2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

This treatment disallows marketing and advertising costs, selling expenses, research and development costs, and other general and administrative expenses unrelated to production or manufacturing operations. This means that only the cost of goods sold, or the adjusted basis in the inventory sold, is reduced from the business income. Consequently, many cannabis companies have become vertically integrated to better control the supply chain costs and the outlet of sale to the end consumer. The motivation is to increase the cost of goods sold for the resale or retail side to maximize deductions. At times, the reallocation of costs can run afoul of the US transfer pricing rules, as it requires a clear reflection of income under the arm’s-length standard. The cannabis industry faces a difficult struggle, and it is unlikely that these strenuous tax provisions will change significantly soon. Further, with the infusion of funding to the IRS via the passing of the Inflation Reduction Act, we will more than likely witness an increase in audit activity for Cannabis companies. The best defense against an IRS transfer pricing audit is to become more proactive and prepare a transfer pricing study, which can be used as an audit defense. BEPS 2.0: PILLAR I AND II UPDATES Building on the OECD’s Base Erosion and Profit Shifting (“BEPS”) plan, in 2019, the OECD launched a two-pillar solution to

the tax challenges arising from the digitalization of the economy aimed at modernizing international tax systems. This initiative, referred to as BEPS 2.0, consists of two pillars: • Pillar I proposes a new taxing right for the digital economy. It could allocate a percentage of large and highly profitable MNEs’ residual profits to end users or customers’ jurisdictions where they have generated significant sales and may not have a traditional taxing presence. This solution considers two parts: Amount A is calculated by applying a formula to an MNE’s global profits that meet certain revenue thresholds. Amount B provides a simplified and streamlined approach to using the arm’s length principle for in-country baseline marketing and distribution activities. • Pillar II proposes a minimum global corporate tax to MNEs with profits in each country or jurisdiction subject to an effective tax rate lower than the minimum rate. In that case, those profits will be taxed at a minimum rate of 15%. It is important to note that Pillar I and Pillar II provisions apply to MNEs with global revenues greater than EUR 20 billion and EUR 750 million. However, this does not mean these initiatives do not have trickle-down effects for smaller and middle market MNEs. Once Pillar I and Pillar II provisions are finalized, it is anticipated that many countries will

adopt modified rules for companies engaged primarily in the digital economy. The most recent public consultation on Pillar 1, launched in July 2023, provides a framework for the simplified and streamlined application of transfer pricing rules to specific marketing and distribution activities under Amount B while proposing two options for the scoping criteria of Amount B. The OECD has announced that the final agreements on Amount B intended by the end of 2023 will be a key content to be incorporated into the OECD Transfer Pricing Guidelines by January 2024. The latest guidance on Pillar 2 addresses, amongst other subjects, the treatment of tax credits and a transitional undertaxed profit rule (“UTPR”) safe harbor, which are considered to be the most relevant measures affecting U.S. MNEs 8 . Although the United States is not anticipating implementing the GloBE rules any time soon, the adoption by important trade partner countries will impact U.S. MNEs operating in those countries. TRANSFER PRICING DISPUTE RESOLUTION UPDATES Dispute Resolution Alternatives Transfer pricing disputes are on the rise due to tax policy and administration developments around the world. The number of audits and the aggressiveness of tax authorities, particularly in the United States, have surged. These tax controversies provoking double

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