Tax News and Developments
North America Tax Practice Group
November 2019 | Volume XIX, Issue 11
In This Issue:
Mexico Tax Reform
Executive Order 12866 Meetings Provide Another Bite at the Regulatory Comment Apple
"What is Dead May Never Die": The Section 385 Re g u l a ti on s
Downward Attribution Guidance: A Patchworkof Changes but No Comprehensive Solution
Treasury Issues Proposed Regulations Relating to the Accrual Method of Accounting and Advance Payments
OECD Issues Unified Approach Proposal for Pillar I
Tax Changes on the Horizon in Canada for the Digital Economy?
MLI to Enter into Force for Canada December 1, 2019
Massachusetts Issues Business Activity Tax Nexus Guidance, Signaling Continued Trend
Belgium - New Tax Exemption for Stock Distributionsin US Sp i n -Offs
Mexico Tax Reform
The Mexican legislation recently passed a broad range of tax reforms. The Mexican Tax Reform for 2020 represents a series of changes in tax treatments and concepts. The main modification to be in force on January 2020 would include the following:
The permanent establishment was extended by expanding the exclusions applicable to independent agents. However, the exemptions through preparatory and auxiliary activities were narrowed. The modifications impact federal tax laws that are subsidiary to Mexican Tax Treaties for the Avoidance of Double Taxation.
Regarding deductibility, payments made to related parties abroad, are deemed as non-deductible whenever the income for the recipient is deemed subject of a Tax Haven Regime. This anti-deduction limitation applies even in case where the recipient forwards the payment to another entity of the group for whom the income also is deemed subject of a Tax Haven Regime.
The main exception for the limitation is for cases where the income subject to a Tax Haven Regime derives from a business activity of the rec ipient, and said party holds personnel and assets for the development of that business activity. The exception would not apply when the payment is deemed income concept subject to a Tax Haven Regime because of a hybrid mechanism. A hybrid mechanism exists when the Mexican legislation and the legislation abroad differ in the characterization of a legal entity, a legal vehicle, income or the owner of a payment, resulting in the deductibility of a payment in Mexico and a non-taxable income abroad.
Deductibility of Interest
In addition, the reform includes a limitation to the deductibility of interest, not applicable to the first 20 million MXP of deductible interest. The limitation consists of considering non-deductible interest the portion of net interest that
Seventh Annual Global Tax Symposium
Houston, Texas December 5, 2019
2021 Platform Law s for VAT in EU and Wider Platform Developments at OECD (Webinar)
December 10, 2019
Mexico Tax Reform Briefing
New York, NY December 10, 2019
Mexico Tax Reform 2020 Webinar
December 17, 2019
Direct Tax - Discussion of Digital Services Taxes Around the World and Their Future Under OECD Developments (Webinar)
January 21, 2020
42nd Annual North America Tax Conference
January 30, 2020
To review the complete Tax Events Calendar visit www.bakermckenzie.com/tax/event
exceeds a 30% ratio that is based upon the adjusted taxable gain. The net interest will be determined by subtracting the taxable interest income and the excluded 20 million MXP from the deductible interest of the fiscal year. The adjusted taxable gain would result from adding the deductible interests and the tax depreciation and tax amortization to the taxable gain of the fiscal year. The non-deductible net interest will be deductible in the next ten fiscal years by adding them to each year's net interest balance, deducting the interest from older fiscal years.
The limitation excludes exchange rate gains and losses, public debt interest, as well as interest derived from debt used to finance public infrastructure, building projects located in Mexican Territory, extractive industry, exploration, extraction, transportation, storage or distribution of oil and hydrocarbons as well as for the generation, transmission or storage of electricity and water. State productive enterprises (government companies) and financial entities will not be subject to the foregoing limitation.
Transparent Foreign Entities and Foreign Legal Vehicles
The Tax Reform includes a treatment for transparent foreign entities and foreign legal vehicles, as well as a tax treatment for them in Mexico. Transparent foreign entities and foreign legal vehicles would be taxed as Mexican legal entities under Titles II, III, V or VI of the Mexican Income Tax Law (MITL). Transparent foreign entities and transparent foreign legal vehicles will be treated as Mexican legal entities when deemed Mexican tax resident, disregarding their transparent character, except when Tax Treaty Provisions state otherwise.
Mexican tax residents and foreign residents holding a permanent establishment in Mexico (Mexican taxpayers) who perceive income through transparent foreign entities and foreign legal vehicles will be taxed by determining the taxable basis under Title II of the MITL. If said Mexican taxpayers receive income through a transparent legal vehicle, the taxable basis shall be determined under the title applicable for the Mexican taxpayer.
Tax Haven Regimes
The taxation rules for Tax Haven Regimes now exclude transparent entities and foreign legal vehicles. In addition, they include the possibility of considering the taxable effect as a consolidation group when an entity consolidates in the country it resides for tax purposes. Also, it will be possible to request an authorization for excluding an entity from the Tax Haven Regime taxation mechanism when the Tax Haven Regime condition is triggered because of temporary differences in the moment of taxation and deduction, to the extent that the temporary difference is no more than 4 years.
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The reform also considers the possibility of analyzing the Tax Haven Regime rules application through comparing statutory tax rates (instead of comparing the final tax burden).
Some exceptions to the Tax Haven Regime taxation mechanism include:
The absence of control. The definition of "control" has been extended in connection with voting rights, control through related parties and linked parties, assets rights, decision faculties, among others.
Business activities representing 80% or more of the income derived for the entity (except when more than 50% of the income is generated from a Mexican source or when the income directly or indirectly represents a deduction in Mexico).
Income tax rate equal or higher than 75% of the applicable Mexican Income Tax Rate.
Corporate restructuring. Subject to an authorization and as long as income is not derived from the transfer of shares issued by a Mexican tax resident and the book value of transferred shared is not represented by more than 50% of immovable property located in Mexico.
New rules are included for digital platforms where legal entities must withhold Income Tax to individuals developing transportation (2% to 8%) and lodging (2% to 10%) activities or selling goods and rendering other services (0.4% to 5.4%) through digital platforms.
Some activities developed through digital platforms will be subject of Mexican Value Added Tax (VAT) when deemed granted in Mexican Territory, including the downloading images, text, information, music, multimedia, games, tones, statistics, other similar items (except for newspapers, magazines and books); intermediation among the bidders and purchasers claimants of goods (except for used movable goods) and services; online clubs and dating sites and, finally, remote learning, tests and exercises.
Article 5-A of the Mexican Federal Fiscal Code, includes anti-abuse rules through a mechanism where Mexican Tax Authorities are entitled to re-characterize legal acts that lack a business reason and that generate a direct or indirect tax benefit to those that correspond to the reasonably expected economic benefit for the taxpayer.
Mexican Tax Authorities will be entitled to presume the lack of business reason when the quantifiable economic benefit is below the tax benefit and when the reasonably expected economic benefit could have been achieved through the
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performance of a lower number of legal acts and the tax effect of those acts would have resulted in a higher burden.
Baker McKenzie will issue a client alert summarizing the main aspects of Mexico Tax Reform and what it means for US multinationals with operations in Mexico.
By Hector Diaz Santana-Iturrios and Roxana Gomez-Orta, Monterrey
Executive Order 12866 Meetings Provide Another Bite at the Regulatory Comment Apple
Prior to April 11, 2018, Treasury and IRS tax regulations were largely exempt from review by the Office of Information and Regulatory Affairs (OIRA), a division of the Office of Management and Budget (OMB). Treasury and OMB entered into a memorandum of agreement in 1983 (and renewed on October 12, 1993) that limited OIRA's review of tax regulations to those that were "economically significant," in contrast to regulations issued by other agencies (which are routinely subject to OIRA review). In practice, Treasury rarely concluded that a regulation was economically significant. Notable exceptions to this general practice include Circular 230 guidance and the consolidated return regulations.
On April 11, 2018, Treasury and OMB entered into a new Memorandum of Agreement (MOA) that reverses the default approach for reviewing tax regulations and subjects tax regulations to similar rules to the rules that apply to other administrative agencies under Executive Order (EO) 12866. See prior Tax News and Developments article, "Treasury, OMB Agree to Revise Review Process For Tax Regulations, (April 2018). Under the MOA, regulations are subject to OIRA review if they: (1) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (2) raise novel legal or policy issues; or (3) have an annual non-revenue effect on the economy of $100 million or more, measured against a no-action baseline. When OIRA reviews regulations, it does not conduct a substantive legal analysis and does not "second guess" the substantive policy choices made by an agency. Instead, OIRA is responsible for ensuring that an agency has appropriately cons idered all feasible policy options, preventing an administrative agency from issuing regulations that are inconsistent with the actions undertaken by other agencies, and supervising and coordinating an effective and efficient regulatory process. OIRA also has primary responsibility for reviewing and approving the "Regulatory Impact Analysis" that is included in the preamble to regulations. A Regulatory Impact Analysis is, effectively, a cost-benefit analysis of the regulation's expected effect on the government and taxpayers, and may include an analysis on any adverse effects on the efficient functioning of the economy or private markets.
In practice, OIRA has and will review most regulations interpreting the law known as the Tax Cuts and Jobs Act. Now that the MOA has been in effect for more than a year and Treasury has been required to prepare Regulatory Impact Analyses for the last six months, it is appropriate to take stock of this additional
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opportunity to engage with the administration during the regulatory process and consider what benefits taxpayers may derive from engaging with OIRA.
The MOA provides stakeholders another opportunity to engage with policy makers. Prior to the MOA, stakeholders were limited to the notice and comment process, along with ad hoc meetings with the Office of Tax Policy in Treasury and the Internal Revenue Service. Not only does the MOA provide taxpayers with another opportunity to engage with policy makers, it provides taxpayers an opportunity to engage with a set of policy makers who are responsible for reviewing the regulatory impact of a regulation. Prior to the MOA, if a taxpayer had compliance or economic comments, the taxpayer may have had a difficult time identifying the appropriate policy maker to meet with to discuss those comments.
What Happens at an EO 12866 Meeting with Regulations' Stakeholders?
Under EO 12866, any stakeholder, including one who has not commented during the notice and comment period, can request a meeting with OIRA to discuss the regulations. Stakeholders that wish to meet with OIRA should submit a meeting request through the OIRA Dashboard under the regulatory review tab. OIRA usually responds to the requester within 24 hours and provides a proposed meeting date and time.
OIRA publishes a calendar on its website listing all of the EO 12866 meetings, along with the persons who requested and plan to attend the meeting. Additionally, OIRA makes public any materials submitted for a meeting on its website, and third parties can obtain documents through a Freedom of Information Act (FOIA) request. However, the notes taken by attendees are not subject to disclosure.
The potential attendees at an EO 12866 meeting is much broader than at a Treasury meeting or IRS regulatory hearing. In addition to OIRA and OMB employees, staff from the National Economic Council, the Council of Economic Advisors, the Vice President's office, and other Cabinet departments (e.g., Department of Commerce) may participate in the meetings. Based on our experience meeting with OIRA, the breadth and number of non-OMB participants in an EO 12866 meeting depends on the subject matter of the regulation being discussed and the size of the regulation's potential impact on the overall economy. Also, subject-matter experts from Treasury's Office of Tax Policy and an attorney from Treasury's Office of General Counsel who has Administrative Procedures Act expertise attend, usually by phone.
The EO 12866 meeting begins with OIRA's recitation of a boilerplate statement regarding the process and an introduction of those attending the meeting. Stakeholders are provided thirty minutes to make their presentation. Unlike a Treasury meeting, where the discussion is generally restricted to technical issues
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and statutory interpretation of particular Code provisions, OMB, OIRA and other participants are interested in the impacts of regulations on businesses and individuals. For example, how would a regulation affect domestic investment? What is the impact on jobs? How burdensome is the compliance with the regulation?
The MOA prohibits Treasury from publishing a regulation until OMB has completed its review. If OMB and OIRA modify regulations, the public can request the draft Treasury submits for review and the revised regulation pursuant to FOIA. As a practical matter, this is generally unnecessary because Tax Analysts and other tax publications have been publishing a copy of the regulation as submitted to OIRA and a redlined version comparing the regulation as originally submitted with the regulation as ultimately published in the Federal Register. It is unclear whether OMB, OIRA and other policy actors in the executive branch are influencing the outcome of tax regulations because extensive data is not yet available. However, it is our understanding that OIRA and Treasury have had robust conversations behind the scenes to discuss Treasury's proposed regulatory approach and the impact of that proposed approach on taxpayers and the overall economy. In other regulatory areas, such as vaping, various actors have successfully persuaded OIRA to require the agency to modify its regulations to address business concerns.
The use of EO 12866 meetings for tax regulations is in early stages, but anecdotal evidence indicates that taxpayers that are concerned about the economic impact and compliance burdens from a particular regulation may benefit from meeting with OIRA to discuss the regulations. While taxpayers should also consider raising their technical tax comments during an EO 12866 meeting, we have found that the most productive use of an EO 12866 meeting is to raise non-tax technical comments about the potential costs (of compliance, and on the taxpayer and the economy as a whole) of a regulation. Furthermore, for regulations that are politically sensitive, an EO 12866 meeting may be a useful way to bring comments to the attention of political staff. Regulatory engagement isn't limited to writing comment letters and testifying at an IRS regulatory hearing anymore, and savvy taxpayers should consider whether to request an EO 12866 meeting as part of their regulatory engagement.
By Joshua Odintz and Alexandra Minkovich, Washington DC, and Christopher Hanna, Dallas
"What is Dead May Never Die": The Section 385 Regulations
On October 31, 2019, Treasury published final regulations under section 385 (the "New Final Regulations") that removed the documentation rules under Treas. Reg. 1.385-2 (the "Documentation Regulations") and adopted conforming
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amendments to the prior final regulations. The New Final Regulations are effective on November 4, 2019. The Documentation Regulations established minimum documentation and information maintenance requirements that had to be met for purported debt obligations among related parties to be treated as debt rather than as equity for US federal income tax purposes.
At the same time, Treasury also announced that it intends to issue proposed regulations under section 385 that will provide taxpayers with a more streamlined and targeted approach to Treas. Reg. 1.385-3 (the "Distribution Regulations"). Until such time, taxpayers should apply the current Distribution Regulations and may rely on the modifications made thereto by proposed regulations under section 385 issued on October 21, 2016 ("2016 Proposed Regulations"), provided that taxpayers consistently apply the rules in the 2016 Proposed Regulations in their entirety.
Background of the Section 385 Regulations
On October 21, 2016, Treasury and the IRS published final and temporary regulations under section 385 (collectively, the "Section 385 Regulations"). The Section 385 Regulations include Treas. Reg. 1.385-1, 1.385-2, 1.385-3, 1.385-3T, and 1.385-4T (the 2016 Proposed Regulations mirrored the temporary regulations). The Section 385 Regulations were intended to curb the rise of inversions and comparable transactions by making it more difficult for foreign-parented groups to use debt to strip earnings from the US tax base. The Section 385 Regulations accomplished this goal by re-characterizing certain debt as equity.
The Documentation Regulations established minimum documentation requirements that had to be satisfied in order for purported related-party debt obligations to be respected as debt for US federal tax purposes. The Documentation Regulations required documentation of: (i) an unconditional and binding obligation to make payments on demand or at one or more fixed dates, (ii) typical creditor rights, (iii) a reasonable expectation of the issuer's ability to repay the loan, and (iv) conduct consistent with a debtor-creditor relationship. Treasury deferred the application of the Documentation Regulations in Notice 2017-36 so that most taxpayers would not have been required to produce the required documentation until they filed their 2019 tax returns.
Through a series of complex rules, the Distribution Regulations re-characterized debt (that otherwise met the requirements in the Documentation Regulations) as equity to the extent it was (i) issued as part of a related party distribution, stock acquisition, or asset acquisition with boot (the "General Rule"), (ii) issued within three years of a related party distribution, stock acquisition, or asset reorganization with boot (the "Per Se Funding Rule"), or (iii) issued with a principal purpose of funding a related party distribution, stock acquisition, or asset reorganization with boot (the "Principal Purpose Funding Rule").
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Removal of the Documentation Regulations
On September 24, 2018, Treasury issued proposed regulations under section 385 (the "2018 Proposed Regulations") that would remove the Documentation Regulations in their entirety. Treasury permitted taxpayers to rely on the 2018 Proposed Regulations until the issuance of final regulations. The New Final Regulations make good on Treasury's promise and completely remove the Documentation Regulations. The combined effect of the delayed implementation of the Documentation Regulations, the 2018 Proposed Regulations, and the New Final Regulations renders the Documentation Regulations wholly inapplicable, which is both welcome and frustrating news given the time and effort taxpayers have already spent updating their intercompany debt arrangements. It may come as no surprise to taxpayers that Treasury expects a revenue reduction of only $407 million compared to a $924 million reduction in taxpayer compliance costs. Lest you think this saga is finally over, Treasury notes that, after further review, it may propose a modified version of the Documentation Regulations at a later date, though it promises to minimize the burden on taxpayers by making the new regulations simpler and more streamlined.
Intention to Issue Proposed Regulations to Replace Distribution Regulations
Treasury still believes the Distribution Regulations are necessary due to their role in preventing an erosion of the US tax base through earnings stripping. However, Treasury has announced its intention to streamline and target the approach taken in the Distribution Regulations to determine what debt should be re-characterized as equity.
Treasury and the IRS are contemplating the following actions: (i) removing the Per Se Funding Rule, (ii) limiting the application of both the General Rule and the Principal Purpose Funding Rule to situations where there is "sufficient factual connection" between the debt and the distribution or related-party stock or asset acquisition, and (iii) removing and substantially revising certain exceptions in the regulations to reflect the new streamlined approach. The public comment period for the new Distribution Regulations is open until February 2, 2020.
By Matt Mauney, Houston, and Courtland Roberts, Washington DC
Downward Attribution Guidance: A Patchwork of Changes but No Comprehensive Solution
The Tax Cuts and Jobs Act of 2017 ("TCJA") changed the attribution rules under Code Section 958 to repeal section 958(b)(4) and allow "downward" attribution of stock ownership from a foreign person to a US person. Prior to the repeal of section 958(b)(4), if, for example, a foreign parent company owned a foreign subsidiary and a US subsidiary as brother-sister entities, the foreign parent's
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interest in the foreign subsidiary would not be attributed to the US subsidiary. Post-TCJA, the foreign parent's interest in the foreign subsidiary is attributed to the US subsidiary, such that the foreign subsidiary is deemed to be a controlled foreign corporation ("CFC").
The legislative history indicates that the repeal of section 958(b)(4) was intended to target a fairly narrow category of "de-control" transactions, in which a CFC was converted to a non-CFC to avoid subpart F. Despite this narrow purpose, the repeal has had far-reaching consequences well beyond curbing the occurrence of inversions. Among other things, the number of entities that are treated as CFCs under section 957(a) and the number of persons treated as "United States shareholders" within the meaning of section 951(b) ("US shareholders") has vastly expanded. This expansion gives rise to potential reporting requirements for US shareholders, as well as the potential for subpart F and GILTI inclusions for US shareholders who own stock in the CFC within the meaning of section 958(a), i.e., directly or indirectly through foreign entities ("section 958(a) US shareholders"). At the same time, the repeal also creates the possibility that an entity may be a CFC even if it has no section 958(a) US shareholders who would be required to include income under the subpart F or GILTI rules.
Importantly, a number of other Code provisions cross-reference the rules in section 958, with the result that the scope of these other provisions is also expanded.
Limited Initial Relief
Notwithstanding the legislative history, so far the IRS and Treasury have only been willing to grant very targeted relief from the broad and far-reaching consequences of the repeal of section 958(b)(4).
Under regulations finalized in February 2019, Treasury provided limited relief from downward attribution in determining whether a corporation is a specified foreign corporation ("SFC") for purposes of section 965. Specifically, a partner will not be considered as being owned by a partnership under sections 958(b) and 318(a)(3)(A) if the partner owns less than ten percent of the interests in the partnership. Treas. Reg. 1.965-1(f)(45). This rule prevents an entity from being treated as a CFC solely because of downward attribution from a partner to a partnership where the partner's interest is very small. In May 2019, Treasury issued proposed regulations under section 954 providing limited relief in determining whether parties are related for purposes of subpart F. The proposed regulations turn off attribution from a shareholder, partnership, or beneficiary "down" to a corporation, partnership, estate or trust. Prop. Treas. Reg. 1.954-1(f)(2)(iv).
With respect to reporting requirements, the IRS and Treasury issued Notice 2018-13 in January 2018, granting some relief from the requirement to file Form 5471 with respect to a CFC. The relief was limited to CFCs that do not have any section 958(a) US shareholders and that are CFCs solely because of downward attribution to a US person. For example, in the case of a foreign subsidiary that
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is owned by a foreign parent and is a brother-sister corporation with a US subsidiary, but has no section 958(a) US shareholders under section 958(a), the foreign subsidiary is treated as a CFC because its stock is attributed to the US subsidiary. Under Notice 2018-13, the US subsidiary is exempt from filing Form 5471 with respect to this CFC.
October 2019 Proposed Regulations
On October 2, 2019, Treasury issued a new set of proposed regulations (the "Proposed Regulations") that continued the trend of offering only limited, targeted relief from the broad consequences of the repeal of section 958(b)(4). The Proposed Regulations update the section 958 regulations to reflect the repeal of section 958(b)(4). They also amend a number of regulations outside of subpart F that were affected by the repeal of section 958(b)(4) because they cross-reference either the section 958 ownership rules or the subpart F definition of a CFC. While some of the changes provide welcome relief to taxpayers, a number of others are designed to limit abuses and ensure that income does not escape US taxation where a CFC has no section 958(a) US shareholders who would be required to include income under the subpart F or GILTI rules.
The Proposed Regulations address the following provisions:
Section 267(a)(3)(B): The Proposed Regulations provide relief from the matching principle for deducting certain amounts owed to a related foreign person. If a CFC has no section 958(a) US shareholders, the taxpayer may deduct amounts (other than interest) owed to the CFC when accrued, provided the resulting income of the CFC is exempt from US tax pursuant to a treaty. Prop. Reg. 1.267(a)-3.
Section 332(d): The Proposed Regulations apply the definition of a CFC as in effect before the repeal of section 958(b)(4) for purposes of section 332(d)(3), which provides that liquidations of certain domestic holding companies are governed by section 331 where the distributee is a CFC. Prop. Reg. 1.332-8.
Section 367(a): Existing regulations provide that a disposition or event is not a "triggering event" for purposes of the rules on gain recognition agreements, provided that the event is a nonrecognition transaction and the US transferor retains an interest in the transferred stock, securities, or assets. In particular, if the acquirer is foreign, the US transferor must own a 5% interest in the acquirer, by vote and value, applying attribution rules. The Proposed Regulations provide that the transferor's ownership is determined without regard to the downward attribution rules. Prop. Reg. 1.367(a)-8.
Section 672: Under section 672(f), the grantor trust rules of sections 671 through 670 apply only to the extent that they result in income being taken into account currently by a US citizen or resident or a domestic corporation. A CFC generally is treated as a domestic corporation for
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this purpose. The Proposed Regulations limit this treatment to entities that are CFCs without regard to downward attribution from foreign persons. Prop. Reg. 1.672(f)-2.
Section 706: For purposes of determining the tax year of a partnership, the Proposed Regulations apply a definition of CFC that is consistent with the definition prior to the repeal of section 958(b)(4). Prop. Reg. 1.706-1.
Section 863: For purposes of certain sourcing rules for space and ocean income and international communications income, whether a foreign corporation is a CFC is determined without regard to downward attribution from a foreign person. Prop. Reg. 1.863-8, -9.
Section 904: The Proposed Regulations would limit the CFC look-through rule, the active rents and royalties exception, and the financial services income rule for foreign tax credit purposes to entities that are CFCs without regard to downward attribution from a foreign person. Moreover, the CFC look-through rule would apply only to persons that are US shareholders without regard to downward attribution from foreign persons. Prop. Reg. 1.904-5.
Section 1297(e): The Proposed Regulations provide relief for purposes of the asset test for determining status as a PFIC. The definition of a CFC for this purpose is modified to disregard downward attribution from foreign persons. Prop. Reg. 1.1297-1.
Section 6049: The Proposed Regulations provide relief from certain Form 1099 reporting requirements for entities that are CFCs only because of downward attribution from a foreign person. Prop. Reg. 1.6049-5.
For each of the above provisions, Treasury cites a section that grants them the authority to issue regulations that are necessary and appropriate to carry of the purposes of the given section. These references imply that Treasury felt its actions were limited to those sections impacted by the repeal of section 958(b)(4) whose original purpose is found to be limited or altered.
Rev. Proc. 2019-40
Along with the Proposed Regulations, the IRS and Treasury also issued Rev. Proc. 2019-40, which addresses certain compliance issues relating to CFCs.
Treasury and the IRS acknowledged that downward attribution can sometimes result in taxpayers having to report and include in income amounts under the GILTI and subpart F provisions, even though the taxpayers may have limited ability to determine whether the entities are actually CFCs or what amounts should be included. Rev. Proc. 2019-40 distinguishes between "section 958(a) US shareholders," who own stock in a foreign corporation within the meaning of
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section 958(a) (and therefore potentially have subpart F or GILTI inclusions), and other US shareholders who do not own stock within the meaning of section 958(a) (which the Rev. Proc. refers to as "constructive US shareholders").
Rev. Proc. 2019-40 provides for three separate safe harbor rules. Each is limited to certain shareholders of CFCs, and applies only to entities that would not be CFCs but for downward attribution to a US person ("foreign-controlled CFCs"). Taxpayers complying with these safe harbor rules will not be subject to penalties under sections 6038 and 6662.
The first safe harbor is for determining that a foreign corporation is not a CFC. The requirements for this safe harbor are as follows:
The US person making the determination does not have actual knowledge or other available information sufficient to determine that the ownership requirements in section 957 for a CFC are satisfied.
If the US person directly owns an interest in a foreign entity, the US person has made certain inquiries as to that directly-owned entity, including inquiries about whether the entity meets the section 957 requirements, and whether the entity owns (directly or indirectly) interests in other foreign or domestic entities. The Rev. Proc. does not explain exactly how those inquiries should be made or what evidence taxpayers may have to provide.
Even if a US shareholder is able to determine that an entity is a CFC, it still may not have sufficient information to determine its subpart F or GILTI income. A second safe harbor relates to making determinations relevant to subpart F or GILTI inclusions with respect to a CFC, including gross income, taxable income, QBAI, specified interest expense, and E&P. Under certain circumstances, the taxpayer can rely on "alternative information," which includes, in order of preference: audited separate entity financials that are prepared in accordance with US GAAP, IFRS, or local GAAP; unaudited separate entity financials that are prepared in accordance with US GAAP, IFRS, or local GAAP; separate entity records used for tax reporting; or separate entity records used for internal management controls or regulatory or other similar purposes. Importantly, Rev. Proc. 2019-40 does not affect the requirements for determining foreign taxes of the CFC for purposes of section 960. The conditions for the safe harbor (one of which must be satisfied) are as follows:
The foreign entity is only a CFC because of downward attribution to a US person.
There is no section 958(a) US shareholder that is related to the CFC, applying the standard of section 954(d)(3).
Information that otherwise satisfies the requirements under sections 952 and 964 is not readily available to the section 958(a) US shareholder that is making the determination.
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The third safe harbor is very similar to the second safe harbor, but relates to determining section 965 amounts.
In addition, Rev. Proc. 2019-40 further relaxes the reporting requirements on Form 5471 for certain filers. US shareholders that are not section 958(a) US shareholders and that are unrelated to the CFC will no longer be required to file Form 5471. Section 958(a) US shareholders that are unrelated to the CFC, and US shareholders that are not section 958(a) US shareholders but that are related to the CFC, will be subject to reduced information reporting on Form 5471. Again, this relief is limited to foreign entities that are CFCs solely because of downward attribution to a US person.
With this latest round of guidance, the IRS and Treasury continue to make only narrowly targeted changes to address downward attribution, and it appears that Treasury believes it may have reached the limits of its authority to resolve the far-reaching problems created by the repeal of 958(b)(4). It will be up to Congress to enact a more comprehensive solution.
By Paula Levy, Palo Alto and Blake Martin, Dallas
Treasury Issues Proposed Regulations Relating to the Accrual Method of Accounting and Advance Payments
The Tax Cuts and Jobs Act (the "TCJA") added new Code Section 451(b) to generally provide that for a taxpayer using the accrual method of accounting, the all events test with respect to an item of gross income (or portion thereof) is not treated as met any later than when the item of income (or portion thereof) is included in revenue on an applicable financial statement (an "AFS") for financial accounting purposes. As such, taxpayers may have to report income earlier than they would have otherwise had to report it depending on whether it has been reported on an AFS. An AFS generally includes a financial statement prepared in conformity with generally accepted accounting principles ("GAAP"), international financial reporting standards ("IFRS"), or financial statements filed with any other regulatory or governmental body specified by the Secretary (generally audited financial statements). These rules are applied on a year-byyear basis; therefore, it is possible for an accrual method taxpayer to have an AFS in one year and not to have an AFS in another year. On September 9, 2019, Treasury published proposed regulations governing how businesses should recognize income based on these new rules.
While the proposed regulations provide guidance on the timing of income recognition, they provide that the inclusion rule does not change when realization occurs for federal income tax purposes. The proposed regulations provide
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several examples of this, including a leasing or licensing transaction for federal income tax purposes that is treated as a sale or financing under an AFS, a transaction that does not have to be marked-to-market for federal income tax purposes that is marked-to-market under an AFS, and an asset sale and liquidation under either of Code Sections 336(e) or 338(h)(10). The preamble cites the Conference Report, which provided that "[t]he provision does not revise the rules associated with when an item is realized for Federal income tax purposes and, accordingly, does not require the recognition of income in situations where the Federal income tax realization event has not yet occurred." The proposed regulations also clarify that the rule does not remove the applicability of exclusion provisions or non-recognition provisions.
With respect to certain contingent payments, the proposed regulations state that the amount subject to these rules should not include several types of payments (including amounts collected on behalf of a third party that would not be included in the taxpayer's income otherwise), payments that are contingent upon the occurrence or nonoccurrence of future events, and reductions for amounts subject to Code Section 461. However, for contingent payments, the proposed regulations presume that an amount that is included in a transaction price under an AFS is not contingent upon the occurrence or nonoccurrence of a future event unless it can be established to the Commissioner's satisfaction based upon all of the facts and circumstances existing at the end of the taxable year that the amount is contingent on the occurrence or nonoccurrence of a future event. As such, reporting an amount as a contingent payment may be subject to additional scrutiny by the IRS with the burden on the taxpayer to prove that the amount not reported is a contingent payment.
Since there are Code provisions that specifically provide for a "special" accounting method, section 451(b)(2) confirms that the income inclusion rule generally does not apply to any item of gross income for which a taxpayer uses a special method of accounting. The proposed regulations are consistent with this rule, providing that the income inclusion rule does not apply to any item of gross income (or portion thereof) when the timing of that item of income (or portion thereof) is determined using "a special method of accounting" and that if a special method of accounting is used, income is taken into account as determined under that special method of accounting. Therefore, methods that specifically result in a different income inclusion timing should not be subject to these rules.
One area of concern with the income recognition rule and the proposed regulations is the lack of a cost offset provision. Based on the Code and the proposed regulations, there is no offset for costs related to income that is included under section 451(b). As such, taxpayers risk both paying tax on gross receipts without the related reduction for costs and not having the gross receipts necessary to utilize a deduction in a later tax year when such a deduction can be taken. The preamble to the proposed regulations cites the lack of legislative history for allowing a cost offset and the general desire to avoid additional distortions of income that can result with an expense being taken prior to the all
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events test being met. However, in the preamble, Treasury noted that it continues to study the merits of including a cost offset mechanism in final regulations.
The TCJA also added new Code Section 451(c) to provide for rules relating to advance payments for goods, services, and certain other items, and Treasury published proposed regulations on September 9, 2019 relating to these payments. Section 451(c) provides that a taxpayer using an AFS may use the deferral method of accounting for advance payments. Section 451(c) provides that a taxpayer computing its taxable income under the accrual method of accounting who receives any advance payment during the taxable year may either (i) elect to include portions required under the rules of section 451(b) in the current year and the additional amount in the taxable year following the taxable year in which the payment is received or (ii) include the advance payment in gross income for the taxable year in which the payment is received. These rules are intended to codify aspects of Revenue Procedure 2004-34, which allowed taxpayers to defer certain advance payments received.
For purposes of section 451(c), an advance payment is any payment (i) the full inclusion of which in gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting, (ii) any portion of which is included in the taxpayer's revenue in an AFS for a subsequent taxable year, and (iii) which is for goods, services, or other items as may be identified by the Secretary. The statute specifically excludes certain types of payments from the definition of an advance payment in section 451(c), such as rents and certain insurance premiums. The proposed regulations provide an additional exclusion for payments attributable to "specified goods" received two or more years before the contractual delivery date of the contracted-for good. For such purposes, a "specified good" is a good for which (i) in the year payment is received, the taxpayer has insufficient inventory to satisfy its obligations under its contract with a customer and (ii) all the revenue from the sale of the good is recognized in the taxpayer's AFS in the year of delivery.
The proposed regulations provide rules for acceleration in instances where a taxpayer dies or ceases to exist unless certain transactions under Code Sections 381(a) or 351(a) occurred. The rules are meant to address situations where deferral is inappropriate to ensure that the obligation is satisfied. A similar rule is implemented for "short" taxable years to ensure that the obligation is satisfied. These rules similarly follow the principles set forth in Revenue Procedure 2004-34.
Like the proposed regulations issued under section 451(b), the proposed regulations issued under section 451(c) do not provide an accelerated cost offset provision. The preamble to the proposed regulations provide two reasons for not including a cost offset provision in this case. First, the preamble notes that a cost offset provision was not provided for in Revenue Procedure 2004-34. Second, and similar to the legislative history of section 451(b), the legislative history of section 451(c) did not contain any cost offset provision under the same desire to
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avoid any unintended benefits. However, as in the context of section 451(b), Treasury noted in the preamble that it is studying the merits of incorporating a cost offset mechanism in final regulations. As stated above, this mismatch may result in paying tax on gross receipts without a related deduction, and the income necessary to utilize the related deduction may not be available when the related deduction can be taken.
By Murtuza Hussain, Houston
OECD Issues Unified Approach Proposal for Pillar I
On October 9, 2019, the OECD released a proposal for a "unified approach" under Pillar I (the "Proposal"). The Proposal aims to increase market countries' taxing rights through a combination of significantly revised nexus rules and a hybrid formulary transfer pricing system. The Proposal is not binding on member countries and does not reflect a consensus; rather the aim of the Proposal is to facilitate a conversation between members in order to move to a consensus.
The tax challenges of the digitalization of the economy have been one of the main focus areas of the OECD/G20 Inclusive Framework, leading to the 2015 Base Erosion and Profit Shifting ("BEPS") Project Action 1 Report. As the original report did not address all of the concerns, individual countries began to implement unilateral measures, such as the UK's Deferred Profits Tax ("DPT") and Italy and France's Digital Services Tax ("DST"), to combat what they perceived to be unfair results arising from remote sales by nonresident digital service providers. Such an uncoordinated and piecemeal approach resulted in increased uncertainty for taxpayers and potential double taxation.
Thus, in hopes of establishing a consensus-based approach by 2020, in June 2019, the OECD/G20 Inclusive Framework's Programme of Work (the "PoW") grouped the proposals to be developed under two "pillars." Pillar I focuses on the reallocation of taxing rights towards the market jurisdiction by reviewing the nexus and profit allocation rules. Pillar II, issued on November 8, 2019, addresses other BEPS issues focused on ensuring a minimum level of taxation on all income.
Attempt at establishing a "Unified Approach"
In drafting the Proposal, the Secretariat sought to identity commonalities from prior PoW proposals under Pillar I, which included: (i) reallocation of taxing rights in favor of user/market jurisdiction, (ii) envisaging a new nexus rule that does not depend on physical presence in the user market/jurisdiction, (iii) going beyond the arm's length principle and departing from the separate entity principle, and (iv) promoting simplicity, stabilizing the tax system, and increasing tax certainty in implementation.
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The building blocks of the Proposal, as explained further below, can be summarized into the following: (i) scope, (ii) new nexus rule, and (iii) a new profit allocation rule.
While BEPS Action 1 was intended to address the tax challenges arising from the digital economy, the objective of the Proposal is to expand the application of the new rules more broadly, and establish taxable nexus rules for all large consumer-facing businesses.
Consumer-facing businesses would include businesses that interact remotely with users, who may or may not be their primary customers, as well as other businesses that market their products to consumers and may use digital technology to develop a consumer base, such as advertising. Thus, the scope could also apply to some business-to-business companies that interact with consumers.
The scope of the rules is a key area that needs to be further developed. For example, the Proposal notes that certain sectors, such as extractive industries and commodities are likely to be presumed out of scope, with the potential to extend the carve out to other industries such as financial services. Additionally, the Proposal recommends limiting the scope based on revenue thresholds, and suggests the 750 million revenue threshold currently used for country-by-country reporting requirements.
(b) New Nexus Rule
The Proposal introduces a new nexus standard defined by a revenue threshold rather than physical presence adding an additional and separate rule to the already existing permanent establishment ("PE") rules.
The Proposal explains that the current PE rules do not properly capture the taxation rights of a jurisdiction when large multinationals increasingly can have a "sustained and significant involvement in the market Jurisdiction," such as through consumer interaction and engagement, without having a local physical presence. Thus, the Proposal views a revenue-based nexus standard (potentially calibrated based on the size of each market) as the simplest possible way to address this nexus issue.
Furthermore, the nexus rule would cover businesses that not only operate from remote locations, but also businesses that sell through affiliated or third-party distributors. This clearly illustrates the intent of the Proposal to go beyond the arm's length principle, since that principle already allows market jurisdictions to tax the arm's length profits of those affiliated or third-party distributors with a local presence.
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Of course, the "issue" of a foreign person earning income in a jurisdiction without a physical presence is not a new problem. Catalog or other direct sales from the foreign country do not result in a PE and predate digitalization. The only difference now appears to be one of volume, as well as the potential for wholesale displacement of traditional business models. The political tension has increased due to the lack of reciprocal trade in digital services, as the major providers tend to be based in the United States.
(c) New Profit Allocation Rule
The Proposal introduces a new profit allocation rule in order to determine the tax basis created as a result of the new nexus rules. The Proposal suggests retaining the existing rules based on the arm's length standard, but then goes beyond such standard by introducing formula-based solutions.
The Proposal indicates that, given that the proposed rules would create a nexus for companies even in the absence of a physical presence, it would be impossible to use the existing rules under Article 7 (Business Profits) and Article 9 (Associate Enterprises) to allocate profit to this new nexus in cases where no functions are performed, no assets are used, and no risks are as sumed in the market jurisdictions.
Therefore, the Proposal presents a three-tier mechanism to allocate profit to the market jurisdiction:
Amount A: This is the amount intended to be captured by the new nexus rules, i.e., taxation of a global enterprise with no physical presence in a market jurisdiction. Amount A would consist of an unspecified portion of the global enterprise's "deemed residual profit," allocated to market jurisdictions using a formulaic approach. The "deemed residual profit" would be "the profit that remains after allocating what would be regarded as a deemed routine return on activities to the countries where the activities are performed." Distinguishing the group's routine returns from its residual profit and determining the share of deemed residual profit allocable to the market country would be based on simplifying conventions rather than a case-by-case analysis under the existing transfer pricing rules. The details on what a routine return might be, or what percentage of the residual profit might be subject to allocation, are still to be determined as part of the consensus-based agreement.
Furthermore, the starting point for determining Amount A would be a tax base that relies not on government-enacted tax laws, but on earnings reported on financial statements, following GAAP or IFRS. It is anticipated that there will be many practical complexities arising from any system which uses one or more accounting standards as a basis for determining taxable profits.
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Amount B: This amount relates to remuneration for routine activities in market jurisdictions, and in particular distribution functions. The Proposal claims that the existing transfer pricing rules with respect to these transactions will be retained, but also suggests using fixed remunerations (reflecting an assumed baseline activity) in order to increase certainty and reduce disputes over the returns earned by distribution functions. Again, the Proposal does not provide specific rates of return and leaves the task of setting the rates to be negotiated between member countries.
Amount C: Where in-country functions exceed the baseline activity compensated under Amount B, the appropriate arm's length price would be set according to the existing transfer pricing rules. Any dispute between the market jurisdiction and the taxpayer should be subject to legally binding and effective dispute prevention and resolution mechanisms.
Interestingly the Proposal does not limit the application of Amounts B and C to "large consumer-facing businesses" (i.e., in-scope businesses), so the fixed remuneration for routine activities would apply across all industries. While this approach may on the surface seem like an effective solution to reduce disputes between taxpayers and tax authorities, major challenges remain for countries to agree on what constitutes baseline activity, to define distribution functions that vary based on industry and individual business practices, and to determine what other country in the supply chain is meant to give up some taxation rights if the mandated margin exceeds the arm's length result for the particular case involved.
Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, indicated in recent public comments that although there are many questions that have yet to be decided, he is hopeful that the Proposal is a good starting point for discussions between member countries.
Saint-Amans pointed out that there would be no reason to develop a proposal unless it was one that the United States could accept and implement. As of now, individual countries, including the United States have not yet provided feedback on the Proposal. However, it is uncertain whether the United States (or other traditionally IP-owning countries) would give up their sovereign right to taxation and cede their taxing rights to market countries. This is especially true where, for example, the United States has already implemented measures such as BEAT and GILTI to ensure that the US fisc receives the benefit from global profits earned by US multinational corporations. Therefore, it is expected that the Proposal will undergo significant negotiations and modifications before member countries would be willing to sign any agreement.
By Sahar Zomorodi, New York
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Tax Changes on the Horizon in Canada for the Digital Economy?
Canadians went to the polls October 21, 2019, electing a newly composed Federal Government to the House of Commons. The incumbent Liberal Party of Canada ("Liberal Party") won the most seats in the House of Commons; however, unlike the previous election in 2015, the Liberal Party failed to win a majority of seats. Accordingly, the Liberal Party will need the support of members of other parties to pass legislation.
In the days leading up to the election, a number of tax policy proposals were announced by the various parties, including two key measures announced by the Liberal Party related to imposition of tax in the context of the digital economy (announced here) as follows:
1. The imposition of a 3% digital services tax on the income of large businesses operating in the digital economy ("DST"); and
2. A requirement for non-resident, digital suppliers who do not carry on business in Canada to register for and collect federal Goods and Services Tax/Harmonized Sales Tax ("GST/HST") on supplies of digital services and intangible property.
DST Proposal According to the Liberal Party's election platform proposal (outlined in a Parliamentary Budget Office Cost Estimate Report found here), a DST would:
replicate the proposed DST announced by the French Government; be implemented on April 1, 2020; target advertising services and digital intermediation services; apply only to businesses with worldwide revenues of at least $1 billion and
Canadian revenues of more than $40 million; and net the Canadian Government new tax revenues of $540 million in 2020-21
and a total of $7.5 billion through 2028-29.
This proposal marks a change in tune by the Liberal Party, as previous statements from the Minister of Finance indicated that the Government would not proceed with imposition of a DST, absent OECD consensus. As the current G20/OECD target date for a consensus-based solution regarding digital economy taxation is currently the end of 2020, imposing a DST effective April 1, 2020 would be a unilateral action, contrary to these previous statements. Furthermore, the proposal has no explicit regard for OECD work completed on these issues to date, nor does it reference the October 9, 2019 OECD public consultation document regarding DST-type measures (which was, albeit, released shortly after the Liberal Party announcement).
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The Conservative Party, which secured the second most seats in the House of Commons, also included a DST proposal in its platform, modelled on the UK's current DST proposal. Perhaps more notably, the New Democratic Party which secured the fourth most seats in the House of Commons and which may support the Liberal Party to pass legislation also included a DST proposal in its platform that is similar to the Liberal Party proposal.
Whether the Government intends to include a unilateral DST in its legislative agenda remains to be seen. Despite the platform proposals, it is plausible that the Government may nevertheless wait for a consensus solution through the OECD, in line with its previous statements.
On November 15, 2019, a group of U.S. trade groups, including US Chamber of Commerce, wrote to Trump administration officials, including Secretary of State Pompeo and Secretary of Commerce Ross (letter available here), urging them "to engage rapidly with [their] Canadian counterparts to discourage them from proceeding" with the Liberal Party DST proposal. The groups argued that the DST "would undermine U.S. investment in Canada's technology market and threaten Canada's compliance with commitments under the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA), and the United-States-Mexico-Canada Agreement (USMCA)."
GST/HST Proposal In terms of potential changes to require non-resident, digital suppliers who do not carry on business in Canada to register for and collect GST/HST on supplies of digital services and intangible property, details regarding the Liberal Party proposal (including a target implementation date) have not been announced. However, proposed measures may mirror recently adopted measures in Quebec for the Quebec Sales Tax ("QST"), which generally follow OECD guidelines. The QST regime requires non-resident suppliers who do not carry on business in Quebec to register for and collect QST on sales of digital services and intangible property where a $30,000 sales threshold is exceeded. These QST changes generally do not apply to B2B transactions. The New Democratic Party has previously advocated for this type of regime to be imposed for GST/HST purposes.
The House of Commons is expected to reconvene on December 5, 2019, at which time the Government will deliver a throne speech outlining its agenda for
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the upcoming Parliamentary session. That speech may offer some insight as to the likelihood and timing of these measures being adopted.
By Bryan Horrigan, Toronto
MLI to Enter into Force for Canada December 1, 2019
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "MLI") will enter into force for Canada on December 1, 2019. As a result, certain of Canada's tax treaties (including Ireland, Luxembourg, the Netherlands and the UK) will be effectively amended (i) as of January 1, 2020 for withholding tax purposes, and (ii) for other taxes, including capital gains taxes, for taxation years beginning on or after June 1, 2020 (which for calendar year taxpayers, would be January 1, 2021).
The MLI is the result of the Organisation for Economic Co-operation and Development (the "OECD") and the G20's base erosion and profit shifting ("BEPS") project and seeks to modify the existing bilateral tax treaties of signatories in a streamlined manner in order to implement treaty -related BEPS measures without the need to individually renegotiate each treaty. Notably, the US is not a signatory to the MLI, such that Canada's tax treaty with the US will not be affected.
The MLI only applies to a bilateral tax treaty if the MLI is in effec t for both countries and if the treaty has been listed as a covered tax agreement by both countries. The MLI enters into effect in a country (i) for withholding tax purposes, on the first day of the calendar year that begins on or after the day the MLI enters into force for the country, and (ii) for other taxes, for taxation years beginning six months after the day the MLI enters into force for the country. The MLI generally enters into force for a country on the first day of the month beginning three months after the day the country deposits its ratification instrument with the OECD. To date, 90 countries have signed the MLI, and six others have expressed their intention to sign. The MLI is currently in force for 30 of these countries and will be in force for seven more by early 2020.
The MLI includes minimum standards, and contemplates that signatories may register reservations (i.e., opt out) of provisions other than the minimum standards. Many provisions also provide signatories with choices. The MLI generally only applies to a covered tax agreement to the extent the choices made by the parties are consistent.
The minimum standards include treaty shopping rules and a comprehensive mutual agreement procedure. The treaty shopping rules include a preamble and a substantive technical rule. The preamble provides that the purpose of the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. The substantive technical rule provides signatories with the choice of a principal
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purpose test, limitation on benefits provision or a combination of both. Canada has chosen the principal purpose test, but has indicated that it intends to seek to negotiate limitation on benefits provisions where appropriate on a bilateral basis (either in addition to, or in replacement of, the principal purpose test). The principal purpose test denies treaty benefits where one of the principal purposes of an arrangement or transaction was to obtain those benefits.
Canada has adopted a number of provisions in addition to the minimum standards, including (i) a requirement that non-resident companies who must meet ownership tests to benefit from reduced dividend withholding tax rates hold the requisite shares for at least one year, (ii) a one-year lookback period for determining whether shares and other equity interests derive their value principally from real property for the purpose of determining whether capital gains arising on the disposition of such interests are exempt from tax, (iii) a provision to resolve cases of dual resident entities (that may, in the absence of an agreement between the competent authorities, result in such entities being denied treaty benefits), and (iv) a mandatory binding arbitration provision that provides a "final offer" model similar to that already contained in the Canada-US tax treaty.
There currently is much speculation in the tax community regarding the impact that the MLI will have on Canada's affected tax treaties. Unfortunately, there is a dearth of guidance from Canadian and foreign tax authorities, and the commentary released by the OECD addresses only seemingly obvious cases. In light of the uncertainty, or where there is a concern that the amendments introduced by the MLI will restrict access to treaty benefits that are currently available, taxpayers may consider taking steps to secure such benefits before the MLI comes into effect. Such steps may include accelerating the timing of dividends that would otherwise be paid subsequent to 2019 so that they are paid in 2019, or crystallizing capital gains in respect of equity interests that historically derived value from Canadian real property and are expected to be disposed of in the near term but after the relevant effective date.
By Stephanie Dewey, Toronto
Massachusetts Issues Business Activity Tax Nexus Guidance, Signaling Continued Trend
Massachusetts recently joined a handful of other states by issuing a final revised regulation adopting a bright-line, $500,000, nexus threshold for its corporate excise tax. It is just the most recent state in a string of others issuing such guidance, suggesting a trend for bright-line nexus rules in the corporate income tax context. As states continue to expand the boundaries of business activity tax nexus, and states each forge their own unique path, taxpayers will have to be mindful of these nuanced and varied approaches.
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By Rob Galloway, Chicago
Belgium - New Tax Exemption for Stock Distributions in US Spin-Offs
Historically, the Belgian tax administration treated the distribution of shares in the context of a US "spin-off" transaction as a "dividend in kind" subject to Belgian tax withholding (typically imposed at the rate of 30%). However, on May 7, 2019, the Belgian government enacted a new law, effective January 1, 2019, introducing a tax exemption for Belgian residents receiving shares in the context of a US corporation spinning off a portion of its business via the distribution of shares of a subsidiary.
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24 Tax News and Developments November 2019