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Qualified Business Income - Are You Eligible for a 20% Deduction?

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Qualified Business Income - Are You Eligible for a 20% Deduction?

Have you ever been asked to define the undefinable?  At first glance, the new 20% Q.B.I. deduction – a reduced tax rate for the self-employed and partnerships introduced by the Tax Cuts and Jobs Act (“T.C.J.A.”) – seems to be just that: a maze in which the general rule is modified in hidden ways through subdivisions of subsections and in definitions that have substantive effect.  In their article, Stanley C. Ruchelman and Fanny Karaman logically guide the reader in detail and with illustrations.

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A New Opportunity for Nonresident Aliens - Ownership in an S-Corporation

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A New Opportunity for Nonresident Aliens - Ownership in an S-Corporation

U.S. tax law allows a domestic corporation to elect pass-thru tax treatment of income by making an S-corporation election.  Several conditions must be satisfied before the election can be made, including a prohibition of any foreign ownership.  In an almost invisible provision of the T.C.J.A., U.S. tax law has been revised to allow an individual who is neither a citizen nor a U.S. resident to hold an indirect current interest in an S-corporation without causing an automatic termination of pass-thru treatment for the corporation.  The key is for the current interest to be held through an Electing Small Business Trust that qualifies as a domestic trust for U.S. tax purposes.  This may be a boon for Canadian-resident individuals who face mind and management issues when a U.S. L.L.C. is established to invest in a U.S. opportunity.  Rusudan Shervashidze and Stanley C. Ruchelman explain all.

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Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

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Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

The Large Business and International Division of the I.R.S. (“LB&I”) periodically develops international practice units (“I.P.U.’s”) that serve as training material for international examiners.  In November 2017, an I.P.U. entitled “Common Ownership or Control Under IRC 482 – Inbound” was published.  On the same date, the I.R.S. issued a sister I.P.U. for outbound transactions, “Common Ownership or Control Under IRC 482 – Outbound.”  Together, they serve as a primer for determining whether sufficient control exists between two parties to bring the arm’s length transfer pricing rules of Code §482 into play.  Stanley C. Ruchelman explains how the I.R.S. trains its examiners when determining whether a transfer pricing adjustment is appropriate. 

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

Following the lead of the O.E.C.D. and the European Commission (“E.C.”), the T.C.J.A. adopts several provisions designed to end tax planning opportunities.  In some instances, the new provisions closely follow their foreign counterparts.  In others, the provisions that are specific to U.S. tax law.  Among these changes are (i) the introduction of the G.I.L.T.I. minimum tax on the use of foreign intangible property by C.F.C.’s, (ii) the total revamp of Code §163(j) so that it reflects an interest ceiling rather than an earnings stripping provision, (iii) the restriction of tax benefits derived from the use of hybrid entities and transactions, (iv) the broadened scope of Subpart F through definitional changes, (v) legislative reversals of judicial decisions in which I.R.S. positions in transfer pricing matters were successfully challenged, and (vi) legislative reversals of a judicial decision invalidating Rev. Rul. 91-32 regarding the sale of partnership interests by foreign partner.  Sheryl Shah and Stanley C. Ruchelman discuss these provisions and place them in context. 

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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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Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

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Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

International tax planning in the U.S. has been turned on its head by the Tax Cuts and Jobs Act (“T.C.J.A.”).  This article looks at (i) the new dividends received deduction that eliminates U.S. tax on the receipt of direct investment dividends paid by a 10%-owned foreign corporation to a U.S. corporation, (ii) the repatriation of post-1986 net accumulated earnings of 10%-owned foreign corporations by U.S. persons and the accompanying deferred tax rules, (iii) changes to Code §367(a) that eliminate an exemption from tax on outbound transfers of assets that will be used in the active conduct of a foreign trade or business, and (iv) a broadening of the scope of Subpart F income by reason of a change to certain definitions.  Rusudan Shervashidze and Stanley C. Ruchelman address and comment on these revisions.

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A New Tax Regime for C.F.C.’s: Who Is G.I.L.T.I.?

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A New Tax Regime for C.F.C.’s: Who Is G.I.L.T.I.?

The T.C.J.A. introduces a new minimum tax regime applicable to controlled foreign corporations (“C.F.C.’s”).  It also provides tax benefits for incomefrom “intangibles” used to exploit foreign markets.  The former is known as G.I.L.T.I. and the latter is known as F.D.I.I.  Together, G.I.L.T.I. and F.D.I.I. change the dynamics of cross-border taxation and can be seen as an incentive to supply foreign markets with goods and services produced in the U.S.  Both provisions reflect a view that only two value drivers exist in business: (i) hard assets (such as property, plant, and equipment) and (ii) intangible property.  In a detailed set of Q&A’s, Elizabeth V. Zanet and Stanley C. Ruchelman look at the ins and outs of the new provisions.

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Anti-Inversion Rules Are Not Just for Mega-Mergers – Private Client Advisors Take Note

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Anti-Inversion Rules Are Not Just for Mega-Mergers – Private Client Advisors Take Note

The U.S. has rules that attack inversion transactions, wherein U.S.-based multinationals effectively move tax residence to low-tax jurisdictions.  If successful, these moves allow for tax-free repatriation of offshore profits to the inverted parent company based outside the U.S.  However, the scope of the anti-inversion rules is broad and can also affect non-citizen, nonresident individuals who directly own shares of private U.S. corporations.  Attempts to place those shares under a foreign holding company as an estate planning tool may find that the exercise is all for naught once the anti-inversion rules are applied.  Elizabeth V. Zanet, Galia Antebi, and Stanley C. Ruchelman discuss the hidden reach of the anti-inversion rules to private structures.

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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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When Does an Aged Account Receivable Give Rise to a Deemed Repatriation?

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When Does an Aged Account Receivable Give Rise to a Deemed Repatriation?

One form of taxation under Subpart F is an “investment in U.S. Property.”  The law treats the investment as a form of taxable repatriation of earnings.  Under certain circumstances, aged accounts receivable may be seen as a form of taxable investment in U.S. property.  Most U.S. tax advisers look to a 60-day rule under which the account receivable is treated as a loan if not settled by the last day of the second month following a sale.  However, that is a safe harbor.  I.R.S. private letter rulings and Tax Court cases have addressed fact patterns in which the account receivable remains open for a much longer time.  Some taxpayers win and others lose.  Elizabeth V. Zanet and Stanley C. Ruchelman explain.

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O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

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O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

In August, the O.E.C.D. released public comments on proposed changes to the Model Tax Convention.  Beate Erwin and Stanley C. Ruchelman examines the suggestions received by the O.E.C.D. and provides observations on the interplay between the O.E.C.D. proposed changes and existing U.S. approaches to these issues.  Areas covered include whether competent authority agreements can define undefined terms thereby removing the interpretation from local courts, whether a limitation on benefits (“L.O.B.”) clause or a principle purpose test (“P.P.T.”) is the better approach to limit treaty shopping, and whether a home that is leased to others can be a permanent home for purposes of applying the residence tiebreaker provision in a treaty. 

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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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Tax 101: Taxation of Intellectual Property—Selected Tax Issues Involving Corporations and Partnerships→

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Published in The Licensing Journal vol. 37, no. 9 (October 2017): pp. 11-18.

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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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Tax 101: Deemed Annual Royalty on Outbound Transfers of I.P. to Foreign Corporations

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Tax 101: Deemed Annual Royalty on Outbound Transfers of I.P. to Foreign Corporations

U.S. tax law contains provisions that attempt to discourage the outbound migration of intangible assets including specific rules that target transfers affected through corporate inversions.  Elizabeth V. Zanet and Stanley C. Ruchelman discuss the history and current standing of those provisions, while pointing out an alternative that is currently available to limit ongoing tax liability in the context of a start-up operation.

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Tax Roulette: Buying a Business Jet in 2017 – Why Following the Patriot’s Example May Lead to a Jackpot

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Tax Roulette: Buying a Business Jet in 2017 – Why Following the Patriot’s Example May Lead to a Jackpot

The New England Patriots recently made headlines with the purchase of two private team jets.  Was this plan implemented only to provide more space for beefy footballers, or did ownership identify the nifty situation that could lead to a jackpot of tax savings for high-ticket assets purchased in 2017?  Beate Erwin and Stanley C. Ruchelman explain that with increased depreciation deductions this year at high tax rates and possible recapture in a future year at low tax rates, the odds are good.

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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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Tax 101: Taxation of Intellectual Property – Selected Issues Involving Corporations and Partnerships

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Tax 101: Taxation of Intellectual Property – Selected Issues Involving Corporations and Partnerships

Tax 101 continues its series regarding the U.S. Federal tax considerations involving the creation, acquisition, use, license, and disposition of intellectual property (“I.P.”).  This month, Elizabeth V. Zanet and Stanley C. Ruchelman focus on I.P. held through a corporation or a partnership/L.L.C.  In particular, the not-well-understood rules regarding the sale of interests in a partnerships/L.L.C.’s owning “hot assets” are explained.  Not all gain benefits from favorable long-term capital gains tax rates.

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European Commission Proposes New Advisor Disclosure Obligation for Aggressive Tax Planning

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European Commission Proposes New Advisor Disclosure Obligation for Aggressive Tax Planning

In June, the European Commission proposed a set of rules calling on tax advisers to report aggressive tax plans submitted to clients.  The proposal identifies the hallmarks of aggressive plans and provides rules for the timing of reports and the exchange of information within Europe.  Fanny Karaman and Stanley C. Ruchelman explain.

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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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