United States - response to BEPS

United States - response to BEPS

Like other countries that are both OECD and G20 members, the United States has been fully engaged in the OECD’s BEPS project.

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Representatives of the US Treasury Department have actively participated in the OECD negotiations and generally expressed support for the goals of the project. Some members of the US Congress have also expressed their support for the project, but others have reserved judgment or expressed concern that the project may have unfairly focused on US multinationals. 

The United States has good reason to believe its companies have been disproportionately targeted. Within Europe, much of the public and media attention relating to BEPS has focused on the perceived tax behavior of US-based multinationals that derive profits from high-value marketing intangibles. A significant portion of the OECD Action Plan focuses on tax issues involving intangible property, and the US is home to many of the world’s highest value brands.

US influence on OECD’s work

Many of the OECD’s recommendations have been revised to address US concerns about the original proposals.

For example, early versions of the OECD’s recommendations for country-by-country reporting sought much more detailed disclosures. Due to concerns expressed by US policy official regarding burden, misuse of information and confidentiality, which are shared by a number of other officials, the OECD’s final recommendations on country-by-country reporting are narrower.

The US influence is also evident in the OECD’s anti-treaty shopping recommendations. Previously, it appeared the OECD was set to recommend that countries adopt both a limitation on benefits article in their treaties and a domestic principal purpose test under which treaty benefits would be denied where gaining the benefit is one of an arrangement’s principal purposes. In line with the general US preference for objective tests over general anti-abuse or anti-avoidance rules, US representatives participating in the BEPS project (among others) felt the domestic principal purpose test would create too much uncertainty. The final recommendations call on countries to adopt either a principal purpose test or an objective limitation on benefits provision coupled with targeted domestic anti-abuse rules, such as anti-conduit rules.

US adoption of OECD’s recommendations?

On 22 December 2015, the US Treasury Department and the Internal Revenue Service issued proposed regulations that would require country-by-country reporting by US persons that are the ultimate parent entity of an MNE group that has annual revenue for the preceding annual accounting period of 850 million US dollars (USD) or more. The proposed regulations would be applicable to taxable years of ultimate parent entities of MNE groups beginning on or after the date of publication of the final regulations. 

Given the late publication date for the proposed regulations, final regulations are not expected until sometime during 2016, pushing the first reportable period for calendar-year MNE groups to 2017, which is 1 year later than the OECD’s recommended first reporting period.

The US Treasury Department released proposals to revise the US model income tax treaty on 22 May 2015. The revisions are designed to respond to changes in US treaty partners’ tax regimes that the Treasury Department believes may encourage BEPS. The proposed changes include provisions aimed at inversion transactions, ‘special tax regimes’, and so-called ‘exempt permanent establishments’. The Treasury Department has stated that, for the next US model income tax treaty update, a new article would be introduced for resolving disputes between tax authorities through mandatory binding arbitration, although this measure is not among the current proposals. 

Previously, the US indicated that it did not intend to take part in the ad hoc group working on the development of a multilateral instrument, but the US has subsequently enlisted as a member of that group.

Beyond these developments, the Obama Administration has indicated it will consider implementation of the OECD BEPS project results, at least to the extent certain results may be implemented solely through administrative actions. The Administration has suggested it may also choose to propose statutory changes based on the OECD BEPS project results, but the likelihood any such proposed changes would be enacted remains uncertain.

Both former House Ways and Means Chairman Dave Camp and former Senate Finance Committee Chairman Max Baucus had previously introduced proposals for international tax reform that include provisions targeted at base erosion. President Obama’s 2017 budget also includes several international tax reform proposals designed to address BEPS concerns.

Common to these proposals are variations on measures that would:

  • create new categories of Subpart F income for certain low-taxed earnings of a controlled foreign company (e.g. where the earnings are attributable to intangibles)
  • impose limitations on earnings stripping interest expense
  • neutralize tax benefits from certain hybrid arrangements
  • deter tax inversions.

Various legislative proposals for a preferential regime for intellectual property have also been put forward. Presumably, these proposals would be considered in the context of broader international tax reform.

Managing the potential impact of other countries’ anti-BEPS measures

Regardless of whether the US enacts these or other statutory or regulatory changes, US-based companies with foreign operations must comply with BEPS-related changes in the local tax laws of the countries in which they operate. In particular, US-based companies may be required to file a country-by-country report locally in jurisdictions in which they operate or designate a surrogate filing jurisdiction where relevant, prior to the effective date of the requirement in the US.

US-based companies also need to:

  • monitor and manage the impact of the implementation of anti-hybrid rules
  • address special measures designed to require additional substance to support the allocation of profit to risk and capital in the context of intercompany transactions
  • evaluate the impact on changes to the rules on permanent establishments in treaties or domestic laws
  • assess the availability of treaty benefits under anti-treaty shopping rules. 

These are just a few of the BEPS-related changes that US companies should begin preparing for regardless of whether or not the US adopts them domestically. Other potential effects may result from new limitations on interest deductibility, European Commission state aid cases, evolving views on the digital economy and changes in dispute resolution.

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