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International Tax Matters Inch Forward

Kitty Miv, Editor
23 April, 2020

While, as might be expected, the news cycle is still dominated by the impact and repercussions of the COVID-19 crisis, and government measures to mitigate the consequences of such, at the fringes there are still a few international tax projects and measures making slow but steady progress, and it is to these that we turn our attention this week.

On April 6, 2020, for example, the Dutch Ministry of Finance published guidance material on the application of the BEPS Multilateral Instrument and its effect on Dutch tax treaties.

The new document provides a brief overview of the Multilateral Instrument, including background to the MLI, how the MLI works, and when the MLI applies.

Additionally, the document provides a list (to be updated quarterly) of the tax treaties to which the MLI applies, and from when these changes apply, as at April 1, 2020.

Falling between the two stools of COVID-19 measures and international tax initiatives, the Slovenian authorities announced on April 9 that financial institutions will have an extra two months to file reports to the tax authority under the Common Reporting Standard (CRS) and the United States Foreign Account Tax Compliance Act (FATCA).

Under Slovenian law, FIs must report information on financial accounts of non-residents to the Financial Administration with respect to the CRS and FATCA by May 31, 2020. However, FIs have requested that this deadline be extended due to the impact of the COVID-19 virus on their operations.

In a notice, the Financial Administration explained that while the May 31, 2020, deadline will remain in place, CRS and FATCA reports will be considered timely filed if they are received by July 31, 2020.

Meanwhile, the tax authorities in the United States have also been busy on the international tax front.

On April 16, 2020, the United States Internal Revenue Service issued a set of frequently asked questions and answers to help inform taxpayers about transfer pricing documentation best practices.

The six new FAQs deal with topics such as the advantages of preparing and providing "robust" transfer pricing documentation; the IRS's guiding principle in establishing whether arm's-length prices were charged in intercompany transactions; areas that the IRS has identified in transfer pricing documentation reports that could benefit from improvement; and examples of a presentation of a company's intercompany transactions for examiners to use in summary when preparing risk assessments.

The US Treasury Department and the IRS additionally recently issued for comment proposed guidance involving hybrid arrangements and the allocation of deductions attributable to certain disqualified payments under section 951A of the tax code, dealing with Global Intangible Low-Taxed Income.

In particular, the document contains proposed regulations that adjust hybrid deduction accounts to take into account earnings and profits of a controlled foreign corporation that are included in income by a United States shareholder.

Additionally, the document contains proposed regulations that address, for purposes of the conduit financing rules, arrangements involving equity interests that give rise to deductions (or similar benefits) under foreign law.

Further, the document includes proposed regulations relating to the treatment of certain payments under the GILTI rules.

Finally, and ending back where we began this week, in the Netherlands, on April 15, 2020, a Government-commissioned report on the taxation of multinationals was submitted to the State Secretary of Finance recommending various changes to make the Dutch tax system fairer while maintaining the jurisdiction's tax competitiveness.

The report was commissioned at the request of the lower house of parliament, the House of Representatives, and carried out by the Advisory Committee on the Taxation of multinationals, which was appointed by the State Secretary of Finance. Broadly, the Advisory Committee's brief was to investigate ways in which the Dutch corporate tax base can be strengthened, and international tax mismatches eliminated, while not compromising the jurisdiction's attractiveness as a location for corporate headquarters.

The report's recommendations, which the committee estimates will raise EUR600m (USD652m) in additional tax revenue, are grouped into three categories, referred to as basic, additional, and compensatory measures.

Basic measures as detailed included limiting the offsetting of losses from previous years, limiting the deduction of shareholder costs to a maximum percentage of taxable profit, looking into whether the deduction of royalties should be limited, making existing CFC rules more effective, eliminating the arm's length principle where it being applied leads to a decrease in taxable profit in the Netherlands with no corresponding upward adjustment in the other jurisdiction, and limiting intra-group transfers of assets from foreign to Dutch related entities in cases where there has been insufficient taxation in the foreign jurisdiction.

Under the umbrella of 'additional measures' were plans to strengthen the earning stripping rules by reducing the deductibility of interest from 30 percent to 25 percent of EBITDA, to limit the deduction of interest used to finance participations in foreign entities, to extend the scope of the interest deduction limitation when equity is converted to debt to royalty and rental payments to limit the deductibility of all types of intra-group payments received in a low-tax jurisdiction, to extend the existing CFC measure to cover active as well as passive income, to introduce non-conditional withholding taxes on interest and royalties, to introduce a national digital services tax, and to introduce tax measures to encourage companies to increase wages and employment.

Compensatory measures, meanwhile, included proposals to reduce the corporate tax rate, to allow costs associated with the buying and selling of a participating interest to be deducted, and to reduce the preferential tax rate under the innovation box regime.

Well that ought to keep them busy for a while, especially at the moment!

Until next week...

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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