2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

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 and the Organisation for Economic Co-operation and Development (OECD) are being addressed in various foreign jurisdictions by the enactment of lower, competitive tax rates and the implementation of the Base Erosion and Profit Shifting (BEPS) Action items, specifically, Country- by-Country reporting and the requirement of a transfer pricing master file and local file. Further, the catastrophic impact of the global COVID-19 pandemic will continue to have serious implications for many multinational groups’ (MNEs) transfer prices, and taxing authorities will be looking for more ways to increase the deficit in tax revenue.

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 inter-company transactions. Several aspects of TCJA upended the way in which MNEs evaluate tax structuring and transfer pricing. X 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 lowered their tax rates in response to the U.S. 21% rate. X 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 principle used to evaluate the appropriateness of transfer pricing applied to inter-company transactions for MNEs. The final GILTI regulations were released in July 2020. The final regulations allow taxpayers to elect to exclude GILTI that is subject to an effective foreign income tax rate exceeding 90% of the maximum U.S. corporate rate (currently 21%) or 18.9%.