US tax reform: New BEAT Regs
In December 2019, the IRS issued final and proposed regulations on Sec. 59A base-erosion and anti-abuse tax (BEAT). Although this guidance offers welcome clarification and certainty in several areas, one of the key challenges for taxpayers is harnessing the capabilities needed to access and analyze that data is necessary for monitoring the impact of BEAT and complying with the rules. Unbundling, grossing up and characterizing a myriad of intercompany transactions to understand the extent of “base eroding payments” is one such challenge.
Another challenge lies in the heavily computational and interrelated nature of BEAT. Annual changes in business footprint and geographic mix of income, GILTI profile, regular US tax and foreign taxes and tax attributes are examples of factors that can cause unexpected BEAT “surprises” from one period to another. In addition, the IRS provided guidance on the reporting and recordkeeping requirements for BEAT under Sec. 6038A. Do you have the data and processes in place to comply?
The US presidential election impact
With the focus now on 2020 elections, it is unlikely that we will see significant new legislation, including additional guidance on 2017 tax reform provisions. Although 2,300 pages of federal regulations implementing US tax reform have been released, many questions remain, and significant guidance still needs to be finalized. Tax functions will not only need to establish new processes, these processes will need to be adaptable to change as additional guidance is released, or alternative scenarios modeled to align with your organization's risk tolerance.
Global tax policy: The digital economy and global transparency (BEPS 2.0)
Transparency and paying a “fair share” of tax
The OECD (Organization for Economic Cooperation and Development) is engaged in a base erosion and profit shifting (BEPS) project that is causing jurisdictions around the world to adopt wide-ranging tax reforms to address BEPS and transparency issues and to promote “fairness” in taxation. These proposals include the possible expansion of country-by-country reporting with a CFC-like minimum tax (like GILTI) and a base eroding payment rule with a denial of deductions and imposition of withholding tax.
Tax in a digitized economy
The OECD is also tackling the challenges of taxation in a digital economy, proposing its own multi-tiered approach to digital taxation in October 2019. The proposal has contributed to an atmosphere of uncertainty, and has left many open questions as to reach and impact—which is troubling given how quickly the initiative is moving forward.
The impact will be wide-ranging, across industries and structures, extending to many companies and industries that may not view themselves as fitting the original “digital” focus. The proposals would result in potentially a higher tax liability and an increase in compliance obligations and burdens—including jurisdictions where there is currently no physical presence or existing liability. There are also important financial reporting elements to consider, given that financial statements have been mentioned as a potential starting point for these determinations. These new rules will strain existing resources as tax departments will need to work with the business to develop processes to identify the location and level of sales to end-customers.
Anticipated tax disputes and the need to prepare
These tax reforms are creating a significant impact on the global tax landscape and present an opportunity for organizations to begin preparing now for the data needed to comply with new rules and to support the perhaps inevitable increase in disputes with global jurisdictions.
Over the last two years, we’ve experienced a “chess-match” of trade controversy: with China and the United States being major players. In December 2019, the United States and China announced that they had reached an agreement in principle, and this “Phase One” trade deal was signed in January 2020. In exchange for China’s commitment to increase purchases of US products in addition to other structural trade changes, the United States agreed to modify its Section 301 tariffs.
Even with a Phase One agreement in place, there is still a significant increase in US tariffs on over half of all Chinese imports, and uncertainty remains over US and China trade relations. Given its impact on the supply chain, transfer pricing and US tax provisions, trade remains a key area for tax professionals to monitor.