International Tax Updates - PwC

International Tax Updates

www.pwc.com/il

Yair Zorea, Tax Partner

Tzachi Schwartz, Tax Partner

PwC Israel

November 12, 2019

PwC IsraelPwC Israel

1. United States

a. Digital and Cloud Transactions

b. Post Tax Reform Updates

I. GILTI – Final Regulations

II. FDII – Proposed Regulations

c. Attribution Rules – Recent Developments

2. OECD – Digital Economy

3. MLI – Current Status

4. Global Tax Updates by Jurisdiction

Agenda

2


Seeking for a One-Stop Shop?

3

PwC Israel

United States

4PwC Israel


Digital and Cloud Transactions

5

Cloud Transactions:transactions through which a

person obtains non de-minimis on-demand network access to computer hardware,

digital content, or other similar resources

Lease Services

All relevant Factors

Media Streaming

Mobile Apps

Access to Databases

SaaS, IaaS, PaaS


Transactions via Digital and Cloud Mediums

6

Expansion of Existing Regulation – Downloaded Content:

Digital content protected by copyright law

“Digital Content”:

New Sourcing Rules Location of end-user’s device

Transfers for advertising: do not constitute a transfer of a copyright right

E-Books

Songs & Movies

Software


Post Tax Reform Updates - GILTI and FDII

7

US Co

(US)

CFC

>50%

Disincentive

US Co

(US)

Foreign Subs

Incentive

Global Intangible Low-Taxed Income (GILTI)

Intended to discourage erosion of the US base that occurs as a result of locating IP outside the United States

GILTI = CFC income in excess of 10% return on tangible assets

The GILTI will be subject to an effective tax rate of 10.5%.

80% of foreign tax credit should be allowed (i.e., GILTI will be effective if the tax rate of the CFC in the foreign country is lower than 13.125%)

Foreign Derived Intangible Income (FDII)

An incentive to own IP in the United States

Lowering effective tax rate on foreign derived royalties and related income by virtue of partial income inclusion

Recap:

IP

IP


Post Tax Reform Updates - GILTI

8

No adoption of a

high tax exception

for GILTI

Final Regs.

Key Changes

Relaxed anti-

abuse rule

regarding held

property

Relief for

computing

certain interest

expenses

Aggregate

treatment for

domestic

partnerships

US Co

(US)

CFC

>50%

Disincentive

IP


Post Tax Reform Updates - FDII

9

Related Party Transactions

Sales – of general property(no intangibles) may qualify under certain conditions.

Services – Benefit & Price tests to determine qualification

Foreign Use

Definitions and requirement with respect to general, transportation & intangible property.

Documentation Requirements

Establishment of foreign use, foreign person & service recipient’s location.

Special rules for small businesses/transactions

Cannot be filed more than a year before the transaction.

‘foreign use’ clarifications

Related party rules: sales &

services

Documentation requirements

US Co

(US)

Foreign Subs

Incentive

ProposedChanges

IP

PwC IsraelPwC Israel 10

Proposed Regs. Addressing §958(b)(4) Repeal

Unintended consequences, e.g., significantly increased risk of foreign corporations being treated as PFICs, especially in private equity and VC context

Recap – Downward Attribution Rules

IL Co

(Israel)

US Co

(US)Non-US Subs

I

P

100%>50%

Base Case

IL Co

(Israel)

US Co

(US)

CFCs

I

P

100%

>50%

Resulting

IL Startup

(IL)

10%

Non-US Fund

IL Co

(IL)

15%

US Co

(US)

>50%

Startups

>10% >10%

>10%

PwC IsraelPwC Israel 11

Proposed Regs. Addressing §958(b)(4) Repeal

Corporation that is a CFC solely due to downward attribution – AKA ‘Foreign-Controlled CFC’

Not CFC for purposes of PFIC classification under the asset test.

Not a US payor, thus not subject to Form 1099 reporting requirement.

Main Relevant Implications


Rev. Proc.

2019-40

12

Rev. Proc. 2019-40

Additional relief for US Shareholders of Foreign-controlled CFCs:

Relief of certain Form 5471 requirement

Alternative information

Safe harbor:

CFC determination & inclusion

Penalty relief

IL Startup

(IL)

80%

US Co

(US)

>50%20%

US Shareholder

Non-US Fund

PwC Israel

OECD – Digital Economy

13PwC Israelhttp://www.coface-eu.org/wp-content/uploads/ 2016/06gpj.ymonoce_latigid/


Two Pillar Approach

14

Allocation of Taxing Rights Global Anti-Base

Erosion – “GloBE”

Two Pillars

Taxing rights to market/users jurisdictions

Modification of transfer pricing rules: non routine returns

Deviation from physical presence taxation

Modification of permanent establishment thresholds

Global minimum tax

Income inclusion rules -

Identifying low-taxed profits: considering different accounting standards and bases for measurement (consolidated, entity, per jurisdiction, worldwide)

Carve-outs

Considering US tax reform initiatives

coordination vs. unilateral actions

I II


Three Profit Allocation Proposals

15

Applies to:

Brand and trade name

Customer data

Customer relationships

Customer lists

Applies to:

Existence of a local user base

Billing and collection in a local currency

Website in a local language

Applies to:

Social media platforms

Search engines

Online marketplaces

Three Proposals

User Participation

Marketing Intangibles Significant

Economic Presence


The Unified Approach – Three-tier Mechanism

16

A Portion of the “deemed residual” profit would be allocated to market jurisdictions

“deemed residual” profit:profit less a deemed routine return

Fixed return for certain routine marketing & distribution activities

Taxable according to existing rules

An adjustment to Amount B, in cases where the marketing and distribution activities go beyond the baseline level


The Unified Approach – Three-tier Mechanism

17

After(Sales of 100)

IL Co

(Israel)

US Distributor

(US)

I

P

Before(Sales of 100)

3

50

IL Co

(Israel)

US Distributor

(US)

I

P

30

20

3

Amount ‘A’

Amount ‘B’

LRD Model

US customers

US customers


Certain Recent Unilateral Actions

18

Digital Service Turnover Tax 2-3%

UK, France, Italy & New Zealand

French YouTube Tax - 2%

India’s Equalization Levy –Online Advertising 6% WHT

PwC Israel

Multilateral Instrument (MLI) – Current Status

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MLI and Israel

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Other Taxes:

entry into force on January

2020

Withholding Taxes:

entry into force on January

2019

Ratified on September

13, 2018

Signed on June 7,

2017

Signed in 2019: Albania, Belize, Morocco, Papua NewGuinea.Ratified in 2019: Belgium, Canada, Curacao, Denmark,Finland, Georgia, Guernsey, Iceland, India, Ireland,Luxembourg, Mauritius, Monaco, Netherlands, Norway,Russia, Switzerland, Ukraine, UAE.

• Application of a standalone PPT rule (minimum standard)

Other Countries


PwC’s MLI Visualization Tool

21

Tracks 3,036 existing treaties

Status per country

MLI’s impact on a client’s treaty network

Potential impact of specific articles

Entry into force timeline per relevant article

PwC Israel 22PwC Israel

Global Tax Updates by Jurisdiction


UK Brexit

23

January 31, 2020

New Brexit

Deadline

December 12, 2019

General Elections

October 28, 2019

EU extension to

UK bill

October 17, 2019

Brexit draft deal agreed with EU

Deal, No Deal or Revoke?

01

02

03

04

Application of EU Directives

International agreements to which the UK is a side to (tax treaties, free trade areas, etc.)

Existing commercial dealings

Gradual implementation, uncertainty, foreign exchange effects

Issues to Monitor


Economic Substance Requirement in Low-Taxed Jurisdictions

24

adequately managed and directed from

within the jurisdiction

relevant

activity

level of relevant derived income

• Headquarters, distribution and service centres

• Financing

• Leasing

• Fund Management

• Banking

• Insurance

• Shipping

• Holding companies

• Provision of intangibles

• Adequate amount of operating expenditure

• Adequate physical presence

• Adequate number of full-time employees or other personnel with appropriate qualifications.

* Slight variation between jurisdictions

Substance


Global Tax Updates By Jurisdictions

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• New free trade zone in Lingang area – with preferential tax treatment.

• Tax incentives to promote MNCs headquartering Shanghai –with preferential tax treatment.

• Fixed assets accelerated depreciation – all industry sectors.

China

• 15% Withholding tax on accrued interest - where the outstanding debt is used to reduce accounting losses of a Brazilian company via a ‘debit to shareholders account’.

• Disclosure of ultimate beneficial owners (UBOs) – new UBO definition and broader disclosure requirements.

• Guidance on US LLCs’ (that are composed of non-residents) classification as ‘privileged tax regimes’– the term ‘non-resident’ should be interpreted from a US (and not Brazilian) perspective.

Brazil

• Rosebud – Israeli CFC rules apply to foreign real estate companies controlled by Israeli shareholders.

• Greenfield – LLC’s losses cannot be offset against income of another LLC in the same group.

• New Tax Treaty with the UK – in force, effective from 1.1.2020.

• New Tax Treaty with Australia– signed 28.3.2019. Not yet ratified.

Israel


Global Tax Updates By Jurisdictions

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• 2020 Budget Bill proposes the expiration of all tax rulings issued before 2015.

• Clarification of PE definition and provision of evidence – in cases of conflict between domestic law and treaty provisions. In general, to be concluded solely by the treaty provisions.

Luxembourg

• Swiss tax reform approved in public vote – the reform, which was introduced in 2017, will cause Switzerland to meet OECD and EU requirements, therefore avoiding possible blacklisting.

Switzerland

• Transposition of ATAD articles 4 and 6– regarding interest limitations and general anti-abuse rules.

• Expansion of participation exemption on dividends – increased 99% exception, relief in eligibility.

• Limitation of deductibility of royalty payments – made to certain related entities benefiting from a harmful tax regime.

France

• Implementation of EU anti-tax avoidance package – including interest limitation rules, exit/entry taxation, CFC rules, criteria for ‘tax havens’ and anti-hybrid rules.

• Reduced CIT rate – on reinvested profits.

Italy

©2019 Kesselman & Kesselman. All rights reserved.

In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers International Limited, each

member firm of which is a separate legal entity. Please see www.pwc.com/structure for further details.

This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. It does not

take into account any objectives, financial situation or needs of any recipient. Any recipient should not act upon the information contained in this

publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or

completeness of the information contained in this publication, and, to the extent permitted by law, Kesselman & Kesselman, and any other

member firm of PwC, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any

consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision

based on it, or for any direct and/or indirect and/or other damage caused as a result of using the publication and/or the information contained in it.

Thank You!

Yair Zorea, Tax Partner, PwC [email protected]: 03-795-4465

Tzachi Schwartz, Tax Partner, PwC Israel [email protected]: 03-795-4811

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International Tax Updates - PwC