Post on 19-Mar-2018
International Tax Update
Jeff Michalak
Arlene Fitzpatrick
Page 1 [ITS TEW breakout]
Disclaimer
► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst &
Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving
member firm of Ernst & Young Global Limited operating in the U.S.
► This presentation is © 2017 Ernst & Young LLP. All rights reserved. No part of this document may
be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or
mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any
information storage and retrieval system, without written permission from Ernst & Young LLP. Any
reproduction, transmission or distribution of this form or any of the material herein is prohibited and
is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in
connection with use of this presentation or its contents by any third party.
► Views expressed in this presentation are those of the speakers and do not necessarily represent the
views of Ernst & Young LLP.
► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax
advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances
► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting
advice.
Page 2 [ITS TEW breakout]
Recent international guidance from treasury
Page 3 [ITS TEW breakout]
Recent international guidance from treasury
► Regulations
► Section 901(m) – 2/17/2017
► Section 367 – 1/17/2017
► Section 901(m) – 12/27/2016
► Section 956 – 11/28/2016
► Section 385 – 11/7/2016
► Section 6038 (CbC) – 7/18/2016
► Section 7874 – 5/16/2016
► Other guidance
► Notice 2016-73 – 12/2/2016
► Notice 2016-52 – 9/15/2016
Page 4 [ITS TEW breakout]
TRA 2014 – Transition toll-charge
Page 5 [ITS TEW breakout]
TRA 2014 mandatory repatriationSummary
► The “Tax Reform Act of 2014” (“Camp II”) would subject to immediate, but reduced, US
federal taxation, all or part of the deferred foreign earnings of a foreign corporation that
is a controlled foreign corporation (“CFC”) or with respect to which a US corporation
owns at least a 10% voting interest, directly or indirectly (“10/50 company”).
► This mandatory repatriation would be carried out by increasing the subpart F income of
a CFC or 10/50 company by the amount of its positive deferred foreign earnings
(“tentative additional subpart F income”).
► Each US shareholder of a CFC or 10/50 company would include in income an amount
equal to its pro rata share of that entity’s tentative additional subpart F income reduced
by the US shareholder’s pro rata share of any E&P deficits from its other CFCs or
10/50 companies.
► The US shareholder’s mandatory income inclusion will be taxed at a effective rate of
8.75% or 3.5%, respectively, depending on the amount of the US shareholder’s
aggregate pro rata shares of deferred foreign earnings is determined to represent cash
(or cash equivalents), which is to be determined on statutory formulas.
► A US shareholder would be permitted to use existing tax attributes (including part of
any foreign taxes deemed paid on the mandatory inclusion) to reduce the US tax due
on the mandatory inclusion.
Page 6 [ITS TEW breakout]
TRA 2014 mandatory repatriation
► The deferred foreign earnings of a CFC or 10/50 company equals its net positive
earnings and profits (“E&P”) accumulated in taxable years beginning after December
31,1986, and determined as of the close of the entity’s last taxable year beginning
before [January 1, 2015], and without reduction by reason of any dividends paid in that
taxable year.
► A deficit in E&P of a CFC or 10/50 company would be computed the same as the
deferred foreign earnings of a CFC or 10/50. However, only E&P deficits of a foreign
corporation that was a CFC or 10/50 company on [February 26, 2014] and in which the
US shareholder held at least a 10% voting interest, directly or indirectly, on that date
will be taken into account.
► A US shareholder’s pro rata share of the deferred foreign earnings or E&P of a CFC or
10/50 company based on its ownership interest (direct and indirect) in the entity as of
the close of the entity’s last taxable year beginning before [January 1, 2015] (i.e., the
same as determining a pro rata share of actual subpart F income).
► Camp II provides statutory formulas for determining how much of the mandatory
inclusion is subject to US tax at an 8.75% rate or a 3.5% rate. Anti-abuse rules would
apply to prevent the US shareholder from changing the composition of its offshore
assets to minimize the transition tax.
Page 7 [ITS TEW breakout]
TRA 2014 multi-step process to determine mandatory inclusion
Camp II’s mandatory repatriation proposal can be illustrated through the following multi-
step process.
► Step 1: The deferred foreign earnings, positive or negative, of each CFC or 10/50 company is
determined as of the close of the corporation’s last tax year beginning before January 1, 2015,
without reduction by reason of any dividends distributed during such taxable year.
► Step 2: For each CFC or 10/50 company with positive deferred foreign earnings, the subpart F
income of that entity for its last tax year beginning before [January 1, 2015], is increased by that
positive amount (“tentative additional subpart F income”).
► Step 3: A US shareholder’s pro rata share of the tentative additional subpart F income of a CFC or
10/50 company is determined.
► Step 4: For each CFC or 10/50 company with negative deferred foreign earnings, a US shareholder’s
pro rata share of that negative amount is determined, but only if as of [February 26, 2014], that entity
was a CFC or 10/50 company and the US shareholder held at least a 10% voting interest in that
entity, directly or indirectly. A US shareholder’s pro rata shares of all negative deferred foreign
earnings balances are combined into an “aggregate foreign earnings deficit”.
► Step 5: A US shareholder’s aggregate foreign earnings deficit is allocated proportionately between its
pro rata shares of the tentative additional subpart F income of its CFC or 10/50 company.
► Step 6: The US shareholder’s inclusion for a CFC or 10/50 company equals the excess, if any, of the
US shareholder’s pro rata share of that entity’s tentative additional subpart F income over the US
shareholder’s aggregate foreign earnings deficit allocated against that pro rata share.
Page 8 [ITS TEW breakout]
Mandatory repatriationEffective date example
► Mandatory Repatriation is effective for the last tax year of a CFC or 10/50 company beginning before 1/1/2018.
► The transition year of CFC1 is its calendar tax year beginning January 1, 2017. Any required inclusion for CFC1 would
presumably be reported by the US shareholder in its calendar tax year ending December 31, 2017.
► The transition year of CFC2 is its calendar tax year beginning December 1, 2017. Any required inclusion for CFC1
would presumably be reported by the US shareholder in its calendar tax year ending December 31, 2018.
► Presumably the mandatory repatriation rules (e.g., netting of positive and negative E&P) are applied separately to
groupings of CFCs and/or 10/50 companies with the same transition year.
1/1/2017 12/31/2017 12/31/2018
US S/H
1/1/2017 12/31/2017 12/31/2018
CFC1
12/1/2016 11/30/2017 11/30/2018
CFC2
Transition Year
Transition Year
Mandatory Inclusion for CFC1Mandatory Inclusion for CFC2
New Tax System
Page 9 [ITS TEW breakout]
Planning for toll charge
Page 10 [ITS TEW breakout]
Opportunities to serveInternational tax “no regrets” planning themes
Strategy Description
Tax Attribute Modeling► Compute impact of toll charge
► Inventory existing tax attributes for no-regrets planning
Accelerate
access to
FTCs
E&P
Management
► Create high-tax E&P pools for pre-Reform repatriation
► Offset E&P with deficits avoid potential “gross” toll charge
► Defer low-tax foreign income into post-Reform period
► Trigger losses or accelerate deductions in pre-Reform period
Positioning
and Accessing
E&P/FTCs
► Position higher-tax E&P in an entity that can trigger actual or deemed
inclusion
► Access FTCs without associated E&P
Utilize FTCs ► Increase FSI to utilize excess or repatriated FTCs
Trigger first-tier built-in
losses
► Trigger §987 loss of foreign branch (consider new regs, T.D. 9794)
► Recognize §988 losses
► Trigger built-in loss in foreign stock
Minimize tax cost of toll
charge
► Reduce of offshore cash balances
► Eliminate/minimize E&P
Page 11 [ITS TEW breakout]
► Evaluate strategies for managing E&P
► Optimize utilization of FTCs while still valuable
► Reduce potential “toll charge” on unremitted earnings
► Defer low-tax foreign income to post-Reform period
► Accelerate E&P expense (loss) recognition
► Themes include
► Create high-tax E&P pools by positioning and accessing E&P deficits of foreign
subsidiaries and by triggering built in losses at all tiers
► Eliminate low tax E&P pools through taxable liquidation of foreign entities
► Consider ability to accelerate unrecognized foreign currency losses on debt
instruments in place
► Review potential accounting method changes to: a) defer foreign income
recognition or b) accelerate expense recognition
► Many possibilities: some options include strategies that follow
E&P management Prepare for transition to territorial or low-rate/no-deferral system
Page 12 [ITS TEW breakout]
E&P management – DeficitsDividends
Objective
► Increase tax pool effective rate by utilizing parent CFC
deficit.
Facts
► CFC1 has an E&P deficit; CFC2 has E&P of $101 and a
tax pool of $30.
► If necessary, USP contributes the stock of CFC2 to CFC1
to position in chain of ownership.
► CFC2 pays $101 dividend to CFC1.
► CFC1 pays $1 dividend to USP.
Anticipated US tax consequences
► Distribution by CFC2 should not give rise to Subpart F
income under §954(c)(6)
► USP may claim $30 of FTC on $1 distribution by CFC1 to
USP
Considerations
► Alternative planning if CFC1 E&P deficit is “hovering”
USP
CFC1
CFC2
E&P $(100)
Taxes $ 0
E&P $101
Taxes $30
Dividend
$1
Dividend
$101
Page 13 [ITS TEW breakout]
E&P management – Built in losses§312(a) distribution
Objective
► Distribute built-in loss assets (including stock) to reduce
E&P.
Facts
► USP owns CFC1, which owns CFC2.
► CFC2 holds stock in a subsidiary (CFC3), a disregarded
entity (DRE) and/or assets that have built-in loss
(aggregate basis $1000, FMV $100);
► CFC2 distributes the built-in loss property to CFC1 (in an
amount not exceeding CFC1’s basis in CFC2 stock).
Anticipated US tax consequences
► CFC2 should realize a $900 loss that is disallowed under
§311(a).
► Under §312(a), CFC2 should reduce its E&P by the
adjusted basis of the CFC3 stock/built in loss assets
($1000).
Considerations
► Consider impact of “otherwise removed” language under
Treas. Reg. §1.902-1(a)(8) on CFC2 FTC pool.
► Consider potential for “double deficit” planning to the
extent of any CFC3 built-in deficit in its assets.
USP
CFC1
CFC2
CFC3
CFC3 Assets
AssetsDRE
DRE
Distribution of built-in loss assets
Page 14 [ITS TEW breakout]
E&P management – Built in lossesSale to partnership
Objective
► Reduce CFC E&P by selling built-in loss property to a
partnership
Facts
► USP owns CFC1 and CFC3. USP and CFC3 are partners
in a partnership (PSP).
► CFC1 owns CFC2. There is a built-in loss in the stock of
CFC2.
► CFC1 sells built-in loss stock of CFC2 to PSP.
Anticipated US tax consequences
► §267(a) disallows the loss on CFC2 stock but the E&P of
CFC1 is reduced by such disallowed loss. Treas. Reg.
§1.312-7(b)(1).
► If PSP sells CFC2 stock at a gain not exceeding the
disallowed loss, USP should have no taxable income.
§267(d).
USP
CFC1
Built-in Loss
CFC2
CFC3
PSP
CFC2
Sale of
CFC295%
5%
Page 15 [ITS TEW breakout]
E&P management – Basis concentration§304 transaction with nominal share issued
USP
CFC1 CFC2
CFC3 CFC3
CFC3 stock
Cash +
CFC1 stock
Basis = $100
FMV = $100
E&P at
least
$100
Objective
► §304 transaction results in deemed dividend and built-in
loss property.
Facts
► USP owns CFC1 and CFC2. CFC2 owns CFC3.
► The FMV of CFC3 stock is $100 and CFC2 has $100
basis in the stock.
► CFC1 acquires the shares of CFC3 from CFC2 for cash
and a nominal share of CFC1.
Results
► CFC1’s acquisition of CFC3 stock is a §304 transaction
that results in dividend income to CFC2.
► The dividends received by CFC2 are intended to qualify
under §954(c)(6).
► CFC2’s basis in the CFC3 stock is intended to “hop” to the
nominal CFC1 share issued.
Considerations
► Upon a future distribution of the nominal CFC1 share,
CFC2 may be able to reduce its E&P by the built in loss
attributed to that share under Section 312(a)(3).
Page 16 [ITS TEW breakout]
Objectives
► Reduce CFC E&P via distribution of built-in loss property
Facts
► CFC1 has adjusted basis in CFC2 stock of $100
► CFC2 owns stock in CFC3 with FMV and tax basis of $100
► CFC4 has at least $100 of E&P
Steps
1. CFC2 sells CFC3 stock to CFC4 in exchange for property of
$100 (assume an intercompany note)
2. CFC2 distributes $100 note receivable to CFC1
3. CFC1 distributes stock of CFC2 to US. At the time of the
distribution, the value of CFC2 stock is less than its adjusted
basis.
Results
► E&P moves from CFC4 to CFC2 pursuant to §304(b)(2).
§954(c)(6) applies.
► CFC2’s distribution of note receivable is a §301 dividend
distribution. §954(c)(6) applies.
► CFC1’s distribution of CFC2 stock results in a $100 reduction
to CFC1’s E&P pursuant to §312(a)(3)
Considerations
► De facto liquidation of CFC1 and/or CFC2
► Measurement of dividend and FTCs associated with
distribution to US
US
CFC1
CFC2
$100
E&P
CFC2 sells
CFC3 stock to
CFC4 for $100
CFC4
CFC2 distributes
$100 to CFC1
Other
Subs/Assets
CFC3
FMV/TB = $100
TB = $100
Other
Subs/Assets
CFC1 distributes
CFC2 stock to
USP US
CFC1 CFC2 CFC4
Other
Subs/AssetsCFC3
Other
Subs/Assets
E&P management – Basis concentration§§304/312(a)(3) distribution
Page 17 [ITS TEW breakout]
E&P managementTriggering foreign exchange losses
► Distributions from CFC
► Under §986(b), consider “hyped” tax pool due to appreciation of USD
relative to many other currencies
► E&P translated into USD is determined at time of distribution
► Foreign taxes translated into USD in year of payment/accrual
► Consider ability to trigger exchange losses on repatriation of PTI under
§986(c)
► §987 losses
► Branch remittance
► Branch termination
► Consider impact of new §987 regulations (T.D. 9794)
► §988 losses
► Repayment of debt
► Significant modifications
Page 18 [ITS TEW breakout]
► Change in local country tax year end to match US year end
► Accelerate foreign audit settlements/deposits
► Taxable asset transfers
► Defer deductions
► Related party income prepayments
► Accelerate dividend withholding tax with stock dividends
Accelerate foreign income tax
Page 19 [ITS TEW breakout]
► There may be a short window to access offshore FTCs before a
territorial or low-rate no-deferral system takes effect
► Take steps now to access FTCs
► FTCs at “lower-tier” CFCs with low-tax CFCs up the chain
► FTCs in CFCs where a dividend is not possible or desirable (e.g.,
distributable reserve limitations or WHT leakage)
► Themes include
► Trigger current inclusions of Subpart F income to facilitate repatriation
of high tax E&P pools of lower tier CFCs
► Utilize cross chain asset and stock sales to access or reposition
existing E&P pools (high and low tax) and to allow for efficient
repatriation pre and post Reform
► Generate additional foreign tax credits without associated foreign
source income
Repatriating FTCs
Page 20 [ITS TEW breakout]
► The House Blueprint taxes unremitted earnings in the form of
cash or cash equivalents at a higher rate
► Consider repatriation of foreign cash
► Repayment of valve debt owed to the US
► Make non-dividend distributions out of foreign subsidiaries, by way of
return of capital or of previously taxed income
► Utilize parent – subsidiary asset and stock sales to repatriate foreign cash
without triggering any US income inclusion
Minimize toll charge
Page 21 [ITS TEW breakout]
TRA 2014Prevention of base erosion
Page 22 [ITS TEW breakout]
Anti-base-erosion focusIP and low-taxed income
Camp proposal Option A:
Excess Income from Intangible
Asset Transfers
Camp proposal Option B:
Current Tax on Low-Taxed Cross-Border
Foreign Income
Camp proposal Option C:
Reduced Tax Rate on Intangible Income
and Current Taxation
► New category of Subpart F income for
Foreign Base Company Excess
Intangible Income (FBCEII): excess
returns from “covered intangibles”
transferred from US if subject to low
foreign ETR
► Broad definition of covered intangible
► Broad determination of income
attributable to covered intangible
► Excess return if gross income > 150%
of costs
► Home country exception
► Full or partial exclusion from FBCEII
based on foreign ETR:
► If foreign ETR ≤ 10% – full
inclusion
► If foreign ETR is between 10% and
15% – proportionate inclusion
► If foreign ETR ≥15% – no inclusion
► New category of Subpart F income
► Includes CFC’s gross income, with
exception for income that is either:
► Derived in the CFC’s home country
or
► Subject to an ETR in excess of
[10%]
► Home country requirement that income
be derived in connection with property
sold for use, consumption or
disposition in such country or services
provided with respect to persons or
property located in such country
► ETR determined separately on a
country-by-country basis
► New category of Subpart F income for
Foreign Base Company Intangible
Income (FBCII)
► Also new concept of foreign intangible
income of a US corp
► US corp allowed a deduction for 40%
of its foreign intangible income and its
pro rata share of the FBCII of its CFCs,
resulting in current taxation at a 15%
tax rate
► FBCII with respect to property sold
into US or services provided in US
would not be eligible for the 40%
deduction
► Broad definition of intangible property
► Broad determination of income
attributable to covered intangible
Page 23 [ITS TEW breakout]
Anti-base-erosion focusIP and low-taxed income
Senator Enzi’s bill President’s framework
► New category of Subpart F income for
income that is subject to a foreign
effective tax rate of not more than 50%
of the top US corporate tax rate
(i.e., 17.5%)
► Exception for qualified business
income
► But exception would not apply to
intangible income
► US corp allowed a deduction of 50% of
its qualified foreign intangible income
► Qualified foreign intangible income
would be foreign intangible income
derived from the active conduct of
a business in the US, provided the
US corp developed the intangible
property or added substantial value
to it.
► Broad definition of intangible property
► Includes proposal that is identical to
Camp Proposal Option A, Excess
Income from Intangible Asset
Transfers
► Same proposal has been included
in the Administration’s Budget
Proposals for last several years
► Includes new proposal for a Minimum
Tax on income of CFCs, under which a
CFC would be subject to immediate
US tax at a specified tax rate with an
FTC for foreign taxes paid
► Rate for Minimum Tax is not
specified in the framework
Page 24 [ITS TEW breakout]
BEPS update
Page 25 [ITS TEW breakout]
BEPSOverview of the project – actions
Coherence Substance Transparency
Action 2
Hybrid mismatch arrangements
Action 3
CFC rules
Action 4
Interest deductions
Action 5
Harmful tax practices
Action 6
Preventing tax treaty abuse
Action 7
Avoidance of Permanent
Establishment (PE) status
Action 8
Transfer pricing (TP) aspects of
intangibles
Action 9
TP/aspects of risk and capital
Action 10
TP/aspects of high-risk
transactions
Action 11
Methodologies and data analysis
Action 12
Disclosure rules
Action 13
TP documentation and
CbC reporting
Action 14
Dispute resolution
Action 15 Multilateral instrument
Action 1
Digital economy
Harmful or inappropriate use of
international tax legislation to obtain
unintended tax benefits
Mismatches where profits are being
taxed vs. where people responsible for
generating these profits are located
Provide tax authorities information to
carry out audits better and determine if
fair share of taxes are being paid
Page 26 [ITS TEW breakout]
Recent OECD guidance
In 2016-2017, the OECD released guidance on several focus areas including:
► 31 October 2016 and 30 January 2017, the OECD published the BEPS Action 14 assessment
schedule of peer reviews, which covers Stage 1 and 2 of the peer review process and catalogues the
jurisdictions to be assessed
► 24 November 2016, the OECD released the text of the Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent BEPS under BEPS Action 15
► 22 December 2016, the OECD issued an updated version of its final report on Action 4 Limiting Base
Erosion Involving Interest Deductions and other Financial Payments
► 6 January 2017, the OECD released a public discussion draft for comment that includes three draft
examples with respect to treaty entitlement of non-collective investment vehicle (non-CIV) funds
► On 1 February 2017, the OECD released BEPS Action 13 on Country-by-Country Reporting Peer
Review Documents providing the approach taken regarding the peer review process, the sources
required to be submitted to the OECD, and the timing for each phase of the process
► 6 April 2017, the OECD released an updated version of the Guidance on the Implementation of
Country-by-Country Reporting
Page 27 [ITS TEW breakout]
Action 15 – Multilateral instrument
Page 28 [ITS TEW breakout]
History and current status of the MLI Timeline
July 2016:
OECD request for input on
the multilateral instrument.
December 31, 2016:
MLI open for signing.
October
2015July
2016
November
2016
December
2016
June
2017
October 5, 2015:
OECD releases its final report on
Developing a Multilateral Instrument
to Modify Bilateral Tax Treaties
(Action 15) under the BEPS action
plan.
June 2017:
High-level signing ceremony where a
significant group of countries are
expected to sign and commence
ratification process.
November 24, 2016:
Text formally adopted and
published.
Page 29 [ITS TEW breakout]
Participants in the MLI working group include
Andorra Egypt Liberia Saudi Arabia
Argentina Fiji Liechtenstein Senegal
Australia Finland Lithuania Serbia
Austria France Luxembourg Singapore
Azerbaijan Gabon Malaysia Slovak Republic
Bangladesh Georgia Malta Slovenia
Barbados Germany Marshall Islands South Africa
Belgium Greece Mauritania Spain
Benin Guatemala Mauritius Sri Lanka
Bhutan Haiti Mexico Swaziland
Brazil Hungary Moldova Sweden
Bulgaria Iceland Mongolia Switzerland
Burkina Faso India Morocco Tanzania
Cameroon Indonesia Netherlands Thailand
Canada Ireland New Zealand Tunisia
Chile Israel Nigeria Turkey
China Italy Norway Ukraine
Columbia Jamaica Pakistan United Kingdom
Costa Rica Japan Philippines United States
Côte d'Ivoire Jordan Poland Uruguay
Croatia Kazakhstan Portugal Vietnam
Cyprus Kenya Qatar Zambia
Czech Republic Korea Romania Zimbabwe
Denmark Latvia Russia
Dominican Republic Lebanon San Marino
* Current as of 12 September 2016 as found at http://www.oecd.org/tax/treaties/multilateral-instrument-for-beps-tax-treaty-measures-the-ad-hoc-group.htm
Page 30 [ITS TEW breakout]
History and current status of the MLITimeline example one
1. Countries A, B, C, D and E are signing the MLI convention. Following the signing, countries A, B, C, D and E commence the ratification,
acceptance and approval process in their respective countries based on domestic legal requirements.
2. Countries A, B, C and D have notified the depositary regarding the completion of ratification process in their respective countries before
November 2017, and country E is the latest in line to notify in November 2017.
3. Upon notification, the MLI convention enters into force for all countries A, B, C, D and E in March 2018, i.e., on the first day of the month
following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification, acceptance or
approval.
4. After entering into force, the MLI convention would enter into effect between country A and B, with respect to non-resident withholding taxes on
January 1, 2019, i.e., on the first day of the calendar year after the MLI convention has entered into force in both countries (March 2018) and
for all other taxes, for taxable periods beginning on or after September 1, 2018, i.e., at least six months after the MLI convention has entered
into force in both countries (March 2018).
1
June 2017
Countries A, B,
C, D and E to
sign MLI
convention
November
2017
Upon completion
of ratification
process, the
latest of 5
countries i.e.,
country E,
notifies the
depositary
(OECD)
March 2018
MLI convention to
enter into force
for countries A,
B, C, D and E
MLI convention between country A and country B
to enter into effect
September 1, 2018
Other taxes
January 1, 2019
Withholding taxes
2 3 4
Page 31 [ITS TEW breakout]
MLI content and mechanicsBEPS MLI adopted November 24, 2016
► Minimum standard on treaty abuse: principal purpose test (PPT), PPT plus simplified limitation on benefits (LOB), or
detailed LOB supplemented by anti-conduit rules
► A “saving clause”
► Specific anti-abuse rules:
► Certain dividend transactions
► Transactions involving immovable property holding companies
► Dual-resident entities
► Treaty shopping using third-country permanent establishments (PEs)
Ac
tio
n 6
► Revision of Article 1 to address fiscally transparent entities
► Measures to address issues with the application of the exemption method
Ac
tio
n 2
Ac
tio
n 7 ► Measures to address commissionnaire arrangements and similar strategies
► Modifications to the specific activity exemptions under Article 5(4)
► Measures to address the splitting-up of contracts to abuse the exception in Article 5(3)
Ac
tio
n 1
4 ► Measures included in the minimum standards and best practices, including:
► Changes to paragraphs 1 through 3 of Article 25
► Inclusion of paragraph 2 of Article 9 of the OECD model
► Option for mandatory binding MAP arbitration
The MLI is open for signature since December 31, 2016. A first high-level signing ceremony will take place in June 2017.
Page 32 [ITS TEW breakout]
MLI content and mechanics Structure of MLI
The MLI applies alongside existing treaties. Modifies application of existing treaties to meet treaty-related
minimum standards agreed as part of the final BEPS package.
MLI structure Countries to determine
Covered tax
agreements
(CTAs)
Applies to the CTAs and to the specific provisions included in
bilateral tax treaties
Treaties that would be CTAs
Minimum
standard
Opt out allowed to the extent the CTA already includes a similar
provision. Jurisdiction may reserve its right to do so and should
notify the depositary of the MLI accordingly.
Whether to adopt MLI provision or
a different approach to meet the
minimum standard
Optional
provisions
Jurisdictions may reserve the right to:
► Opt out of the other provisions not considered minimum
standards
► Not apply these articles to its treaties or to a subset of treaties
Which optional articles to apply,
or not
Compatibility
clauses
if there are conflicts with existing provisions in tax treaties that cover
the same subject matter, such a clause would describe the existing
provisions that would be superseded.
The compatibility of the provision
in their tax treaties with the ones
included in the MLI
Reservations Countries have the right to:
► Reserve certain parts of the MLI (opt-out)
► Have these specific articles not apply to their tax treaties
Whether to opt for reservations,
or not
Notifications Signatories should notify the depositary of the instrument (the
OECD)
Notifications to be made
Page 33 [ITS TEW breakout]
Key takeaways
Expected that
access to treaty
benefits would be
more difficult as a
result of the
introduction of a
PPT/LOB or a
mixture of the two
Monitor
implementation of
the MLI per
jurisdiction,
including
implementation of
the minimum
standards
Interpretation of
tax treaties is
expected to
change. New title
and preamble
are minimum
standards
Review tax treaty
positions. Potential
impact for
dividend, interest
and royalty
transactions and
for capital gains
Next
steps
Treaty
benefits
1 2
3
TimingAs of 2019, possible that
the BEPS treaty
changes could be
included in many of the
existing bilateral treaties
Page 34 [ITS TEW breakout]
Action 13 – Country-by-country reporting
Page 35 [ITS TEW breakout]
Country-by-
Country reportHigh level information about
MNE’s jurisdictional allocation
of revenue, profit, taxes,
assets and employees to be
shared with all tax authorities
where MNE has operations
Action 13 – Transfer pricing documentation and country-by-country reporting Who, when, where, how and what?
► Multinational groups with consolidated
revenue of €750m or more.
► Fiscal years beginning on or after 1
January 2016, with first CbC reports to
be filed by 31 December 2017.
► Filing with tax authority in parent
country, to be shared with tax
authorities in countries where group has
entities or branches.
► Secondary reporting either directly
by each local entity or for group
by ‘surrogate parent’ entity.
► Information on revenue, profit, tax (cash
and accrued), stated capital,
accumulated earnings, tangible assets
and employees provided on a CbC
aggregated basis.
► Entity level information on principal
businesses and country of tax residence
vs. country of organization.
Transparency
readiness
Master fileHigh level information about
MNE’s business, transfer
pricing policies and
agreements with tax
authorities in single document
available to all tax authorities
where MNE has operations
Local fileDetailed information about
MNE’s local business,
including related party
payments and receipts for
products, services, royalties,
interest, etc.
Page 36 [ITS TEW breakout]
Action 13 – Country-by-country reporting
► *110 countries have committed to implement CbC reporting
► *49 countries have enacted rules enabling CbC reporting
► A number of other countries have issued draft legislation
► Most countries have introduced primary and secondary filing
mechanisms
► Voluntary filing is expected to be permitted in 7 countries (Hong Kong,
Japan, Liechtenstein, Russia, Singapore, Switzerland, and the US)
► CbC reporting is one of the most active points from the BEPS project,
and we expect a lot of country activity on this area in the months to
come
Page 37 [ITS TEW breakout]
Filing and notifications – OECD model legislation
Reporting
entity
Tax jurisdiction
of residence
Step 1: The MNE group should:
► Identify the constituent entities in the MNE group
► Determine the reporting entity
Step 2: Each constituent entity should make the necessary notifications
Step 3:
Reporting entity
prepares the
CbC report
Step 4:
Reporting entity
files the CbC report
Other
competent
authorities
Step 5:
Exchange of CbC reports
► Multilateral instrument
► Bi-lateral CA agreement
with Treaty and TIEA
partners
Page 38 [ITS TEW breakout]
Action 13 – country-by-country reporting
5 October 2015
OECD/G20 Base
Erosion and Profit
Shifting Project
Transfer Pricing
Documentation
and CbC
Reporting Action
13: 2015 Final
Report.
21 December 2015
US Proposed
Regulations for
CbC Reporting.
2015 2016
29 June 2016
US Final
Regulations for
CbC Reporting
released. The
OECD released
guidance on the
implementation of
country-by-country
reporting.
2017
11 January 2017
Draft form Form
8975, Country-by-
Country Report,
and Form 8975
(Schedule A), Tax
Jurisdiction and
Constituent Entity
Information
released.
23 February 2017
The draft
instructions
released for Form
8975, Country-by-
Country Report,
and Form 8975
(Schedule A), Tax
Jurisdiction and
Constituent Entity
Information.
20 January 2017
The IRS released
Revenue
Procedure 2017-
23.
Page 39 [ITS TEW breakout]
Action 13 – country-by-country reportingRevenue Procedure 2017-23
► Final regulations announce Treasury’s intention to address the “gap year” by
allowing voluntary filing
► In Revenue Procedure 2017-23, the IRS issued guidance for the process for
voluntarily filing Form 8975 for reporting periods beginning on or after 1
January 2016, but before the applicability date in Reg. Section 1.6038-4
(early reporting periods)
► Beginning on September 1, 2017, Form 8975 may be filed for an early
reporting period with the income tax return or other return as provided in the
Instructions to Form 8975 for the taxable year of the ultimate parent entity of
the US MNE group with or within which the early reporting period ends
► A UPE that files an income tax return for a taxable year that includes an early
reporting period without a Form 8975 attached may file an amended income
tax return and attach Form 8975 to the amended return within twelve months
of the close of the taxable year that includes the early reporting period
Page 40 [ITS TEW breakout]
Exchange of the CbC reports
► Preamble to the Final Regulations: Treasury and IRS are committed to
entering, in a timely manner, into bilateral competent authority agreements
with jurisdictions with which the US has an income tax treaty or a tax
information exchange agreement that provides for the automatic exchange of
CbC reports, taking into consideration the need for appropriate review of
systems and data safeguards in the other jurisdictions
► Preamble indicated that Treasury and the IRS anticipated that information
about the existence of the competent authority arrangements relating to the
exchange of CbC reports would be made publicly available
► To date, no information has been made publicly available
► Recent reports indicate that Model Competent Authority agreements have
been approved and negotiations are underway with certain Treaty and TIEA
partners
Page 41 [ITS TEW breakout]
Multilateral competent authority agreement on the exchange of CbC reports
► Several countries have signed a multilateral instrument with respect to
the exchange of CbC reports including:
► Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile,
China, Costa Rica, Curaçao, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Gabon, Georgia, Germany, Greece, Guernsey, Hungary,
Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey,
Korea, Latvia, Liechtenstein, Luxembourg, Malaysia, Malta, Mauritius,
Mexico, Netherlands, New Zealand, Nigeria, Norway, Poland, Portugal,
Russian Federation, Senegal, Slovak Republic, Slovenia, South Africa,
Spain, Sweden, Switzerland, United Kingdom, and Uruguay
Status as of 26 January 2017. See http://www.oecd.org/tax/automatic-
exchange/about-automatic-exchange/CbC-MCAA-Signatories.pdf
Page 42 [ITS TEW breakout]
EU proposals
Page 43 [ITS TEW breakout]
EU proposals regarding public CbC reporting
► On 12 April 2016, the European Commission proposed to amend the
Accounting Directive (Directive 2013/34/EU) which would require large
multinational companies operating in the EU to draw up and publicly disclose
reports on income tax information, including a breakdown of profits, revenues,
taxes and employees
► On 11 November 2016, in response to the request by the Working Party on
Company Law, the Legal Service of the Council of the EU gave written
opinion on the legal basis of the proposal of amending the Accounting
Directive and concluded that the proposal must be based on Article 115 TFEU
(which requires unanimous consent) rather than Article 50(1) TFEU (which
only requires a qualified majority)
Page 44 [ITS TEW breakout]
EU proposals regarding public CbC reporting
► On 12 January 2017, the European Parliament’s Committee on Legal
Affairs gave an opinion on the basis of the proposal to amend the EU
Directive on disclosure of income tax information (the Accounting Directive)
► The Committee concluded that the proposal must be based on Article 50(1) of
the Treaty on the Functioning of the European Union (TFEU), instead of
Article 115 of the TFEU
► This would mean that the introduction of public CbC reporting by amendment to the
Accounting Directive is an accounting matter and therefore it requires approval by a
qualified majority of Member States rather than a unanimous vote.
► The opinion contradicts the legal advice given to the Council of Member
States earlier in November 2016, wherein it was opined that the proposal to
amend the Accounting Directive must be based on Article 115 of the TFEU
► Next steps?
Page 45 [ITS TEW breakout]
EU Anti-Tax Avoidance Directive
Page 46 [ITS TEW breakout]
ATAD I – Background
► The objective of the Directive is to ensure a coordinated implementation of certain BEPS outputs at
the EU level
► The European Commission published the first draft of the ATAD on 8 January 2016 as part of its
wider EU Anti-Tax Avoidance Package
► Agreement on a final Directive was reached on 20 June 2016
► Member States must adopt and publish the laws, regulations and administrative provisions necessary
to comply with this Directive by 31 December 2018 at the latest. As such, the rules should be
implemented at 1 January 2019 at the latest
► An additional year is provided for the implementation of the exit tax provisions (31 December 2019)
► Member States which have (equally effective) national targeted rules for preventing base erosion and profit
shifting risks, may defer implementation of the ATAD interest limitation rules, but not until later than 1 January
2024
► On 25 October 2016, the European Commission released its proposals for a major corporate tax
reform across the EU
► The package includes three separate legislative initiatives, namely: (i) a two-stage proposal towards
a Common Consolidated Corporate Tax Base (CCCTB); (ii) a Directive on Double Taxation Dispute
Resolution Mechanisms in the EU; and (iii) amendments to the ATAD agreed in June 2016, as
regards hybrid mismatches with third countries
Page 47 [ITS TEW breakout]
Impact of ATAD I
Intangible
Property and
supply
chain
Holding
► Interest deduction limitation rules
(30% EBITDA)
► EU Anti-hybrid rules
► Controlled Foreign Company
(CFC) rules
► Rules on cross-border transfers of
assets, businesses and tax
residence (exit taxation)
► EU Anti-hybrid rules
Financing
Ge
ne
ral A
nti
-Ab
use
Ru
les
Potential consequences for US
multinationals with investments and
operations in Europe could include:
► Higher effective tax rate (ETR),
e.g., due to a cap on interest
deductions and direct taxation of
profits realized by foreign
subsidiaries and branches,
potentially in multiple EU
jurisdictions
► More challenges on structures as
a result of the introduced anti-
hybrid rules and General Anti-
Abuse Rules (GAAR), potentially
leading to more controversy
Page 48 [ITS TEW breakout]
Introduction ATAD II
► On October 25, 2016, the European Commission released its
proposals for a corporate tax reform across the EU, including a
proposal to amend the adopted ATAD I in respect of hybrid
mismatches (“ATAD II”)
► ATAD II expands the territorial scope of the minimum standards for
hybrid mismatches to third countries so that scope is expanded to:
► Hybrid PE mismatches
► Hybrid transfers
► Imported mismatches
► Reverse hybrid mismatches
► Dual resident mismatches
Page 49 [ITS TEW breakout]
Introduction ATAD II
► Under the ATAD II, EU Member States should either deny deduction
of payments, expenses or losses or include payments as taxable
income, in case hybrid mismatches lead to so-called mismatch
outcomes
► On February 21, 2017, the European Council reached final political
agreement on the ATAD II and it will be formally adopted once the
European Parliament has given its opinion
► EU Member States are obliged to implement the ATAD II by
December 31, 2019 and the rules should apply as of January 1,
2020, except for
► Mandatory taxation of income derived by certain EU reverse hybrid
entities until January 1, 2022
► Grandfathering for certain financial instruments used by the banking
sector until January 1, 2023
Page 50 [ITS TEW breakout]
Article 9 – Hybrid mismatches
► Hybrid entity mismatches
► A payment to an entity that is qualified as non-transparent under the laws of one jurisdiction and qualified as
transparent by another jurisdiction
► Hybrid financial instrument mismatches
► Situations where the tax treatment of a financial instrument differs between two jurisdictions
► Imported mismatches
► Situations where the effect of a hybrid mismatch between parties in third countries is shifted into the jurisdiction of
a Member State through the use of a non-hybrid instrument thereby undermining the effectiveness of the rules
that neutralize hybrid mismatches. This includes a deductible payment in a Member State under a non-hybrid
instrument that is used to fund expenditure involving a hybrid mismatch
► Hybrid permanent establishment mismatches
► Situations where the business activities in a jurisdiction are treated as being carried on through a PE by one
jurisdiction while those activities are not treated as being carried on through a PE in the other jurisdiction
(disregarded PE), including payments to such PE unless an exemption under a treaty applies
► Situations where there is a difference in allocation of a payment between the head office and PE
► Hybrid transfers
► Situations where an arrangement to transfer a financial instrument gives rise to a difference in tax treatment, if the
underlying return of a financial instrument is treated as derived by more than one of the parties to the
arrangement
Page 51 [ITS TEW breakout]
Treatment of mismatch outcome
Double deductions
► In case a hybrid mismatch results in double deductions:
► If the investor jurisdiction is a Member State, that Member State shall deny the deduction; or
► If the investor jurisdiction is a third country that has not denied the deduction, the Member State
that is the payer jurisdiction shall deny the deduction.
Deduction without inclusion
► In case a hybrid mismatch results in deduction without inclusion:
► If the payer jurisdiction is a Member State, that Member State shall deny the deduction; or
► If the payer jurisdiction is a third country that has not denied the deduction, the Member State that
is the payee jurisdiction shall include the payment in its income.
► Optional limitation to scope: ATAD II allows Members States to exclude mandatory income inclusion in the
case of certain hybrid mismatch situations that result in a deduction without inclusion, if the payment has its
source in a third country.
► The optional limitation to the scope includes the following hybrid mismatch situations: differences in allocation
of payments to a hybrid entity or differences in allocations of payments between a head office and PE,
payments to a disregarded PE and deemed payments between a head office and PE.
Page 52 [ITS TEW breakout]
Article 9a/b – Reverse hybrids and dual resident mismatches
Article 9a – Reverse hybrid entities
► Article 9a of the ATAD II is applicable to all reverse hybrid entities that are treated as transparent for
tax purposes by a Member State and it is not relevant whether there is so-called mismatch outcome.
A reverse hybrid mismatch exists where an entity is incorporated or established in a Member State
that qualifies the entity as transparent and held by an associated nonresident entity that is located in
a jurisdiction that qualifies the entity as non-transparent.
► In such case, the Member State of incorporation or establishment shall regard the entity as a resident
of that Member State and shall tax the entity on its income to the extent that this income is not
otherwise taxed under the laws of the Member State or any other jurisdiction.
Article 9b – Dual resident mismatches
► Article 9b of the ATAD II is applicable to all dual resident mismatches. A dual resident mismatch
exists when the taxpayer is resident for tax purposes in two jurisdictions and a payments, expense or
loss is deductible from the taxable base in both jurisdictions.
► In such case, a deduction of a payment, expense or loss of the dual resident shall be denied by the
Member State of the taxpayer. If both jurisdictions are Member States, the Member State where the
taxpayer is not deemed to be a resident according to the tax treaty between the two Member States
concerned shall deny the deduction.
Page 53 [ITS TEW breakout]
Timeline ATAD I and ATAD II
► Deadline – EU Member States are obliged
to apply legislation to address the exit tax
and hybrid mismatches covered by ATAD
II at the latest on January 1, 2020.
► Exception – Rules to address mandatory
taxation of income of reverse hybrid
entities do not have to be adopted per this
date.
January 1, 2019
ATAD I general
ATAD II – Anti-Hybrid legislation
January 1, 2020
ATAD II
► Deadline – EU Member States
are obliged to apply legislation to
comply with ATAD I at the latest
on January 1, 2019.
► Exception – The anti-hybrid
rules does not have to be
adopted per this date.
General ATAD I implementation
January 1, 2022
Reverse EU hybrids
► Deadline – EU Member States
are obliged to apply legislation to
address reverse hybrid entities
covered by ATAD II at the latest
on January 1, 2022.
ATAD II – Reverse hybrids
Page 54 [ITS TEW breakout]
EU non-cooperative jurisdictions
Page 55 [ITS TEW breakout]
EU non-cooperative tax jurisdictions
► The establishment of a list of a non-cooperative tax jurisdictions was
proposed by the European Commission during the External Strategy
for Effective Taxation in January 2016, and endorsed by EU Finance
Ministers in May 2016
► Member States agree that a single EU list of non-cooperative
jurisdictions will carry much more weight than the current patchwork
of national lists when dealing with non-EU countries that refuse to
comply with international tax good governance standards
► A common EU system for assessing screening and listing third tax
jurisdictions identifies those that are having a particular role in tax
avoidance and evasion, which can be used in base erosion and profit
shifting practices
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build trust
and confidence in the capital markets and in economies the world
over. We develop outstanding leaders who team to deliver on our
promises to all of our stakeholders. In so doing, we play a critical role
in building a better working world for our people, for our clients and
for our communities.
EY refers to the global organization, and may refer to one
or more, of the member firms of Ernst & Young Global Limited, each
of which is a separate legal entity. Ernst & Young
Global Limited, a UK company limited by guarantee, does not
provide services to clients. For more information about our
organization, please visit ey.com.
Ernst & Young LLP is a client-serving member firm of
Ernst & Young Global Limited operating in the US.
© 2017 Ernst & Young LLP.
All Rights Reserved.
1704-2283688
ED None
This material has been prepared for general informational purposes
only and is not intended to be relied upon as accounting, tax or other
professional advice. Please refer to your advisors for specific advice.
ey.com