Marcum 2021 Year-End Tax Guide

file and local file. Since the release of these action items, many less sophisticated foreign taxing jurisdictions have implemented the requirement of CbC reporting and transfer pricing master file and local file, thus further increasing the compliance burden on MNEs and the possibility of more audit activity by the taxing authorities. • In February 2020, the OECD released guidance on financial transactions. The release of this report was significant because it was the first time that the OECD Transfer Pricing Guidelines included guidance on the transfer pricing aspects of financial transactions. The main goals of this report are to provide more consistency in the interpretation of the arm’s length principle and help avoid transfer pricing disputes and double taxation. COVID-19 The COVID-19 pandemic has had far-reaching consequences, beyond the spread of the disease itself and efforts to quarantine it, and continues to do so. As the virus spread around the globe, concerns shifted from supply-side manufacturing issues to decreased business in the services sector. The pandemic caused the largest global recession in history, with more than a third of the global population at the time being placed on lockdown. • COVID-19 created a sudden, unexpected supply chain disruption for MNEs. The virus shut down manufacturing in the heart of China and other North Asian countries and rapidly moved to impact manufacturing all over the world. Business closures across the globe had already impacted suppliers and customers, depending on the industry, and will likely continue to impact more in the future as global consumers are required to stay home and unemployment has been on the rise. The discovery of vaccines came as a sigh of relief but also divided many, where individuals were not willing to take the vaccine. Many different variants of the virus mutated and caused further widespread disruption and restrictions on travel. Although most schools reopened and many companies reopened their offices, many employees continued working remotely. MNEs were forced to review clauses in supply contracts and evaluate alternative means of performing contract obligations. Further, companies were forced to look at temporary supply options, including assessing whether to support their suppliers with advance payments or even acquisitions in order to keep them afloat. The travel restrictions

modified taxable income at 5%. The HWMC proposal accelerates the rate increases under BEAT, but despite early proposals by the Biden administration to replace BEAT with a new regime, the HWMC proposals do not propose a repeal of BEAT. 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 HWMC proposal removes the 3% threshold. 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 on 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. • Additional changes in the HWMC proposal that will interact with transfer pricing planning include the following: » The disallowance of FTC carrybacks. FTC carryforwards will still be allowed for 5 years under the proposal. FTCs (except those in the GILTI basket) can currently be carried forward for up to 10 years. Ability to carry forward FTCs can affect transfer pricing planning strategies that include relocating taxable income and/or taxes. » FTCs and associated limitations would be calculated country-by-country. Transfer pricing planning strategies will need to account for a country-by-country approach to FTCs. OECD BEPS INITIATIVES The OECD continues to play an integral role in providing transfer pricing guidance to its 38 member states, which includes the U.S. • 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 a transfer pricing documentation master

continued to remain in force, and many business activities were put on hold or performed virtually.

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