2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

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n Base Erosion and Anti-Abuse Tax (“BEAT”). The BEAT is a minimum tax charged on payments to related foreign affiliates. Like the former corporate Alternative Minimum Tax (“AMT”), this is a parallel tax system that applies when the BEAT is in excess of the regular tax liability. Unlike the former corporate AMT, there is no credit to offset future regular tax liabilities. The BEAT specifically targets payments for services, royalties and interest to foreign affiliates. The BEAT is calculated by increasing taxable income by deductions taken for related party transactions and taxing the modified taxable income at 5%. The BEAT only applies to MNEs with revenues in excess of $500 million. Further, it only applies if payments to foreign affiliates equal or exceed 3% of total tax deductions. The direct impact of this tax is that it is aimed at transfer pricing payments made by U.S. entities to foreign related parties. It ignores traditional transfer pricing principles based upon the arm’s length method and seeks to broaden the tax base through the creation of a modified taxable income taxed at a lower rate. Also, the BEAT potentially creates double taxation since transfer pricing examinations are based on the calculation of the regular tax liability, and there is no mechanism for foreign entities to counteract the BEAT. OECD BEPS INITIATIVE As reported elsewhere in this publication, the OECD published 15 action items addressing base erosion and profit shifting by taxpayers reporting in multiple taxing jurisdictions. The focus of these actions was to ensure that profits are taxed in the jurisdictions where they are earned. One of these action items introduced CbC reporting, which provides increased transparency of global transfer pricing. CbC reporting is required for MNEs with global revenues in excess of $850 million. First time implementation of this reporting occurred over the last three years, as it was required in OECD members’ jurisdictions for tax years beginning after January 1, 2016, and for U.S. reporting MNEs for tax years beginning after June 30, 2016, if not adopted earlier. Similar to the OECD reporting template, Federal Form 8975 Country by Country Report, is required to be attached to the U.S. tax return. Form 8975 discloses key information by taxing jurisdiction including: unrelated party and related party revenues, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash and cash equivalents. Disclosure of entities in each tax jurisdiction is required as well. This provides an increased level of transparency to tax examiners with regard

to global intercompany transactions and an opportunity to identify base erosion and profit shifting occurring in the various tax jurisdictions. As the tax audit cycles come into play for these CbC reporting years, we can expect an increased focus on transfer pricing strategies and communication between various taxing jurisdictions. What also remains to be seen is the impact of digital services taxes (“DST”). In July of this year, France enacted a three percent DST which retroactively applies to income generated after January 1, 2019, with the first payments due in October 2019. The tax is intended to apply to certain digital services provided to french internet sellers. This tax applies to companies with annual global revenues in excess of Euro 750 million and Euro 25 million in France. The enactment of the DST comes at the same time the OECD is pushing for a global consensus on the establishment of new global tax rules addressing digitalization of the global economy. IRS DIRECTIVES FOR IRS TRANSFER PRICING EXAMINATIONS Over the last year and a half, the IRS Large Business and International (“LB&I”) division released 53 directives focused on identifying potential compliance risks. Among those directives are the following, specific to transfer pricing and information reporting: n Elimination of the requirement that mandatory transfer pricing information document requests (“IDRs”) be issued; n Appropriate application of the transfer pricing penalties as they apply to contemporaneous documentation; n Analysis of the best method selection; n Reasonably anticipated benefits in cost sharing arrangements; n Treaty and transfer pricing operations; n Transfer pricing between US MNEs and foreign captive insurance service providers; n Correctly filing Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

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