On February 26, 2019, International Tax Review held its second annual Women in Tax Forum. Panelists included distinguished women from law firms, accounting firms, and multinational companies. In addition, Grace Perez-Navarro, Deputy Director, OECD Centre for Tax Policy and Administration, participated in a panel discussion on dispute resolution and prevention.
Post-TCJA Effects on Corporations
The first panel discussed the effects that U.S. tax reform has had on multinational companies. Tax reform introduced base erosion and profit shifting (BEAT) as a minimum tax on “applicable taxpayers” who make deductible payments to foreign related parties. According to the panel, a section 332 liquidation and section 351 transfer could include base erosion payments. In addition, base erosion payments include non-cash payments, such as property, stock, or assumption of liability.
Melissa Hall, Senior VP and Global Head of Tax at Assurant, emphasized the importance of modeling post-TCJA. Global intangible low-taxed income (GILTI) is another provision created under tax reform. According to the panel, GILTI may have unintended consequences. For example, an insurance company responsible for paying money to people affected by hurricanes may incur a loss during this period. As a result of the loss, the company cannot take the section 250 deduction, and therefore, will have a higher GILTI inclusion.
Dispute Resolution and Prevention
One of the panels focused on dispute prevention and resolution. Dispute prevention consists of two main options: (1) Compliance Assurance Process (CAP) and (2) advanced pricing agreements (APAs). The second option includes a $113,000 filing fee.
Resolution of domestic disputes include: (1) agreement with exam; (2) fast-track settlement; (3) litigation; and (4) appeals. Resolution of cross-border disputes include administrative litigation / appeal and mutual agreement procedure (MAP).
Daniella Zagari, a Partner at Machado Meyer Advogados, spoke about Brazil’s resolution of tax disputes. Since Brazilian legislation does not permit tax settlement, taxpayers are required to litigate their disputes. As a result, Brazil has a high rate of litigation compared to OECD standards. Brazil may need to reconsider this route if it joins the OECD. Currently, Brazil is a member of the G20 and the BEPS Inclusive Framework. Brazil currently does not have any APAs.
Brazil believes that it has taken steps to implement BEPS Action 14 with regard to transparency. However, according to Zagari, Brazil lacks rules for access to MAP by foreign residents. There is also a lack of mutual trust between taxpayers and tax authorities.
From a U.S. perspective, MAP is a good alternative to resolve double taxation. However, different jurisdictions are not consistent in their implementation of MAP.
APAs take a long time to conclude (they take approximately two to three years to negotiate), are expensive, and require affirmative disclosure by taxpayers. Taxpayers must disclose not only the transaction at issue, but also interrelated transactions. APAs may have variable outcomes, and a company’s global transfer pricing methodology could be called into question. In addition, both MAP and APAs have treaty network limitations.
On the positive side, taxpayers who enter into APAs can eliminate reserves for financial statement purposes. Renewals of long-standing APAs (i.e., routine transactions) are relatively common.
Tax Certainty and Risk Assessment
Perez-Navarro discussed business’ preference for tax certainty, which includes the following initiatives:
- Binding APAs.
- Country-by-country (CbC) reporting.
- Cooperative compliance outcome (voluntary).
- Risk assessment outcome.
- Audit outcomes.
According to the panel, over 70 jurisdictions have introduced a CbC reporting filing requirement. June 30, 2018 was the initial deadline for jurisdictions to exchange CbC reports. The OECD is training countries to use the information from CbC reports as originally intended (i.e., “appropriate use”). According to Perez-Navarro, the OECD will most likely not push for public disclosure of CbC reports as there is currently no consensus on this issue. The OECD will review its findings on CbC reporting before 2020, and a public consultation is expected at the end of 2019.
International Compliance Assurance Program (ICAP)
Eight countries participate in this program, including the U.S. ICAP provides MNEs and tax administrations with increased certainty. The program will run until mid-2019. ICAP performs a risk assessment of MNEs by effectively using information from CbC reports. In addition, because tax administrations can ask MNEs questions up front, this leads to fewer MAP disputes in the long run.
Joint audits are less time consuming than audit (plus MAP) and can be followed up with an APA.
The Action 14 peer review process is under way, which will determine how well jurisdictions are complying with the minimum standard. Phase 1 of the process included five batches of jurisdictions and Phase 2 is currently in progress. 60% of jurisdictions participating in MAP have resolved their cases within 24 months. There has been an 80% full resolution of transfer pricing cases. In 20% of MAP cases, unilateral relief was granted.
Taxation of the Digital Economy
The OECD and EU have been focusing on how to tax the digital economy. The digital economy is composed of: (1) Different digital business models facilitated by the Internet; (2) online sale of goods and services; and (3) intermediation services.
Key questions for policymakers (and potential answers) include the following:
- What creates value? Infrastructure, management, collection, processing, sale of data.
- Who creates value? User, data collector.
- Which country should get the right to tax? Country of residence. Where value is created.
- How should apportionment be calculated?
- Who / what to tax? Profit vs. revenue?
The panel pointed out the evolution of the digital economy by using Netflix as an example. Netflix originally delivered movies. Now, this company also develops content. This is what “digitalization of the economy” refers to. Each country may have a different definition of “value creation” and “user contribution.” There needs to be certainty of terms, as well as ease of administrability.
In 2015, the BEPS project focused on double non-taxation. Now, the OECD is focusing on the allocation of taxing rights between jurisdictions.
In March 2018, the EU released two proposals to tax the digital economy. The short-term proposal introduced an interim digital services tax (DST) and the long-term proposal introduced the concept of significant digital presence, which is an expanded definition of a permanent establishment (PE).
Questions remained however around the scope of taxable services, how to treat user data, and whether there should be a sunset clause in favor of a long-term solution.
Recently, the OECD issued a consultation document, which recommended three proposals to revise profit allocation and nexus rules:
- Active user participation – focuses on tech companies, social media platforms, and online marketplaces.
- Marketing intangibles (U.S. prefers this as an alternative to active user participation proposal) – User or consumer base? What is the value of the brand in a specific jurisdiction? How should this be calculated?
- Significant economic presence – extension of PE definition. Activities include sales plus something else (i.e., user base, local billing, content).
The EU is currently working on a proposal for a digital advertising tax. It is also considering changing its decision-making process from unanimity to a qualified majority. Ireland and the Netherlands are opposed to this change.
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