International tax update
February 26,
26 2013
© 2013 Baker Tilly Virchow Krause, LLP
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,
an independently owned and managed member of Baker Tilly International.
Presenters
Mark Heroux
Richard Shapland
Nachu Vellayappan
Bernadette Rivera
Principal, Firm Leader
IRS Practice & Procedures
B k Tilly
Baker
Till
Director
International Tax
B k Tilly
Baker
Till
Senior Manager
International Tax
B k Tilly
Baker
Till
Manager
International Tax
B k Tilly
Baker
Till
2
Topics of discussion
>
>
>
>
>
Recent transfer pricing developments
Recent corporate tax developments
Passive foreign investment companies (PFICs)
Controlled foreign
g corporations
p
((CFCs))
Final regulations under the Foreign Account Tax
Compliance Act (FATCA)
> Streamlined filing compliance for nonresident nonfiler US
taxpayers
3
Recent transfer pricing developments
Transfer pricing developments
> United Kingdom: Crackdown
– Her Majesty’s
Majesty s Revenue and Customs (HMRC) is targeting
GBP 1 million (approximately $1.57 billion) of tax linked to
transfer pricing issues, up 47% from last year’s figures
– Large multinationals such as Amazon, Google, and Starbucks are
under heavy scrutiny
– In December 2012, Parliament’s Public Action Committee (PAC)
issued a highly critical report on HMRC’s ability to deal with large
corporations which generate significant income in the UK but appear
to play little to no tax in the country; as a result of this report,
Starbucks offered to pay HMRC GBP 20 million in extra tax over the
next two years
5
Transfer pricing developments
> Brazil: New guidance
– Regulatory Instruction No 1,312 (Published Dec. 31, 2012)
o Safe Harbor
•
•
Net revenue from export transactions to related parties cannot exceed 20% of
new revenues from all export transactions
Taxpayer must have at least 10% profitability based on a three
three-year
year average
o Redefined PRL (resale price minus profit margin method)
•
•
PRL20
PRL60
– Transfer pricing applies to drop shipments
– Transfer pricing applies to all loans, even those registered with the
Brazil Central Bank
6
Transfer pricing developments
> India: New APA regime
– Indian Finance Ministry entered into force, on Aug. 31, 2012, its
new Advanced Pricing Agreement (APA) regime in an effort to
reduce transfer pricing disputes
– Provides for the determination, in advance, of either the arm’s
length price or the manner for determining an arm’s length price
– After determined, APA is good for up to five years
7
Transfer pricing developments
> Australia: Amendments
– Tax Laws Amendment (Cross-Border
(Cross Border Transfer Pricing) Bill (No 1)
2012 recently passed, detailing amendments to the country’s
transfer pricing rules
– Bill applies to years commencing on or after July 1, 2004
– New rules are better aligned with Organization for Economic
Cooperation and Development (OECD)
– Single set of rules for treaty and nontreaty cases and applies
arm’s
’ llength
th principle
i i l tto relevant
l
t cross-border
b d d
dealings
li
b
between
t
both associated and nonassociated entities
8
Transfer pricing developments
> Panama: New rules
– Adopted legislative amendment that introduces transfer pricing
rules on transactions with foreign related parties irrespective of
whether one of the parties is a tax resident in a country that holds
a convention for the avoidance of double taxation with Panama
– Previously, taxpayers were exempt if one party was a tax resident
in a country that had a treaty with Panama
9
Transfer pricing developments
> United States: Customs policy, intangible property and services
– US Customs and Border Protection (CBP) published the final version
of its new policy regarding post-importation transfer pricing
adjustments on May 30, 2012, effective July 30, 2012. Provides
clear guidance on the impact of transfer pricing policies on the
d l d customs
declared
t
values
l
ffor related
l t d party
t sales
l off ttangible
ibl goods.
d
– Intellectual Property (IP) targeted
o Easy for IRS to attack
•
•
Use of IP by affiliates is often subtle
IP may not appear in the balance sheet
o Examples
•
•
trade name/marks
industrial processes or know how
o IP migration outside the US is gaining interest
– High corporate tax rate affects inbound investment planning
10
Intercompany services - new regulations
> IRS finalized regs in 2009 with regards to intercompany services,
>
effective for y
years beginning
g
g after July
y 31,, 2009 – these regulations
g
replace the 1994 rules which allowed a safe harbor cost allocation
approach to charges for providing intercompany services
Arm’s length
g p
price can be determined by
y one of the following
g
methods that is deemed most appropriate:
–
–
–
–
–
–
Services Cost Method (SCM)
Comparable Uncontrolled Services Method (CUSP)
Gross Services Margin Method (GSMM)
Cost of Services Plus Method (CSPM)
Comparable Profits Method (CPM)
Profit Split Method (PSM)
> SCM is the only choice that allows no mark-up on “covered services”
> Rev. Proc. 2007-13 specifies 101 types of services that may qualify
as covered services
11
11
Intercompany services - new regulations
> Controlled services transaction – any activity by one member
of a g
group
p of controlled taxpayers
p y
that results in a “benefit” to
one or more members of the controlled group
– Benefit - if an independent company in similar circumstances
would have been willing to purchase similar services
– Duplicative
D li i and
d shareholder
h h ld activities
i i i - do
d not require
i a charge
h
– Total service costs - include all resources expended, used or
made available to achieve the desired outcome, but do not include
interest expense,
p
, foreign
g income taxes,, or domestic income taxes
– Allocation - reasonable method standard
– Limited experience with IRS audits at this point
12
12
Recent corporate tax developments
Corporate tax developments
> BRIC countries (Brazil, Russia, India, and China): Cooperation
– Recentlyy met in India to discuss potential
p
areas of cooperation
p
o Development of international standards on international taxation and TP
o Strengthen enforcement processes by taking actions for noncompliance
and putting more resources into international cooperation
o Sharing of best practices and capacity building
o Sharing of anti-tax evasion and noncompliance practices
o Promotion of effective exchange of information
o Any other issues of common interest and concerns related to taxation
14
Corporate tax developments
> Mexico: Tax amnesty
– Mexican Congress
g
approved
pp
tax amnesty
y on Dec. 13,, 2012
– Corporate income tax rate will remain at 30% for 2013, 29% in 2014,
and 28% in 2015
– Amnesty applies to 80% of the omitted tax along with inflation
adjustments and 100% of interest and penalties through
adjustments,
Dec. 31, 2006
– Possible to receive tax amnesty of 100% on tax liabilities for years
prior to 2007 for certain taxpayers who have already had audits
completed by the tax authorities for years 2009, 2010, or 2011
– For years 2007 through 2012, amnesty will be 100% with respect to
interest and penalties derived from tax liabilities
– No abatement for this period
period, however
however, with respect to tax liabilities
currently subject to a deferred payment plan; amnesty will only apply
to the remaining payable balance
15
Corporate tax developments
> Canada – rate reductions and stepped-up enforcement
– In Februaryy 2012,, Financial Stability
y Board ((FSB)) p
passed the
Canadian government’s response to the global financial crisis
– Country is in final stages of incremental corporate tax reduction
that lowered effective tax rates from 22.12% in 2007 to 15%
in 2012
– APAs can be negotiated with the Canada Revenue Agency (CRA),
but take an average of four years to complete
– Proposed section 237.3 of the Income Tax Act (Canada) (ITA) is
expected to come into force in early 2013
o Requires information returns for “reportable transactions,” defined as an
avoidance transaction or series of transactions that would result directly
or indirectly in a tax benefit unless the transaction may reasonably be
considered to have been undertaken or arranged primarily for bona fide
purposes other than to obtain the tax benefit
16
Corporate tax developments
> Australia
– Recent decision made to appoint
pp
a specialist
p
reference g
group
p to
examine the tax minimization strategies used by multinational
corporations with operations in the country
– Introduced new Mineral Resource Rent Tax (MRRT) on July 1, 2012;
applies to all new and existing iron ore and coal projects in Australia
Australia,
and is applied at 30% of the taxable profit of a project
– Corporate tax rate remains at 30%, almost 5% above the OECD
average, which was 25.4% in 2011
– Pay as You Go (PAYG) withholding tax system, whereby foreign
resident withholding tax is due on items of income from employment,
investment or business, and is paid in installments
17
Corporate tax developments
> United Kingdom: Patent Box
– Patent Box regime
g
((starting
g April
p 2013)) allows UK companies
p
to
elect into a lower rate of corporation tax on profits from patents.
Relief will be phased in over a five-year period, culminating in an
effective tax rate of 10% for income within the patent box.
– UK tax advantages
o Corporate tax rate of 24%, reducing to 22% by 2014
o No tax on a vast majority of dividends paid from overseas to the UK
o No withholding tax on dividends paid by a UK company
o Extensive treaty network
o Competitive deductibility of interest
o CFC regime focusing on profits diverted from the UK and includes an
“interest box” for interest earned overseas which doesn’t generate a
UK deduction
o Elective system to exempt branch profits
18
Corporate tax developments
> Columbia: Lower rates and stepped-up enforcement
– 2012 Columbian Tax Reform Bill No 166 issued Oct. 4,, 2012
o Reduction of statutory rates for corporate income tax to 25% and capital
gains taxes to 10%
o New 8% net income surcharge replacing certain wage-based employer
welfare
lf
contributions
t ib ti
o Changes to the framework for tax-free organizations, in an effort to
curtail M&A transfer strategies that result in acquisitions of corporate
assets and businesses in Columbia that,, due to current loopholes
p
in the
statutes, escape local taxation
o General Anti-Avoidance Rule (GAAR)
19
Corporate tax developments
> China: VAT changes
– In Januaryy 2012,, China introduced a p
pilot p
program
g
in Shanghai,
g ,
replacing business tax (BT) with a value added tax (VAT) for the
transportation, asset leasing, and modern services sectors—an
initial step in an overall plan to replace BT with VAT across the
whole service sector in mainland China
– New VAT rates are 6% for modern services and 11% for
transportation
– In 2013, VAT reforms expected to apply to financial services, real
estate and construction,
construction and postal,
postal telecommunications,
telecommunications and
entertainment services
– Changes will unify the VAT system applicable to the goods sector
with that of the services sector, and in so doing, remove
inefficiencies in each system
20
Corporate tax developments
> Netherlands
– Repeal
p
of thin capitalization
p
rules to further encourage
g inbound
investment
– Attractive IP company regime – competes with UK patent box
regime
21
Corporate tax developments
> United States
– CFC “look-through”
g rules finally
y extended following
gap
period of
uncertainty
– Covered asset acquisitions as defined by IRC § 901(m) have reduced
the benefits of the § 338(g) election for acquisitions of foreign
corporations
– IC-DISC remains a beneficial export incentive after the Jan. 1, 2013, tax
rate changes
– Compliance
o Form 8938 – Statement of Specified Foreign Finanical Assets
•
•
Still only required for individuals
Earliest for entities will be years ending after Dec. 31, 2012
o Form
F
8621 – has
h b
been revised
i d and
d awaiting
iti §1298(f) regulations
l ti
o Form 5471 – IRS extended CFC “constructive ownership” exception to
Category 5 filers
– IRC
C § 7874
8 further
u t e discourages
d scou ages inversion
e s o transactions
t a sact o s with
t mechanical
ec a ca
tests
22
Corporate tax developments
> Increased interest in “inversions”
– To name a few: Aon Corp,
p, Coopers
p
Industries,, Everest Re Group,
p, Foster
Wheeler, Fruit of the Loom, Global Crossing Ltd, Ingersoll-Rand Ltd,
Leucadia National Corp, McDermott Inc, Nabors Industries, Noble Drilling,
Santa Fe International Corp, Seagate Technologies, Trenwick Group,
Triton Energy
gy Group,
p, Tyco
y International,, Veritas DGC,, Weatherford
International Inc, Stanley Works
– What is an inversion?
o One of a host of restructuring transactions by which a group of corporations owned
b a US corporation
by
ti b
become owned
db
by a fforeign
i corporation
ti
o The transaction takes place when the foreign entity purchases either the shares or
the assets of a domestic corporation
o The shareholders of the domestic company typically become shareholders of the
new foreign parent company
o The legal headquarters of the company changes through a corporate inversion
from the US to another country
o The group’s operational structure and operating locations typically do not change
23
Passive foreign investment companies (PFICs)
PFIC
> Definition of PFICs
– Gross income test – 75%
o 75% or more of gross income is passive
– Asset test – 50%
o The average percentage of assets (by value) that produce passive income
are held for the production of passive income is at least 50%
> Taxation of PFICs
– Excess distributions: Default method of taxation if no election made
– US person receives an excess distribution in a taxable year to the
extent that the total distributions received during the year by such
person exceed 125% of the average of the distributions received in
the three p
preceding
g taxable yyears;; additionally,
y, all gain
g
recognized
g
on
the disposition of PFIC stock is treated as an excess distribution
– Ordinary tax rates and excess interest charge
25
PFIC
> Elections
–
–
–
–
Qualified electing
g fund ((QEF))
Mark to market
Deemed sale
Purging
> Form 8621 – Information Return by a Shareholder of a PFIC
or QEF
– Form updated for 2012 filing season to include new requirement of
§ 1298(f) (added by the HIRE act of 2010)
– If new regulations issued in time for 2013 filing, it seems as though
taxpayers will have to file Form 8621 for all PFICs in which they
had ownership
p for 2001 thorugh
g 2013
26
Controlled foreign corporations (CFCs)
Reporting income from CFCs
> Definition of CFC: Foreign corporation in which more than 50%
total combined voting
gp
power,, or total stock value,, is owned by
y
5 or fewer US persons that each own at least 10% of the entity
– Where foreign corporation is owned 50-50 by foreign and US
shareholders—NOT a CFC (unless US shareholders control the
board of directors)
> Earnings of foreign subsidiaries are generally deferred from
US taxation until dividends are paid or the CFC shares sold
– Offshore
Off h
deferral
d f
l off CFC subsidiary
b idi
earnings
i
iis enormous
– APB 23 exception
> CFC status invokes several anti-deferral rules
– S
Subpart
b t F iincome
– Increase in CFC earnings invested in US property
– CFC earnings invested in excess passive assets
28
Reporting income from CFCs
> Subpart F income consists principally of foreign base company
income p
plus certain insurance income
> Foreign base company income consists of:
–
–
–
–
–
foreign personal holding company income,
foreign
g base company
p y sales income,,
foreign base company services income,
foreign base company shipping income, and
foreign base company oil-related income.
29
Reporting income from CFCs
> Increase in earnings invested in US property consists of the
amount by
y which the CFC’s earnings
g invested in US property
p p y
at year-end exceeds the earnings so invested at the beginning
of the year
> US property:
p p y
–
–
–
–
Tangible property located in the US
Stock of a related domestic corporation
An obligation of a related domestic party
Any right to use patents or other intangible property in the US
30
Reporting income from CFCs
> Earnings invested in excess passive assets: CFC income
includes income to the extent of the corporation’s
p
accumulated
earnings invested in excess passive assets
> Includible amount is the lesser of:
– The excess of the US shareholder’s p
pro rata share of the CFC’s
excessive passive assets over that portion of its retained earnings
that are treated as having been previously included in the US
shareholder’s income because of excessive passive assets; OR
– The CFC’s
CFC s applicable earnings defined as the US shareholder’s
shareholder s
pro rata share of the CFC’s total current E&P (but not reduced by
a deficit in accumulated E&P) and E&P accumulated in tax years
beginning after Sept. 30, 1993
31
Reporting income from CFCs
> Subpart F relief provisions include:
– Disregard
g
foreign
g base company
p y income if it is less than the
lower of 5% of the CFC’s gross income or $1 million of the CFC’s
gross income
– Exclusion from foreign base company income of certain amounts if
a tax avoidance effect is not present because of high foreign tax
levels, i.e., 90% of highest US corporate tax rate or 31.5%
– Same country exception to FBCSI
– 30 consecutive day rule for determining whether any amount is to
be attributed to the CFC’s shareholders
– CFC “look-through” rules for dividends from lower-tier CFCs
– Manufacturing exception to FBCSI
> Planning
Pl
i
– Active trade or business
– Use of “check the box” elections
32
Final regulations under the Foreign Account Tax
Compliance Act (FATCA)
FATCA
> Enacted in 2010 as part of Hiring Incentives to Restore
Employment
p y
Act ((HIRE))
– Part of effort to combat tax evasion by US persons holding
investments in offshore accounts
> IRC sections 1471-1474 impose
p
30% withholding
g on p
payments
y
to Foreign Financial Institutions (FFIs) and on behalf of its
customers where the FFI does not comply with FATCA
– In order to avoid withholding,
g FFIs must conduct due diligence
g
to
identify US account holders, recalcitrant account holders, and
disclose these account holders plus other information to the IRS
> Similar withholding imposed on payments to nonfinancial
foreign entities (NFFEs) that must also identify and report
information on US owners
34
What is a Foreign Financial Institution?
> Non-US financial institution that accepts deposits, holds
financial assets for others,, invests in securities,, or trades in
securities
> Includes banks, funds, insurance companies, trusts, private
equity
q y companies
p
> Includes Special Purpose Entities, SPAs; all entities that
accept deposits, hold financial assets for others, invest in
securities, or trade in securities
35
Definition of a financial account
> FATCA reporting is required only with respect to US accounts
> A US account is any financial account held by a US person or
a foreign-owned US person
> Financial accounts include only:
–
–
–
–
Depository accounts in a financial institution
Custodial accounts
Nonpublicly traded equity or debt in a financial institution
Cash value insurance contracts
> Exclusions:
– Retirement and pension accounts subject to non-US laws
– Tax-favored nonretirement savings accounts established under
non-US law that limit annual contributions to $50,000 or less
– Accounts held by foreign governments
36
Nonfinancial foreign entities
> Nonfinancial foreign financial entity (NFFE) is a foreign entity
that is not a financial institution
– Less than 50% of gross income from preceding calendar year is
passive income, or
– Less than 50% of assets held by the NFFE at any time during
preceding calendar year are assets that produce or are held to
produce passive income
> Exceptions:
– Publicly traded corporations on established securities markets
– NFFEs located in US possessions owned by bona fide residents of
US possessions
37
Substantial US ownership
>
>
>
>
Partnerships: Greater than 10% capital or beneficial interest
Corporations: Greater than 10% interest by vote or value
Trusts: Greater than 10% beneficial interest
Look through rules required for all entity accounts
38
Definition of withholding agent
> Any person, US or foreign, in whatever capacity acting, that
has the control,, receipt,
p , custody,
y, disposal,
p
, or payment
p y
of a
withholdable payment
> Includes a participating foreign financial institution (PFFI)
> Includes trusts
39
Withholdable payments
> Includes US-source FDAP (fixed, determinable, annual, or periodic)
> Includes gross
g
p
proceeds from the disposition
p
of any
yp
property
p y of a type
yp
which can produce interest or dividends from sources within the US
(e.g., US stocks, bonds, and real estate)
> Does not include payments made by withholding agents in the ordinary
course of its trade or business for nonfinancial services or goods
(e.g., wages, office and equipment leases, software licenses,
transportation, freight, etc.)
> Withholding
Withh ldi is
i required
i d beginning
b i i JJan. 1
1, 2014
2014, ffor FDAP payments
t made
d
to NPFFIs, recalcitrant account holders, and NFFEs unless the payor can
establish that the beneficial owner is not subject to FATCA
– FFIs and NFFEs will use Forms W-8BEN
W 8BEN and W-8BENE
W 8BENE to show
beneficial owner of payments not subject to FATCA
– Withholding on gross proceeds begins on Jan. 1, 2017
40
Grandfathered obligations
> Generally obligations outstanding prior to Jan. 1, 2014
> Any obligation that:
– Produces (or could produce) a foreign pass-through payment,
– Cannot produce a US-source withholdable payment, and
– Is outstanding as of the date that is six months after the date final
regulations defining foreign pass-through payments are filed with the
Federal Register
> Any instrument that gives rise to US-source
US source withholdable
payments solely because it is treated as making a dividend
equivalent payment under section 871(m)
– Provided the instrument is outstanding
g on the date that is six months
after the date the instrument becomes subject to dividend treatment
> Any obligation to make a payment with respect to, or to repay,
collateral p
posted to secure obligations
g
under a notional principal
p
p
contract that is a grandfathered obligation
41
Intergovernmental agreements (IGAs)
> Model 1 IGA: Instead of reporting to the IRS directly, FFIs in
j
jurisdictions
that have signed
g
Model 1 IGAs report
p the
information about US accounts required by FATCA to their
respective governments who then exchange this information with
the IRS
> Model 2 IGA: A partner jurisdiction signing an agreement based
on the Model 2 IGA agrees to direct its FFIs to register with the
IRS and report the information about US accounts required by
FATCA directly to the IRS
> IGAs have been signed with Norway, Mexico, the UK, Denmark,
Ireland, Switzerland, and Spain,
p
and another 50 agreements
g
are
in the queue
42
What are other countries doing?
> South Korea:
– Enacted similar FATCA legislation and has had an Offshore
Voluntary Disclosure Program (OVDP)
– Signed an agreement with Switzerland to identify and report
accounts held offshore
> Russia has passed similar FATCA legislation
> Lichtenstein and Canada are sharing information
> Tax Information Exchange Agreements (TIEAs) are helping
countries like Denmark net $182 million in less than two years
through audits of funds transferred to low tax jurisdictions
> India
India’s
s General Anti-Avoidance
Anti Avoidance Rule aimed at tax evasion by
overseas investors goes into effect Jan. 1, 2016
43
What to do?
> If you expect to receive any payments of US-source income
through
g an offshore account or entity,
y, be sure that the financial
institution or foreign entity has your identification information so
the financial institution or entity can comply with FATCA
– Confirm that the information has been adequately provided to any
US withholding agent
> If you make any payment of US-source income to an FFI or an
NFFE, make sure you have all the identification information
necessary to identify US-owned accounts OR withhold 30%
from FDAP payments starting Jan. 1, 2014, and gross
proceeds payments starting Jan. 1, 2017
44
Streamlined filing compliance for nonresident
nonfiler US taxpayers
Streamlined filing compliance for
nonresident nonfiler US taxpayers
> New amnesty program for US taxpayers residing outside of the US
since Jan. 1,, 2009
> File three years income tax returns and six years of Foreign Bank
Account Reports
> Payment in-full of tax and interest required at time of submission
> Complete questionnaire that discloses financial information and
reasons for noncompliance
> The
Th new procedure
d
will
ill also
l help
h l eligible
li ibl ttaxpayers with
ith fforeign
i
retirement plan issues
> Amended returns are high risk returns except where the sole
purpose is to submit late-filed
f
Forms 8891 to seek relieff ffor ffailure
to timely elect deferral of income from certain retirement or savings
plans where deferral is permitted by relevant treaty
46
Streamlined filing compliance for
nonresident nonfiler US taxpayers
> Intended to help taxpayers who are low compliance risks to get
current with their tax requirements
q
without facing
g large
g
penalties or additional enforcement action; these taxpayers
generally will have simple tax returns and owe $1,500 or less
in tax for any of the three years
> Taxpayers' ability to file streamlined forms will depend on the
IRS's assessment of whether they present a high or low
compliance risk
47
Streamlined filing compliance for
nonresident nonfiler US taxpayers
> For those with a low compliance risk, the review will be
expedited
p
and IRS will not assert p
penalties or p
pursue follow-up
p
actions
> Submissions with higher compliance risk are not eligible for the
streamlined p
processing
g procedures
p
and will be subject
j
to a more
thorough review and possibly a full examination
> Program does not provide protection from criminal prosecution
> Other option:
– Offshore Voluntary Disclosure Program (OVDP): Program
administered by the IRS Criminal Tax Division and designed for
taxpayers
ta
paye s who
o knowingly
o
gye
evaded
aded pay
payment
e to
of substa
substantial
ta a
amounts
ou ts o
of
US tax; taxpayers use this program to avoid potential imprisonment
> Once Streamlined submission made, OVDP no longer available
48
Streamlined filing compliance for
nonresident nonfiler US taxpayers
> Indicia of high risk
– Material economic activity in the United States
– Taxpayer has a financial interest or authority over a financial
account(s) located outside his/her country of residence
– Taxpayer
p y has a financial interest in an entityy or entities located
outside his/her country of residence
– There is US source income
– If there are indications of sophisticated tax planning or avoidance
49
Q&A/Contact information
Mark Heroux
Nachu Vellayappan
312 729 8005
mark.heroux@bakertilly.com
248 368 8812
nachu.vellayappan@bakertilly.com
Richard Shapland
Bernadette Rivera
312 729 8046
richard.shapland@bakertilly.com
312 729 8044
bernadette.rivera@bakertilly.com
50
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