Fri, April 26, 2019
Earlier this year, the Organisation for Economic Co-operation and Development (OECD) revealed its plans to implement a global minimum tax rate by 2020 in an effort to update tax rules for the current era. The global minimum tax is one of a number of proposals to address concerns that corporations operating in more than one country are improperly avoiding taxes by attributing an outsized share of earnings to low-tax jurisdictions. The most prominently cited examples of this practice involve digital e-commerce or platform companies, but the new rules would apply broadly.
The proposed plan would address a number of issues, such as how to divide up the taxation of an entity’s cross-border income between countries, which will hopefully prevent larger companies from shifting profits to low-tax countries. The idea was inspired by the U.S.’s 2017 tax overhaul, which included global intangible low-taxed income (GILTI) rules, which take effect if a company isn’t paying enough tax on its foreign income.
Despite the overall simplicity of the idea, some experts believe that the implementation of the plan faces a number of challenges. In particular, the OECD must figure out whether the minimum tax would apply to a multinational’s activities in any country with an effective tax rate below an agreed-upon threshold, or if the company’s global foreign average tax rate is too low to apply, similar to U.S. policy under the new GILTI rules.
Another challenge involves deciding how a minimum tax would interact with a defensive regime that denies deductions for payments that are made to offshore entities not subject to the minimum tax regime.
Already, several countries outside the U.S., such as the U.K., France, Italy and Spain, have adopted their own policies for taxing large digital firms. This could result in some companies being double-taxed, with others not being taxed at all.
Of course, the most obvious hurdle is expected to be opposition from large multinationals themselves, many of which will undoubtedly voice their disapproval. Some multinationals, however, could view the changes in a more positive light and embrace a more predictable and homogeneous approach to their tax planning.
Fri, April 26, 2019
Colombia passed Law 1943 in December 2018 to balance the general budget and obtain the missing resources to execute the country’s National Development Plan. These tax reforms introduce a number of important measures that will impact both direct and indirect taxation, and modify a number of provisions within the tax code.
Some of the key changes include services rendered from abroad, income tax, dividends, indirect sale of assets, and creation of a Colombian holding company regime—and all could have an impact on foreign nationals residing in the country.
Services Rendered from Abroad
Law 1943 establishes an alternative procedure for legal entities that render electronic or digital services from abroad that don’t want to adhere to the standard VAT system. The procedure allows providers of audiovisual services, online marketing, remote training services, and other similar services to users in Colombia to voluntarily submit to a withholding tax system. This requires them to apply a VAT withholding tax in instances where the payment for such services is made using credit or debit cards, prepaid cards, or cash collectors on behalf of third-parties.
Sale of Real Estate
Under Law 1943, the sale of real estate assets is no longer subject to VAT but will be subject to consumption tax at a 2% rate, which will be applied to the full price of the asset when its price exceeds $300,000. The purchaser will be the taxpayer, but the seller is the one who will be directly liable for the amounts collected.
Income Tax Provisions
Law 1943 also includes modifications relating to income tax, including the establishment of a gradual decrease of the income tax rate for legal entities. For 2019, the tax rate of 33% will remain but will be followed by a reduction to 32% in 2020, 31% in 2021, and 30% in 2022. Additionally, financial entities with a gross income of $1.3 million will be subject to a surcharge of 4% in 2019 and 3% in 2020 and 2021. It should be noted that this particular change was done in accordance with OECD guidelines and with the tax policies of its member countries.
The law also increases the withholding tax for dividends paid to national and foreign shareholders, as well as taxing the distribution of dividends to national corporations. As a result, dividends distributed to Colombian companies, out of profits taxed at a corporate level, will be subject to a withholding tax rate of 7.5%. However, dividends paid to Colombian companies out of profits not taxed at a corporate level will be subject to the general income tax rate, with the remaining amount subject to the withholding tax rate of 7.5%. Additionally, dividends distributed by a Colombian company to its foreign shareholders will be subject to a tax rate of 7.5%.
Colombian Holding Company Regime
Finally, Law 1943 establishes a Colombian Holding Company (CHC) regime as a means to incentivize multinational groups investing in the country to establish their headquarters in Colombia. To access the benefits of the regime, the main purpose of the CHC should be investment or holding of shares of subsidiaries and the administration of the investments. The CHC must also have direct or indirect participation in at least 10% of the capital of the subsidiaries in a 12-month period and it must also develop its corporate purpose in Colombia and have at least three employees, as well as a management office there. Dividends distributed to the CHC from a foreign subsidiary will be exempt from Colombian income tax. However, dividends distributed by a CHC to nonresidents aren’t considered Colombian-sourced income, providing such dividends are attributable to activities performed by nonresident entities.
Fri, Mar 29, 2019
As Beijing increases its efforts to prevent tax evasion, wealthy Chinese are facing a variety of new tax rules both at home and abroad. The increased focus on reporting comes as the country experiences a boom in wealth, with some experts reporting that personal wealth in China skyrocketed to $24 trillion and $1 trillion of that is held outside the country.
Increased global cooperation through the CRS
At the forefront of worldwide anti-tax evasion efforts is the introduction of a global financial disclosure system – the Common Reporting Standard, or CRS – through which participating jurisdictions automatically share annual reports detailing reportable accounts, their balances, and their beneficiaries. For example, if a Chinese tax resident opens a bank account in the U.K., the CRS requires British authorities to send the information to Beijing as part of their report, and vice versa.
The CRS casts a broad net, with any entity or individual who’s a resident of a CRS signatory state being considered a reportable person (although real estate is an excluded asset). The process has become so common that even several tax-favorable jurisdictions have agreed to sign up for CRS. Last year, China started sharing information with approximately 100 participating jurisdictions.
However, there are holdouts – most of which are unsuitable as tax havens due to political, economic or social instability. Another notable exception is the U.S., as the country chose to maintain its own framework, the Foreign Account Tax Compliance Act (FATCA), through 113 bilateral agreements.
Domestic regulations tightened following the CRS
In addition to participating in the CRS framework, China is continuing its efforts to close loopholes in the system. Previously, wealthy Chinese citizens were not required to pay taxes on overseas earnings by acquiring a foreign passport or green card while maintaining Chinese citizenship. However, China recently began taxing global income from all holders of “hukou” household registrations, regardless of whether they may be citizens elsewhere.
Additionally, the government has implemented the “Golden Tax System Phase III,” a new data platform that gives it a more complete picture of a taxpayer’s finances. The government is hoping to stem the loss of tax revenue through means such as underground banks that facilitate illegal foreign exchange transactions. Uncertainty over those new rules has led certain Chinese taxpayers to create overseas trusts. For example, in late 2018, four Chinese tycoons transferred more than $17 billion into family trusts with ownership structures involving entities solely in the British Virgin Islands.
Participation in CRS, changes to the “hukou” system, and the implementation of the Golden Tax System together signal the Chinese government is tightening its anti-tax evasion legislation and enforcement. Chinese taxpayers with investments or property overseas should be aware of the new disclosure requirements and seek professional advice.
Fri, Mar 29, 2019
In November 2018, the IRS and Treasury Department released proposed regulations on the determination of foreign tax credits. The proposed regulations provide guidance to a number of taxpayers who are having difficulty figuring out the impact of provisions introduced by the 2017 Tax Cuts and Jobs Act.
The 2017 tax act made several changes to the foreign tax credit scheme, including:
* creating the global intangible low-taxed income (GILTI) and foreign branch income baskets of income;
* reducing the foreign tax credit limitation to account for the new 100 percent dividends received deduction on certain dividends received from foreign subsidiaries;repealing indirect credits for deemed-paid foreign taxes related to dividends from foreign subsidiaries;
* modifying the rules for deemed-paid foreign taxes related to Subpart F and GILTI income inclusions;
* andeliminating the fair market value method for interest expense apportionment.
The November 2018 proposed regulations address questions related to these changes and will be applicable to taxable years beginning after December 22, 2017 and will apply to the 2018 taxable year.
The regulations address numerous issues, including:
Allocation and Apportionment of Deductions:
The proposed regulations characterize the portion of GILTI offset by the foreign-derived intangible income and GILTI deduction as “exempt income.” Therefore, it isn’t taken into consideration for the purposes of allocating and apportioning deductible expenses, increasing the foreign tax credit limit in the GILTI basket. However, this limited relief won’t prevent residual U.S. Taxation on GILTI income where material expenses are allocated to the GILTI income basket.
The Foreign Branch Income Bracket:
Foreign branch income is also clarified to include income of a U.S. person attributable to foreign branches held by that person – where a foreign branch includes the activities of a corporation, partnership or individual that constitute the conduct of a trade or business outside the United States and where a separate set of books and records is maintained. If a taxpayer has more than one foreign branch, all income of the different branches will be aggregated into a single foreign branch income category. The regulations also include an anti-abuse rule through which an income item can be reattributed by the IRS to the foreign branch owner if tax avoidance is suspected.
Transition Rules for Foreign Tax Credit Carryovers and Carrybacks:
Carryovers of pre-2018 excess foreign tax credits can be allocated to the foreign branch income basket if the tax had been paid in 2018 or later. Additionally, excess foreign tax credits in the foreign branch income basket for a post-2017 tax act taxable year can be carried back to a pre-tax act taxable year and will be allocated to the general basket.
The proposed regulations include other miscellaneous provisions not strictly related to changes introduced by the 2017 tax act, such as changes to the look-through rule, special rules for certain partnership loans, and the Subpart F high-tax exception.
As these proposed changes come into effect, taxpayers will need to prepare for not only the new foreign tax credit baskets but also the alterations to interest expense allocation rules, the elimination of the fair market value method and other changes.