United States: Introduction To The New World Of Global Tax Planning

As all multinationals (MNEs) are discovering, domestic implementation of the recommendations set out in the BEPS (Base Erosion and Profit Shifting) final reports from 2015 have the potential to significantly impact effective tax rate planning. The immediate issue flows from the new country-by-country transfer pricing (TP) documentation regime (CbC). Many countries (including China, Japan, Italy, the United Kingdom and others) have implemented domestic legislation to be effective for 2016, and the United States has finalized regulations to be effective for 2017. A multilateral instrument relating to CbC, which is expected to impose the CbC requirements in all existing treaties (some 3,000), is well underway.

The critical consequence of the CbC regime, as well as many of the other BEPS initiatives, will be an inevitably heightened focus of tax authorities on testing locally reported TP results on a profit split basis. In our TP dispute resolution practice over the years (beginning long ago with the Japanese tax authority), we have found that such a focus does not, itself, provide any basis for concern. Indeed, many of our clients have developed means of testing reported TP results on such a basis (e.g., as elements of APA or Competent Authority processes), though typically these are not included in local documentation.

In the case of companies that have not developed profit split models, it may be a challenge to develop pertinent TP data (due to systems limitations, accounting differences, faulty assumptions, country-specific issues and so on). Our experience is that there are inevitably surprises when a robust system profit analysis is undertaken.

In our work with clients evaluating potential CbC implications, we have developed a checklist to facilitate the process of developing profit split models, which is set forth below. It reflects our overall approach to documentation, which is to develop a customized model for the unique circumstances of each client. This approach has evolved over time. The reference in the checklist to "building blocks" has to do with the material elements of the group's global effective tax rate plan.

Our experience to date in working with clients on CbC matters underscores the importance of developing a working group composed of those internal and external colleagues who can develop an efficient and effective policy for adapting to the new requirements. Within our approach, we have resources to provide as large or small a role as needed by the working group.

A discussion of the details of the CbC regime and associated planning considerations, and standard elements of complying with CbC documentation requirements, is beyond the scope of this article and will be taken up in a subsequent edition of this newsletter.

Checklist for Formulating a CbC Strategy

A. Formation of Working Group to Address the Following Matters

  • What is the role of attorney-client privilege in the process?
  • The working group could be composed of experts from:

    • Internal departments

      • Tax (domestic and international)
      • Transfer pricing (if separate)
      • Information technology
      • CFO (financial accounting)
      • Information technology
      • Supply chain
      • Legal
    • External international tax advisor
    • External transfer pricing advisor
    • Potential use of CbC software
    • Financial auditor (as appropriate in terms of independence and related matters)

B. Current Global Effective Tax Rate Planning

  • Refresh and confirm the building blocks of the existing ETR plan
  • Implementation mechanics
  • Structural (non- transfer pricing (TP)) aspects of the ETR plan
  • TP building blocks

    • Functional analysis
    • TP performed on a one-sided basis (e.g., CPM/TNMM)
    • Integration with non-TP building blocks
  • Allocation of taxable income by country
  • Formulation of global results on a system profit or profit split basis (a two-sided TP basis)

C. CbC Formulation for Global Documentation

[Note: If the group is not experienced with profit split TP methodologies, this will be an interesting experience; be patient]

  • Complete a draft of the documentation (local, master and CbC)
  • Evaluate local reports

    • From the standpoint of each local tax authority
    • From the standpoint of the home or other pertinent country tax authority
  • Prepare a risk assessment for each building block of the global ETR strategy
  • Prepare a synthesis of likely tax authority evaluations (which will be instructive in the process of re-evaluating the ETR strategy), restructure as appropriate and prepare for controversy, as noted below.

D. Re-evaluate the Global ETR Plan

  • Revisit the building blocks of the ETR plan
    • Evaluate in view of the CbC analysis in B
  • Consider need to change the building blocks
  • Consider need to update the ETR plan
  • Consider restructuring options
  • Other conclusions

E. Impact of Potential Restructuring

  • Income tax
  • TP
  • Exit or restructuring taxes
  • Existing examinations or pending disputes
  • Consumption taxes
  • Financial accounting
  • Financial reporting

F. Preparing for Controversy

  • Categorize building blocks of existing global ETR plan
  • Model:

    • Risk of tax authority challenge (e.g., in cases where some of the building blocks are specifically mentioned in the BEPS final reports)
    • Potential impact on global ETR of successful challenge
    • Likelihood of successfully defending a challenge
    • Cost-benefit analysis of defending tax authority challenges
  • Decide (in conjunction with E above) which building blocks will be proactively amended
  • For those building blocks that the group decides will not be amended:

    • Proactively prepare responses to possible tax authority enquiries
    • Gather and organize existing data and other materials supporting group's position
  • As regards building blocks that the group will be amending, are currently under audit or are being challenged:

    • Articulate controversy positions in relation to each building block
    • Consider impact of restructuring on tax authority perception of existing building blocks

G. Agenda for Proceeding (including tax authority outreach)

  • An agenda can be composed reflecting the prior elements of the Checklist and the orientation of the working group

Introduction To The New World Of Global Tax Planning

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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