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International Tax Updates
www.pwc.com/il
Yair Zorea, Tax Partner
Tzachi Schwartz, Tax Partner
PwC Israel
November 1, 2018
PwC IsraelPwC Israel
1. Rethinking on Global Structures of Multinational Groups
a. New Downward Attribution Rules
b. Tax Rates
c. GILTI vs FDII
d. IP Amortization
e. Expedite Procedure (Maslul Yarok) for Inversion
2. ‘Wayfair’ Decision
3. From NAFTA to USMCA
4. New Israeli Case Laws
5. MLI - Status
6. The Netherlands
7. Switzerland
Agenda
2
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Rethinking on Global Structures of Multinational Groups
3PwC Israel
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Case Study – Common Structure
4
IL Co
(Israel)
US Co
(US) Non-US Subs
IPSale of Products / License
Sale of Products
Third party customers in North America
100%100%
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New Downward Attribution Rules - Example
5
IL Co
(Israel)
US Co
(US)Non-US Subs
IP
100%>50%
Step 2: Attribution
IL Co
(Israel)
US Co
(US)Non-US Subs
IP
100%>50%
Step 1: Base Case
IL Co
(Israel)
US Co
(US)
CFCs
IP
100%
>50%
Step 3: Resulting
And what if the US entity is a fund?
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Attribution Rules - Key Tax Implications
6
Toll
Charge
Attribution
Rules
Subpart F
PFIC GILTI
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Case Study
7
IL Co
(Israel)
US Co
(US)CFCs
IP
100%100%
Common Structure?
US Co
(US)
IL Co (CFC)
(Israel)CFCs
IP
100%100%
US Structure?
Which structure would be more
tax efficient?
And what about investments in foreign funds?
US Investor
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Tax Rates
EffectiveTax Rate
StateCorporate2017
~40%~5%35%United States
6% - 24%-6% - 24%Israel
4% - 24%-4% - 24%IL WHT
EffectiveTax Rate
StateCorporate2018
~26%~5%21%United States
6% - 23%-6% - 23%Israel
4% - 23%-4% - 23%IL WHT
Founder
Where should I incorporate my business?
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GILTI vs FDII
Global Intangible Low-Taxed Income (GILTI)
Intended to discourage erosion of the US base that occurs as a result of locating IP outside the United States
GILTI = CFC income in excess of 10% return on tangible assets
The GILTI will be subject to an effective tax rate of 10.5%.
80% of foreign tax credit should be allowed (i.e., GILTI will be effective if the tax rate of the CFC in the foreign country is lower than 13.125%)
Foreign Derived Intangible Income (FDII)
An incentive to own IP in the United States
Lowering effective tax rate on foreign derived royalties and related income by virtue of partial income inclusion
US Co
(US)
CFC
IP
>50%
Disincentive
US Co
(US)
Foreign Subs
IP
Incentive
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GILTI Impact on IL CFCs – Example
IL Sub – Corporate Level IL CIT = 6% IL CIT = 12% IL CIT = 16%
Taxable Income 100 100 100
Tax in Israel 6 12 16
US Parent (Assuming no NOLs)
GILTI (Assuming IL Taxable Income) 100 100 100
Section 78 Gross-up (IL Tax) 6 12 16
GILTI Inclusion 106 112 116
GILTI Deduction (50%) (53) (56) (58)
Taxable Income 53 56 58
US Tax before FTC (21%) 11.1 11.7 12.2
FTC (80%* IL Tax) (4.8) (9.6) (12.8)
Incremental US Tax 6.3 2.1 -
12
3
No GILTI Impact
1 2 3
Preferred Enterprise
Minimal GILTI Impact
Substential GILTI Impact
Preferred Technology Enterprise
Special Preferred Technology Enterprise
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IP Amortization
Effective with respect to amounts paid or incurred in taxable years
beginning after December 31, 2021
R&D expenditures to be capitalized and amortized over a 5 year period
R&D expenditures to be capitalized and amortized over a 15 year period
US R&D Foreign R&D
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Case Study
12
IL Co
(Israel)
US Co
(US)Foreign Subs
IP
100%100%
Foreign?
US Co
(US)
IL Co (CFC)
(Israel)CFCs
IP
100%100%
US?
Which entity should own the
IP?
And what about BEAT?
Buy-Sell / License
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Expedite Procedure for Inversion
IL Co
(Israel)
US Co
(US)
100%
Shareholders
IL Co
(Israel)
100%
Shareholders
100%
G ‘Maslul Yarok’
Transfer of all of the shares in an Israeli company to a non-Israeli company, solely in exchange for newly issued shares of the non-Israeli company
Expedite procedure for a pre-ruling
Applies only for foreign entities with which Israel has a tax treaty
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‘Wayfair’ Decision
14PwC Israel
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‘Wayfair’ Decision
South Dakota v. Wayfair
Abolishment of “Physical Presence” Standard
Sales / Use Tax Implications
Reporting Implications
Income TaxImplications
Introduction of “Economic Nexus“ Standard
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From NAFTA to USMCA
16PwC Israel
PwC IsraelPwC Israel 17
From NAFTA to USMCA
North American Free Trade Agreement (NAFTA)
Main Provisions
• Trilateral “trade bloc”
• Tariff-free access on certain products
• Intellectual property protection on traded products
• Dispute resolution mechanism
• Effective as of January 1, 1994
United States–Mexico–Canada Agreement
(USMCA)
Main Provisions
• Preserve the tariff-free access for most goods and services
• Increase access to the Canadian dairy market
• Provisions intended to strengthen the automotive manufacturing in the US
• Provision allows to terminate the agreement if any party enters into negotiations for a trade agreement with non-market economy (e.g., China)
• Waiting for ratification (possible in 2019, effective as of 2020)
PwC IsraelPwC
New Israeli Case Laws
18PwC Israel
PwC IsraelPwC Israel
New Israeli Case Laws
19
הכנסהמס ' קניג נ13807-01-17מ "ע
ב"האמנה עם ארהסותר את אינו ' א100' סע•
נכסים שנמצאים בישראלגם על חל ' א100' סע•
תיתכן סטייה מהנוסחה הלינארית במקרים חריגים•
עקב ב "לפי האמנה עם ארהמתן פטור שלילת •
דיווח כראויחוסר תום לב ואי
' הראל ניעקב 4030/17א "ע
דןשומה גוש פקיד
זיכוי מס עקבקבלת אי : סוף פסוק
LLCהימנעות מבחירה להשקיף
לצרכי מס בישראל
שומה פקיד 6995/18א "בש
מ"בעדלק הונגריה ' נתניה נ
רווחים ראויים לחלוקה בעת
מכירת מניות של חברה זרה
4א "פקיד שומה ת8934/16א "ע
מ"גמול אמריקה בע' נ
זיכוי מס זר: קבלת ערעור פקיד השומה
חודשים או בשנת 24יינתן במגבלת
התשלום כנגד הכנסת חוץ מאותו מקור
PwC IsraelPwC
Multilateral Instrument
20PwC Israel
PwC IsraelPwC Israel
BEPS – Action Item 15 (Multilateral Instrument)
21
MLI
July 1, 2018
MLI Entered Into Force
September 13, 2018
Israel Ratified MLI
January 1, 2019
Come Into Force in
Israel
PwC IsraelPwC 22PwC Israel
The Netherlands
PwC IsraelPwC Israel
The Netherlands – 2019 Budget – Main Proposals
23
CIT rate will be reduced gradually
from 25% to 22.25%
(24.3% in 2019, 23.9% in 2020 and
22.25% in 2021)
Introduction of CFC rules on
foreign subsidiaries
(>50%) in low tax jurisdictions
Introduction of conditional
withholding tax rules to affiliated companies in low tax jurisdictions
(Full CIT rate; dividends –postponed; interest and
royalties– as of 2021)
Limitation on the deduction of interest expenses exceeding
30% of EBITDA
(As of January 1, 2019; taxpayer basis rather than ‘per entity’ basis; 1M Euro
threshold)
PwC IsraelPwC 24PwC Israel
Switzerland
PwC IsraelPwC Israel
Switzerland – Tax Reform - Main Proposals
SwitzerlandTax Proposal
2017
Patent box
Elimination of current
tax regimes
CIT rate reductions
R&D super deduction
‘Step-up’ upon
migration
Transitional rules
Patent box (cantonal level)
OECD-compliant patent box
Patents and comparable rights (excluding copyrighted software) can benefit up to 90% reduction of patent box profit
R&D super deduction (cantonal level)
Deduction of an additional 50% of actual R&D costs resulting in a maximum 150% deduction.
Step-up of assets and goodwill for companies or operations moving to Switzerland
Tax neutral step-up of assets and goodwill upon immigration or a transfer of business operations or functions to Switzerland, creating tax-deductible amortization basis.
Elimination of current tax regimes
Elimination of auxiliary (domicile, mixed) company, holding company, finance branch and principal company regimes
Corporate income tax rate reductions (cantonal level)
Effective combined corporate income tax rate of 12-14% is expected to be available in many cantons
Transitional rules for elimination of current tax regimes (‘step-up’)
Model 1: step-up of assets and goodwill followed by a depreciation.
Model 2: hidden reserves and goodwill will be subject to a lower tax once they are released (5 year period).
January 1, 2020
Bill will enter into force
Mid-January 2019
Deadline for
referendum
September 28, 2018
Parliament approved
the bill
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Thank You!
Yair Zorea, Tax Partner, PwC [email protected]: 03-795-4465
Tzachi Schwartz, Tax Partner, PwC Israel [email protected]: 03-795-4811