2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

TRANSFER PRICING UPDATE

Transfer pricing continues to be one of the leading topics in the tax world. Tax jurisdictions everywhere are looking to increase revenues. Changes brought about by U.S. tax reform are being addressed in various foreign jurisdictions by the enactment of lower, competitive tax rates. The European Union’s (“EU”) antitrust regulator, the European Commission (“Commission”), continues to pursue multinational entities (“MNEs”), asserting that certain member states of the EU have gained an unfair competitive advantage resulting from government tax incentives and agreements, in certain cases disregarding conventional transfer pricing regulations and agreements between and among MNEs and tax authorities. The Organization for Economic Cooperation and Development (“OECD”) is advocating for a global consensus on the establishment of new tax rules addressing the rapid digitalization of the global economy. Concurrently, certain European states have enacted their own digital services taxes. All of these global tax issues are converging at the same time. Action Items adopted by the OECD and largely followed by the Internal Revenue Service (“IRS”) under the Base Erosion and Profit Shifting (“BEPS”) initiative -- most notably country-by- country (“CbC”) reporting -- are creating transparency with respect to global transfer pricing that did not exist before. Further, new information reporting on U.S. tax return forms has resulted in transfer pricing coming into sharper focus. With all of this change, the IRS reorganized its transfer pricing unit and is addressing transfer pricing with a view towards identifying high compliance risks. A series of IRS campaigns has targeted issues representing a risk of non- compliance, which are considered to result in more successful IRS transfer pricing audits. TRANSFER PRICING UNDER U.S. TAX REFORM The Tax Cuts and Jobs Act of 2017 (“TCJA”) continues to have both direct and indirect effects on global intercompany transactions. Several aspects of TCJA upended the way in which MNEs evaluate tax structuring and transfer pricing. n Corporate tax rate reduction. One of the main purposes of the reduction in the corporate tax rate was to make the

U.S. competitive with foreign jurisdictions that offer lower tax rates and other tax incentives. The reduction in the tax rate from 35%, formerly one of the highest global tax rates, to 21% encouraged MNEs to re-evaluate the location of business activities, including the location of valuable intellectual property (IP) and services such as research and development. While some countries already had low tax rates at the time of TCJA enactment, other higher taxed countries have lowered their tax rates in response to the U.S. 21% rate, most notably India, which recently lowered its rate from 35% to 22%. n Global Intangible Low Taxed Income (“GILTI”). The GILTI applies to controlled foreign corporation (“CFC”) income that exceeds a 10% return on tangible assets of CFCs. This tax only applies to CFCs and presents a new stand- alone anti-deferral regime. It applies in addition to the existing subpart F regime. Foreign tax credits can offset up to 80% of the GILTI tax. The GILTI tax was designed to discourage the offshoring of valuable IP, as it taxes certain offshore income in a manner similar to the taxation of subpart F income. An indirect effect of the GILTI on transfer pricing is that it is based on a formulaic calculation that calls into question the traditional arm’s length principal used to evaluate the appropriateness of transfer pricing applied to intercompany transactions for MNEs. n Foreign Derived Intangible Income (“FDII”). Section 250 of the TCJA lowers the revised 21% corporate tax rate to an effective rate of 13.125% for foreign-use intangibles held by U. S. taxpayers (“FDII eligible income”). FDII eligible income relates to excess returns derived from foreign sources, which include income from the sale of property, services provided, and licenses to non-U.S. entities/persons. The lower tax rate applicable to FDII income was designed to encourage U.S. entities to develop technology or intangibles in the U.S. and to license such IP to overseas affiliates. Further, it encourages U.S. entities to provide corporate support or other services to foreign affiliates. Similar to the GILTI, the indirect effect on transfer pricing is that the FDII calls into question the arm’s length principal used to evaluate the transfer pricing of MNEs. (Continued)

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