November 19, 2020 | 5 minute read
As the dust continues to settle from the 2020 US elections, companies need to employ their resources wisely. Even as we get increasing certainty as to the results, the international tax landscape continues to evolve rapidly, and keeping the eyes of the C-suite on the ball of international tax is key. There are four areas of international tax that US multinational companies should focus on right now: international tax reform, transfer pricing, transparency, and TCJA implementation.
Summer 2021 will be here before we know it—and it is a key milestone date for global tax reform. It is still planned that the 137 countries in the OECD Inclusive Framework (IF) will reach agreement on a plan to address the international tax issues raised by the digitalization of the economy by June 2021, currently reflected through Pillar One (a new nexus rule and global profit reallocation regime) and Pillar Two (a new global minimum top-up tax), sometimes collectively referred to as BEPS 2.0.
Key outstanding issues for US companies include the interaction between US global intangible low-taxed income (GILTI) and a new global minimum tax; and whether the rules for calculation and scope of the profit allocation and nexus rules under Pillar One will be mandatory or on a ‘safe harbor’ basis.
The transition to President-elect Biden may encourage more collaboration at the OECD, but will not likely change the US government’s strong bipartisan opposition to imposing foreign digital taxes on US multinationals. Adding to complexity of US engagement in the OECD negotiations is the fact that the incoming administration may not have senior personnel in place at the Treasury until April or May of 2021.
Companies should prepare for the likelihood that the Inclusive Framework’s technical work will be implemented in the foreseeable future, either under a multilateral agreement by the IF or from unilateral actions by countries that use the Pillar One and Pillar Two blueprints as starting points. In particular, companies should examine whether they are in scope, and what consequences will result from their global digital footprint. It is important to model out how these measures will impact overall effective tax rates (ETR), as well as how they will intersect with US rules, such as the foreign tax credit (particularly bearing in mind the recently released proposed FTC regs).
In the short term, there is still time to make an impact. The OECD is currently soliciting comments until December 14, 2020, in advance of the next public consultation meetings, which will be held in mid-January 2021. Tax leaders should engage with the C-suite to identify primary areas of concern and collaborate with other stakeholders, such as sectoral and broader trade groups, to provide feedback.
In addition to pressures arising from BEPS 2.0, abrupt changes in economic conditions and additional COVID-related challenges have caused existing transfer pricing policies to not reflect the current economic reality.
There are several specific transfer pricing topics that businesses should be focusing on today: supply chain disruption, debt modification, excess losses or gains directly or indirectly attributable to the pandemic, and displaced workforces. Each company should consider these topics, examine their unique circumstances, and consider changes to their transfer pricing regime based on economic impact and global footprint. While OECD guidance may be forthcoming in the next several months, these issues should be considered now.
Finally, foreign tax controversy is expected to intensify in the aftermath of the pandemic, OECD negotiations, and regional initiatives like the EU Anti-Tax Avoidance Directives (ATAD I & ATAD II). Therefore, companies should have a reliable framework around data and documentation to ground their approach with respect to their evolving facts.
Business leaders should also be cognizant of an increased emphasis on transparency, corporate governance, and sustainability in the tax arena.
In addition to transparency vis-a-vis tax authorities, we are in an era of growing public awareness of, and interest in, tax matters leading to calls for further public tax transparency. New global standards for public reporting on tax are evolving, and both the EU and the US have contemplated mandatory public country by country reporting (CbCR) disclosures. These dynamics make internal transparency– between tax and the C-suite –even more critical to tell the right story. Additional pressure is coming from ESG reporting standards, which are increasingly adopting various levels of tax-specific disclosures. Companies must proactively understand what information they hold, how to respond to public inquiries, and tell a story about how the tax strategy aligns with operations and social investments.
During his candidacy, President-elect Biden set forth some ambitious international tax reform proposals including a 28 percent corporate tax rate; a 10 percent surtax on ‘offshore’ production activities; an increased GILTI rate; and a proposed global minimum tax on book income.
It’s important to note that, given the likely very narrow majorities in both chambers, these changes—precisely as proposed—may not be achievable in the near term.
Because of this, companies should factor into their scenario planning incentive-related proposals that may have potential for bipartisan compromise (e.g., the incentives related to investing in the United States and US jobs). Further, tax leaders should engage with the C-suite to plan ahead for 2022, where midterm elections mark the possibility of change in balance of power.
Notwithstanding this uncertainty, tax leaders should work with the C-suite to plan for the changes to base erosion and anti-abuse tax (BEAT), foreign derived intangible income (FDII) and GILTI rates after 2025, to ensure sustainable and long-term business planning related to supply chains, mergers and acquisitions, and IP planning. For more on the US political and tax landscape, consult last week’s blog, The road after the election: Preparing the C-suite for an uncertain future in tax policy.
Tax leaders should be proactive and engage the C-suite on key areas regarding international tax planning regardless of the uncertainty in the international and domestic spheres. Active discussions now will pay off with business leaders informed and ready to make key decisions as new developments in these areas occur.