What Another Trump Presidency Means for Tax Policy in 2025 and Beyond

Key Takeaways:

Potential 2025 tax changes may lower corporate rates and extend key business deductions, affecting planning and cash-flow strategies.

Trump’s policies may reduce clean energy incentives while maintaining fossil fuel preferences, impacting energy investments.

Estate tax exemption increases from the TCJA could be made permanent, with long-term implications for estate planning.

With President-elect Donald Trump winning a second term in the November 5 election, we have a clearer picture of what tax policies will be at the forefront of discussions as we head into 2025 and the scheduled expiration of many Tax Cuts and Jobs Act (TCJA) provisions. While Trump has not released a detailed tax plan, he has commented on several areas of tax law and policy, making it possible to get a good idea of the direction tax policy may take next year.

Republicans also gained control of the Senate and will have a small majority in the chamber in 2025. As of the date of publication of this article, control of the House has yet to be called. Even if Republicans retain control of the House, passing tax legislation may still be challenging. Unless the legislative filibuster is eliminated from Senate rules, any tax law changes will likely still have to be passed through the budget reconciliation process. If the Democrats manage to gain control of the House, passing tax legislation to advance Trump’s policies would become much more difficult and will require much more bipartisan negotiating.

Although it remains to be seen what specific legislative proposals will emerge, businesses and individuals should pay close attention to how Trump’s proposed policy preferences could alter their total tax liabilities.

The tables below outline current tax law and policy, as well as expected potential future tax policies under a Trump administration. Four separate tables cover provisions for business tax, international tax, individual tax, and estate, gift, and generation-skipping transfer (GST) tax. All data is based on information released or discussed by Trump as of November 8, 2024.

Business tax provisions

International tax

Individual tax

Estate, gift, and GST tax

How MGO can help:

MGO delivers comprehensive tax advisory and compliance services to guide you through an increasingly complex and evolving tax landscape. Leveraging deep industry insights and a proactive approach, we assist your business in managing tax liabilities efficiently while uncovering opportunities for growth.

Our team works diligently to provide tailored solutions that address unique challenges, from navigating shifting regulations to optimizing your overall tax strategy. Even in times of regulatory uncertainty, we are committed to helping your organization remain agile and well-positioned for long-term success.

Have questions? Reach out to our tax team today.

How to Secure Your Financial Future as a Professional Gamer

Key Takeaways:

Professional gaming careers can be lucrative but short-lived, making smart financial management crucial from the start.
Mastering the intricacies of contracts, taxes, and revenue streams is essential for pro gamers to maximize earnings and avoid costly pitfalls.
Building a sustainable financial future in esports demands a strategic balance between capitalizing on current opportunities and planning to achieve long-term goals.

The rise of electronic sports (esports) has been nothing short of phenomenal. According to Variety, esports viewership increased a whopping 92% from 2019 to 2023 — with viewers watching more than 2.5 billion hours of esports events last year. Major colleges and universities like Ohio State now offer esports degrees, and brands like Intel, Coca-Cola, and Mastercard are spending millions on esports sponsorships each year.

As a professional gamer, you’re part of this fast-growing industry. But with the thrill of competition and the allure of sponsorships comes the challenge of managing your earnings. Whether you’re streaming on Twitch, competing on the esports circuit, or signing a deal with a major brand, understanding how to manage and maximize your income is crucial.

Making the Right Deal: Stream Play Versus Team Play

As a pro gamer, you’ll likely face a key decision: Should you focus on building your own brand through streaming or join a team? Both options have their pros and cons, and your choice will impact your earnings significantly.

Streaming: Building Your Own Brand

Streaming offers you the opportunity to build a personal brand and connect directly with your audience. Platforms like Twitch and YouTube allow you to monetize your content through ads, subscriptions, and donations. However, it also means you’re responsible for managing your content, marketing yourself, and properly tracking and reporting your earnings.

An additional challenge with streaming is validating that you’re getting the right percentage from platforms like YouTube. Are you confident that your views and ad revenue are being reported accurately? This is where working with a financial advisor or a business manager can help. They can audit your earnings, verify you’re being paid fairly, and help you optimize your revenue streams.

Joining a Team: Stability with a Salary

Joining an esports team can provide a steady salary and the chance to compete at the highest levels. Teams often handle sponsorships, brand deals, and the logistics of competition, allowing you to focus solely on your gameplay. However, the trade-off is that you may have less control over your brand, and the team may take a cut of your earnings from sponsorships or tournament winnings.

Before signing with a team, it’s critical to have a lawyer review your contract. They can help you understand the terms, such as how much of your earnings the team will take, what happens if you leave the team, and what other obligations you may have. Remember, a contract that seems straightforward can contain clauses that significantly impact your income and career.

Navigating Taxes in Professional Gaming and Esports

As you start earning from your gaming career, taxes are one of the first challenges you’ll face. Your earnings — whether from streaming, sponsorships, or tournament winnings — are all taxable. It’s essential to understand how taxes work in both the country/locality where you live, as well as any jurisdictions where you earn money.

Domestic Taxes: Earning Income Across the U.S.

In the United States, professional gamers are often subject to what’s known as the “jock tax.” Originally designed for athletes, this tax rule applies to individuals who earn income in states where they do not reside. Today, the rule extends beyond athletes to include high-income earners like entertainers and competitive gamers. The tax is typically based on the number of “duty days” you spend in a state for income-generating activities.

For example, if you live in Illinois and come to California for a tournament, California can tax you on that income — even if you’re only there for a few days. Enforcement of the “jock tax” varies by state and locality, and whether you are taxed may depend on how much you earn (the more you make, the more likely you are to be taxed). Because of varying state and local tax rules, you may end up owing taxes in multiple states and localities depending on where you compete and earn income.

Additionally, if you’re selling merchandise or other products as part of your brand, you’ll also need to be aware of sales tax obligations. Depending on where your customers are located, you may be responsible for collecting and remitting sales tax to different states and localities. Each jurisdiction has its own rules, and failing to comply with them could result in penalties or back taxes.

International Taxes: Considerations for Global Gamers

With esports growing globally, you might earn pro-gaming income from multiple countries — each with its own tax rules. For example, if you win a tournament in South Korea or get sponsorship from a European company, you may owe taxes in those countries. You also need to report all foreign income to your home country, adding complexity to your taxes.

Here are some considerations to keep in mind when managing international taxes:

Double taxation: To avoid paying taxes in two countries on the same income, you can use options like exclusions or foreign tax credits (FTCs). Tax treaties between some countries can also reduce your tax burden. But not all countries have treaties, and claiming these credits can involve complex filings and detailed records. Knowing your options and understanding how to apply them can help you manage your taxes strategically and minimize what you owe across borders.
Withholding taxes: Various countries impose a withholding obligation on certain types of revenue streams. This means, before you receive your earnings, the country may withhold a portion of your taxes. The rate varies depending on the type of income and local tax laws.
Intellectual property (IP): Savvy professional gamers are cognizant of IP such as copyrights and trademarks, as well as name image and likeness (NIL). Whether revenue streams like photoshoots, appearances, speaking engagements, and even your social media presence are compensated as “services” or a “right of use” can influence taxation in various countries. Having clear contracts that appropriately define income classes can help you best manage taxation and protect your rights.

Given the complexity of both domestic and international tax laws, it’s wise to consult with a tax team familiar with the esports industry. They can help you navigate multistate and international tax rules, take advantage of deductions and credits, and structure your finances in a way that minimizes your tax burden across multiple jurisdictions.

5 Common Financial Pitfalls Pro Gamers Should Avoid

In the fast-paced world of esports and professional gaming, it’s easy to get caught up in the excitement and make decisions that could hurt your financial future. Here are a few pitfalls to watch out for:

1. Don’t Rush into Contracts

It’s tempting to sign the first deal that comes your way, especially when there’s a significant amount of money involved. But taking your time to understand the terms of the contract can save you from potential headaches down the line. Work with legal and financial advisors to review any offers before you sign.

2. Watch Out for Hidden Costs

Some deals come with hidden costs that can eat into your earnings. For example, if a team covers your living expenses but then deducts those costs from your winnings you could end up with much less than you expected. Always ask for a detailed breakdown of any expenses and how they will be handled.

3. Budget for the Long Haul

Esports careers can be short — a recent Washington Post headline read “Esports stars have shorter careers than NFL players” — with the peak years often occurring in your early 20s. This makes budgeting and saving for the future even more important.

4. Prioritize Needs Over Wants

When the money starts rolling in, it can be tempting to splurge on the latest gear or a luxury lifestyle. But remember, this income may not last forever. Prioritize saving and investing your money wisely. Work with a financial advisor to create a budget that accounts for your current needs and future goals.

5. Plan for a Sustainable Future

Consider how your current earnings can help you achieve your long-term goals. Whether you want to invest in a new business, save for retirement, or buy a home, planning ahead is key. This is where having a solid financial plan and the right advice can make all the difference.

Level Up Your Financial Strategy

Managing your finances as a pro gamer can be overwhelming, especially when you’re focused on winning and building your brand. That’s why having experienced professionals in your corner can make all the difference. Working with a team of advisors — whether it’s a tax professional, lawyer, or financial planner — can give you the peace of mind to focus on your game knowing your finances are in good hands.

How MGO Can Help

We know the unique challenges you face as a professional gamer. From reviewing contracts to navigating international taxes, we’re here to help you maximize your earnings and secure your financial future. Before you sign any deal or make a financial decision, talk to our Entertainment, Sports, and Media team.

Navigating the Future of Tax Policy: A Guide for Corporate Boards

Key Takeaways:

The upcoming election cycle has introduced uncertainty in U.S. tax policy, so corporate boards should be ready for potential changes — namely the expiration of the 2017 TCJA provisions.
Boards should stay flexible in their tax planning. Divergent tax policies from both parties mean the election outcome could yield drastic differences in tax rates, capital gains treatment, and deductions.
Boards should regularly review tax strategies for alignment with corporate goals and regulatory standards, maintaining oversight of the corporate tax posture.
Stakeholders expect companies to be transparent and socially responsible in tax. Boards should prioritize this.

The upcoming U.S. election cycle gives rise to ambiguity in business tax planning. Companies must prepare for a shifting tax landscape while considering differing priorities of Republicans and Democrats regarding U.S. tax policies, such as the approaching expiration of some components of the 2017 Tax Cuts and Jobs Act (TCJA). This environment emphasizes the importance of the board’s oversight role and its understanding of a company’s total tax strategy, emerging compliance complexities, the impact of potential election results and associated tax planning scenarios, and the need for a broad perspective on total tax posture and associated social responsibility of the company.

The TCJA

The TCJA brought significant changes to the U.S. tax code, but many of its provisions are set to expire in 2025. Notably, the corporate tax rate will remain at 21%, but other aspects of the act will sunset, potentially leading to increased tax liabilities for businesses and individuals. Future tax policies will be shaped by the House of Representatives, the Senate, and the White House, and a resulting mix of political power within these bodies will necessitate compromises to pass proposed legislation.

Political Corporate Tax Priority Outlines

Table-BDO-Article-Navigate-Tax-policy_v01

Boards should have a clear understanding of their company’s current tax strategy, which takes into consideration the total tax liability – the composite total of all taxes owed by a taxpayer for the year. Next, consideration of the impact of and response to various tax scenarios and business operations, while ensuring compliance with existing tax law and regulations, should inform oversight of the company’s tax strategy.

Regular reviews of the company’s current tax strategy is a fundamental component of the board’s oversight responsibility. Key questions for management and tax advisors include:

What is the company’s current tax strategy? Do they support the company’s corporate strategy?
Is the tax department evaluating how potential tax scenarios may impact the company?
Is management developing alternative action plans in response?

Tax Considerations and Questions the Board Should be Asking: Big Picture

Election-related risk factors, such as potential tax code changes, are top of mind in boardrooms. Directors know changes may be coming, and proactive management will facilitate a timely response. An effective tax strategy can positively impact the company’s bottom line, help to mitigate risks, and drive growth. Boards play a pivotal role in overseeing these efforts, ensuring management remains vigilant in weighing tax impacts in making informed and responsible strategic decisions. Read on for key tax considerations for boards and the questions they should be asking of management.

Total Tax Posture

Understanding the company’s total tax posture is essential. This includes not only corporate income tax liability but also other tax responsibilities such as payroll, real estate, sales, and value-added taxes (VAT). For example, a company with large net operating losses (NOLs) may not pay corporate income taxes but may still have other tax obligations to consider.

Has risk oversight responsibility for total tax posture been allocated to the full board or a committee of the board? If so, has the company disclosed this at the board or appropriate committee level?
Who is responsible for managing and reporting total tax posture? Does the company have adequate resources to fulfill this responsibility?
What KPIs are being used to track the company’s total tax posture?
How do company KPIs compare to those of competitors?

Global Tax Compliance

Global tax compliance is a complex undertaking, involving issues such as the U.S. global intangible low-taxed income (GILTI) and the base erosion and anti-abuse tax (BEAT). Global tax compliance requires a deep understanding and active monitoring of current and evolving international tax laws and regulations in multiple jurisdictions. Boards need to be proactive in overseeing how management is addressing these complexities to ensure compliance and avoid potential legal and financial risks.

Who is responsible for and how is the company monitoring global tax compliance?
Does the company have adequate resources dedicated to tax compliance?
Have there been instances of noncompliance? How were they resolved?
How does the company monitor evolving domestic and international regulations and legislation impacting compliance?

Tax Transparency and Social Responsibility

Tax transparency and social responsibility are increasingly important in today’s business environment. Companies should strive to be transparent about their tax practices within financial reporting and demonstrate their contributions to society through tax postures. Boards should consider how stakeholders, including investors and the community, see the company’s contribution to social responsibility through taxes. This includes evaluating the company’s tax practices and their alignment within the context of broader social goals.

Who is responsible for drafting and monitoring all tax disclosure?
Is the company conducting any stakeholder engagement around tax transparency and social responsibility?
How is the company using information obtained from stakeholders to adjust its tax planning strategy?
How do the company’s tax contributions align with competitors and stakeholder expectations?

Engineering Value Chain Efficiencies

Proactive tax structuring and value-chain planning are crucial for optimizing tax efficiency. Boards need to consider how much engineering for tax efficiency is acceptable and what might be perceived negatively by the tax authorities or the public. While manipulating the value chain for tax mitigation is generally acceptable, significant legal structuring and non-arm’s-length transactions, such as the use of shell companies or intercompany transfers, may raise speculation and scrutiny.

What options are available for value chain efficiencies?
Does the company have policies regarding tax structuring and value-chain planning?
Were any structuring and planning policies considered and rejected? If so, why did we decide not to adopt them?

Conclusion

As the expiration of the 2017 TCJA approaches and pending November 2024 U.S. election results clarify which political priorities may evolve into legislation, companies must stay informed and prepare for potential changes in tax policy. By understanding their current tax strategy, planning for various domestic and international taxation scenarios, and emphasizing tax transparency and social responsibility, businesses can better navigate the complexities of the tax landscape and ensure compliance. Boards have the responsibility to play a critical oversight role in guiding these efforts and ensuring that the company management remains proactive and responsible in formulating its tax practices and executing its tax strategy.

How MGO Can Help

Our tax team is here to help your board navigate today’s complex tax landscape with tailored strategies that directly address shifting policies and compliance challenges as they arise. From strategic planning and global compliance support to enhancing overall tax transparency and optimizing value chain efficiencies, we provide proactive solutions that align with your company’s goals — as well as your shareholders’.

Be prepared for whatever changes come your way, all while maintaining robust tax oversight and committing to social responsibility and long-term success. Reach out to our team today.

Essential Guide to Transfer Pricing for Your Multinational Business

his article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA“. View all the articles in the series here.

Key Takeaways:

Implementing effective transfer pricing strategies is essential for regulatory compliance and optimizing your tax position in the U.S.
Transfer pricing helps intercompany transactions align with the arm’s length principle, preventing double taxation and mitigating tax risks.
Meticulous documentation and regularly updated policies are key to maintaining compliance with transfer pricing regulations.

As a multinational enterprise setting up operations in the United States, it is imperative for you to understand the complexities of transfer pricing and intercompany transactions. Effective transfer pricing strategies will help you meet regulatory compliance and improve your tax position.

Fundamentals of Transfer Pricing

Transfer pricing involves setting prices between related entities for transactions — such as the purchase or sale of goods, provision of services, performance of manufacturing activities, cost allocation, or use of intellectual property. This practice of “negotiating” prices between related entities ensures transactions are conducted at “arm’s length”, meaning the prices are consistent with those charged between independent parties. Proper transfer pricing can help you avoid double taxation, mitigate tax risks, and follow U.S. laws.

It is important to note that “related entities” for these purposes involve the concepts of both common ownership and common control. Many taxpayers who fail to understand these concepts also fail to properly address transfer pricing rules and regulations for various transactions.

Regulatory Requirements

IRS Guidelines on Transfer Pricing

The Internal Revenue Service (IRS) provides detailed guidelines on transfer pricing to promote fair pricing practices. These guidelines require businesses to apply the arm’s length principle and provide adequate documentation to justify pricing methods.

Documentation and Compliance

Compliance with U.S. transfer pricing regulations involves meticulous documentation. Companies must prepare and keep detailed records of intercompany transactions — including the rationale for pricing decisions, application of the best method, and evidence that prices meet arm’s length standards. Non-compliance can lead to substantial penalties and adjustments imposed by the IRS.

Setting Up Transfer Pricing Policies

Establishing effective transfer pricing policies requires a thorough understanding of the business model, industry standards, and regulatory requirements. Your company should develop policies that align with the arm’s length principle and keep consistency across all intercompany transactions. Additionally, you should continuously check and update these policies to adapt to any changes in business operations and tax regulations.

For further insights into developing robust transfer pricing strategies, explore our case study on global transfer pricing for a semiconductor leader.

Real-World Transfer Pricing Strategies

Examining real-world examples can offer valuable insights into effective transfer pricing strategies.

Example 1: Goods Transfer

A multinational company based in the United Kingdom sets up a U.S. subsidiary to handle distribution. To follow transfer pricing regulations, the company conducts a thorough analysis to decide proper prices for goods transferred to the U.S. entity, verifying the profitability of the U.S. entity is appropriate.

Example 2: Service Provision

A Japanese company provides technical support services to its U.S. subsidiary. By documenting the cost-plus method, where a markup is added to the costs incurred in providing the services, the company shows compliance with the arm’s length principle.

Example 3: Intellectual Property Licensing

A German firm licenses its proprietary software to a U.S. branch. The firm conducts a detailed analysis to decide the right royalty rate, confirming the transaction meets IRS guidelines and minimizes tax liabilities.

Optimizing Your Transfer Pricing Approach

For multinational businesses moving into the U.S. market, it is vital to understand and implement effective transfer pricing strategies to assist with regulatory compliance, improve tax positions, and support seamless intercompany transactions.

Even if your business is familiar with Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines or currently operates in a country that mirrors them, you need to know the subtleties that may occur should the IRS review your related-party transactions. The IRS will generally abide by U.S. transfer pricing principles without consideration of OECD guidelines. Understanding the differences may help you avoid headaches and create a consistent approach throughout your organization worldwide.

If your business is navigating the complexities of transfer pricing, professional advice and tailored strategies are recommended. For detailed guidance and personalized support, reach out to our International Tax team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. This series will delve into specific aspects of this process, providing detailed guidance and practical tips. Our next article will discuss operational strategies for a successful expansion.

CFOs: Prepare Your Company for IRS Transfer Pricing Audits and Mitigate Risk

Key Takeaways:

Transfer pricing is an increasing area of focus for tax authorities, requiring CFOs to adopt more strategic audit preparation.
Proactive measures like pre-audit reviews, voluntary disclosures, and benchmarking are crucial for companies to defend transfer pricing policies and minimize risks.
Prioritizing high-value transactions, collaborating with tax professionals, and leveraging technology are essential to stay ahead of evolving transfer pricing regulations and potential audits.

In today’s global tax environment, transfer pricing has become a critical focus for tax authorities. With multinational companies operating across multiple jurisdictions, tax authorities are intensifying their efforts to scrutinize transfer pricing practices and confirm that profits are appropriately distributed and taxed in their jurisdictions. This growing focus requires chief financial officers (CFOs) and tax executives to shift from compliance alone to comprehensive audit preparation and strategic risk management.

From Compliance to Audit Readiness

While transfer pricing compliance has always been important, the increasing focus on audit enforcement is changing the landscape. It is no longer enough to simply have policies in place; your company needs to be prepared to defend them under rigorous examination. This shift highlights the importance of proactively managing transfer pricing risk and preparing for potential audits.

Risk management and audit preparation efforts include:

Pre-audit reviews — Conducting periodic pre-audit reviews is essential. These reviews offer an opportunity to examine your transfer pricing documentation and policies to confirm the pricing of all intercompany transactions is supported by clear agreements. It is important the documentation reflects an arm’s length standard and is presented in a way that would stand up to an audit. Showing gaps, inconsistencies, or potential weaknesses early on allows your company to address them before tax authorities intervene.
Voluntary disclosures — In cases where pre-audit reviews reveal potential issues, voluntary disclosures can be a valuable tool. If discrepancies are found, making voluntary disclosures to tax authorities can sometimes lead to more favorable outcomes as it shows good faith and a proactive approach to compliance. It also demonstrates your company has a level of sophistication in overall global financial hygiene. This strategy can help you avoid more severe penalties that may arise from issues discovered during an Internal Revenue Service (IRS) or foreign jurisdiction audit.
Benchmarking — Benchmarking and testing are also key components of audit preparedness. Your company should consistently review its transfer pricing policies and test them against current market conditions. This is particularly important when there are economic shifts or significant changes in business operations — such as the introduction of new products, services, or intangible assets. By regularly benchmarking intercompany pricing, your company can support alignment with the arm’s length principle and minimize risk during an audit.

The Role of CFOs in Managing Transfer Pricing Risk

For CFOs, transfer pricing audits are a significant financial risk. These audits can result in tax adjustments and penalties. They can also lead to reputational damage if issues are not handled properly and with sufficient expeditiousness. CFOs together with their tax advisors play a significant role in mitigating this risk by taking a strategic approach to audit readiness and documentation.

Key areas of focus for CFOs include:

High-value transactions — A top priority for CFOs should be focusing on high-value transactions. Not all intercompany transactions carry the same level of risk, and those involving intangible assets, intellectual property, or complex financial arrangements tend to receive the most scrutiny from tax authorities. It is important to thoroughly document and benchmark these transactions to avoid potential challenges during an audit.
Tax professionals — Another critical element of risk management is collaborating with tax professionals. Transfer pricing rules can vary significantly across jurisdictions, and tax advisors are well-versed in the specific requirements and regulations in various countries. Working closely with these advisors enables your company to adapt its transfer pricing policies to standards and minimize exposure to risk.
Voluntary compliance programs — In some cases, companies may receive help by entering voluntary compliance programs — such as advance pricing agreements (APAs). These agreements allow your company to gain certainty over transfer pricing arrangements by agreeing to terms with tax authorities in advance. For high-risk transactions or operations in high-risk jurisdictions, APAs can provide a level of protection from future audits and disputes.

Proactive Risk Management in Transfer Pricing

The global tax landscape continues to evolve as regulatory authorities refine their approaches to transfer pricing audits and enforcement. For mid-market companies with limited resources, it is particularly important to strike the right balance between compliance and cost-efficiency. This requires a proactive approach to transfer pricing risk management that combines audit readiness with strategic planning.

Steps for proactive risk management include:

Audit-ready documentation — The first step in proactive risk management is building audit-ready documentation. This includes keeping detailed records of all intercompany transactions, agreements, and financial data that support the arm’s length nature of pricing decisions. Regularly reviewing and updating this documentation helps your company stay prepared for potential audits.
Regular market testing — Beyond documentation, CFOs should incorporate benchmarking and market testing into risk management strategies. By continuously checking how your pricing compares to the market, your company can stay aligned with the arm’s length principle and minimize exposure to tax adjustments. Regular testing can also help you find potential discrepancies before they become audit issues.
Automated solutions — Finally, using technology to enhance efficiency and accuracy in transfer pricing documentation and analysis is essential. Automated solutions and data analytics offer the ability to quickly find risks, prioritize compliance efforts, and streamline the process of audit preparation.

Keeping Your Company Ahead of the Transfer Pricing Curve

In an era of increased scrutiny and regulatory pressure, transfer pricing compliance is a priority for multinational companies. For CFOs and tax executives, the challenge lies not just in keeping compliant but in preparing for audits and managing the associated risks. Proactive risk management, strategic audit readiness, and a careful focus on high-value transactions are critical components in navigating this complex landscape.

By focusing on audit preparedness, keeping documentation up-to-date, and collaborating with local tax professionals, you can position your company to minimize tax adjustments, penalties, and disputes. As transfer pricing rules continue to evolve, staying ahead of the curve with a forward-thinking strategy is essential for supporting compliance and reducing financial risks.

How MGO Can Help

Our International Tax team is here to help you navigate the new transfer pricing landscape. We can assist you in both broad and focused areas, providing guidance to meet your specific transfer pricing needs. Our services include:

IRS Pre CheckUP — We help you identify and rectify potential weaknesses in transfer pricing and international tax documentation and practices before facing an actual IRS audit.
Review of:
Cross-border agreements for U.S. tax updates
Benchmark data sets
Transfer pricing documentation
U.S. tax returns to confirm consistency with transfer pricing documentation and policies, as well as withholding practices

Protect your company from costly adjustments and penalties — reach out to our team today.

Navigating Pillar Two and Supply Chain Challenges for Your Global Business

Key Takeaways:

The OECD’s Pillar Two rules are pushing large multinational enterprises to restructure and rethink location strategies to navigate the 15% global minimum tax more effectively.

AI and digital tools are revolutionizing supply chain operations, enabling you to make faster decisions and drive your efficiency while meeting ESG reporting requirements.

An increasing number of multinational enterprises are planning major business model overhauls in response to Pillar Two’s growing influence on tax, operational, and geographical strategies.

If you act early to integrate Pillar Two considerations into your strategic planning, you could avoid unforeseen costs and position your business for long-term success in what will continue to be a complex global landscape.

Throughout the last few years, the global business landscape has been rocked by a series of unprecedented disruptions affecting supply chains and operating models. From natural disasters like the Fukushima earthquake to geopolitical tensions and the COVID-19 pandemic, businesses like yours have no doubt been forced to reevaluate and adapt strategies to maintain efficiency and meet evolving customer expectations. 

It is likely that these disruptions have prompted you to diversify your sourcing, move your manufacturing closer to markets, and adopt a more regionalized supply chain model with an increased reliance on artificial intelligence (AI) and digital tools for more rapid supply chain decision-making and environmental, social, and governance (ESG) reporting.

While Pillar Two considerations were not the primary driver of these types of transformations, they have started to influence corporate strategies — including business model revisions, supply chain alterations, and legal entity restructuring as companies assess the tax implications and integrate them into business cases.

How You Can Respond to the Disruption

In response to these supply chain challenges, businesses have taken to adopting other strategies to stay nimble. Here are some things you can do:

Diversify your supply sources: Companies are moving their sourcing and manufacturing closer to their markets to increase supply chain diversity and provide greater market responsiveness.

Reduce your dependence on China: There has already been a noticeable shift away from the country as the primary manufacturing base.

Look at nearshoring and onshoring: This can bring your manufacturing closer to end markets and decrease your transportation costs.

Consider digitalization: Using AI and digital technologies can accelerate your decision-making, as well as enhance supply chain efficiencies.

Transform your supply chain: Companies are revising their supply chains to mitigate tariffs, optimize green credits, and meet ESG reporting requirements.

The Role Pillar Two Plays in Your Business

The Pillar Two model rules, also referred to as the Global Anti-Base Erosion (GloBE) rules, were released on December 20, 2021, and are part of the Organisation for Economic Co-operation and Development‘s (OECD’s) two-pillar solution to address the tax challenges of the digitalization of the economy that was agreed to by 137 jurisdictions and endorsed by the G20 finance ministers in October 2021. They were designed to ensure that large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% on the income arising in each jurisdiction where they operate.

The OECD’s global minimum tax rules apply to MNEs with revenue of at least EUR 750 million and are not self-implementing. Each jurisdiction must enact them into their domestic legislation. Some jurisdictions have already issued legislation to enact the global minimum tax, but others are still enacting legislation. You can track the status of this implementation here.

You are most likely navigating a complex landscape of challenges that include the green transition, digital transformation, geopolitical tensions, talent shortages, and supply chain disruptions. The Pillar Two tax reforms intersect with these issues, meaning you need to take a comprehensive approach to guard your strategies and operations across your people, processes, and technology. You can respond to these disruptions in a myriad of ways, from adjusting your supply chains to overhauling your recruitment strategies to even making fundamental shifts in your business models.

You’ve probably seen firsthand how the rise of digitization has driven more commerce online, fostering new platforms and subscription-based models. In that same vein, the increasing emphasis on sustainability and ESG factors is prompting organizations to reevaluate their core objectives and metrics of success. From this angle, Pillar Two is emerging as a significant consideration factor in your transformation.

While it is not quite a catalyst yet, it is gaining influence around operational restructuring and relocation, with an increasing percentage of MNEs planning major structural changes due to Pillar Two. Because of this new tax landscape, you will have to reassess the optimal locations for their people, functions, assets, and risks, as you may no longer see a strong business case to centralize in one location to obtain very low tax rates via incentives.

Pillar Two is becoming more prominent as a cost factor due to its potential to increase costs and impact strategic plans. MNEs anticipate a significant rise in effective tax rates due to it, which can add to the already existing cost pressures. If you fail to incorporate Pillar Two considerations into your strategic planning, you’ll likely be impacted by unforeseen costs and erode your profitability. That is why it is key to take early action on implementation — you’ll be setting yourself up for a competitive advantage.

How MGO Can Help

The supply chain landscape and operating model disruption are complex and will continue to evolve. MGO can help you take an integrated approach to adapt to these changes. Our experienced team will consider the location of your people, functions, assets, and risks to diversify your supply sources, leverage digital technologies, and adapt your overall strategies in response to the environmental, social, and regulatory changes.

As the shift towards decentralized, regional hub models continue to gain traction, we can assist you in moving away from the traditional centralized models to enhance your flexibility and resilience. Let us tackle the additional layer of complexity Pillar Two adds as we reassess your operations and strategies holistically. As you move forward, your success will hinge on your ability to adapt and innovate in the face of these disruptions, and we can help set you up for long-term success and sustainability.

To learn how we can help you address supply chain challenges and Pillar Two tax implications, reach our to our International Tax team today.

IRS Releases Dual Consolidated Loss Proposed Regulations

Key Takeaways:

The Treasury and IRS released new proposed regulations affecting how dual consolidated losses (DCLs) are calculated and their interaction with the Pillar Two global tax regime.

A new set of rules for disregarded payment losses (DPLs) has been introduced — these apply to disregarded payments deductible in foreign countries, but not included in U.S. taxable income.

The proposed regulations expand the definition of a separate unit and address how foreign tax rules (under Pillar Two) may trigger foreign use restrictions on DCLs.

The Department of the Treasury and the IRS on August 6 released proposed regulations on the dual consolidated loss (DCL) rules and their interaction with the Pillar Two global taxing regime. The proposed regulations also make several changes to how DCLs are calculated and introduce a new disregarded payment loss rule.

DCL Rules

The DCL rules apply to ordinary losses of a dual resident corporation (DRC) or a separate unit. A DRC is either (1) a domestic corporation that is subject to an income tax of a foreign country on its worldwide income or taxed as a resident under the law of that country; or (2) a foreign insurance company that elects to be taxed as a domestic corporation under Internal Revenue Code Section 953(d) and is a member of an affiliated group, even if not subject to tax in the foreign country. A separate unit for purposes of the DCL rules is a foreign branch or hybrid entity that is owned by a domestic corporation. S corporations are not subject to the DCL rules, and domestic corporations will be treated as indirectly owning a separate unit that is owned by a partnership or grantor trust.

Under Section 1503(d), a DCL of a DRC or separate unit generally cannot be used to offset U.S. taxable income of a domestic affiliate (no “domestic use”). This means that the DCL may be used only for U.S. federal income tax purposes against the income of the DRC or separate unit that incurred the DCL.

Some exceptions apply to the domestic use prohibition; for example, a U.S. taxpayer may file a domestic use election and agreement (DUE) certifying that there has not been and will not be any foreign use of the DCL. Foreign use is defined making a portion of the DCL available under a foreign country’s income tax laws to reduce the income of another entity (one that is classified as a foreign corporation for U.S. income tax purposes).

DCLs and Interaction with Pillar Two

The proposed regulations address the coordination between foreign use under the DCL rules and Pillar Two, including expanding the definition of a separate unit to include certain hybrid entities subject to an income inclusion regime (IIR) and foreign branches subject to a qualified domestic minimum top-up tax (QDMTT) or an IIR. More specifically, the proposed rules provide that an income tax for purposes of the DCL rules may include a tax that is a minimum tax computed based on financial accounting principles, such as an IIR or QDMTT. Subject to an exception under the duplicate loss arrangement rules when a double deduction is denied, foreign use could occur if a deduction or loss included in a DCL were used to calculate net GloBE income for an IIR or QDMTT or, alternatively, used to qualify for the transitional CbCR safe harbor. The result of a foreign use would be that no DUE would be permitted to be made to allow for the DCL to be used in the U.S. The proposed rules provide no guidance on the undertaxed profit rules (UTPR).

The proposed regulations also address the concept of “mirror legislation.” The mirror legislation rule under the current DCL rules essentially provides that if the foreign country has its own DCL-type rule that “mirrors” the U.S. rule and that foreign country’s DCL-type rule applies to the loss at issue, then for purposes of the U.S. DCL rules, a foreign use of the DCL will be deemed to occur. The proposed regulations clarify that foreign law, including the GloBE rules, that deny deductions due to the duplicate loss arrangement rules, does not constitute mirror legislation as long as the taxpayer is allowed a choice between domestic or foreign use.

To address legacy DCLs, the proposed regulations provide a transition rule that, subject to an anti-abuse rule, extends the relief given in Notice 2023-80 by treating DCLs incurred in tax years beginning before August 6, 2024, as legacy DCLs and allowing the DCL rules to apply without regard to Pillar Two taxes.

Inclusions Due to Stock Ownership

Under the current DCL rules, U.S. inclusions arising from a separate unit’s ownership in a foreign corporation (such as Subpart F or GILTI) are treated as income and attributable to that separate unit for purposes of determining the income or DCL of that separate unit. This rule also applies to other types of income, such as dividends (including section 1248) and gains from the sale of stock. Under the DCL proposed regulations, with limited exceptions, these types of income (as well as any deductions or losses, such as section 245A dividends received deductions (DRD), attributable to these income items) would be excluded for purposes of calculating a DRC’s or separate unit’s income or DCL.

New Disregarded Payment Loss Rules

The proposed regulations introduce a new set of disregarded payment loss (DPL) rules, which operate independently of the DCL rules. To address certain deduction/non-inclusion outcomes, the DPL rules would apply to some disregarded payments (interest, royalties, and structured payments) that are deductible in a foreign country but are not included in U.S. taxable income because the payments are disregarded.

The DPL rules would require a consenting domestic owner of a disregarded payment entity to include in U.S. taxable income the amount of the DPL of the disregarded payment entity, subject to certain calculation requirements, if one of the following triggering events occur within 60 months: (1) a foreign use of the disregarded payment loss; or (2) failure to comply with certification requirements during the 60-month certification period. A disregarded payment entity is generally a disregarded entity, DRC, or foreign branch.

Since no express statutory authority exists for the new DPL rules, under the proposed regulations, Treasury would implement the DPL rules in coordination with the entity classification election rules under Treas. Reg. §301.7701-3(c), which means that when a specified eligible entity either elects to be disregarded for U.S. tax purposes or defaults to a disregarded entity under the general rules of Treas. Reg. §301.7701-3(b), the domestic owner would be deemed to consent to the new DPL rules. A specified eligible entity is an eligible entity (whether foreign or domestic) that is a foreign tax resident or is owned by a domestic corporation that has a foreign branch. This deemed consent rule would also apply in a situation where a domestic corporation directly or indirectly acquires an interest in a preexisting disregarded entity, as well as a domestic corporation that owns an interest in a disregarded entity by reason of a conversion from a partnership.

The DPL consent rules would apply to new entity classification elections filed on or after the date the proposed DCL rules are finalized and existing entities starting 12 months after the date the proposed regulations are finalized, which would allow taxpayers to restructure their operations before the DPL rules enter into effect.

Intercompany Transactions

The Section 1502 consolidated return regulations provide rules for taking into account certain items of income, gain, deduction, and loss of members from intercompany transactions, essentially treating consolidated group members as separate entities for some purposes and single entities for other purposes. The purpose of the regulations is to provide rules to clearly reflect the taxable income (and tax liability) of the group as a whole by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income (or consolidated tax liability).

The proposed regulations modify the existing regulations and generally shift application of the regulations to separate-entity treatment. More specifically, if a member of a consolidated group is a DRC or a U.S. member that owns a separate unit, the proposed regulations state that despite Section 1503(d) requiring certain treatment of the member’s tax items, the counterparty consolidated group member’s income or gain on the intercompany transaction will not be deferred. For example, if one member has intercompany loan interest expense that the DCL rules prevent from being deducted, the counterparty member’s interest income would still be included in income.

Additionally, under the proposed regulations, the Section 1503(d) member has special status in applying the DCL rules, which means that if a Section 1503(d) member’s intercompany (or corresponding) loss would otherwise be taken into account in the current year, and if the DCL rules apply to limit the use of that loss (preventing it from being currently deductible), the intercompany transaction regulations would not redetermine that loss as not being subject to the limitation under Section 1503(d). A Section 1503(d) member is an affiliated DRC or an affiliated domestic owner acting through a separate unit.

Books and Records

Under Treas. Reg. Section 1.1503(d)-5, a separate unit’s income or DCL calculation is based generally on items reflected on the separate unit’s books and records as adjusted to conform to U.S. federal income tax principles. As a result, certain transactions, such as transactions between the separate unit and its U.S. owner, are disregarded for purposes of calculating a separate unit’s income or DCL. The proposed regulations clarify that items that are not (and will not be) on the books and records of the separate unit are not included in the separate unit’s income or DCL calculation. This clarification was provided, according to the Treasury, to address positions taxpayers have taken that allocate income on the books and records of the U.S. owner to the separate unit, although those items are not on the books and records of the separate unit.

Applicability

The proposed regulations would generally apply to tax years ending on or after August 6, 2024, except for the intercompany transaction regulations, which would apply to tax years for which the original U.S. income tax return is due without extensions after the date the final DCL regulations are published in the Federal Register. This means that if the final regulations are published by April 15, 2025, they would apply to calendar year 2024. Deemed consent under the DPL rules would apply to tax years ending on or after August 6, 2025.

Once the proposed regulations are finalized, taxpayers can choose to apply them retroactively to open tax years, subject to some consistency requirements.

Insights

The DCL proposed regulations are lengthy and complex and include significant changes that taxpayers should consider now, since many of the changes will apply retroactively to calendar year 2024 once the proposed regulations are finalized.

Taxpayers affected by the proposed regulations should consider the impact these rules may have on their DRCs or separate units, especially since the transitional Pillar Two relief is expected to end soon for many calendar-year and fiscal-year taxpayers.

Taxpayers may need to make adjustments to their DCL calculations going forward to take into account the new rules regarding removing items from the DCL calculation that are not on the separate unit’s books and records and U.S. inclusions, among others. The removal of these items could have a significant effect by unintentionally creating a DCL or increasing the amount of any existing DCL, among other possible upshots.

How MGO Can Help

If the Treasury and the IRS finalize these proposed regulations and you have a multinational company, you may lose the ability to take a U.S. deduction for losses incurred by foreign hybrid entities and foreign branches. If you are affected by the interaction of Pillar Two and the new proposed DCL rules, MGO’s team of experienced international tax advisors can discuss the potential of restructuring to minimize any negative tax consequences. We can also mockup OECD Pillar Two modeling and assist with planning for the overall minimization of your worldwide taxation with income or direct taxes. Our compliance services can help you with your foreign compliance calendars too. Trust us as we dive into the details and limit your global tax rate and overall exposure.

5 Tips for Setting Up Your Business in the U.S.

This article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA”.

Key Takeaways:

Expand into the U.S. market to access a large and diverse customer base.

Navigate the multi-layered U.S. tax system and adapt to cultural differences.

Choose the right business entity and plan for compliance with U.S. regulations.

Expanding your business into the United States can significantly increase your market share and open the door to new opportunities. However, the process involves navigating a complex landscape of regulations, tax considerations, and operational challenges. This series provides an overview to help you understand how to successfully set up your business in the U.S.

Why Expand to the U.S.?

Expanding into the U.S. market allows you to:

Access a large and diverse customer base.

Leverage the economic scale of the U.S. market.

Explore opportunities for growth and innovation that may not be available in other countries.

Have access to what may be a significant amount of capital (whether this may be equity or debt or other arrangements).

Moving into the U.S. market can help you drive more sales and reach new types of customers. You may also launch new products here that might not succeed in your home market.

5 Key Considerations for Foreign Businesses

When setting up a business in the U.S., you must navigate a range of unique challenges — including:

1. Multi-Layered Tax System

In many countries, businesses deal with a single national tax system where their provinces or states mimic or have congruent rules with federal rules. In contrast, the U.S. has a multi-layered tax system involving federal, state, and local taxes that at many times are not congruent.

When you start a business in the United States you are dealing with 50 states (and the District of Columbia), multiple localities, and certain territories. Each state has its own set of rules and regulations applicable to income taxes, which can be quite different from a single national system (and often at odds with the federal rules).

In addition, state and local jurisdictions impose taxes unique to the state and local level — including sales tax, property tax, and gross receipt tax. Finally, not all states honor the provisions of U.S. tax treaties with foreign countries.

2. Cultural and Business Practice Differences

Understanding and adapting to cultural and business practice differences is crucial. For instance, business practices that are common in Europe or Asia might not be as effective in the U.S. Additionally, legal agreements and formalities that might be less stringent abroad are often necessary in the U.S. to protect business interests.

3. Legal Structure and Entity Choice

Choosing the right business entity is vital as it affects tax obligations, legal liability, and operational flexibility. Options include C corporations (or C corps), limited liability companies (LLCs), foreign corporations with or without U.S. branches, partnerships or joint ventures, or franchising or direct importing. An S corporation (S corp) is not an option for foreign businesses due to ownership restrictions.

Each structure has its own set of advantages and legal implications, which should be carefully considered.

4. Regulatory Compliance

The Corporate Transparency Act is one newly created obligation for all businesses operating in the U.S. Failure to comply can result in significant penalties. It is important to understand the reporting requirements and file all necessary documentation on time.

In addition, you should consult a lawyer to ensure the entity form is respected — including prompt organizational filings with the Secretary of State and obtaining necessary business licenses.

These are just a few of the myriad of regulations your business must navigate. That’s why it’s critical to hire the right professionals to build your team, as missing any of these requirements may place your business in peril.

5. Operational Challenges

Operational planning is essential for a successful U.S. expansion. Key operational considerations include:

Employee benefits and regulations: U.S. regulations on health insurance, retirement plans, and other employee benefits can be significantly different from those in other countries. For example, in Europe, many employee benefits are government-run, while in the U.S., they are often the responsibility of the employer.

Logistics and supply chain management: Choosing the right location for operations includes considerations such as proximity to logistics centers and understanding regional operational costs.

Insurance and banking: Obtaining necessary insurance coverage and opening bank accounts can be challenging for foreign businesses. Some U.S. banks may not provide accounts to foreign-owned companies, and those that do might have stringent requirements. Certain banks may refuse to conduct business with certain entities in industries such as cannabis and cryptocurrency, to name a couple.

Establishing a U.S. Presence for Your Business

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. From navigating the multi-layered tax system to selecting the right business entity and following U.S. regulations, each step is crucial for a successful expansion. By addressing these key considerations and seeking professional guidance, you can effectively establish your presence in the U.S. market.

For more detailed insights and personalized help, connect with our International Tax team and start your journey towards successful U.S. market entry today.

Setting up a business in the U.S., requires thorough planning and an understanding of various regulatory and operational challenges. This series will delve into various aspects of this process, providing guidance and practical tips. Our next article will discuss navi

Transfer Pricing Compliance Checklist for Your Business

Key Takeaways:

Businesses operating internationally should regularly review transfer pricing practices — including documentation, benchmarking, and IRS reporting requirements.

Understanding the classification of inter-company transactions, learning from past audits, and considering Advance Pricing Agreements can improve tax compliance and strategy.

Regular assessment of transfer pricing practices can help maintain compliance, mitigate risks, and potentially reveal cost-saving opportunities.

For today’s global businesses, understanding and managing the complexities of international tax and transfer pricing can be a challenge. That’s why it is important to regularly review your practices against critical standards to maintain compliance and improve tax strategies.

To help you determine if your company is compliant or if consultation may be needed, use this straightforward checklist based on key questions about your operations:

Does your company need transfer pricing documentation? Transfer pricing documentation is essential to show your company’s pricing policies follow local and international arm’s length standards. This documentation should include detailed analyses of inter-company transactions, the methods used to set prices, and how these follow applicable tax laws. Having robust documentation can help you prevent disputes with tax authorities, avoid potential tax penalties, and make audits run smoother.

Do your inter-company transactions need to be benchmarked? Benchmarking is the process of comparing your inter-company transactions with those of similar transactions by unrelated parties to confirm the inter-company pricing is at arm’s length. This process involves gathering data from uncontrolled comparable companies and transactions to justify your pricing strategies. Effective benchmarking helps maintain compliance and supports your transfer pricing documentation.

Do your inter-company transactions need to be reported on an IRS form? Certain inter-company transactions must be reported to the IRS to follow regulations and avoid penalties. For instance, transactions with foreign affiliates often require filling out Form 5472. Regularly reviewing which forms are applicable and accurately reporting transactions can help you stay compliant and avoid fines. In addition, your company may have offshore investments that may require reporting on IRS Forms 5471 and/or 8621.

Are your inter-company transactions “regarded” or “disregarded”? (Consider if some are regarded and others are disregarded.) The tax treatment of inter-company transactions can vary, with some being regarded and others disregarded. Understanding which transactions fall into each category is vital for proper tax planning and compliance as it affects income allocations and taxable earnings calculations.

Have your inter-company transactions come under IRS or state audit in the last five years? If your transactions have been audited, it’s important to review the outcomes and learn from them. An audit history can show potential areas of risk in your transfer pricing practices. Reviewing and adjusting practices based on past audits can help reduce the likelihood of future audits and potential penalties.

Does your company have an Advance Pricing Agreement (APA) in place? An APA is an agreement between a taxpayer and tax authorities that pre-approves transfer pricing methods the taxpayer will apply for future inter-company transactions. Having an APA can reduce uncertainty in tax matters, prevent disputes, and provide clarity on how transactions will be treated. If you don’t have an APA, it might be time to consider whether it could help your operations.

Could your company benefit from a “health check” on its international tax or transfer pricing practices? A tax “health check” involves a comprehensive review of your company’s tax and transfer pricing practices to find areas for improvement and potential risks. This proactive approach can help your company improve its tax strategies, verify compliance, and potentially uncover cost-saving opportunities.

Is Your Business Meeting Transfer Pricing Compliance Standards?

By answering the questions above, you can identify areas where your company may need to improve its transfer pricing and international tax practices. Addressing these key areas will help you develop more effective strategies to mitigate your risks.

How MGO Can Help

We are committed to helping you navigate the complex world of international tax and transfer pricing. With our comprehensive approach, we address each area of potential concern — from correct documentation and effective benchmarking to navigating IRS reporting requirements and understanding the tax implications of every transaction.

Whether you are looking to set up an APA or simply need a thorough “health check” of your current practices, our team is here to provide the support and insights necessary to improve your tax strategies and enhance your operational efficiency. Reach out to our team today.

OECD Publishes Additional Amount B Guidance

Key Takeaways:

The Amount B framework aims to simplify the arm’s length principle for pricing marketing and distribution activities, applicable to all taxpayers.
On June 17, 2024, supplementary guidance was released to finalize the administrative aspects of Amount B.
“Covered jurisdictions” are low-and middle-income countries, including some OECD and G20 members like Argentina and Mexico; “qualifying jurisdictions” are determined by income level and credit rating and have fewer than five local comparables.

Background

The Amount B framework for pricing baseline marketing and distribution activities is a new approach that seeks to streamline and simplify the application of the arm’s length principle. This approach applies to all taxpayers regardless of size and profitability. A report on Amount B was approved and published by the Inclusive Framework on February 19, 2024, and incorporated as an annex to Chapter IV of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.

The February 2024 report was published pending completion of work on some outstanding administrative aspects of the guidance. The supplementary guidance released on June 17 completes the work on those sections of the report. It consists of two documents, one of which defines and identifies “covered jurisdictions” within the scope of the political commitment regarding Amount B. These jurisdictions are those for which jurisdictions have agreed that an Amount B determination of returns in a covered distribution transaction will be respected regardless of whether the counterparty to the transaction has adopted Amount B.

A separate document addresses the definition and listing of jurisdictions determined to be “qualifying jurisdictions.” Qualifying jurisdictions are identified for two purposes: (1) a checking mechanism on the profit determined through the primary Amount B mechanism (Section 5.2 of the Amount B report), and (2) an adjustment to the profit determined through the primary Amount B mechanism for distributors in jurisdictions in which the global dataset of distributors does not provide sufficient coverage (Section 5.3 of the Amount B report).

Covered Jurisdictions

Under the agreement reached by the Inclusive Framework, jurisdictions can choose to apply the simplified and streamlined approach to the qualifying transactions of their in-scope tested parties; however, the outcome determined under that approach by a jurisdiction that has chosen to apply it would not be binding on the counterparty jurisdiction if that counterparty has not adopted the approach. To address this, members of the Inclusive Framework committed to respect the outcome determined under the simplified and streamlined approach when the approach is applied by what was initially called a “low-capacity jurisdiction.”

The Inclusive Framework originally said it would agree on the list of low-capacity jurisdictions by March 31, 2024; however, that deadline was not met. The first supplementary guidance document released on June 17 now addresses this. The term “low-capacity jurisdiction” has been replaced by “covered jurisdiction,” and includes certain low- and middle-income OECD and G-20 members.

The definition of covered jurisdictions is as follows:

Low- and middle-income Inclusive Framework jurisdictions as determined using the World Bank Group country classifications by income level, excluding EU, OECD, and G20 member countries.

Inclusive Framework jurisdictions that are OECD and G20 member states that otherwise meet the World Bank Group country determination as low- and middle-income, and that have expressed to the Inclusive Framework a willingness to apply Amount B. Argentina, Brazil, Costa Rica, Mexico, and South Africa fall in this category.

Any non-Inclusive Framework jurisdiction that meets the first criterion and expresses to the Inclusive Framework a willingness to apply Amount B will be added to the list of covered jurisdictions.

Qualifying Jurisdictions

The simplified and streamlined approach applies an operating expense cross-check as a guardrail for the primary return on sales net profit indicator. As part of this guardrail, a maximum or cap operating return-on-operating-expense (EBIT/Operating Expenses) ratio is specified, and if the actual ratio (as a result of the application of Amount B) exceeds that cap, the Amount B profit margin will be adjusted downward until the resulting return on operating expenses falls to the cap. This cross-check provides for both a default cap rate and an alternative higher cap rate, with the latter being applicable when the tested party is located in a “qualifying jurisdiction.”

The second supplementary guidance document released June 17 identifies the qualified jurisdictions for purposes of this operating expense cross-check cap and clarifies that Inclusive Framework members agreed that the term “qualifying jurisdiction” is not defined by reference to low-capacity. Rather, qualifying jurisdictions for purposes of the operating expense cross-check refers to jurisdictions that are classified by the World Bank Group as low income, lower-middle income, and upper-middle income based on the latest available World Bank Group country classifications.

This guidance document also provides a separate definition and enumeration of qualifying jurisdictions for an adjustment mechanism to the profit determined through the primary Amount B mechanism. Specifically, the return on sales specified in the pricing matrix will be adjusted for distributors in jurisdictions for which the global dataset of distributors does not provide sufficient coverage (the “data availability mechanism” described in Section 5.3 of the Amount B report).

In this context, the new guidance provides that a qualifying jurisdiction refers to jurisdictions with a publicly available long term sovereign credit rating of BBB+ (or equivalent) or lower from a recognized independent credit rating agency, and fewer than five local-country comparables in the global dataset.

The lists of covered jurisdictions and the two types of qualified jurisdictions will be updated every five years and published on the OECD website.

How MGO Can Help

In the evolving landscape of international taxation — where compliance and strategic adaptation are crucial to your success — MGO is uniquely positioned to guide your business through the complexities of the new Amount B framework. By understanding the intricate interplay between global tax regulations and your business operations, MGO can provide tailored guidance to align your transfer pricing strategies with the OECD’s latest guidelines.

Our international tax team excels at helping you identify the right pricing mechanisms and manage the necessary adjustments to optimize your business’s financial outcomes. For inquiries or support in navigating the Amount B framework, reach out to our team today.