International Tax Services at EY: Three Key Issues to Consider
Cross-border transactions and situations require cross-border reporting. Some examples include master and local files for transfer pricing, EU Anti-Tax Avoidance Directive reporting for controlled foreign companies, and reporting on global intangible low-taxed income in the United States. The international tax service at EY helps clients meet these reporting obligations and analyze the impact on their business. It also provides tax certainty and analysis of the impact of various laws. Here are three key issues to consider.
Tax treaties
There are many benefits of international tax treaties, but how do they work? First, treaties determine whether a country has exclusive or shared taxing rights, with priority given to source taxing rights. Then, there is the issue of double taxation, and a treaty’s article 23 outlines the methods of eliminating such taxation. Other benefits of international tax treaties include administrative cooperation among contracting states and a dispute resolution procedure if disputes arise.
Using Lexis(r) can help you search the extensive database of international tax treaties, including related documents. You can also use the Treaties Advanced Search Form to locate the legislative history of a particular treaty, including the parties and subjects. You can also use the Search Within Results feature to narrow your search to a specific treaty. You can search all treaties, or select only those that contain specific terms. There are many tables available to help you locate specific treaties, including historical versions of many of the major treaties.
Double taxation
Double taxation is the process of having taxes applied twice on the same income, goods, or property. It primarily affects multinational corporations that operate outside their home countries, but it can also affect individuals who earn income abroad. In some cases, a taxpayer may be taxed in two countries for the same income, resulting in an increased cost of goods and services. Double taxation may also discourage cross-border investment, deter capital flows, and violate the principle of tax fairness.
In some cases, there is a legal reserve required under civil law but not deductible under tax law. Another common scenario is the use of a letter-box company, also called a shell company, with limited business operations in another country. Double taxation is reduced in this situation by establishing a level playing field among taxing authorities. The concept of a “parent company” is also used. A company that performs services for its shareholders in the ordinary course of business is called a “parent company.”
Tax certainty
To ensure that an APA or ATR is granted in a timely and efficient manner, the State Secretary recently published a letter detailing a new process for obtaining these rulings. The new process does not affect the actual procedure for obtaining a APA/ATR, but it does align the process of granting international tax rulings. The new process requires two signatures, the second of which must be provided by a member of the new International Tax Certainty Team. This should improve the quality of international tax rulings and unite the policy.
This voluntary pilot programme, led by the OECD’s Forum on Tax Administration, is expected to give multinational groups more certainty about their tax obligations. It would complement the
WTO’s existing MAPs and avoid introducing new obstacles to international tax transparency.
The pilot programme would help countries align bilateral tax treaties to international standards. The G20 should support initiatives to align domestic and regional tax treaties with international standards. And finally, the OECD should encourage international agreements that would increase tax certainty.
Tax-related disputes
The causes of international tax-related disputes vary widely, depending on the country and its culture, technical capacity, human capacity, financial resources, and compliance attitudes. In cases where both parties are unwilling to agree on an outcome, both sides may choose to use arbitration. In the Model Tax Conventions, countries are entitled to use two types of arbitration: baseball arbitration and conventional reasoned opinion arbitration. The former is considered to be the more appropriate dispute resolution method, while the latter is considered nonreasonable.
Tax treaty negotiations are aimed at eliminating taxation that is contrary to the treaty. For instance, if the treaty provides that certain countries must apply a minimum tax rate worldwide, then the states may agree to exempt the income of the taxpayer or to adjust the tax payable to comply with the treaty. If this method fails, lending money can be resolved by arbitration.
International tax-related disputes, however, can be highly contentious and costly.
Reduced rates of taxation
Many OECD countries have moved to fully territorial systems. These countries have lower tax rates than their neighbors, which means more money in a company’s coffers. In addition, companies that have operations in multiple countries are more likely to benefit from reduced rates of international taxation. One such example is Colombia. This country’s corporate income tax rate is nearly the same as that of the OECD average, but is subject to a more lenient set of rules. For example, it allows businesses to use past losses to offset future tax obligations.
To make this system fairer, a new international tax reform should embrace three major policies. First, companies must pay enough taxes in their home country to offset their profits. Taxing income that is not sufficiently taxed abroad is a major concern for many companies. Reduced rates of international taxation will help keep companies competitive and prevent rampant international tax avoidance. For this reason, the Biden Administration’s proposed legislation should be implemented on a jurisdiction-by-jurisdiction basis.
