2. Int'l Tax Update Significant Developments in the Global Tax System - Andrew Seidler

Helping with tax challenges wherever you are in the world
INTERNATIONAL TAX UPDATE:
SIGNIFICANT DEVELOPMENTS IN THE GLOBAL TAX SYSTEM
Bucharest, 11 April 2018

Presenter
Andrew Seidler
Partner, RSM UK
andrew.seidler@rsmuk.com
+44 20 3201 8615
• International Tax Partner, RSM London
• 20 years international tax experience across range of taxes
• Chair of RSM International European Tax Centre of Excellence
• Author of Tolley’s International Tax Planning 2017-18 and 2018-19 (forthcoming).
2

Overview
BEPS
Global Tax
Reform
US Tax
Reform
BREXIT
3

Corporate Changes

Corporate changes
Tax change Post reform law Considerations
Reduced Corporate Tax
Rate & Move to Territorial
Type System
• Reduced 21 percent flat corporate
federal income tax rate from 35
percent, generally effective Jan. 1,
2018
• Companies need to consider whether
flow-through or corporate structure is
most efficient
• Investor make up?
Net Operating Loss (NOL)
rules
• Limits NOL deduction to 80 percent
of taxable income for NOLs arising in
years beginning after Dec. 31, 2017
• Eliminates NOL carrybacks for NOLs
arising in years ending after Dec. 31,
2017
• NOLs generally carried forward
indefinitely if they arise in years
ending after Dec. 31, 2017
• Fiscal year taxpayers with years
ending after Dec. 31, 2017 cannot
carryback losses
• Limited impact on state NOLs as
many states have their own NOL
deduction provisions
5

International tax provisions: Repatriation and DRD
Tax Change Post Reform Law Considerations
One-time deemed
repatriation tax on foreign
deferred earnings (effective
for tax years beginning
before January 1, 2018)
• Foreign deferred earnings are taxed
at 15.5 or 8 percent based on
balance sheet attributes (cash &
cash equivalents vs. non-cash
assets, respectively).
• Election to defer payment over 8
years
• Determine applicability at portfolio and
owner level
• Significant diligence item as well as
cash flow concern
• Need to understand E&P on all
impacted companies
• Many states will treat the repatriation
as Subpart F income subject to full or
partial dividend received deduction
Dividend Received
Deduction/ Participation
Exemption (effective for
distributions made after
Dec. 31, 2017)
• Certain foreign dividends non-taxable
in the US
• Certain gains on sale of foreign
subsidiaries will not be subject to
U.S. federal income tax
• Applicable to C-Corporations with
foreign corporation(s)
• Corporate structure may be benefit
due to participation exemptions
• How significant are foreign earnings?
6

Corporate changes
Tax change Post reform law Considerations
Immediate Expensing –
Bonus Depreciation
• 100 percent bonus depreciation
through 2022, then phased out
through 2026
• Applies to new and used property
acquired and retroactive to assets
placed in service after Sept. 27,
2017
• Adds more importance to purchase
price allocation agreements
• Asset deals are even more attractive
• States may not conform
• Immediate expensing benefit is
reduced to the extent it generates an
NOL
Corporate Alternative
Minimum Tax (AMT) & AMT
Credit
• Repeals corporate AMT for tax years
beginning after Dec. 31, 2017
• Credits can be refundable
• Refundable credit is an unexpected
benefit
7

UK Planning Considerations: Dividend Exemption
To qualify for dividend exemption the US
must be a C Corp: many family companies
(even sizeable ones) and financial services
entities are transparent in the US, too.
The effect of subpart F or checking the box
for disregard is current year US taxation
(with foreign tax credit) as opposed to an
exempt dividend.
Dividend exemption has an impact on
deferral planning.
Entity
classification
US
UK
Entity
classification
Non-US Affiliate
EU
Customer

UK Planning Considerations: NOL Limitation
In the UK, the strategy for foreign profits often took
into account the current and brought forward NOL
position in the US:
• In the past there was no credit for foreign tax if
NOLs – the strategy was to defer tax on profits by
avoiding Subpart F and regarding the UK
subsidiary – to pay a dividend at a later date;
• This is no longer relevant if all foreign dividends
are exempt;
• Absolute rate of foreign tax becomes more
important though, as it is not safe to assume the
effective tax will be higher of US and overseas
tax rates (with the US usually being higher);
• Planning to use foreign tax to frank the tax on the
the 20% profits not covered by NOLs;
• NOLs no longer fully cover disposals for example
of exported IP.
US
UK
UK
EU
Customer

UK Planning Considerations: Deemed Repatriation
• This is a tax charge as if the funds
had been repatriated to the US – the
cash does not have to be repatriated
(although the tax will need funding,
but the tax can be spread);
• Is the cash accessible? Has it been
tied up in acquisitions and financing?
IP Co
US
Ireland
In some
groups this
will be UK
• If the UK is an intermediate parent
company is any structuring required
whilst the UK has access to EU
directives to ensure WHT free access
to the cash?
Fin Co
UK
EU EUEU
EU
Customer

Withholding Taxes After Brexit
• With the UK outside the EU the Parent
Subsidiary Directive will no longer eliminate
dividend withholding taxes on payments to
the UK: treaty rates will apply and these
are commonly 5%.
• Where dividends are exempt from tax – in
the UK and now the US – withholding taxes
represent additional tax.
• Netherlands has just changed its law to
exempt dividends from withholdings.
US
UK
Dividend WHT UK US
Ireland 15/5% 15/5%
Germany 15/5% 15/5/0%
Ireland
Netherlands
Germany
Luxembourg 15/5% 15/5/0%
Belgium 10/0% 15/5/0%

Withholding Taxes After Brexit
• Holding EU based activities in branches
or partnerships.
UK
• Germany:
• Conversion of a company to a
partnership does not trigger taxes
domestically in Germany;
• Partners pay tax in Germany at rates
equivalent to German corporate rates;
• Dividends between German resident
companies should be exempt from tax;
• Under the Organschaft (fiscal unity)
the German group parent pays tax on
behalf of the group members as if they
were one.
GmbH1
KG
GmbH2
EU other

Withholding Taxes and the Digital Economy
(UK Government Position Paper)

Withholding Taxes and the Digital Economy
Progress of Profit Split from last resort
moth to method of choice;
The 3% Revenues Tax is a hybrid tax:
• It will have to be expressed as tax on
profits otherwise treaties will not
apply;
• It is on gross income and so behaves
like a withholding tax;
• In operation it may be more like an
indirect tax.
Is its purpose is to pave the way for
something that is better, but would have
otherwise been unacceptable? CCCTB.
Profit Split
Digital
Economy
Final
Model
CCCTB
3%
Revenues
Tax
Digital
Economy
Interim
Measure

Common Consolidated Corporate Tax Base
On 15 March 2018 the European Parliament approved proposals for directives for the Common
Corporate Tax Base and the Common Consolidated Corporate Tax Base.
The directives will initially be binding on groups with revenues exceeding EUR 750m but this
threshold will be lowered reaching zero after seven years.
The intended implementation date is 1 January 2020.
The Common Consolidated Corporate Tax Base provides the method of consolidation and the
formula for allocating the tax base of a multi-national company between Member States. The
allocation formula is based on headcount, sales, data collection and assets, each having equal
weight.
Headcount
Sales
Data
Collection
Assets

Common Corporate Tax Base
• A definition of digital permanent establishment:
• Revenues exceeding EUR 5m pa derived remotely from users in a members state,
• where at least 1,000 registered individual users per month visited the digital platform or
• at least 1,000 digital contracts have been concluded per month with customers or users
in a member state
• or the volume of digital content collected by the taxpayer in the year exceed10% of the
group’s overall stored content;
• Amendments to R&D tax incentives to limit the credit to 10% of the R&D staff costs, with a
maximum threshold of EUR 20m for such costs;
• Limits the deductibility of finance costs to 10% of EBITDA or EUR1m if higher;
• Limits the carry forward of losses to five years;
• Disallowance of expenses paid to beneficiaries located in a jurisdiction considered to be a tax
haven according to the EU list of non-cooperative jurisdictions for tax purposes;
• Amendments to the classification of CFCs;
• Amendments to double tax treaties so that the parties agree to ensure that tax is paid where
economic activities take place and add anti avoidance/anti tax-evasion clauses.
• Provides for an EU wide tax identification number.

Digital Economy Interim Measure
Example:
For every £100 of revenue £3 of
tax is due.
The profits required to generate
£3 of tax under traditional
methods is different in each
country –shown in the graph.
The green line represents
potential double tax relief
limitation in relation to say the US.
30
25
20
15
10
5
0

Digital Economy Interim Measure
Effect of interim measure:
• Some sectors the 3% revenues based tax would increase the tax take
• Taking out centralised costs, most tech sectors would experience and effective tax rise
Sector
NP%
2012
NP%
2018
Information Technology 16.7 17.5
Communications/Telecom 6.2 11.5
Pharma, Life Sciences,
Biotech
19.5 26.9
Media, Broadcast 10.1 12.2
Tax at
20%
3.5
2.3
5.4
2.5
Data from S&P 2012 and CSI Market.com 2018

BEPS Measures:
Anti-hybrid rules
Interest Limitation

US Outbound Acquisition
Typical simple structure in the past for
an outbound acquisition from the US:
applied in other jurisdictions too:
• Dutch BV/CV
• Double Lux co for debt
Acquisition
US
UK
Holdco
Non-US Affiliate
Interest
Interest
group relief
UK

Anti-hybrid provisions

US Hybrid Rules
A “hybrid entity” is any entity that is:
• Fiscally transparent for US tax purposes but
not transparent under foreign law, or
• Fiscally transparent for foreign law
purposes, but not transparent for US tax
purposes.
A “hybrid transaction” is any transaction, series
of transactions, agreement, or instrument
• treated as interest or royalties for US federal
tax purposes
• but not treated as interest or royalties by the
country in which the related party is resident.
US hybrid
entity
Acquisition
US
UK
Holdco
Non-US Affiliate
UK
Not a US
hybrid
transaction
Interest
Interest
group relief

US Hybrid Counteraction
The Act denies a deduction for any disqualified
related party amount paid or accrued pursuant
to a hybrid transaction or by or to a hybrid
entity.
US hybrid
entity
US
Disqualified
related party
amount
Interest
A “disqualified related party amount” is any
interest or royalty paid to a related party where
the related party
• does not include the payment in its income
in the country in which it is a resident or
• is allowed a deduction with respect to the
amount in the country in which it is a
resident.
Acquisition
UK
Holdco
Non-US Affiliate
UK
Interest
group relief
Treasury Regulations expected.

UK approach
Type Mismatch involving Primary Response Defensive Rule Scope
D/NI Ch 3: Financial Instruments Deny payer deduction
Related parties and structured
Include as ordinary income
arrangements
D/NI Ch 4: Hybrid Transfers Deny payer deduction
Related parties and structured
Include as ordinary income
arrangements
D/NI Ch 5: Hybrid Payer Deny payer deduction
Control group and structured
Include as ordinary income
arrangements
D/NI
Ch 6 Transfers by
Permanent Establishments
Deny deduction to UK PE No limitation on response
D/NI Ch 7: Hybrid Payee Deny payer deduction
Include as ordinary income Control group and structured
in investor, then LLP arrangements
D/NI Ch 8: Multinational Payee Deny payer deduction
Control group and structured
arrangements
DD Ch 9: Hybrid Entity Deny investor deduction Deny payer deduction
Related parties and structured
arrangements
Dual resident company deny
deduction
DD
D/NI
Ch 10: Dual Territory
Multinational company: deny
parent jurisdiction deduction
Ch 11: Imported Mismatches Deny payer deduction
Tolley’s International Tax Planning 2017/18
Multinational company:
deny deduction to UK PE
No limitation on response
Control group and structured
arrangements

UK approach compared to US
Type Mismatch involving
Primary Response
D/NI
Ch 3: Financial
Instruments
Deny payer deduction
D/NI Ch 4: Hybrid Transfers Deny payer deduction
D/NI Ch 5: Hybrid Payer Deny payer deduction
D/NI
Ch 6 Transfers by
Permanent
Deny deduction to UK PE
Establishments
D/NI Ch 7: Hybrid Payee Deny payer deduction
D/NI
Ch 8: Multinational
Payee
Deny payer deduction
DD Ch 9: Hybrid Entity Deny investor deduction
Dual resident company
deny deduction
DD
D/NI
Ch 10: Dual Territory
Ch 11: Imported
Mismatches
Multinational company:
deny parent jurisdiction
deduction
Deny payer deduction
US hybrid
entity
Acquisition
US
UK
Holdco
Non-US Affiliate
UK
Not a US
hybrid
transaction?
Interest
Interest
group relief
Who has to disallow first?

Hybrids and single member disregards
Type Mismatch involving
Primary Response
D/NI
Ch 3: Financial
Instruments
Deny payer deduction
D/NI Ch 4: Hybrid Transfers Deny payer deduction
D/NI Ch 5: Hybrid Payer Deny payer deduction
D/NI
Ch 6 Transfers by
Permanent
Deny deduction to UK PE
Establishments
D/NI Ch 7: Hybrid Payee Deny payer deduction
D/NI
Ch 8: Multinational
Payee
Deny payer deduction
DD Ch 9: Hybrid Entity Deny investor deduction
Dual resident company
deny deduction
DD
D/NI
Ch 10: Dual Territory
Ch 11: Imported
Mismatches
Multinational company:
deny parent jurisdiction
deduction
Deny payer deduction
Not a US
disqualified
related party
amount
by nature
US
Cost Plus
US hybrid
entity
US
UK
I
Not a US
hybrid entity
FA 2018 fix
for dual
inclusion
income
EU
Customer

Interest Limitation

Interest deduction limitations
Tax Change
New Interest
Deduction
Limitation
Post Reform Law
• Limits the net interest expense
deduction to 30 percent of adjusted
taxable income (ATI)
• For 2018 through 2021, ATI will
approximate earnings before
interest, taxes, depreciation and
amortization (EBITDA)
• After 2021, ATI will approximate
earnings before interest and taxes
(EBIT)
• Disallowed interest generally may
be carried forward indefinitely
• Limitation does not apply to
businesses with an average
gross receipts of ≤$25 million
USD and certain agricultural,
farming and real estate
businesses
• “Net interest expense” so back
to back loans remain viable for
intercompany financing
activities
• Real property trade or
businesses that use ADS and
farming businesses may elect
not to be subject to the business
interest deduction limitation
28

Interest deduction – comparison with UK
Small company exemption:
• US defined de minimis by type companies
and nature of trade;
• UK defines de minimis as amount of
interest £2m.
Allowable amount:
• US defines it by fixed ration of ATI;
• UK defines it by fixed ration of tax EBITDA
or group debt ratio is larger.
IP Co
US
Ireland
Non-US Affiliate
External
Planning to spread the deduction in the
group – excessive disallowance if
concentrated too narrowly - limitation on net
expense.
Fin Co
UK
EU EUEU
UK Thin Capitalisation as an overlay on the
interest restriction gives rise to tax leakage.

GILTI
FDII
BEAT

Global Intangible
Low Taxed Income
GILTI

International tax provisions: GILTI Minimum Tax
Tax change Post reform law Considerations
Global Intangible
Low Taxed Income
(GILTI) (effective for
tax years beginning
after Dec. 31, 2017)
• Targeted at foreign
corporations that earn a
high rate of return on their
intangible assets
• Much broader than
intangible holding
companies
• All industries
• Calculates tax on amount
over net deemed tangible
income
• GILTI applies to any CFC
• C corporations receive a
deduction against GILTI
equal to 50 percent
• Expectation is that many CFCs will be
subject to GILTI
• Effectively a 10.5 percent minimum tax
CFC is owned by a domestic C Corp
• Eligible for partial foreign tax credit
offset
• New diligence item
32

GILTI Example Calculation
GILTI Calculation
QBAI 200
Routine % of return – 10% 10%
Net deemed tangible return 20
Net CFC tested income 120
Net deemed tangible return (20)
GILTI 100
US Tax Calculation
GILTI 100
Allowed deduction (50% of GILTI) 50
US Taxable Income 50
Tax Rate 21%
US Tax (A) 10.5
Qualified business asset investment (“QBAI”):
Equals the CFC’s average aggregate adjusted bases
for specified tangible property.
Routine return is 10% x QBAI - Net Interest Expense
Interest expense less allocable interest income
taken into account in determining net tested income.
Net CFC tested income: The excess (if any) of the
aggregate tested income of each CFC less the
aggregate tested loss of each CFC.
Example assumes no foreign taxes paid – generally
80% of foreign taxes paid (subject to limitations) may
be available to offset US taxes paid on GILTI

UK Planning Considerations: GILTI Income Sources
What is the impact on R&D and Patent
box type arrangements which trigger
foreign tax breaks?
Product and
Brand
US
Not compliant with the Nexus
requirement in BEPS – some countries
may impose withholdings on royalties.
IP Co
Ireland
R&D
intangibles
from buy in
Although the GILTI tax rate is 10.5%
and so comparable to the rates under
some preferred IP regimes,
• The tax base is foreign income over
an IRS accepted base level, and so
• The foreign income may not be
repatriated to US to claim foreign
tax credit.
Fin Co
UK
Customer
related
intangibles
EU EUEU

Foreign Derived Intangible Income
FDII

Foreign Derived Intangible Income Deduction – FDII
Tax change Post reform law Considerations
Foreign Derived
Intangible Income
(FDII) (effective for
tax years beginning
after Dec. 31,
2017)
• Deduction results in an
effective 13.125 percent
• Applicable for Domestic C
corporations with gross
income generated by
revenues to foreign
customers for foreign use
• Products & services
revenue with respect to
property not located
within the US
• Requires base
calculations of “tangible”
income and intangible
income
• Consider using C corporations to take
advantage of FDII deductions
• Need to identify and document
qualification of this deduction
• Sales to domestic unrelated parties before
final overseas sale eliminates benefit
• New diligence item
36

FDII Example
US
Corp
US
sales
$500
Revenue
$1,000
Revenue
Non US
related or
unrelated
U.S. Corp.
P&L
Sales of products for use in the U.S. 500.0
Sales of products for use outside the U.S. 1,000.0
Total deductiable eligible revenue 1,500.0
COGS 300.0
Gross profit 1,200.0
Allocable deductions (including Interest) 100.0
Potential FDII eligible income 1,100.0
Other income/(deduction) for non-FDII eligible activities -
Taxable income 1,100.0
Qualified Business Asset Investments (QBAI) 500.0

FDII Example
Step 1: Determine Deduction Eligible Income (DEI)
Gross income 1,200.0
Less Subpart F income -
Less GILTI income -
Less Financial services income -
Less Dividend received from CFC -
Less Domestic oil and gas extraction income -
Less foreign branch income -
Adjusted Gross Income 1,200.0
Less Allocable deductions 100.0
DEI 1,100.0 A
Step 2: Reduce by Routine Return
QBAI 500.0
Apply Routine Return Factor 10.0%
Less Interest expense included in allocable deductions w/o interest income -
Routine Return 50.0 B
Step 3: Determined Deemed Intangible Income (DII)
(DEI - (10% x QBAI)) 1,050.0 C = A - B

FDII Example
Step 4: Determine Ratio of Foreign-derived deduction eligible income (FDDEI) to DEI
Foreign revenue 1,000.0
COGS 200.0
Gross profit 800.0
Allocable deductions 66.7
FDDEI 733.3 D
FDDEI / DEI ratio
66.7% E = D / A
Step 5: Determine Foreign Derived Intangible Income (FDII)
Determine initial FDII (DII x (FDDEI/DEI)) 700.0
Less Limitation of FDII based on taxable income -
FDII 700.0
Step 6: Determine FDII Deduction
FDII Deduction factor 37.5%
FDII Deduction 262.5

FDII Example Summary
Taxable income 1,100.0
FDII Deduction 262.5
Adjusted Taxable Income 837.5
Tax Rate 21.0%
Total Tax 175.9
U.S. Corp. ETR 15.989%

UK Planning Considerations: FDII
Purpose is to encourage groups to
either bring IP back to the US or to
leave it in the US.
Beneficial tax rate (13.125%) applies
to US sales to foreign customers.
Does not apply to income taxed on a C
Corporation in the US from
disregarded subsidiaries.
IP Co
US
Ireland
Fin Co
UK
EU EUEU

Base Erosion Anti-abuse Tax
BEAT

BEAT – Base Erosion Anti-Abuse Tax
Tax change Post reform law Considerations
43
Base Erosion
and Anti Abuse
Tax (BEAT)
(effective for tax
years beginning
after Dec. 31,
2017)
• 10% minimum tax on U.S. corporations (5% for
2018).
• Applies where 10% of ‘modified taxable
income’ (MTI) exceeds regular tax.
• MTI is taxable income without regard to base
erosion tax benefit (i.e., no deduction for base
erosion payments).
• Base erosion payments include any deductible
amount paid/accrued to a foreign related party.
• Includes payments for depreciable property or
insurance payment.
• Excludes items that reduce gross receipts (like
cost of goods sold).
• Threshold for related party status 25 percent
vote or value.
BEAT applies to U.S.
corporations not treated as
flow-through (e.g. S corps,
REITS, RICs).
USD 500 million of domestic
gross receipts if base erosion
percentage is 3 percent or
higher.
Members of U.S. consolidated
group are treated as single
corporation.

UK Planning Considerations: BEAT Outbound
• COGS is outside the scope of BEAT:
ensure all COGS items are properly
identified.
US
• Equity contributions to fund R&D /
cost sharing arrangements with
foreign affiliates.
IP Co
Equity
Ireland
Manufacturer
Fin Co
UK
EU EUEU

UK Planning Considerations: BEAT Inbound
• Inbound parent / subsidiary loans
could be replaced by parentguaranteed
third-party loans and so
avoid BEAT (however see Interest
Limitation).
Service agreements
UK
US
External debt with
parent guarantee

QUESTIONS

Brexit Monitor
Visit https://www.rsmuk.com/ideas-and-insights/brexit-monitor for news and information about Brexit

Tax Reform Resource Center
Visit our tax reform resource center for more information on how legislation can affect your business
and tax planning. www.rsmus.com/taxreform

THANK YOU