International Tax Update - EY Tax Update Jeff Michalak ... by the US shareholder’s pro rata share...

International Tax Update

Jeff Michalak

Arlene Fitzpatrick

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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

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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.

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Recent international guidance from treasury

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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

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TRA 2014 – Transition toll-charge

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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.

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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.

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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.

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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

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Planning for toll charge

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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

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► 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

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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

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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).


► 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

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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.


► §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%

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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).

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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

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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

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► 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

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► 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

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► 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

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TRA 2014Prevention of base erosion

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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


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

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Anti-base-erosion focusIP and low-taxed income

Senator Enzi’s bill President’s framework


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

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BEPS update

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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

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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

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Action 15 – Multilateral instrument

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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.

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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

http://www.oecd.org/tax/treaties/multilateral-instrument-for-beps-tax-treaty-measures-the-ad-hoc-group.htm

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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

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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.

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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

[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

[ITS TEW breakout]

Action 13 – Country-by-country reporting

[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.

[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

[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

[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.

[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

[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

[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

http://www.oecd.org/tax/automatic-exchange/about-automatic-exchange/CbC-MCAA-Signatories.pdf

[ITS TEW breakout]

EU proposals

[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)

[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?

[ITS TEW breakout]

EU Anti-Tax Avoidance Directive

[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

[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

[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

[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

[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

[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.

[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.

[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

[ITS TEW breakout]

EU non-cooperative jurisdictions

[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

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