2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

Transfer Pricing Update

X 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 principle used to evaluate the transfer pricing of MNEs. The final FDII Regulations were released in July 2020 and provided some favorable guidance for taxpayers. X Base Erosion and Anti-Abuse Tax (“BEAT”). The BEAT is a minimum tax charged on payments to related foreign affiliates. Like the former corporate Alternative Minimum Tax (“AMT”), this is a parallel tax system that applies when the BEAT is in excess of the regular tax liability. Unlike the former corporate AMT, there is no credit to offset future regular tax liabilities. The BEAT specifically targets payments for services, royalties and interest to foreign affiliates. The BEAT is calculated by increasing taxable income by deductions taken for related-party transactions and taxing the modified taxable income at 5%. The BEAT only applies to MNEs with revenues in excess of $500 million. Further, it only applies if payments to foreign affiliates equal or exceed 3% of total tax deductions. The direct impact of this tax is that it is aimed at transfer pricing payments made by

U.S. entities to foreign related parties. It ignores traditional transfer pricing principles based upon the arm’s length method and seeks to broaden the tax base through the creation of a modified taxable income taxed at a lower rate. Also, the BEAT potentially creates double taxation since transfer pricing examinations are based on the calculation of the regular tax liability, and there is no mechanism for foreign entities to counteract the BEAT. The final BEAT regulations were issued on September 1, 2020, which provided additional guidance on its application. OECD BEPS INITIATIVES The OECD continues to play an integral role in providing transfer pricing guidance to its 37 member states, including the U.S. X The OECD published 15 action items addressing base erosion and profit shifting (BEPS) by taxpayers reporting in multiple taxing jurisdictions. The focus of these actions was to ensure that profits are taxed in the jurisdictions where they are earned. One of these action items introduced CbC reporting, which provides increased transparency of global transfer pricing. CbC reporting is required for MNEs with global revenues in excess of $850 million. Similarly, the same action item introduced the concept of transfer pricing documentation master file and local file. Since the release of these action items,

many less sophisticated foreign taxing jurisdictions have implemented the requirement for CbC reporting and transfer pricing master file and local file, and thus further increased the compliance burden on MNEs and the possibility of more audit activity by the taxing authorities.