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More Permanent Establishments: The Dwindling Preparatory and Auxiliary Activities Exception

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More Permanent Establishments: The Dwindling Preparatory and Auxiliary Activities Exception

Nothing is certain in this world, except death and taxes – and even taxes are subject to change.  The ever-expanding definition of a permanent establishment (“P.E.”) and ever diminishing exceptions to a P.E. under the O.E.C.D.’s B.E.P.S. Project has made one thing clear – the restrictions local jurisdictions put on activities by foreign taxpayers to trigger taxation are tightening.  The dwindling preparatory and auxiliary activities exception is a prime example.  Neha Rastogi and Beate Erwin explain.

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Insights Vol. 6 No. 2: Updates & Other Tidbits

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Insights Vol. 6 No. 2: Updates & Other Tidbits

This month, Neha Rastogi and Nina Krauthamer look at interesting items of tax news from around the world: A new foreign investment law could ease the U.S.-China trade war, and another illegal State Aid investigation has been announced — this time over Dutch tax rulings issued to Nike and Converse.

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Mirror, Mirror, On the Wall, Which Is My Tax Home of Them All? – Foreign Students Face Dilemma in the U.S.

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Mirror, Mirror, On the Wall, Which Is My Tax Home of Them All? – Foreign Students Face Dilemma in the U.S.

The U.S. Department of State administers the Exchange Visitor Program, which designates sponsors to provide foreign nationals with opportunities to participate in educational and cultural programs in the U.S. and return home to share their experiences. These students receive taxable stipends, file tax returns, and reduce taxable income by costs associated with participation. Unfortunately, a recent Tax Court case, Liljeberg v. Commr., has determined that the travel and lodging costs of these individuals could not be deducted. Neha Rastogi and Beate Erwin explain that while home is where the heart is, a “tax home” is where a person is expected to live taking into consideration the person’s principal place of employment.

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Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

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Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

In August, the I.R.S. issued much-awaited proposed regulations under the new Code §199A covering Qualified Business Income (“Q.B.I”). This provision of recently enacted U.S. tax law allows entrepreneurial individuals to claim a 20% deduction on taxable business profits of a sole proprietorship, partnership, L.L.C. or S-corporation. Galia Antebi, Nina Krauthamer, and Fanny Karaman ask and answer the pertinent questions: Who may benefit? How do the rules addressing R.E.I.T.’s and publicly traded partnerships (“P.T.P.’s”) affect Q.B.I when a net negative result is reported by the R.E.I.T. and the P.T.P.? When is an individual’s income effectively connected to a trade or business and when is the. income a form of disguised salary for which no deduction is allowed? What is a specified trade or business (“S.S.T.B.”)  for which the resulting income cannot benefit from the Q.B.I. deduction? How does the de minimis rule work under which a limited Q.B.I. deduction is allowed S.S.T.B. income does not exceed a specified ceiling? How does the ceiling based on W-2 wages work when calculating the Q.B.I. deduction? 

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Insights Vol. 5 No. 8: Updates & Other Tidbits

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Insights Vol. 5 No. 8: Updates & Other Tidbits

This month, Rusudan Shervashidze, Neha Rastogi, and Nina Krauthamer look at several interesting updates and tidbits, including (i) potential tax reasons for Cristiano Ronaldo’s move to Italy, (ii) a law suit brought by high-tax states against the U.S. Federal government in connection with the T.C.J.A. limitations on deductions for state and local taxes, (iii) the finding of the European Commission that the aid given to McDonalds by the Luxembourg government did not constitute illegal State Aid, and (iv) a successful F.A.T.C.A. prosecution against a former executive of Loyal Bank Ltd.

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Insights Vol. 5 No. 6: Updates & Other Tidbits

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Insights Vol. 5 No. 6: Updates & Other Tidbits

This month, Neha Rastogi and Nina Krauthamer look at several interesting updates and tidbits, including (i) an I.R.S. notice that addresses legislative workarounds to limitations on deductions for state and local tax payments effective in 2018, (ii) new rules under Code §83(i), which allow a qualified employee to defer income attributable to stock received in connection with the exercise of an option or the settlement of a restricted stock unit (“R.S.U.”), and (iii) a call for guidance regarding cryptocurrency accounting.

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The F-1 Visa – Privileged U.S. Tax Status and How to Keep It

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The F-1 Visa – Privileged U.S. Tax Status and How to Keep It

Foreign students leaving their home country and arriving in the U.S. for higher education may come across many things that seem alien to them – like the accent, culture, and inexplicably large food portions. But one area where they are treated as the aliens is under U.S. Federal income tax law, where foreign students holding F-1 visas are treated as nonresident aliens who are subject to special tax provisions.  Neha Rastogi and Beate Erwin discuss tax residence status, Federal income tax consequences, and U.S. reporting requirements for holders of F-1 visas.

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Investing in U.S. Real Estate on a (Possibly) Tax-Free Basis

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Investing in U.S. Real Estate on a (Possibly) Tax-Free Basis

A Real Estate Investment Trust, or R.E.I.T., is a popular type of investment vehicle.  A R.E.I.T. is an entity that generally owns and typically operates a pool of income-producing real estate properties, including mortgages.  Its investors generally look to a return on investment in two forms: (i) distributions from the R.E.I.T. and (ii) dispositions of the R.E.I.T. stock.  If certain facts exist, U.S. tax law offers foreign investors a completely tax-free avenue to invest in a R.E.I.T.  Galia Antebi and Neha Rastogi explain the ins and outs of tax-free treatment for the foreign investor.

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

T.C.J.A. changes to the Subpart F rules have the effect of deconstructing cross-border arrangements structured to prevent the creation of a C.F.C.  A change to constructive ownership rules may cause all foreign members of a foreign-based group to be treated as C.F.C.’s for certain reporting purposes merely because the group includes a member in the U.S.  A change to the definition of a U.S. Shareholder of a C.F.C. makes the value of shares owned as important as voting power in determining whether a U.S. person is a U.S. Shareholder and a foreign corporation is a C.F.C.  The 30-day requirement for a C.F.C. to be owned by a U.S. Shareholder before Subpart F applies has been eliminated.  In some instances, the changes are retroactive to the 2017 tax year.  Neha Rastogi, Sheryl Shah, Beate Erwin, and Elizabeth V. Zanet explain and provide a case study that ties everything together

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Insights Vol. 5 No. 1: Updates & Tidbits

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Insights Vol. 5 No. 1: Updates & Tidbits

This month, Neha Rastogi and Nina Krauthamer look briefly at three recent developments in international tax: (i) expired I.T.I.N.’s and how tax returns that use an expired I.T.I.N. will be treated by the I.R.S., (ii) the E.U. blacklist of uncooperative jurisdictions, which includes American Samoa and Guam, and (iii) and unanticipated tax demands on contributions to the Brexit campaign.

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Modifications to the Foreign Tax Credit System Under the Tax Cuts and Jobs Act

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Modifications to the Foreign Tax Credit System Under the Tax Cuts and Jobs Act

The T.C.J.A. introduces new concepts in foreign tax credit planning and eliminates others.  Gone are the pool of post-1986 earnings & profits and deemed-paid foreign tax credits for intercompany dividends.  In their place is a dividends received deduction.  Allocations of interest expense between foreign-source income and domestic income now must be based on tax book value.  Entities that manufacture in one jurisdiction and sell in another will find that the source of income is controlled only by production activities.  Neha Rastogi and Stanley C. Ruchelman explain.

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O.E.C.D. Releases Mutual Agreement Procedure Peer Review Report for the U.S.

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O.E.C.D. Releases Mutual Agreement Procedure Peer Review Report for the U.S.

The B.E.P.S. Action 14 Report, Making Dispute Resolution Mechanisms More Effective, acknowledged that the actions to counter B.E.P.S. must be complemented with effective dispute resolution mechanisms.  Participating countries agreed to have their compliance with the minimum standard reviewed by their peers.  The U.S. is among the first few countries that have been reviewed.  Neha Rastogi and Michael Peggs summarize the M.A.P. report card issued for the U.S. 

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Insights Vol. 4 No. 10: Updates & Other Tidbits

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Insights Vol. 4 No. 10: Updates & Other Tidbits

This month, Sheryl Shah, Neha Rastogi, and Nina Krauthamer look briefly at certain timely issues: (i) Swiss nexus requirements to be eligible for treaty benefits, (ii) the impact of technology tax reporting and information sharing, (iii) an I.R.S. pilot program expanding the scope of letter rulings to Code §355 stock and security distributions, and (iv) recent application of the 2016 anti-inversion regulations issued by the Obama Administration under Code §7874.

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Treasury Turns Back the Clock on 2016 Tax Regulations

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Treasury Turns Back the Clock on 2016 Tax Regulations

On October 4, the “other shoe dropped” on eight regulations issued by the Obama administration in 2016 and January 2017.  These eight measures, which were first identified in an interim report to the president as unnecessary, unduly complex, excessively burdensome, or failing to provide clarity and useful guidance, will be withdrawn, revoked, or modified.  Stanley C. Ruchelman, Sheryl Shah, and Neha Rastogi identify the targets and explain the plans of the Treasury Department.

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The Changing Face of Service Permanent Establishments

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The Changing Face of Service Permanent Establishments

As governments struggle to adapt the old rules of taxable presence within a jurisdiction to economic activities in the digital age, new concepts have been asserted to impose tax on foreign service providers who are based abroad but regularly furnish services within a country.  India is among the global leaders rejecting physical presence in favor of location of the customer.  Neha Rastogi and Stanley C. Ruchelman look at the concept of destination based taxation and a recent case, where an Indian Income Tax Appellate Tribunal held that the physical presence of the foreign taxpayer’s employees is not relevant for determining the existence of a Service P.E. in the source country.

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O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention

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O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention

Earlier this year, the O.E.C.D. proposed amendments to Article 5 (Permanent Establishment) of the Model Tax Convention and Commentary.  The revisions eliminate loopholes that exist for commissionaire arrangements, artificial characterization of core activities as “preparatory,” avoidance of permanent establishment status through artificial fragmentation of contracts, and the use of not-so-independent agents.  Neha Rastogi, Beate Erwin, and Stanley C. Ruchelman explain the replacement provisions.

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The Economic Substance Doctrine: A U.S. Anti-Abuse Rule

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The Economic Substance Doctrine: A U.S. Anti-Abuse Rule

While the O.E.C.D. and the European Commission have only recently discovered the “principal purpose” test as a tool to combat aggressive tax planning, U.S. case law has enforced an economic substance rule for over 85 years and that rule was codified in 2010.  Fanny Karaman, Neha Rastogi, and Stanley C. Ruchelman explain the hurdles that must be achieved in order for a plan to have economic substance.

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Insights Vol. 4 No. 8: Updates & Other Tidbits

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Insights Vol. 4 No. 8: Updates & Other Tidbits

This month, Neha Rastogi and Nina Krauthamer look briefly at certain timely issues: (i) a European parliament proposal to extend the scope of country-by-country (“CbC”) reporting by group members when the group parent is not obligated to report and (ii) regulations identified by the I.R.S. as imposing undue burden on taxpayers.

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Foreign Partner Not Subject to U.S. Tax on Gain from Redemption of U.S. Partnership Interest

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Foreign Partner Not Subject to U.S. Tax on Gain from Redemption of U.S. Partnership Interest

Hurray!  After three years, the U.S. Tax Court ruled that gain from the sale of a partnership interest or the receipt of a liquidating distribution by a retiring partner is not subject to U.S. income tax even though the partnership conducts business in the U.S.  Neha Rastogi, Elizabeth V. Zanet, and Nina Krauthamer explain the reasoning behind the decision and the magnitude of the defeat for the I.R.S. Unless the case is reversed on appeal, the decision invalidates the I.R.S. position announced in Rev. Rul 91-32.

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I.R.S. Explains “Substantially Complete” in Relation to International Information Return

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I.R.S. Explains “Substantially Complete” in Relation to International Information Return

Taxpayers having cross-border operations are confronted with numerous tax information forms to be filed as part of the annual tax return.  Because the forms are not directly used to compute taxable income, they frequently are completed at the last minute and with less attention to detail.  However, the I.R.S. imposes penalties for filing an incomplete form.  Taxpayers faced with asserted penalties often argue that the forms are substantially complete.  In a recent International Practice Unit (“I.P.U.”) issued by the Large Business & International Division of the I.R.S., the I.R.S. view regarding substantially complete form was explained.  Not surprisingly, the I.R.S. view is significantly different from taxpayer expectations.  It also differs from holdings in several Tax Court decisions involving other forms.  Neha Rastogi and Stanley C. Ruchelman discuss the I.P.U. in detail.

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