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Foreign financial institutions must report US accounts.

International exchange of offshore financial account information and tax records between governments has become the norm when it comes to international taxation. The United States initiated the trend of exchange of information by implemented the Foreign Account Tax Compliance Act (the “FATCA”) then, the OECD followed by introducing the Common Reporting Standard (CRS) for Automatic Exchange of Information (AEOI) in 2014. The main purpose of these programs is to combat tax evasion and improve financial transparency. FATCA was enacted on March 18, 2010, under the Hiring Incentives to Restore Employment (the “HIRE”) Act. It was a response to a series of scandals. The most famous is the 2009 Swiss banking scandal which concluded UBS agreeing to pay $780 million in penalties to the U.S. government.1  (The whistleblower a UBS private banker, received prison time, but received $104 million from the U.S. government for his role in exposing the scandal. FATCA requires most foreign financial institutions (FFIs) to register with the Internal Revenue Service (IRS) to obtain a Global Intermediary Identification Number (GIIN). Some FFIs are exempt from both registration and reporting requirements; for example, governmental entities, non-profit organizations, and small/local FFIs. Other FFIs are required to register, but they may be able…

OECD Action 13: Country-by-Country Reporting – is it working as intended?

The OECD initiative on base erosion and profit shifting (BEPS) is an ambitious effort to inhibit multinational corporations from avoiding taxes. One of the most important components of the initiative is OECD Action 13, which mandates country-by-country reporting by multinationals of important financial information about their subsidiaries in the countries in which they operate. The parent company is required to collect information like: The number of employees working in each country Where the subsidiary has its “permanent establishment” Revenues Profit before tax Tax paid Amount of capital is employed Value of tangible assets The information is then sent to the tax jurisdiction in which the parent company is headquartered. The intent was to have a record of the amount of tax paid by multinationals, because it was widely assumed the effective tax they were paying was lower than the statutory requirements. The thinking was that companies would not want to be seen as being tax avoiders and would change their behavior to pay taxes closer to what was required. This reporting requirement was initially met with trepidation, if not alarm. Country-by-country reporting (CbCR) has been substantially in place for two years now. Has it had the effect that was intended…

The United States Treasury Issues GILTI Final Regulations

The primary purpose of the Global Intangible Low Taxed Income regulation (GILTI) is to provide a disincentive for US-based multinational corporations to shift profits to relatively low-tax countries. GILTI creates a minimum tax increment on foreign taxes rates by US multinationals of between 10.5 percent and 13.125 percent. This effectively reduces the tax savings on every dollar shifted to low-tax jurisdictions. GILTI is intended to reduce the incentive to shift corporate profits out of the United States, particularly by using intellectual property (IP) as a tax-shifting vehicle. Some low-tax countries have marginal corporate tax rates that approach zero. GILTI creates a tax regime where corporations must pay between 10.5 percent and 13.125 percent, making profit shifting less attractive. On June 14, 2019, the Treasury Department issued section 951A Global Intangible Low Taxed Income (GILTI) final regulations and proposed regulations related to stock ownership and excluding foreign hightaxed income from GILTI. Final rules reject the hybrid approach and adopt the aggregate approach for determining a partner’s GILTI inclusion amount due to CFC stock owned by a domestic partnership. GILTI final regulations also contains modifications to the pro rata share rules, clarification of anti-abuse rules, foreign tax applicability to direct or indirect…

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