U.K. Implements 25% “Google Tax” on Diverted Profits

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The U.K. has implemented the controversial diverted profits tax on the profits of multinational companies that are “artificially diverted” from activity within the country. This 25% levy became effective on profits arising on or after April 1, 2015. At this point, it is unclear whether the outcome of the Parliamentary election on May 7 will impact the enforcement of the diverted profits tax, which was enacted without thorough examination by Parliament.

U.K. officials claim multinational corporations are manipulating the tax system and have imposed the 25% levy to prevent companies from avoiding a taxable presence in the U.K. This corporate diversions tax is aimed at entities that transfer profits to lower tax jurisdictions, away from the U.K. The diverted profits tax is being called the “Google tax” because it addresses the practices of well-known international entities such as Google Inc., Amazon.com Inc., and Starbucks Corp. that have used the U.K.’s permanent establishment and economic substance rules to craft tax advantages within the bounds of the law. Legislators have held hearings within the last year on how these three companies in particular have been able to generate billions of dollars in revenue in the U.K. but report little or no taxable profits.

The U.K. tax authority, Her Majesty’s Revenue and Customs (“H.M.R.C.”), introduced a draft of the diverted profits tax last fall and quickly implemented the legislation ahead of the May 7 election. There is great concern about the legislation’s complexity and that its hasty enactment will only result in future revisions, which will further complicate the matter. On the whole, the government is targeting transactions that it does not favor even though they are legal, and the tax itself is being criticized for undermining the Base Erosion and Profit Shifting project executed by the Organization for Economic Cooperation and Development.

An American Solution to Offshore Tax Evasion

Volume 2 No 5    /    Read Article

By Robert J. Alter (guest author)

The United States Department of Justice Tax Division and the I.R.S. have been ramping up an intense crackdown on offshore tax evasion, and while new budget cuts have vastly reduced I.R.S. resources, the cutbacks are having no effect on I.R.S. enforcement initiatives in this area. Robert J. Alter of McElroy, Deutsch, Mulvaney & Carpenter discusses the U.S. crackdown on offshore tax evasion and the various programs available to rectify noncompliance, including the Offshore Voluntary Disclosure Program, Streamlined Procedures, Delinquent International Information Return Submission Procedures, and Delinquent F.B.A.R. Submission Procedures.   See more →

India’s $6.4 Billion Tax on Foreign Investment

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Foreign institutional investors in India have been troubled by the demands from Indian tax officials to pay liabilities owed under the newly enforced minimum alternate tax (“M.A.T.”). India’s Finance Minister, Arun Jaitley, announced that beginning April 1, portfolio investors residing in countries that have tax treaties with India are fully exempt from the tax and will not have to pay the accompanying 20% levy on past capital gains.

The M.A.T. is essentially a minimum corporate tax that creates an overall tax of 20% on capital gains. Previously, foreign investors paid 15% on short term listed equity gains, 5% on bond gains, and nothing on long term gains.

In 2014, India’s Finance Ministry began issuing notices to foreign companies for the payment of the M.A.T. on past capital gains amounting to $6.4 billion, collectively. The Finance Ministry has not enforced the M.A.T. on foreign institutional investors for over 20 years, according to the international fund organization, Investment Company Institute Global. Foreign institutional investors have been contending that the M.A.T. should only apply to Indian companies, not foreign entities.

A Foreign Taxpayer’s Refund or Credit Could Be Limited by Upcoming Regulations

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In Notice 2015-10 (the “Notice”), issued on April 28, 2015, the I.R.S. stated that it was concerned about cases in which persons subject to withholding under Code §§1441-1443 (“Chapter 3”) or Code §§1471 and 1472 (“Chapter 4”) are making or will make claims for refunds or credits in circumstances where a withholding agent failed to deposit the amounts required to be withheld under §6302.

If a withholding agent fails to deposit an amount withheld under Chapters 3 or 4, or reported as withheld on Form 1042-S, and the I.R.S. issues a refund or credit for the amount, the I.R.S. may not be able to recover that amount because the claimant, and in some cases the relevant withholding agent, may be outside the United States. The new regulations aim to reduce the risk that the I.R.S. may issue improper refunds or credits for fictitious withholding or amounts that have not been deposited and are difficult to collect.

As will be seen below, the new regulations would limit a foreign taxpayer’s refund or credit to the amount deposited by the withholding agent. Though collecting undeposited amounts from withholding agents located outside the United States may be difficult for the I.R.S., one wonders about the fairness of limiting a foreign taxpayer’s refund or credit when the I.R.S. could use its greater resources to collect against the withholding agent.

“Trust” – A New Concept in Russia

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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.

BACKGROUND

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.

Transfer Pricing Implications of the B.E.P.S. Action Plan

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Determined to eliminate so-called “double non-taxation,” as well as no or low taxation, associated with practices that are perceived to segregate taxable income from the activities that generate them, the Group of Twenty (“G20”) and the Organisation for Economic Co-operation and Development (“O.E.C.D.”) released their Action Plan on Base Erosion and Profit Shifting (“B.E.P.S. Action Plan”) in 2013. Included in the B.E.P.S. Action Plan are several provisions related to transfer pricing:

• Action 4: Limit base erosion via interest deductions and other financial payments;
• Action 8: Assure that transfer pricing outcomes are in line with value creation – Intangibles;
• Action 9: Assure that transfer pricing outcomes are in line with value creation – Risks and capital;
• Action 10: Assure that transfer pricing outcomes are in line with value creation – Other high-risk transactions; and
• Action 13: Re-examine transfer pricing documentation.

The O.E.C.D. has since delivered a number of reports and recommendations related to these actions, including revisions to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“Transfer Pricing Guidelines”), and it continues to perform additional work on deliverables scheduled for later this year.

Insights Vol. 2 No. 4: F.A.T.C.A. 24/7

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POTENTIAL DISAGREEMENT BETWEEN THE U.S. AND I.G.A. JURISDICTIONS ON HOW TO TREAT NEW INDIVIDUAL ACCOUNTS

Based on the answer to Question 10 under the “General Compliance” heading of the I.R.S.’s F.A.T.C.A. Frequently Asked Questions And Answers webpage, the I.R.S. requires that financial institutions in I.G.A. countries refuse to open new individual accounts if they cannot obtain a Form W-8BEN or a self-certification from the account holder. Conversely, the governments of both the U.K. and Canada have taken the position that under their I.G.A.’s, resident F.F.I.’s can open new individual accounts without self-certifications as long as the accounts are treated as reportable accounts.

In a letter to the Treasury Department released on March 27, the Securities Industry and Financial Markets Association (“S.I.F.M.A.”) pointed to this potential disagreement as having inconsistent guidance coming out of the U.S. and other I.G.A. countries. Such inconsistency may hurt American banks with foreign operations. These banks will be placed at a disadvantage if they follow U.S. authority while their competition is allowed to follow less restrictive rules. S.I.F.M.A. does not take a position as to who is right in the disagreement, but expressed their concern about this dispute and the lack of any information on this and similar disputes over the meaning of important I.G.A. terms that will need to be resolved in the future.

I.R.S. TO PUBLISH TECHNICAL EXAMPLE DEMONSTRATING EXCHANGE OF INFORMATION

F.A.T.C.A. reports are to be submitted to the International Data Exchange Service (“I.D.E.S.”), which is a secure managed file transfer system that only accepts encrypted transmissions. The I.R.S. announced on March 2 that the I.D.E.S. gateway had been opened for countries and financial institutions to begin transmitting data.

The I.R.S. posted on a service called GitHub a new example showing F.F.I.’s how to create “data packets” of taxpayer account information to transmit using the I.D.E.S. The example also shows how to decrypt a notification.

GitHub is an open source repository hosting service that allows users to collaborate and share code and content. The I.R.S. has made it clear that they do not endorse any commercial product.

Pre-Immigration Income Tax Planning, Part II: Covered Expatriates→

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INTRODUCTION

Continuing on from our previous article concerning pre-immigration planning, this article will explain the tax rules by which an individual seeking to renounce his or her U.S. citizenship or green card status may be affected.

To relinquish U.S. citizenship or a green card, a formal act of relinquishment is required. Therefore, a green card holder who moves outside the U.S. will continue to be treated as a U.S. resident for tax purposes until he or she formally relinquishes green card status or it is rescinded by the government. A U.S. citizen residing outside the U.S. will have to formally relinquish his or her citizenship in order to be removed from the U.S. tax system. As a general rule, termination of U.S. residency becomes effective on the last day of the calendar year in which the status was relinquished. However, under certain circumstances, termination may be effective midyear.

Upon expatriation, should an individual be considered a “covered expatriate,” he or she may be subject to an exit tax, and following expatriation, any gifts and bequests made by such an individual may be subject to a succession tax in the case of U.S.-resident recipients.

For planning purposes, U.S. citizens wishing to relinquish their citizenship should determine if they are covered expatriates prior to undertaking any such action. Green card holders wishing to relinquish green card status must first determine if they are treated as long-term residents. If so treated, green card holders should determine if they are covered expatriates under the same tests applicable to U.S. citizens.

Corporate Matters: Help – My Delaware Entity Has Been Cancelled!

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We have received inquiries recently concerning Delaware entities that have been cancelled by the State. This situation is not as bad as it sounds, and after a few simple steps (and a couple of checks), the entity can be reinstated.

How Does it Happen?

In Delaware, a corporation becomes “void” for failure to file its annual report. The entity becomes “forfeited” if its registered agent resigns and is not replaced. Registered agents typically resign if their annual fee is not paid in a timely manner. The registered agent is required to give 30 days’ notice of its intention to resign and will have forwarded to the address of record delinquency notices from the State with respect to unfiled reports.

The certificate of formation of a Delaware limited liability company will be cancelled if the entity fails to pay its annual franchise tax for three consecutive years, or if it fails to replace its registered agent within 30 days.

Before a Delaware corporation becomes void or forfeited or a limited liability company has its certificate of formation cancelled, such entity first ceases to be in “good standing.” This occurs as soon as an entity fails to pay certain fees or to file annual reports. While in this status, an entity cannot make any filings with the State or sue in the courts of Delaware. It is also difficult to close any transaction where a good standing certificate is required. This situation may be cured by filing the outstanding reports and paying all outstanding franchise taxes.

“Helen of Troy” Inversions Continue

volume 2 no 4   /   Read article

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 →

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Moving Deductions into the U.S. as a Tax Planning Strategy

volume 2 no 4   /   Read article

By Stanley C. Ruchelman and Philip R. Hirschfeld

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. Taking a lead from the preceding article, the report discovers that a better tax result is obtained when deductible expenses are booked in high tax countries. Stanley C. Ruchelman and Philip R. Hirschfeld explain.  See more →

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Shifting Income and Business Operations

volume 2 no 4   /   Read article

By Stanley C. Ruchelman and Kenneth Lobo

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report discovers that a better tax result is obtained when income is booked in low tax countries. Stanley C. Ruchelman and Kenneth Lobo explain.  See more →

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Economic Distortions Arising from Deferral

volume 2 no 4   /   Read article

By Christine Long

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report explains what corporate tax executives know but most tax advisers and voters forget: The after-tax returns can be greater when one chooses to build a plant outside the U.S. Moreover, it never makes sense to repatriate the earnings and trigger the recognition of deferred tax expense. Is this the way to manage an economy? Christine Long comments.  See more →

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Competitiveness of the U.S. Tax System

volume 2 no 4   /   Read article

By Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. The report compares the U.S. tax system with the systems of other countries. Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah explain what the J.C.T. staff believes. It is not pretty.  See more →

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Repatriation of Foreign Earnings v. Related Party Indebtedness

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On March 13, 2015, the United States Court of Appeals for the Fifth Circuit (the “Appeals Court”) reversed a decision of the United States Tax Court regarding the rules relating to the repatriation of earnings under Code §965.

Code §965 was a temporary statute permitting an 85% dividends received deduction in connection with the repatriation of earnings from a foreign subsidiary as long as the proper tests were satisfied. One test related to intercompany loans to foreign subsidiaries allowing them to pay the low-tax dividends. Even though the statute is not currently in effect, the reasoning of the Appeals Court suggests that substance will at times prevail, even if it works against the I.R.S.

BMC Software, Inc. (“BMC”) was a software developer that generated income from licensing operations. It had in effect a qualified joint cost-sharing agreement with a subsidiary. In 2002, the agreement was terminated and BMC began to pay royalties to the subsidiary in return for the transfer of rights back to BMC. In an I.R.S. examination, the arm’s length nature of the royalty amount was challenged and ultimately was resolved through two closing agreements entered into in 2007. The first determined that the amount of an arm’s length royalty was less than the amount paid. The second permitted BMC to treat the excess payment as a loan to the foreign subsidiary. This treatment, which has a long history in practice, was permitted under Rev. Proc. 99-32. As a result, the cash flow between BMC and its subsidiary was not changed but made to conform to the agreed amount of an arm’s length royalty, and the return of the cash would be tax-free but for some deemed interest.

J.C.T. Report on Competitiveness – A Step Toward Consideration of New Rules

volume 2 no 4   /   Read article

By Stanley C. Ruchelman

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. Stanley C. Ruchelman leads with comments on the J.C.T. analysis of Subchapter N of today’s Code – the foreign provisions.  See more →

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The Italian Voluntary Disclosure

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INTRODUCTION

Italy has a long history of tax amnesty programs established under a broad variety of names and rules. Interestingly, every new program has been described as “the last chance” for tax evaders to comply with the Italian tax code. It is no wonder that, as in all prior cases, Italy’s most recent voluntary disclosure program (the “V.D.”) has been defined as the “last call.” Having said that, and sensitive to prior performance, we firmly believe that for a wide range of reasons the V.D. will truly be the last opportunity for Italian citizens and residents to get their tax matters in order.

One indicator is heightened criticism of the typical Italian de facto tolerance toward tax evasion, which is now being blamed for the country’s ongoing economic crisis. Accordingly, the war against tax havens, as initiated by the U.S. under F.A.T.C.A. and subsequent inter-governmental agreements, has changed the way the whole world approaches such matters. Today, there is a new sensitivity toward tax compliance and no discernable government or media tolerance towards tax avoidance.

In addition, a different approach is now being taken with respect to tax amnesty matters. In the past, there was a sort of “reward” for the penitent evaders. Such individuals were granted the opportunity to regularize their positions by paying a low flat-rate extraordinary tax. The V.D. is different. Under the new provisions of the Law n. 186, dated December 15, 2014, (the “V.D. Act”), a taxpayer who enters the V.D. procedure (“V.D. Applicant”) will be required to pay every single euro of unpaid tax; the only benefit lies in the reduction of penalties, which are less than those applicable in an ordinary tax audit procedure.

Insights Vol. 2 No. 3: F.A.T.C.A. 24/7

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FOREIGN ACCOUNTS – UPDATE TO 2014 INSTRUCTIONS TO FORM 8938

Form 8938, Statement of Specified Foreign Financial Assets, requires the disclosure of certain foreign financial assets owned by U.S. citizens, resident alien individuals, and nonresidents who elect to be treated as resident alien individuals for U.S. tax purproses. (E.g., a nonresident alien having a U.S. citizen spouse may elect be treated as a U.S. resident for purpose of filing a joint income tax return.) Form 8938 is attached to the individual’s income tax return for the applicable year (starting with tax year 2011) and must be filed by the due date for said return, including extensions.

Updates to the 2014 instuctions for the Form 8938 reporting requirements were announced on March 10, 2015 and incorporate final Treasury Regulations under Internal Revenue Code (the “Code”) §6038D, adopted in December 2014. The final regulations are effective for taxable years beginning after December 19, 2011. The update contains additional information not included in the updated instructions for Form 8938. Taxpayers and their tax return preparers must review these recent changes to the form’s instructions to make sure it does not affect their filing obligations.

Dual Resident Taxpayers

A dual resident taxpayer, within the meaning of these regulations, is an individual who is considered a resident of the U.S. under the Code and applicable regulations because he or she meets the “Green Card Test” or the “Substantial Presence Test” and is also a resident of a treaty country (pursuant to the internal tax laws of that country). The updated instructions apply to dual resident taxpayers who determine their income tax liability for all or a portion of the taxable year as if they were nonresident aliens (pursuant to a provision of an income tax treaty that provides for resolution of conflicting claims of residence by the U.S. and its treaty partner).