from principles to planning recent developments in international tax from principles to planning

FROM PRINCIPLES TO PLANNING

Recent Developments in International Tax

FROM PRINCIPLES TO PLANNING

Recent Developments in International TaxJerry Jonckheere, Plante & Moran PLLCMichael Schwartz, WeiserMazars LLPColleen Waddell, WeiserMazars LLP

Gerard Roddis, MNP LLPRaul Montemayor, Mazars México

Recent Developments in the U.S.Jerry Jonckheere, Plante & Moran PLLCMichael Schwartz, WeiserMazars LLPColleen Waddell, WeiserMazars LLP

Praxity Tax AlertsOver the last two years we have issued a number of Tax Alerts that are sent to Praxity Clients. If you are not on the mailing list please contact Dara Green (Kaufman Rossin) or I for more information on getting on the mailing listThe Tax Alerts can be found at www.praxity.com // News // Global Tax Alerts

Recent Developments in the U.S.

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Form 8938Form 8938 continues to be subject to continued discussion on what should be included on the form and how it should be valuedIn July, 2012, the IRS provided additional guidance on whether tangible assets, collectibles, and gold must be reported on Form 8938 (or included in the threshold computations)

Tangible assets held directly do not have to be reported, but that assets held through certificates must be reported

In October, 2012, the AICPA submitted comments to the IRS regarding the valuation of non-monetary assets

The Comment Letter requested safe harbor valuation options such as tax basis or book basis for non-monetary assets and clarification of when leases could be considered reportable assets


Form 8938Captive Insurance Companies domiciled outside of the U.S. must also be included on Form 8938 even if an IRC § 953(d) Domestication Election is made


Overseas Voluntary Disclosure Programs•IRS re-opened its third OVDP on January 9, 2012, with no stated deadline

• Can be closed at any time at IRS discretion• Still open as of May 2013 Conference

•The OVDP offers an opportunity to come forward and be compliant for unreported foreign income, bank accounts, entity reporting, and other assets

•Taxpayers may be able to avoid penalties if income was not underreported

•Conditions are substantially similar to 2011 program• Maximum penalty increased from 25% to 27.5%

•OVDP # 2 Closed on September 9, 2011


IRS Program for Low-Risk Foreign FilersThe U.S. Tax system requires that U.S. citizens and green card holders file U.S. income tax returns regardless of where they are residentNon-compliant U.S. citizens / green card holders living abroad may use a new program if they have been outside of the U.S since January 1, 2009, and are considered “low-risk” filers

Low-risk vs High-risk is determined by a questionnaire

Filers meeting the requirements have lower filing requirements to get back in the graces of Uncle Sam


Reporting for Land Owned in FideicomisosU.S. filers must report holdings of property in foreign trusts on Forms 3520 and 3520-AIn the past, the IRS has given informal advice that property owned in a Mexican fideicomiso constituted ownership of property in a foreign trustPLR 201245003 provided guidance that ownership of property in a typical fideicomiso where the trustee performs no duties normally associated with a trustee does not require reporting in the U.S.


Form 5713 – International Boycott ReportU.S. filers are required to report a comprehensive list of transactions with countries listed by the Secretary as participating in foreign boycotts.Iraq was added to the list in August, 2012


IRS ‘Tweaking’ ITIN Application ProceduresForeign natural persons filing in the U.S. typically must receive an Individual Taxpayer Identification Number (“ITIN”) to receive reduced withholding rates or be claimed as an exemption.The rules have gone through a number of revisions and now require that a foreign person:

Send an original passport with Form W-7Have an original passport reviewed by a Certified Acceptance AgentHave the passport ‘certified’ by the issuing agency

Another key change is that ITINs now expire after five years


Status of Forces AgreementsThis is really a UK change, but it impacts many US personsWhen civilians attached to a military operation work overseas they may be entitled to tax exclusions beyond the foreign income exclusionTo qualify, civilian personnel should obtain certification on their passport that indicates that the bearer is a “member of a civilian component of a visiting military force” and a “note of recognition” from the foreign country


Unique Reference Identification Number•Unique Reference Identification Number• Form 5471• Form 8858• Form 8865•Optional in 2011, mandatory for reporting years beginning January 1, 2012, or after•Taxpayer assigns a unique number up to 50 alphanumeric characters (but, darn, no special characters)•The assigned URI must be used consistently until entity is disposed of, liquidated, or ceases to exist• Old and new numbers required in certain transaction years•Surprise! IRS has indicated penalties will apply for failure to provide URI


Schedule UTP (Uncertain Tax Positions)•Uncertain tax positions are reported with the applicable code section and a concise description• Uncertain equals not “more likely than not”•Provides “transparency” (code for “Roadmap”) for IRS examiners• IRS working under a “policy of restraint” in seeking workpapers related to uncertain tax positions•Required for corporations filing Form 1120; 1120-F; 1120-L; or 1120-PC• 2010-11 - $100 million in assets; issues audited statements; has one or more uncertain tax

positions• 2012-13 - $ 50 million in assets; issues audited statements; has one or more uncertain tax

positions• 2014 - $ 10 million in assets; issues audited statements; has one or more uncertain tax

positions•Reporting for pass-through entities and tax-exempt organizations is being “considered” by the IRS


Captive Insurance Companies•Captive Insurance Companies have been in existence since the 1950s in various forms• “When you’ve seen one Captive… you’ve seen one Captive”•We are now seeing several IRC § 831(b) variations being aggressively marketed to our clients• Many are legitimate, but the proof is in the pudding as to whether they could

survive an IRS Audit• Many engagement letters defer tax advice to the client’s tax advisors, i.e. us

and we need to be aware of that language


New Outbound 367 Transaction Regulations•Final and Temporary Regulations were released on March 18, 2013 on • Transfers of property by a domestic corporation to a foreign corporation in

nonrecognition exchanges, and• Distributions of stock of foreign corporations by a domestic corporation in

nonrecognition distributions•Old Regulations were issued in 1988. The new Regulations address issues with intangibles and global economies•Mechanical issues including transfer pricing concerns, definitions of goodwill and workforce in place, and interaction of IRC §§ 367 and 482


Foreign Account Tax Compliance Act Developments•Proposed regulations issued February 8, 2012• Grandfathered obligations• Transitional rules for entities with non-US legal prohibitions to FATCA

compliance• Deemed compliant entities• Due diligence requirements• Procedures to verify FATCA compliance• Definition of financial account• Transition period for pass-through payments• Government-to-government reporting


FATCA Developments•Grandfathered obligations• Protection extended to obligations outstanding Jan 1, 2013•Transitional rules for entities with non-US legal prohibitions to FATCA compliance• Extended compliance date to Jan 1, 2016•Deemed compliant entities• Registered Foreign Financial Institutions (FFI’s), Certified FFI’s, Owner-documented FFI’s•Due diligence requirements• Limited to electronic records for accounts less than US$1,000,000• Pre existing individual accounts less than US$50,000 and insurance policies less than US$250,000

are exempted• Pre-existing entity accounts less than US$250,000 exempted•Procedures to verify FATCA compliance• Third party audits are not required, officer certification accepted• Initial certification due within one year of FFI agreement


FATCA Developments (cont’d)•Definition of financial account• Depository accounts in financial institution• Custodial accounts• Non-publicly traded equity or debt in a financial institution• Cash value insurance contracts•Transition period for pass-through payments• Withholding obligations begin in 2014 or 2015 depending on facts• Payments made by withholding agent in ordinary course of business from non-financial

goods and services are exempt•Government-to-government reporting• FFI’s may be able to report information to residence country government• Foreign government will provide information to IRS


Obama Administration Budget Proposal

• On April 10, 2013, President Obama released the 2014 fiscal year budget proposal. President Obama’s budget proposal contains a number modifications to existing tax law for individuals and businesses.

• Budget Proposals Affecting Individuals • Limitation on itemized deductions- 28% cap on the value of itemized deductions

claimed by individuals in the top tax brackets. • Buffet rule- requires individuals with adjusted gross income above $1 million to pay a

minimum tax rate of 30% on the excess of the individual’s adjusted gross income over the individual’s deduction, subject to modifications, for charitable contributions.

• Retirement plan savings cap- imposition of limits on contributions and accruals for retirement plans if an individual’s retirement plan accumulates amounts in excess of a maximum permitted accumulation amount. The current maximum permitted accumulation amount is approximately $3.4 million.

• Estate and gift taxes- reinstatement of 45% tax rate, a $3.5 million estate tax exclusion, and a $1 million lifetime gift tax exclusion effective for taxable years beginning in 2018 and thereafter.


• Budget Proposals Affecting Businesses• Carried interest reform- carried interest payments from investment partnerships will

be subject to tax at ordinary income tax rates. Carried interest payments will also be subject to self-employment tax.

• Elimination of LIFO method of accounting- taxpayers will no longer be able to use the last-in first-out method of accounting in certain circumstances.

• Dollar limitations on elections to expense certain depreciable assets- the $500,000 threshold limitation and $2 million investment limit amount for IRC Sec. 179 elections to expense certain depreciable business assets will be permanent, subject to adjustments for inflation, for qualified property placed in service during taxable years beginning after December 31, 2013.

• Reinstatement of FUTA surtax- the 0.2% FUTA surtax will be permanently reinstated. • Repeal of deduction for dividends paid to ESOPs- the corporate deduction currently

permitted for dividends paid by a corporation to employee stock ownership plans will be repealed for ESOPs sponsored by C corporations with gross receipts in excess of $5 million.


• Budget Proposals Affecting Businesses• Exemption from FIRPTA for foreign pension funds- foreign pension funds with

investments in U.S. real property will be exempt from FIRPTA tax upon disposition of the U.S. real property interest.

• Extension of R&D credits- credits for research and development costs will be made permanent and the alternative simplified credit will be increased to 17%.

• UNICAP exemptions- Employers with average gross receipts of $10 million or less per year will be exempt from the uniform capitalization rules.

• Deduction for start-up expenses- the $10,000 deduction (reduced to the extent expenses exceed $60,000) for qualified start-up expenses will be made permanent.

• Alternative energy incentives- a number of alternative energy tax incentives will be available and certain existing alternative energy tax incentives will be enhanced and/or extended.

Obama Administration Budget Proposal• Budget Proposals Affecting U.S.-Based Multinationals • Outbound transfers of intangibles to low-tax jurisdictions- Any excess income resulting from the

transfer of an intangible asset from the U.S. to a CFC is treated as Subpart F income and subject to current inclusion in gross income provided the income will be subject to an effective rate of tax of 10% or less in the foreign jurisdiction. There is a phase-out for effective tax rates of 10% to 15%.

• Deferral of interest deductions- Deductions for interest expense will be deferred to the extent the deduction exceeds the taxpayer’s pro rata share of income subject to current taxation from subsidiaries located outside the U.S. The deferred portion of the interest expense deduction may be deductible by the taxpayer in subsequent years.

• Limitations on earnings stripping interest deductions involving related parties- The Obama Administration's budget proposals may place additional limitations on deductions for interest expense paid to a related foreign entity in certain situations.

• Limitations on deemed paid foreign tax credits- The amount of a taxpayer’s deemed paid foreign tax credit will be limited to the proportional amount of the taxpayer’s pro rata share of income of a foreign subsidiary’s earnings and profits that are repatriated to the U.S. and subject to taxation in the current year.

• Limitations on deductions of reinsurance premiums- Reinsurance premiums may not be deductible for transactions involving reinsurance premiums paid to a foreign related party if the reinsurance income is not subject to U.S. taxation.

Ways and Means Draft Proposal

• The Ways and Means Committee released a draft proposal in 2011 regarding application of the U.S. tax system in the international context.

• The draft proposal includes the following potential alterations to the current U.S. tax system:

• Change the current U.S. tax system from a worldwide system to a territorial system. • Reduction of the maximum corporate rate of tax from 35% to 25% for tax years

beginning after December 31, 2012.• Replacement of foreign tax credit for 10% shareholders in a CFC with a dividends

received deduction of 95% of the foreign source portion of the dividend for dividends paid by a CFC to a domestic corporation.

• Transition rule: The Ways and Means Committee draft contains a transition rule providing for a 5.25% tax applied to all earnings and profits currently held outside the U.S. regardless of whether the earnings and profits are repatriated to the U.S. When the earnings and profits are actually repatriated to the U.S. , the recipient of the income will be entitled to the 95 dividends received deduction on the foreign source portion of the dividend. Payment of the 5.25% on offshore earnings and profits will be payable in eight annual installments.

OECD Project on Base Erosion and Profit Shifting

• On February 12, 2013, the OECD issued an initial report regarding the Base Erosion and Profit Shifting project (the “BEPS Report”).

• The Base Erosion and Profit Shifting project is divided into three areas of concentration:

• Base erosion- Chaired by Germany• Jurisdiction to tax- Chaired by the United States and France• Transfer pricing – Chaired by the United Kingdom

• Base erosion: What is the proper base upon which tax may be imposed by a country?• Jurisdiction to tax: Whether a taxpayer conducts sufficient activities in a country to

give rise to a permanent establishment? • Transfer pricing: Whether the price at which goods or services are exchanged

between related parties constitutes an arm’s length price?


• The main goal of the OECD is to eliminate taxpayers avoiding taxation in two or more countries. The OECD has discussed utilizing a tool similar to common LOB clauses in most income tax treaties to prevent instances of double non-taxation.

• The OECD anticipates releasing the final report in July 2013. • Base erosion: What is the proper base upon which tax may be imposed by a country?• Specific areas of focus:

• Hybrid mismatches- the tax benefits resulting from differences in the classification of entities or the characterization of instruments by two or more countries.

• Treaty abuse- use of treaties by taxpayers to escape taxation in two or more countries.

• Earnings stripping- limitations on interest deductions when the recipient of the interest is not subject to tax on the interest income in the same country in which the interest deduction is claimed.


• Jurisdiction to tax: Whether a taxpayer conducts sufficient activities in a country to give rise to a permanent establishment?

• Specific areas of focus:• Permanent establishment concerns- whether a taxpayer has sufficient

activities in a country to give rise to a permanent establishment. • Controlled foreign corporations (“CFC”)- taxpayers with a controlling

ownership interest in a foreign corporation. • Transfer pricing: Whether the price at which goods or services are exchanged

between related parties constitutes an arm’s length price?• Specific areas of focus:

• The shifting of risks and intangibles- income from high value intangibles is shifted to low-tax jurisdictions.

• Artificial splitting of assets between the legal owners- discrepancies between the legal owner of an asset and the beneficial owner of the asset for tax purposes.

• Abnormal transactions- transactions entered into by related parties that often do not occur between unrelated parties.

Section 901(m) – Covered Acquisitions: Upcoming Guidance • 901(m) denies FTCs for foreign income not subject to U.S. tax by reason of

“covered asset acquisitions • Potential guidance:

• Exempt CAAs• Ability to use basis under foreign law or other reasonable methods• De-minimus basis differentials • Later transaction reconciling local country and tax basis• Succession acquirers • Computational issues (e.g., aggregate transactions within CFCs)• Effective date


Recent Developments in CanadaGerard Roddis, MNP LLP

Legislation – Foreign Affiliates

•Foreign affiliate dumping rules•Represents a significant shift in Canadian tax policy•Intended to prevent foreign-based groups from artificially loading up their Canadian subsidiaries with debt to generate tax shelter in Canada•Also, prevents foreign groups from indirectly extracting earnings from Canada without paying a dividend subject to withholding tax through investments in related foreign corporations•Very broad application•Generally apply to transactions that occur after March 29, 2012

Recent Developments in Canada

Legislation – Partnership Transactions

•A qualifying Canadian corporate buyer may “push down” its tax cost of the target shares to increase (bump) the tax cost of the target’s non-depreciable capital property upon amalgamation/wind up of target•Amendments impose significant limits on the ability to bump the tax cost of a partnership interest held by a target•Aimed at transactions that used the bump of a partnership interest to extract assets from a corporation that could not be “bumped” themselves •Effective after March 28, 2012


Legislation - Thin Capitalization

•Limitations on deductibility of interest expense of a Canadian corporation paid or payable to certain non-resident shareholders •Applies where debt/equity ratio exceeds 1.5:1 for years beginning after 2012 (reduced from 2:1)•Rules extended to include debts of partnership where Canadian corporate member •Disallowed interest is treated as dividends• Deemed paid at time the interest is actually paid or otherwise at end of tax

year, with election to allocate disallowed payments • Withholding tax due based on deemed payment dates


Legislation – Upstream Loans

•Apply to require an income inclusion in Canada where a foreign affiliate (or partnership of which a foreign affiliate is a member) makes a loan to a person (or partnership) that is a “specified debtor” in respect of Canco•Loan is outstanding for more than two years•Exceptions for loans made in the ordinary course of business – repayment in a reasonable period of time•Deductions available for loan that, if paid as a dividend, would be paid from exempt, taxable or hybrid surplus•Some situations will allow a deduction for the cost base of lender foreign affiliate shares


2013 Income Tax Rates : Individual and Corporate


• Declining corporate income tax rates from 2008 to 2012 - federal corporate rate now 15%

• Most provincial rates now close to 10% - combined rates about 26%• Federal individual rate unchanged – ON and QC provincial rates increased • Highest marginal rates in ON now 49.53% and QC now 49.97%

Cases - Velcro Canada Inc. v. The Queen•Second case to consider meaning of “beneficial owner” in treaty context after Prevost Car Inc. v. The Queen•AntillesCo held IP and licensed to Canco in return for royalty payment•AntillesCo granted BVCo as sublicense and assigned the royalty rights from Canco – BVCo agreed to pay AntillesCo a royalty of Canco royalties•CRA challenged the parties position that BVCo was entitled to treaty benefits under the Canada-Netherlands treaty – BVCo not the beneficial owner •TCC held BVCo was beneficial owner of royalty payments•Royalty funds not segregated and agreement didn’t restrict BVCo from using the royalty payments in its discretion•Continues trend of rejecting expansive interpretations of limitations on right to claim treaty benefits


Cases – GlaxoSmithKline Inc. v. The Queen

•First transfer pricing decision by Supreme Court of Canada (SCC)•Taxpayer held license from foreign parent for drug ingredient trademarks/patents•Licensing agreement obliged taxpayer to purchase the ingredient from related Swiss company•CRA argued taxpayer paid unreasonable amount in light of generic price•SCC agreed with lower court – other factors, such as licensing agreements, should be considered when determining a transfer price


Tax Treaties and TIEA

•Comprehensive tax treaties signed with Serbia and Hong Kong in 2012•New treaties signed with New Zealand and Poland in 2012 •New Zealand, Polish and Hong Kong treaties include a form of anti-treaty shopping provision in each of dividends, interest and royalty articles•Treaty with Columbia and Singapore entered into force in 2012•New protocols to the Austrian and Luxembourg treaties•Canada announced it was in negotiations with the United States on an agreement to improve cross-border tax compliance through enhanced information exchange •TIEAs with Costa Rica, Saint Lucia, Aruba and Dominica entered came into force


Recent Developments in Mexico

Raul Montemayor, Mazars México

Recent Developments: Mexico• Legislative Reform

• In 2011 government published the Miscellaneous Tax Resolution for 2012, some of the rules will become effective on July 1st, 2012

• On March 30th, 2012 a Decree of Benefits was published on the Official Federal Gazette


Miscellaneous Tax Resolution for 2012 • Taxpayers must inform the tax regime in which they contribute on

their invoices• Include the measuring unit• In installment payments, invoices must include the folio of

the invoice issued for the total value of the transaction• Detail the form of payment in the invoice, including the last 4

numbers for the bank account or credit card used• If this is not possible at the moment the invoice is issued,

the wording “ Not Identified “ should be added


Miscellaneous Tax Resolution for 2012 (cont’d)• Changes to rules in respect of Tax invoices issued by Foreign

residents without a PE in Mexico to Mexican residents…must include the following in order to be deductible for Mexican residents• Issuer’s name or legal name, tax domicile and tax identification

number when applicable or its equivalent• The place and date of issue• The federal tax payer identification number of the person to

whom the documentation is issued• The quantity and category of merchandise or a description of

the service provided


Miscellaneous Tax Resolution 2012 (cont’d)• Changes to rules in respect of Tax invoices issued by Foreign

residents without a PE in Mexico to Mexican residents…must include the following in order to be deductible for Mexican residents (cont’d)• The unit value must be indicated in numbers and the total

amount must either be indicated in numbers or written out• In cases of income from granting the right to temporarily use or

enjoy real property, the property tax number must be indicated


March 30, 2012 Benefits Decree• Deductibility of Profit Sharing payment from estimated monthly net

income, when calculating the monthly estimated income tax payment• The profit sharing will be reduced in equal parts starting in May

through December• Deductibility of 25% of the salaries paid to handicapped

employees/employees older than 65 years• Apply the same taxable income used to calculate the monthly

estimated Income Taxes (accrued basis) to calculate the IETU Monthly payment • If this option is taken the taxpayers can never go back to prior

methodology (cash basis)


March 30, 2012 Benefits Decree (cont’d)• Entities and individuals not obligated to have audit financial

statements audited by a CPA

• File their IETU payments bi-monthly instead of monthly

• Entities obligated to have financial statements audited by a CPA can choose instead to file an Alternative Tax Report in the format established by the SAT


To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

IRS Circular 230 Disclosure

Questions?

Contact Information

Jerry Jonckheere, Plante Moran [email protected]

Michael Schwartz, WeiserMazars [email protected]

Tim Bloos, MNP [email protected]

Raul Montemayor, Mazars (Mexico)[email protected]

mailto:[email protected]




from principles to planning recent developments in international tax from principles to planning

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