On April 16, 2019, NYU and KPMG held the 19th Annual Tax Symposium. Several of the panel discussions are highlighted below.
Interaction between US tax reform, US tax treaties and global tax reforms
Panelists included Professor H. David Rosenbloom, NYU School of Law; Mary C. Bennett, Baker McKenzie; Christopher P. Bowers, Skadden, Arps, Slate, Meagher & Flom; Kimberly T. Majure, KPMG.
The main points of the discussion included whether the Base Erosion and Anti-Abuse Tax (BEAT) is an income tax and if so, does it violate the nondiscrimination clause in US double tax agreements (DTAs).
- Is the BEAT an income tax under the Internal Revenue Code (IRC)?
Subtitle A of the IRC covers both BEAT and income tax. BEAT is similar to the former alternative minimum tax (AMT), which was generally treated as an income tax.
- Does BEAT violate the nondiscrimination clause in US DTAs?
In general, the BEAT calculation does not allow foreign tax credits (FTCs); however, FTCs are used to determine regular tax liability. Essentially, BEAT claws back some of these FTCs. See the example below:
$100 Foreign-source income
$21 Foreign taxes (all creditable for regular tax liability purposes)
$100 Modified Taxable Income
10% BEAT rate
$10 BEAT liability
$21 Value of regular FTCs
– $10 BEAT claw back
$11 Residual value of FTCs
Nevertheless, BEAT does not violate the nondiscrimination clause in US DTAs due to the following reasons:
- BEAT also applies in the context of US-based multinational groups, e.g., to deductible payments made to controlled foreign corporations (CFCs) or depreciation / amortization on property acquired from CFCs.
- BEAT applies to deductible payments made by a US permanent establishment (PE) of a foreign corporation, to the extent included in business profits attributable to the US PE.
- Amounts paid to a US PE that are included in business profits and subject to US tax are not considered base erosion payments.
Evolving global conversation regarding taxation of the digital economy
Panelists included Manal Corwin, KPMG; Jesse F. Eggert, KPMG; Brian Jenn, Deputy International Tax Counsel, U.S. Department of the Treasury; Jefferson VanderWolk, Squire Patton Boggs; Brett Weaver, KPMG.
The OECD’s Policy Note of January 29, 2019 outlined two pillars to address taxation of the digital economy.
- Pillar One (user contribution, marketing intangibles, significant economic presence).
- Pillar Two (income inclusion rule, tax on base eroding payments, coordination rules).
Pillar One moves away from the arm’s length principle to global formulary apportionment, whereas Pillar Two considers a minimum tax applied by all participating countries to income below a certain threshold. The Policy Note reflects a combination of source and residence country measures.
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