Members of Ruchelman P.L.L.C. contribute to publications throughout the world and the Firm’s monthly tax journal, Insights.
Tax 101 is back, this time addressing the basic concepts of tax-free A- and B-reorganizations. The first relates to statutory mergers and the latter relates to share-for-share exchanges. Rusudan Shervashidze and Andrew P. Mitchel explain the basic concepts for non-tax savvy readers.
Read MoreRusudan Shervashidze and Stanley C. Ruchelman explain the tests the I.R.S. applies to determine whether a foreign corporation is a C.F.C. and a U.S. person is a “U.S. Shareholder” potentially subject to tax under Subpart F. They explain the tax forms that examiners are encouraged to look for and the telltale signs of direct, indirect, and constructive ownership of shares by U.S. persons.
Read MoreThis month, recent developments in F.A.T.C.A. include the D.O.J.’s Swiss bank deferred prosecution program; new instructions for Form 8966, F.A.T.C.A. Report; six new YouTube videos regarding the Online Registration System; extension of time to file F.A.T.C.A. Reports; upgrade to F.F.I. lists, the current I.G.A. partner countries, and more.
Read MoreEveryone likes Christmas presents and the P.A.T.H. Act delivers. It provides favorable tax treatment in the form of (i) F.I.R.P.T.A. exemptions for foreign pensions funds, (ii) increased ownership thresholds before F.I.R.P.T.A. tax is imposed on C.I.V. investment in R.E.I.T.’s, (iii) increased ownership thresholds before F.I.R.P.T.A. tax is imposed on foreign investment in domestically-controlled R.E.I.T.’s, (iv) a reduction in the time that must elapse in order to avoid corporate level tax on built-in gain when an S-election is made by a corporation after the close of the year of its formation, and (v) a permanent exemption from Subpart F income for active financing income of C.F.C.’s.
However, not all taxpayers benefitted from the Act. The P.A.T.H. Act increases F.I.R.P.T.A. withholding tax to 15%, adopts new partnership tax examination rules, and tightens rules regarding I.T.I.N.’s. Elizabeth V. Zanet, Christine Long, Rusudan Shervashidze, and Philip R. Hirschfeld explain these and certain other legislative changes.
Read MoreIn late September, the Obama Administration released the tax revisions that are part of its Fiscal Year 2016 Budget Proposal (the Proposal). These changes are designed to provide deficit reduction measures through additional revenue increases and spending cuts. We explain the new twists to seasoned proposals. If enacted, the changes described in the Proposal could influence global patterns of investment and employment by U.S. multinationals.
Read MoreAs the conclusion of the O.E.C.D.’s B.E.P.S. Project draws ever nearer, Rusudan Shervashidze examines domestic implementation efforts in a number of foreign countries and the unanticipated tax ramifications for multinational enterprises. In their attempts to meet these requirements, countries are making some of the most significant changes to international taxation policy that we have seen in decades.
Read MoreMany advisers believe that the interest-charge Domestic International Sales Corporation (D.I.S.C.) is the last great international tax planning idea because a portion of the export profits are taxed at low rates for shareholders that are individuals. Some believe it is even better when the benefit is channeled to a Roth I.R.A. that provides tax forgiveness rather than tax deferral. But in a recent case won by the I.R.S., we see how too much of a good thing may be bad.
Read MoreOn May 28, 2015, the O.E.C.D. announced the countries that will participate in a meeting to begin substantive work on drafting a multilateral instrument under B.E.P.S. Action 15. Currently, more than 83 countries have expressed interest in joining the discussion, which will take place on November 5 and 6, 2015. The United States was noticeably absent from the list. However, the O.E.C.D. hopes that support will continue to grow in the intervening months and that the meeting may ultimately include as many as 100 countries.
The U.S. Treasury chose not to participate in negotiating a multilateral instrument under B.E.P.S. Action 15. After a careful review of the agenda for the discussion on the multilateral instrument, the U.S. Teasury felt that participation did not seem like a good use of its scarce resources. This decision was prompted by the question, “What is there for U.S. to gain by participating in the discussions?”
In recent years, Russia has introduced several economic and political reforms, including a deoffshorization policy that some would say appears to be sound economic policy but others would say is more politically motivated by the centralization of power in the office of the President. In principle, the idea is to make Russian legislation friendly for Western investors, although the context suggests otherwise. Nonetheless, Russia is attempting to westernize its domestic laws and introduce economic concepts that are familiar to Western businessmen.
In 2014, the Russian government came out with a plan that would attack capital flight by residents. This was the so-called “deoffshorization” of investments. Among other things, this legislation increases the tax burden of many offshore holding companies by requiring payment of Russian taxes in the absence of any repatriation of profits. It also requires the disclosure of beneficial owners in the accounting statements of these holding companies. Again, these are concepts that are popular among policy makers in Western Europe, albeit in a different context.
Now, the Russian government is contemplating introduction of the “trust” into the Russian legal system. New laws are anticipated that are intended to formalize Russian arrangements where the nominal owner and the beneficial owner are separate individuals.
By Rusudan Shervashidze and Andrew P. Mitchel
This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. The Joint Committee Report discovers that a better tax result is obtained when foreign low-tax profits are removed from the U.S. tax stream, leaving more for shareholders and executives. Is it an inversion or merely self-help? Andrew P. Mitchel and Rusudan Shervashidze explain. See more →
New York State has been known to question individuals who leave the state, easily identifiable as prior New York residents who file Form IT-203, Nonresident and PartYear Resident Income Tax Returns. Often, the New York State Division of Taxation (the “Division of Tax”) will argue that the taxpayer has not established sufficient evidence to relinquish New York domicile. New York places a high standard on redomiciliation: “The taxpayer must prove his subjective intent based upon the objective manifestation of that intent displayed through his conduct,” and it is always challenging for the taxpayer to show subjective intent. Therefore, it was welcome news when Judge Herbert M. Friedman Jr., an Administrative Law Judge, in Albany, New York recently ruled in favor of the taxpayer Irenee D. May.
Mr. May moved to New York State and acquired a home in Harrison, New York (the “Harrison House”), where he resided with his wife and two children. He worked for JP Morgan in New York City for almost 20 years. Mr. May was terminated from his job effective January 2005. Shortly after, Mr. May obtained a position in London, working for the Royal Bank of Scotland. Mr. and Mrs. May made plans for the family to move to London with their children. They rented an apartment in London for the whole family, including their nanny. The lease was for one year; the eventual goal of the family was to sell Harrison House and purchase a home in London.
Subsequently, the children were not accepted to the desired London schools; therefore, Mrs. May returned with the children to Harrison allowing them to continue attending their previous school in Greenwich, C.T. Mr. May’s daughter briefly attended school in London but later returned to Harrison to live with her mother and brother.
There is no denying that HSBC Holdings plc (“HSBC”) has significantly benefited from the Swiss bank secrecy laws. A February 8, 2015 report by the International Consortium of Investigative Journalists (the “I.C.I.J.”) revealed the private banking information for a Swiss subsidiary of HSBC as of 2007. The list of clients with secret accounts includes royal families, ambassadors, terror suspects, drug cartels, arms dealers, tax evaders, and fugitive diamond merchants.
The I.C.I.J. announced that it received information on 100,000 accounts through its collaboration with the French newspaper Le Monde, which obtained it from a source in the French government. The information was initially provided by a former HSBC employee, a computer technician named Hervé Falciani. French newspapers have dubbed him “the Man Who Makes the Rich Tremble.”
The Discussion Draft on Action plan 14 (the “Draft”) received an overwhelming response. On January 19, 2015, the O.E.C.D. published over 400 pages of comments on how to make dispute resolution mechanisms more effective.
Many believe that as a result of the B.E.P.S. program, the number of treaty-related tax disputes will increase. To accommodate this surge in tax cases, it is crucial to develop an effective dispute resolution mechanism that will enhance cross-border trade.
The Draft reflects a lack of consensus regarding the Mutual Agreement Procedure (“M.A.P.”). Most of the comments support creating a M.A.P. that facilitates final and binding decisions within a set timeframe. It is seen as a step towards improving the efficiency and effectiveness of the B.E.P.S. project as a whole. Creating an efficient M.A.P. will demonstrate the O.E.C.D.’s commitment to creating a mechanism that will provide progress.
Making the M.A.P. mandatory may not be enough, as other issues come into play. Here is a sampling of comments that appear in the 400 pages that were released:
Read Publication The discussion draft on Action 10 (the “Discussion Draft”) deals with transfer pricing issues in relation to commodities transactions and the potential for Base Erosion and Profit Shifting (“B.E.P.S.”). The commodity sector constitutes major economic activity for developing countries and provides both employment and government revenue.
In seeking to create clear guidance on the application of transfer pricing rules to commodity transactions, the Discussion Draft identifies several problems and policy challenges and seeks to establish a transfer pricing outcome that is in line with value creation.
There has been another release on Base Erosion and Profit Shifting (“B.E.P.S.”) deliverables. B.E.P.S. refers to the tax planning that moves profits to a low-tax jurisdiction or a jurisdiction that allows a taxpayer to exploit gaps in tax rules. These deliverables have been developed to ensure the coherence of taxation at the international level. The aim of these deliverables is to eliminate double non-taxation. The measures have been developed throughout 2014, and they will be combined with the work that will be released in 2015.
In the December 16th release on Action 10 (the “Discussion Draft” or “Draft”), Working Party No. 6 on the Taxation of Multinational Enterprises (“M.N.E.’s.”) released various factual scenarios, posed questions and invited affected persons to suggest answers. The goals of the Draft are to assure that transfer pricing outcomes are in line with value creation and to determine whether it is more appropriate to apply the profit split method in some circumstance instead of a one-sided transfer pricing method.
The Draft identifies relevant issues in the posed scenarios, asks questions, and invites commentary as follows.
Value Chains
The term “global value chain” describes a wide range of activity, from the consumption of the product to the end use and beyond. Therefore, one particular method of transfer pricing may not be appropriate.
The O.E.C.D.’s pending base erosion and profit shifting action plan is due to face a significant challenge as to how to address controlled foreign corporations. Action 3, which strengthens C.F.C. rules, is set to be released in 2015. Currently, European case law restricts the scope of E.U. members establishing C.F.C. regimes.
Stephen E. Shay of Harvard Law School says the U.S. is encouraging the expansion of the C.F.C. rules as a way to solve several of the issues the B.E.P.S. action plan is trying to address, however, these new rules run the risk of being contrary to E.U. jurisprudence. The E.U.’s ability to adopt stringent C.F.C. rules is limited by the Cadbury Schweppes (C-196/04), a 2006 ruling from the Court of Justice of the European Union. The Court held that E.U. freedom of establishment provisions preclude the U.K. C.F.C. regime unless the regime “relates only to wholly artificial arrangements intended to escape the national tax normally payable.”
Without resolving the issue among E.U. countries, Action 3 may not be effective in appropriately addressing earnings stripping. However, Shay also added that Action 2, which neutralizes the effects of hybrid mismatch arrangements, so far appears to include an approach that works without C.F.C. rules.
Department of Justice announced that charges have been laid against Peter Canale, a U.S. citizen and resident of Kentucky, for conspiring to defraud the I.R.S., evade taxes, and file a false individual income tax return. It is alleged that Canale conspired with his brother and two Swiss citizens to establish and maintain secret, undeclared bank accounts in Switzerland.
In approximately the year 2000, a relative of Canale died and left a substantial portion of assets which were held in an undeclared Swiss bank account to Canale and his brother, Michael. The brothers met with two Swiss citizens, who agreed to continue to maintain the assets in the undeclared account for the benefit of the Canales.
Luxembourg made front-page news last month with the leak of hundreds of documents that had been signed when current European Commission President, Jean-Claude Juncker, was prime minister and finance minister of Luxembourg. The leak, exposed by the International Consortium of Investigative Journalists (“I.C.I.J.”), revealed confidential agreements approved by Luxembourg authorities that provided tax relief to more than 340 global companies.
The leaked documents implicated not only private companies but also revealed that the Canadian government received a tax ruling for its Public Sector Pension Investment Board, which manages pensions for all Canadian federal employees. The Canadian Pensions Board issued a statement addressing this ruling and claimed that since it is tax-exempt in Canada its ruling is not tax avoidance as it has “no tax advantage.”
The European Union Antitrust Authority is now expected to expand its ongoing illegal state aid probe using the leaked documents in its investigation. A high-level European Commission official said, “We expect to expand our current request for documents…These documents are now available. They are clearly relevant to the ongoing probe, which is a high political priority.”
The leaked documents put Luxembourg in hot water, especially former prime minister and finance minister, Jean-Claude Juncker, who now faces great political pressure to explain his role in the scandal. He is accused of acting to enrich his country at the expense of its European partners. His actions are purported to have been in defiance of the E.U. spirit, which he hopes to represent as the new Commission President.
In 2006, the I.R.S. created the International Collection program (“International Collection”), whereby collections officers are primarily responsible for collection of all delinquent taxes and tax returns of taxpayers located outside the U.S., but subject to the United States tax and reporting requirements. Since its inception, International Collection has undergone certain changes with the intention of developing a well-structured, long-term strategy to curb international tax noncompliance.
Significant emphasis now is placed on international tax compliance. The I.R.S. is concentrating on collecting delinquent payments, and through the three voluntary programs alone, it collected $6.5 billion from 45,000 participating taxpayers.
There are four types of international taxpayers that are of interest to the I.R.S.
In a recent opinion, C.J.E.U. Advocate General Juliane Kokott suggested that the terms used in the landmark Marks and Spencer decision should now be abandoned. Marks and Spencer involved U.K. group relief legislation that, among other things, allowed a U.K. group parent company to offset the losses of its U.K. subsidiaries against the parent’s profits. Stanley C. Ruchelman, Fanny Karaman, and Rusudan Shervashidze contemplate the future of U.K. group relief in light of the Advocate General's opinion and the E.U.’s freedom of establishment principle.
Read MoreImplementation of many of the B.E.P.S. Action Items would require amending or otherwise modifying international tax treaties. According to the O.E.C.D., the sheer number of bilateral tax treaties makes updating the current treaty network highly burdensome. Therefore, B.E.P.S. Action Item 15 recommends the development of a multilateral instrument (“M.L.I.”) to enable countries to easily implement measures developed through the B.E.P.S. initiative and to amend existing treaties. Without a mechanism for swift implementation of the Action Items, changes to model tax conventions merely widen the gap between the content of the models and the content of actual tax treaties.
Discussion of Action Item 15 has centered on the following issues:
In the spirit of these ongoing discussions concerning Action Item 15, we offer our commentary in a “point/counterpoint” format.
