Financier Worldwide Indepth Feature: Global Tax 2025
Clark Armitage offers insights in Indepth Feature: Global Tax 2025 issue of Financier Worldwide Magazine.
Q: What do you consider to be among the key developments affecting corporate tax in your country of focus over the last year or so?
Armitage: On 4 July, US Independence Day, President Trump signed the Big Beautiful Bill. Its foreign provisions mostly maintain the status quo, but importantly make permanent global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII) and the Base Erosion and Anti-Abuse Tax (BEAT), with some changes. GILTI is renamed the ‘net CFC tested income’ regime. Its rate varies based on circumstances – if a CFC pays no foreign income tax, its domestic corporation shareholder is increased from 10.5 percent to 12.6 percent. FDII is renamed ‘foreign-derived deduction-eligible income’ and its rate increased from 13.125 percent to approximately 14 percent. Both regimes now apply not only to intangible income but to all income derived from foreign markets. The BEAT tax rate is increased from 10 percent to 10.5 percent. The law does not include section 899, which would have penalised taxpayers from foreign countries that impose Pillar Two style top-up taxes. The provision was dropped after the US Treasury Department negotiated exceptions to Pillar Two taxes for US companies. The law has numerous other provisions focused on creating incentives for US investment. The ability to deduct certain capital expenditures is a key provision.
Q: To what extent have tax authorities in your country of focus increased their monitoring and enforcement activities?
Armitage: US tax enforcement efforts have evolved significantly, both before and following the recent change of administration. The Internal Revenue Service (IRS) has been shifting toward issue-based audits. Rather than auditing entire tax returns, the agency uses data analytics to identify and audit specific tax issues, especially in areas identified as enforcement priorities, such as cryptocurrency and other virtual assets. The IRS also has adopted a stricter stance on penalty enforcement, imposing penalties even when taxpayers rely on professional tax opinions and documentation. The Trump administration has changed the landscape by dramatically reducing IRS staffing from 102,000 employees to less than 76,000, as of June. The administration intends that artificial intelligence and automation will compensate for the reduction in personnel. While we advise clients not to be sanguine about reduced staffing, we are aware that some audits have been terminated early and anticipate some reduction in near-term enforcement.
Q: How are tax authorities approaching the issue of transfer pricing? In your experience, do companies tend to underestimate the risks and challenges in this area?
Armitage: The IRS continues to focus on transfer pricing enforcement by auditing and litigating big-dollar transfers of intangible property. A representative situation is the Coca-Cola case, in which the US Tax Court ruled that Coca-Cola owed approximately $2.7bn in additional taxes. The court concluded that foreign “supply points” did not have beneficial or legal ownership of marketing intangibles and that earnings from those intangibles were earned by the US parent company. The IRS also has increasingly invoked the economic substance doctrine to challenge transactions lacking economic purpose beyond tax benefits. They have imposed penalties of 20 or 40 percent on resulting underpayments, including in transfer pricing cases. We expect continuing and substantial activity in this space.
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