Marcum 2021 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, the country- by-country report and the requirement of a transfer pricing master file and local file. Recent changes in the U.S. tax administration and the announcement by the House Ways and Means Committee (“HWMC”) on September 15, 2021, provide further details of proposed changes that may come into effect as of January 1, 2022. The catastrophic impact of the global pandemic of COVID-19 also continues to have serious implications for many multinational enterprises’ (MNE’) transfer prices, and taxing authorities will be looking for more ways to reduce their deficits with tax revenue. TRANSFER PRICING UNDER U.S. TAX REFORM AND PROPOSED CHANGES UNDER THE BIDEN ADMINISTRATION The Tax Cuts and Jobs Act 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. Further, proposed changes announced by the HWMC on September 15 may update certain provisions of the TCJA. A final bill, if any, has not passed at the time of this writing. • 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. The HWMC proposal introduces a graduated corporate tax rate for certain corporate taxpayers, with a top rate of 26.5%.

• Global Intangible Low Taxed Income (“GILTI”). The final GILTI regulations were released in July 2020. The GILTI currently applies to controlled foreign corporation (“CFC”) income that exceeds a 10% return on a CFC’s tangible assets. This tax only applies to CFCs. It applies in addition to the existing subpart F regime. The changes to the proposed tax rates, as described above, along with a reduction in the deduction for GILTI, may result in a higher effective tax rate on GILTI. In addition, under the HWMC proposal, GILTI will be applied on a country-by-country basis including net CFC-tested income, net deemed tangible income return, Qualified Business Asset Investments (QBAI) and interest expense. The HWMC proposal also allows for carryforward of GILTI Foreign Tax Credits (FTC), a major complaint from taxpayers under the current rules. Allowing carryforward of GILTI FTCs would substantially affect transfer pricing and international tax planning strategies that were needed in light of the current rule. • Foreign-Derived Intangible Income (“FDII”). Section 250 of the TCJA lowered 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”). The final FDII Regulations were released in July 2020 and provided some favorable guidance for taxpayers. FDII-eligible income relates to excess returns derived from foreign sources, including 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. The new proposals by the HWMC intend to raise the rate on FDII-eligible income. • Base Erosion and Anti-Abuse Tax (“BEAT”). The final BEAT regulations were issued on September 1, 2020, providing additional guidance on their application. 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

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