EU to Modernize VAT Rules on Financial and Insurance Services

Excerpt from Practical European Tax Strategies by Tracey Paveley (Baker & McKenzie)

The European Union (EU) has recognized that the EU VAT legislation in relation to financial and insurance services is becoming increasingly out of date as providers introduce more sophisticated and diverse financial products into the marketplace. Businesses are finding it difficult to define these products for VAT purposes within the confines of the current legislation.

This uncertainty surrounding the VAT treatment of financial and insurance products has led to an increased amount of tax litigation, particularly as businesses are often required to negotiate the application of the VAT exemption in multiple Member States. This process can be very costly for businesses.

In addition, there is growing concern that EU financial institutions are less efficient than their U.S. counterparts. The embedded irrecoverable VAT cost suffered by EU providers of financial or insurance services is considered one of the factors contributing to this perceived inefficiency.

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Brazilian Exporters Surprised by Change of Position on Inflation Correction

Excerpt from Practical Latin American Tax Strategies
published by WorldTrade Executive

Brazilian exporting firms have been surprised by the sudden reversal of a longstanding policy correcting tax credits for inflation.

For years, exporters have been able to use credits from their “presumed” excise tax (IPI) to compensate for payments of Brazil’s PIS-Cofins corporate social security taxes. This compensation was created as a fiscal incentive for exporters. Rather than exempt exporters from PIS/Cofins, which would have required legislation, the government adopted an administrative approach, granting a credit for what companies would have paid in excise taxes, the reason why it is referred to as the “presumed IPI.”

In practice, exporters have commonly allowed these credits to accumulate over several years before claiming them. Since these credits often date back six or seven years, the tax department has permitted companies to adjust their credits for inflation, using the country’s base interest rate.

But starting last December, the tax department has rejected this practice. In a series of decisions in February and March of this year, the department’s Superior Chamber of Fiscal Appeals, the last administrative recourse for companies, has supported this new policy, turning down the appeals of exporting firms.

More: How does this affect compensation for exporters?>

Mexico's Dictamen Fiscal Is Similar to New Fin 48 in the US

Excerpt from Practical Mexican Tax Strategies by Steve Axler & Dinorah Gonzalez (Halliburton)

One of the concerns resulting from the introduction of FIN 48 for many in-house tax practitioners, especially for US based multinational companies, is that the US Internal Revenue Service would now essentially have a road map to various tax positions taken by the taxpayer. However, the disclosure of tax positions to the tax authorities is not a new or unusual event in Mexico. In fact, for large taxpayers in Mexico this is an annual occurrence known in Spanish as the Dictamen Fiscal.

Often simply referred to just as “the Dictamen”, this is a tax audit of a Mexican legal entity or person that carries out business activities or any foreign residents with a permanent establishment in Mexico. The Dictamen Fiscal can only be performed by a registered and certified Mexican public accountant. Upon completion of the Dictamen, the accountant will issue a report which will be filed with the Mexican tax authorities (Servicio Administración Tributaria or “SAT”) stating whether, according to the applicable tax regulations and audit standards, the taxpayer has complied with its obligations. The public accountant is required to sign the Dictamen under penalty of perjury.

It cannot be emphasized enough the influence that a Mexican statutory auditor has regarding the tax positions taken by a taxpayer in Mexico.

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The Pot Calling the Pot Black: Congress Points a Finger at the Internal Revenue Code (and Itself)

Excerpt from Practical US/Domestic Tax Strategies by Joseph B. Darby III (Greenberg Traurig LLP)

On April 10, 2008, the Small Business Committee of the U.S. House of Representatives released a Report stating that small businesses, which could otherwise help the U.S. economy get “back on track,” are burdened by a variety of barriers under the “remarkably outdated tax code.”

In the legendarily famous words of Homer Simpson himself, “Duh!”

What makes this Report newsworthy is not the content but rather the author. We are familiar in politics with the “pot calling the kettle black,” since, after all, finger-pointing and blame-shifting is pretty much what Congress does. However, since the primary party to blame for the tax code being “remarkably outdated” is Congress itself, Congress has, in effect, decided to point a finger at itself: This is the pot calling the pot black. Now that is news, indeed.

The funny thing is that the Report is absolutely dead-on accurate in its criticisms of the Code—so much so that it gives the reader a small hope that some of the changes might actually be enacted. Experience shows that when members of Congress are bickering and blaming each other, very little gets done. However, when Congress decides to look in a mirror and blame itself—well, almost anything seems possible.

Although the Report is concerned primarily with “small business” issues, the recommendations (if adopted) would benefit all tax-paying businesses, by simplifying the law and eliminating burdensome recordkeeping. Best of all, the Report might actually initiate a movement in Congress to consider the extraordinary burdens it places on U.S. taxpayers as part of the “voluntary” U.S. income tax system. In short, the Report is a surprisingly candid document that should be read by taxpayers of all sizes and stripes.

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Accounting—In Practice—for Back Office and Headquarters Services After Changes to Intercompany Service Transactions

Excerpt from Practical US/International Tax Strategies' interview with Transfer Pricing Specialist Eric Ryan, DLA Piper

In 2006 the Treasury Department and the IRS issued temporary regulations under Code Section 482 that phased out the simplified cost based method for reporting intercompany service transactions, and replaced it with the Services Cost Method (SCM). In order to find out how companies are adapting to the changes, Tax Strategies talked with Eric Ryan, a Partner with DLA Piper, resident in the Palo Alto office. Mr. Ryan has been working closely with many companies, primarily in high tech sectors, to implement the new rules.

Strategies: What kinds of companies are most affected by the changes to the new transfer pricing methods provided under the temporary service regulations?

Ryan: The key companies that are affected by this are U.S. multinationals that, on a regular basis, are charging out to their foreign affiliates some portion of what they consider U.S. headquarters costs. These companies in particular have basically had to do a complete relook at what they were doing previously.

Strategies: What has been the general taxpayer reaction to the SCM or Services Cost Method and the temporary regulations that allow expenses to be charged to affiliates without a markup?

Ryan: With the exception of one or two items, I think it has actually been favorable. Of course the SCM—the no-markup approach—is an exception to the arm’s length standard because the tax authorities would otherwise assume that there’s a profit motivation in arm’s length dealings. So what the IRS tried to do here was to keep the categories of expenses that could be allocated out without a markup to non high value-added activities. There was an earlier version of these proposed regulations issued in 2003 that had a formula which was just not workable, and it took a lot of effort to figure out if you could qualify for the new markup. Now the IRS has issued this list of 101 things that companies can allocate without a markup and that list, which is in Rev. Proc. 2007-13, we are coming to find out, is fairly extensive for General and Administrative activities.

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2008 Tax Reform in Japan

Excerpt from Practical Asian Tax Strategies by Yumiko Arai and Al Zencak
(PricewaterhouseCoopers, Tokyo)

The 83 trillion yen Japanese state budget and tax reform bill for fiscal 2008 passed the House of Representatives with a majority vote by the ruling parties. The budget and the tax reform bill cleared the lower house with an approval of the ruling Liberal Democratic Party and its coalition partner New Komeito party, making sure that the budget will pass through the parliament in time for the beginning of the new business year (April 1). The following excerpt reviews some of the major corporate taxation changes currently contained in the 2008 tax reform legislation.

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Thank God I'm a Country Boy

Why Country Songwriters Now Get Capital Gain Treatment for Their Music

Published in Practical US/Domestic Tax Strategies by Joseph B. Darby, III (Greenberg Traurig LLP)

As a tax lawyer, my professional life has the elements that my grandfather believed were essential to a really good job: indoor work, no heavy lifting.

In fact, there are only three things that I do as a tax lawyer. I help taxpayers (1) avoid income, (2) defer income, and (3) convert ordinary income into long-term capital gains. That’s really all there is to it, other than reading and understanding the Internal Revenue Code. All in all, as I said, a pretty cushy existence.

However, late at night, after everyone else has gone to bed, I sometimes wish I had time for one other important thing: I wish I had time to write country-western songs. You know the type of songs I’m referring to: mournful ballads sung with a twangy drawl, about how my old dog done died, and my new dog won’t hunt, and the finance company repossessed my truck, and my dern wife done run off with the guy from the finance company in my old truck, and my 12-gauge shotgun was in the back of the truck they took so I kain’t shoot no one, and my latest batch of homemade whisky just kilt four of my few remaining friends and blinded the rest, so there ain’t no one left who can see that I’m all tore up inside.

That’s what I call music.

Unfortunately, country songwriting is a tough racket, and so I have stuck until now with the practice of law, with the occasional tax or sports article on the side. The problem was that, until recently, all income from writing activities was taxed at ordinary federal income tax rates. There was no percentage in that kind of work, I figured.

You can imagine my amazement, therefore, when country songwriters managed to convince Congress in 2005 and 2006 that their creative endeavors deserved a special tax dispensation and that the sale of a copyright in a song is no longer ordinary income, but rather can be taxed at favorable capital gains tax rates.

This is a story worth telling. In fact, I may even write a song about it.

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Intellectual Property Holding Companies: Tax Panacea or IP Mistake?

Excerpt from Practical US/Domestic Tax Strategies by Paul Dau, Paul Devinsky and Justin Hill (McDermott Will & Emery LLP)

Typical reasons for establishing intellectual property (IP) holding companies include (i) tax planning, (ii) protection in the event of insolvency, and (iii) administrative synergies, such as consolidation of legal costs. In reality the process of establishing and operating an IP holding company is far from trivial. By its very nature it brings together three complex legal fields, namely intellectual property, tax and insolvency. Moreover, the considerations that apply are usually multi-jurisdictional and therefore inherently complex. Oftentimes, IP holding strategies turn out to be optimized with one or more of the above legal fields more in mind than the others. Failure to assess properly competing economic and legal considerations in these complex international scenarios can lead to failure to meet objectives and runaway costs.

In many cases, the holding company is a subsidiary within an international corporate group. Sometimes, although less often, the holding company is the parent company of the overall corporate group. Adoption of a suitable structure depends to a large extent on the headquarter jurisdiction, the mechanism by which the various synergies are anticipated to operate, and on the circumstances of the particular scenario.

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Transfer Pricing and Customs Valuation

Excerpt from Practical US/International Tax Strategies by Peter E. Kirby (Fasken Martineau DuMoulin LLP)

While the income tax authorities in Canada and the U.S. have spent the last twenty years developing, refining, and explaining their policies for testing transfer pricing decisions, the customs authorities in these countries have been slower to come to grips with the issue. That has now changed and the customs authorities in Canada and the U.S. have begun to look more carefully at transfer pricing. As a result of that scrutiny, two things have become clear. First, a transfer price that may be acceptable to the income tax authorities may not be acceptable to the customs authorities. Second, a transfer price study that confirms the acceptability of transfer prices for income tax purposes is, in most cases, irrelevant for the purposes of customs valuation.

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Spain’s Draft Regulations on Transfer Pricing Rules

excerpt from Practical European Tax Strategies written by Pedro Aguarón (Baker & McKenzie Barcelona, S.L.)

As a result of the new Law for Avoidance of Tax Fraud (LATF) enforceable in 2007, the Spanish transfer pricing legal framework has changed significantly.

One notable change is that the LATF introduced specific transfer pricing requirements. The taxpayer is required to properly document that the price used in related transactions is arm’s length and make this documentation available at the tax authorities’ request.

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