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Alston & Bird’s Sam Kaywood on BEPS and U.S. TCJA Implications

Jessica Silbering-Meyer  

Jessica Silbering-Meyer  

Sam Kaywood is a co-chair of the Federal Income & International Tax Group and International Team at Alston & Bird. He concentrates his practice on federal income tax and international tax, including cross-border M&A and joint ventures, as well as inbound investments into the U.S. He has worked on virtually all forms of cross-border investments over his 30-year career, with substantial experience in Canada, Europe, China, and Latin America.

Mr. Kaywood is a frequent author and speaker on international tax topics, including those related to Latin America. He is also an Adjunct Professor at Emory University School of Law, where he teaches International Tax.

Mr. Kaywood answered the following questions for BEPS Global Currents on June 29, 2018 regarding the U.S. Tax Cuts and Jobs Act (TCJA) and country-by-country (CbC) reporting:

Q: How are your clients generally complying with CbC reporting requirements?

A: In general, our clients are complying with the current requirements.

The EU has proposed making CbC reporting information public, which would be problematic for U.S. MNEs. There has been a fair amount of push back by both U.S. and EU MNEs, who are concerned that public CbC reporting could become too politicized. Public CbC reporting is simply a bad idea. My understanding is that it does not require unanimous approved by all EU member states, making it a bit worrisome.

The U.S. performs simultaneous international tax audits throughout the year, and some of our clients have participated in the U.S. version of that program. This is an interactive audit by the IRS with MNEs, which has been helpful for our clients. Typical simultaneous audit discussions involve a collaboration between the U.S. MNEs and the IRS on transactions, restructurings, and other significant tax issues that arise during the year. In addition, under a separate program, many taxpayers have entered into advance pricing agreements (APAs) on transfer pricing issues with the IRS. The APA program is relatively successful.

The International Compliance Assurance Programme (ICAP) is a voluntary program that allows MNE groups to share CbC reports with tax administrations for risk assessment purposes and to provide tax certainty. I would suspect that most MNEs would be hesitant to volunteer for this program until there is confidence that foreign tax authorities are acting responsibly with the information.

Q: Assuming the EU introduces public CbC reporting requirements, how do you see MNEs reacting?

A: The EU has become a hostile tax climate lately, due to the various state aid cases (e.g., Apple, Amazon, etc.) and significant BEPS related regulation. Most recently, we have seen the EU levy a €5 billion fine on Google over competition issues, furthering the perception of EU hostility toward U.S. MNEs.

The EU is an important market for U.S. MNEs, so there is no question that they will continue to do business there.  However, requiring public disclosure of CbC reports would be another negative factor to be taken into account in deciding whether to add operations in the EU or somewhere else.

Note that with U.S. Tax Reform (e.g., 21% rate, immediate expensing, and the foreign derived intangible income (FDII) deduction), there is more incentive to add R&D and manufacturing in the U.S.

The OECD and the EU were correct to address excessive base erosion in their constituent countries, but they might be swinging the pendulum too far. If the EU makes base erosion such a difficult and politicized issue, then MNEs will look at moving or growing the “base” somewhere else, while continuing to sell in the EU. That would be completely natural.

Q: Assuming the EU introduces public CbC reporting requirements, do you think MNEs may choose to be fined rather than to comply?

A: All MNEs that I know will comply with all legal requirements, foreign or U.S.  It is not good business to plan your way into fines.

Nevertheless, if the requirements are onerous and bad for business (like public CbC would be), that will affect business decisions going forward in ways unhelpful to the EU.

Q: How are your clients generally responding to the TCJA?

A: Some of our clients are still trying to wrap their heads around it, while others have taken steps to respond to the changes.

The base erosion and anti-abuse tax (BEAT) is a problem for our foreign inbound clients, leading to the restructuring of operations in some cases. Foreign-owned MNEs are also considering building royalties into their cost of goods sold (COGS), which is not subject to BEAT. Under this view, royalty payments would be capitalized into inventory, and therefore, not deductible. This is a change from prior tax strategies, where taxpayers preferred to avoid capitalizing royalties to inventory. It remains to be seen how the IRS will react to this position, although most practitioners believe it to be proper.

The global intangible low-taxed income (GILTI) rules are toughest on service industries that have few tangible business assets. GILTI is particularly harsh for individual shareholders of CFCs, since they cannot qualify for the 50% deduction under Section 250 or the 80% deemed foreign tax credit (FTC) under Section 960. It is unclear how effective the Section 962 election will be in alleviating some of the harshness of GILTI for individuals.

MNEs are generally pleased with the TCJA, especially those who can avail themselves of the reduced GILTI rate, offset by FTCs, and can repatriate foreign earnings to the U.S. They can use this extra cash to finance acquisitions, buy back shares or for other purposes. Nevertheless, open issues remain regarding FTCs, including how they should be calculated and how to allocate expenses against foreign-source income. As a result, MNEs will need to work closely with tax advisors and the U.S. government to see how these rules will be applied in practice.

Q: What are some of challenges you see with clients in complying with the new U.S. Section 965 transition tax?

A: The Section 965 transition tax is complex, although the IRS has done a good job of providing guidance on a timely basis.  Nevertheless, there remains considerable confusion and it will take time to sort that out.  The transition tax is to be paid over eight years. Allocating responsibility for that liability needs to be considered in acquisitions, so we can expect new language in deal documents to account for it.

This article is provided for informational purposes only and does not constitute legal advice from Alston & Bird LLP.

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