BEPS implementation, U.S. Tax Cuts and Jobs Act changes, digital taxation proposals, European state aid investigations… What is a multinational corporation to do in these uncertain times?
In recent years, governmental entities, most notably the OECD, the United States, and the EU Commission, have driven massive changes to the once-stable field of international tax law. These changes have created uncertainty and challenges for all levels of taxpayers, tax practitioners, and (even) regulators. When the OECD began pushing these initiatives with the BEPS Project back in the earlier part of this decade, the EU Commission responded with its state aid investigations, sending not-too-subtle reminders of its legal authority to create extra-statutory tax laws.
These ongoing cases have induced responses from both tax authorities and taxpayer behavior.
ATAD and DAC6
Most recently, the EU introduced a requirement that its member states implement the Anti-Tax Avoidance Directive (ATAD) and the DAC6 (Directive on Mandatory Disclosure for Intermediaries) into their own national laws. For smaller EU member states and for those seeking to compete on a tax basis in the global economy, implementation of these directives, such as introduction of CFC legislation, represents significant (and potentially unwelcome) legislative and policy change.
Under these extra-national rules, EU member states must also create interest deductibility restrictions featuring a fixed ratio rule, exit tax provisions, and anti-hybrid rules, further introducing complexities and compliance burdens. No end appears in sight, either, as the EU Commission continues its tax juggernaut with further draft directives, the most prominent of which is the Digital Tax Directive—considering a potentially aggressive approach to taxation of non-brick-and-mortar business profits, a notably unpopular piece of regulation that many member states believe ought to be left to the OECD (although the UK seems to be trying to foment quick adoption with its recently proposed digital services tax).
Last year saw the hasty codification of U.S. international tax reform—something which had been many years in the making. Hailed by legislators as a simplification and territorial tax measure, this legislation brought further complexities to an already complex system and extended the reach of the US tax hand across the globe. The full effects of the legislative measures—and the regulations which are following—will not be entirely clear for years to come.
State Aid Cases
Prior to U.S. tax reform, the U.S. would react vociferously to state aid cases on the ground that U.S. multinationals were being unfairly targeted. In reality, each dollar of tax paid by a non-U.S. subsidiary of a U.S. multinational to a non-U.S. government was a dollar that the U.S. would likely lose when the U.S. shareholder repatriated those profits and claimed the associated foreign tax credit. However, enactment of U.S. tax reform (a) accelerated U.S. taxation of U.S.-based multinationals’ offshore profits; (b) ended the possibility of future deferrals; and (c) limited the utility of the U.S. foreign tax credit regime, essentially ending the U.S.’s economic interest in state aid cases. Further, by setting a minimum tax on a U.S. multinational’s worldwide profits via the new Global Intangible Low-taxed Income (GILTI) provisions, the U.S. established a new view regarding multinationals offshore tax savings: if a U.S. multinational pays more tax offshore than GILTI demands, its overall cash tax rate will reflect that marginal tax; if a U.S. multinational pays less than GILTI demands, the U.S. will (partially) credit the foreign taxes and tax the difference in the U.S.
Although U.S. government interest in state aid cases may have decreased as a result of U.S. tax reform, "state aid" threats continue to impact U.S. multinationals in at least two significant ways, creating:
- Risk of sizeable payouts by multinationals who are (or may be) under investigation (often to governments who are supportive of and benefit from the activities of such multinationals); and
- Challenges, whether real or perceived, regarding traditional business avenues utilized by multinationals while conducting business beyond their minimal needs.
As a result, many U.S. multinationals are in a “wait and see” mode and thoughtfully considering the extent to which they wish to:
- expose their profits to both certain and pending risks (i.e., state aid, Digital Tax Directive); and
- Deploy their limited resources to manage their involvement in the EU and the potential legislative impacts (e.g., tax department attention to CFC rules which would impact traditional intermediate holding company locations, such as Luxembourg and Netherlands).
As U.S. tax reform has been enacted, U.S. multinationals will look continue to (a) optimize offshore cash taxes relative to their U.S. cash taxes, (b) optimize their debt loads and financing arrangements to maximize interest expense deductibility, and (c) hope for issuance of clear guidance by the Court of Justice of the European Union in regard to tax competition
A&M Taxand Says:
Each multinational’s situation and risk tolerance will vary, and there is no straightforward answer regarding an optimal tax structure for a U.S. multinational. For now, U.S. multinationals are considering EU exposures, weighing their potential supply chain exposures related to their subsidiaries, ensuring they are fully compliant with tax laws (esp. in the wake of U.S. Tax reform), and modeling potential outcomes that fit their businesses and risk tolerances. Risk analysis, business needs, modeling, and technical savvy will drive structures, and the best of these will incorporate low-cost options to flex in the future as global tax policy continues to change at an unprecedented pace.