundbreaking decision" to make the registry public, Levin said in a Nov. 1 news release, calling it "the biggest blow struck in years against the hidden ownership of corporations."

Levin said hewould continue to push for his own legislation (S. 1465) thatwould require U.S. states to obtain the identities of the beneficial ownerswho form corporations under their laws. The Michigan Democrat introduced the measure Aug. 1with Senate Judiciary Committee ranking member Charles Grassley (R-Iowa).

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Practitioners should expect to see discussion drafts soon about revenue procedures on competent authority and advance pricing agreements, according to Samuel Maruca, transfer pricing director, IRS Large Business and International Division.

Maruca, speaking November 5 during the High Technology Tax Institute conference sponsored by the Tax Executives Institute and San Jose State University in Palo Alto, Calif., said the IRSwas "very, very close" to issuing those discussion drafts.

According to Maruca, the anticipated guidance is only one issue that LB&I's transfer pricing operations has beenworking on. The staff has greatly improved its advance pricing mutual agreement case processing times and is seekingways to further streamline safe harbor memoranda of understanding, he said.

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Everybody knows that in the 21st century, profit shifting and intangibles go together like bagels and cream cheese. But few have ventured to ask the question that looms like a dark cloud over federal tax reform and the OECD's base erosion and profit-shifting effort: If governments succeed in their quest to stop the shift of intangible profits to tax havens,will they stifle the creation of knowledge-based capital in their domestic economies?

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The Organization for Economic Cooperation and Development's action plan for curbing base erosion and profit shifting offers a "coordinated and comprehensive approach," the Congressional Research Service said in a new report.

The action plan came in response to concerns that the current global tax structure allows companies to pay little or no tax in some cases, CRS said in the report, released Oct. 31. Increasing globalization is raising tough issues on perceived gaps in the tax rules and friction between countries over tax revenues, tax compliance, tax sovereignty and tax fairness, it said.

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For the CRS report, go here.

There is a long history of politicians accusing US MNCs of "shipping jobs overseas"when they invest outside the US. President Obama, for example, has proposed special support for US firms that stay at home, and criticised those that move abroad. This line of attack implicitly assumes that expansion abroad by US firms substitutes for domestic expansion, harming USworkers. It is equally possible that foreign expansion increases the productivity and market share of firms in away that benefits USworkers. Empirical studies on this topic have come to different conclusions.

We take a fresh and up-to-date look at the extent towhich MNC activity at home and abroad are substitutes or complements.

For the article, go here.

In an exclusive interview, Algirdas Semeta, EU Commissioner for Taxation, Customs Union, Audit and Anti-Fraud discusses progress on VAT reform, plans for the financial transactions tax (FTT) in the face of opposition from some member states, efforts to tackle tax avoidance and his priorities for 2014,which include taxation of the digital economy.

For the story, go here.

The internet has made international borders inconsequential for e-commerce and business transactions, leaving countrieswith the challenge of developing aworkable tax policy for those online dealings.

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Businesses must be proactive in finding solutions to address base erosion and profit shifting, and they need to build trustwith governments and the public if they desire favorable outcomes from the OECD's BEPS project, European and U.S. tax leaders said October 29 at the annual Tax Executives Institute conference in New Orleans.

Consultationswith the business community have become a bit predictable, said Harry Roodbeen, director for international tax policy and legislation at the Dutch Ministry of Finance. Multinationals detail all the dangers of the possible changes to come from the implementation of the BEPS action plan but provide few suggestions for potential changes, he said. Roodbeen said that officialswould like to receive more actionable comments, adding that coming upwith ideas togetherwould be in the mutual interest of businesses and governments.

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Public perception that companies are participating in aggressive tax structuring is creating significant impetus for the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting project, tax officials from the U.K., the Netherlands and France said.

Speaking Oct. 29 at the Tax Executives Institute 68th Annual Conference in New Orleans, they said pressure continues to mount.

"I think there's a great concern among the public that everyone should pay their fair share of tax, and a concern about businesses paying their fair share of tax," said Mikewilliams, director for business & international tax at HM Treasury in the U.K.

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A Bloomberg Government analysis of options for lawmakers as they consider an overhaul of the international tax system includes the possibility that action on tax treaties and major changes to the Subpart F active financing exemption could be coming.

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