Members of Ruchelman P.L.L.C. contribute to publications throughout the world and the Firm’s monthly tax journal, Insights.
The busy season for the B.E.P.S. Project opened at the end of July, as O.E.C.D. Working Parties completed their assignments. Readers may wish to see how the world will look after all B.E.P.S. Actions are completed. Galia Antebi and Stanley C. Ruchelman discuss several developments.
Read MoreIn April, the I.R.S. proposed regulations (REG-108214-15) that provide exceptions for P.F.I.C. treatment for offshore insurance companies, unless they are formed by hedge funds intending to defer or reduce tax. Andrew P. Mitchel and Christine Long look at comments of industry representatives. Many professionals deem these regulations too restrictive, needlessly subjecting legitimate insurance businesses to the harsh tax treatment of P.F.I.C.’s.
Read MoreFavorable long-term capital gains tax treatment for managers of hedge funds has been under attack by the Obama Administration. While the industry defended itself from outright changes to favorable tax treatment, the I.R.S. recently proposed to disallow favorable treatment where a manager’s right to payments bears no entrepreneurial risk. Nina Krauthamer, Philip R. Hirschfeld, and Kenneth Lobo explain.
Read MoreIs the Altera case important because it struck down the I.R.S.’s stock-based compensation regulations related to cost sharing agreements? Or is it important because of the procedural analysis, which enabled the Tax Court to be in position to strike down a regulation? Beate Erwin, Stanley C. Ruchelman, and Michael Peggs explain why the case is important for both reasons.
Read MoreHave you ever thought of using a trust to hold property for the benefit of a German resident or to hold property in Germany? Your first roadblock: Germany is a civil law jurisdiction that does not recognize common law trusts. However, the path need not end there. Guest author Alexander Fürwentsches of Baker Tilly Roelfs, in Munich, explains the pitfalls and possible benefits.
Read MoreOn July 1, the Foreign Account Tax Compliance Act (“F.A.T.C.A.”) celebrated the first anniversary of its implementation. F.A.T.C.A. was created to improve international tax compliance and combat offshore tax evasion. Notwithstanding dire predictions about its impact on the financial community when F.A.T.C.A. was first enacted in 2010, the sky has not yet fallen as of its first anniversary.
In our May issue, we discussed the implications and importance of drafting governance documents to cover the death of a business partner. We thought an appropriate follow-up would be a brief examination of buy/sell provisions.
Buy/Sell provisions deal with the transfer of ownership interests, typically within a business enterprise, when one of the partners wants out, or, potentially, wants another partner out. In either circumstance, it is not uncommon for each partner to want to carry on with the business – just as long as the other partner is excluded.
Although the origins of the Financial Transactions Tax (“F.T.T.”) date back to the 1970’s, the European Commission first proposed a European Union-wide financial transactions tax in 2011. The proposal came at a time when many Europeans were concerned about the bad behavior of large banks and several E.U. countries were spending billions of dollars to bail out failing banks, while imposing austerity measures to counterbalance the impact on their budgets. Elizabeth V. Zanet and John Chown ponder whether the E.U. will adopt an F.T.T. now that 11 states have agreed to work on its implementation. Open issues exist.
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?”
The U.S. Department of Justice’s (“D.O.J.”) “Swiss Bank Program” (officially called the “Program For Non-Prosecution Agreements”), was announced in August 2013 and provided a path for Swiss banks to resolve potential criminal liabilities in the U.S.
Swiss banks eligible to enter the program were required to advise the D.O.J. by December 31, 2013 that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks that were already under criminal investigation related to their banking activities were expressly excluded from the program.
A “cascading tax” is a tax that is enforced more than once on the income from the same transaction or related transactions. A common example involves a back to back license in which:
The focus of a debt-versus-equity inquiry generally narrows to whether there was intent to create a debt with a reasonable expectation of repayment and, if so, whether that intent comports with the economic reality of creating a debtor-creditor relationship. This determination has led various courts of appeals to identify and consider a multi-factor test for resolving such inquires.
In the typical debt-versus-equity case, the I.R.S. will argue for equity characterization whereas the taxpayer will endeavor to secure debt characterization to obtain an interest deduction. In some cases, the roles are reversed, but this does not require that courts apply different legal principles. Some courts consider 10 factors, while others consider as many as 16 factors. No matter how many factors are considered, the multi-factor test is the established, standard analysis used in such disputes.
Recently, the Internal Revenue Service (“I.R.S.”) Office of the Associate Chief Counsel (Corporate) announced that it may hold off on issuing ruling requests to taxpayers seeking assurance on the “active trade or business” requirement (“A.T.B.”) of a tax-free spinoff under Code §355. In light of recent market transactions, the I.R.S. is in the process of considering, how much A.T.B. is enough for a spinoff to qualify for nonrecognition treatment.
The announcement also placed doubt on whether ruling requests already submitted to the I.R.S. would be issued. Speaking at a District of Columbia Bar Association event, a senior technical reviewer at the Office of the Associate Chief Counsel (Corporate) stated that the I.R.S. will hold off on issuing new ruling requests starting on May 19, 2015. He said that requests that were submitted before that date will be reviewed in the normal course, but that position may also change depending on what is decided in the next few months.
Tax legislation to encourage foreign investment in U.S. real estate made through real estate investment trusts (“R.E.I.T.’s”) was recently introduced in both the House and the Senate. Representatives Kevin Brady (R-T.X.) and Joe Crowley (D-N.Y.), introduced H.R. 2128, the “Real Estate Investment and Jobs Act of 2015.” The measure, backed by 22 bipartisan members of the U.S. House of Representatives, would make significant changes to the Foreign Investment in Real Property Tax Act (“F.I.R.P.T.A.”). The bill is similar to legislation Representatives Brady and Crowley introduced in the last session of Congress, as well as a companion version introduced in the U.S. Senate this year, co-authored by Senators Mike Enzi (R-W.Y.) and Bob Menendez (D-N.J.), S. 915. The Senate version would adopt additional changes including a proposed increase in F.I.R.P.T.A. withholding tax rates that would complicate investing by those not benefitting from the proposals. Enactment of the significant provisions in H.R. 2128 and S. 915 would signify an important step toward achieving F.I.R.P.T.A. reforms that have been advocated for by a number of real estate organizations for many years.
A R.E.I.T. is a creation of the tax law. Any corporation, trust, or unincorporated entity may qualify as a R.E.I.T. if it meets the requirements of Code §856. A benefit of R.E.I.T. status is that it is a conduit for tax purposes, provided distributions are made to shareholders. No tax is imposed on the R.E.I.T. if it distributes all its income to its owners. The R.E.I.T. claims a deduction for dividends that it pays to its shareholders. In addition, a shareholder of the R.E.I.T. may be able to treat a dividend from the R.E.I.T. as taxable at capital gains rates if the underlying income of the R.E.I.T. that generates the dividend arises from the sale of an asset.
In a partial reversal of the I.R.S. position, a U.S. financial institution was allowed to deduct interest expense on borrowings that formed part of a S.T.A.R.S. transaction in Salem Financial, Inc. v. United States. While the Appeals Cout held that the taxpayer could not claim foreign tax credits for the U.K. taxes paid pursuant to the S.T.A.R.S. transaction, it allowed deductions for interest paid on a loan.
Branch Banking & Trust Corporation (“BB&T”), a North Carolina financial holding company, and Barclays Bank PLC (“Barclays”), a U.K. bank were the participants in a financial product transaction BB&T entered into a structured trust advantaged repackaged securities (“S.T.A.R.S.”) transaction with Barclays from August 2002 through April 2007. Generally, the economic benefit of a S.T.A.R.S. transaction is to increase yields on investments by affixing an interest expense deduction and a double dip of foreign tax credits to the total return of the investor. Barclays invented the S.T.A.R.S. transaction structure along with the international accounting firm based in the U.K., KPMG L.L.P.
U.S. charities are required to obtain I.R.S. approval in order to be exempt from federal income tax under §501(a) of the Internal Revenue Code (the “Code”). Under Code §508(a), new organizations must notify the Secretary of the Treasury that they are applying for recognition of Code §501(c)(3) status. In order to establish such exemption, Treasurey Regulation §1.1501(a)-1(a)(2) requires that an organization must file an appropriate application form with the district director for the internal revenue district in which the principal place of business of the organization is located. Furthermore, any rulings or determination letters holding the organization exempt are effective so long as there are no material changes in the organization’s character, purposes, or methods of operation. To be tax-exempt under §501(c)(3), an organization must be organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual.
This begs the following question: If a charity changes its organizational structure or state of incorporation, will a new application be required?
The U.S. Tax Court’s transfer pricing trial of Eaton Corp. v. Comm’r1 will begin on August 24, 2015, despite attempts by the I.R.S. to further delay the trial until 2016. The controversy between the parties began in 2011, when the I.R.S. used its discretionary power to cancel its advance pricing agreements2 with Eaton Corp. and issued a notice of deficiency. Eaton Corp. filed a petition in 2012 challenging the I.R.S. cancellations and claiming that the agreements should be upheld on the basis of contract principles. The outcome of the trial could have a substantial impact on the I.R.S. Advance Pricing Agreement Program and impact the finality of these agreements with other taxpayers.
The trial was originally scheduled to begin August 5, but the I.R.S. filed a motion to delay the trial for five months. In response to the motion, Judge Kathleen Kerrigan ordered a 19-day continuance. The I.R.S. filed another motion to reconsider the five-month delay, which Judge Kerrigan denied. The I.R.S. argued that Eaton Corp. has failed to cooperate during the discovery process and that it requires additional time to prepare for trial in light of new developments. Judge Kerrigan denied a further delay of the trial because she doubts that the hostile relationship between the parties will improve with additional time.
The first Conservative budget in almost 20 years was announced in July. Large corporations are the winners. Non-domiciled individuals and hedge fund partners holding carried interests are the losers. More funds were appropriated for tax shelter witch-hunts. Martin Mann, Paul Howard, and John Hood of Gabelle L.L.P., London tell all.
Read MoreThe European Union’s plan on putting an end to corporate tax breaks granted by means of letter rulings ran into German privacy concerns as E.U. Finance ministers met on June 19, 2015. The initiative, aimed at implementing an automatic exchange of letter rulings granted by E.U. Member States, will affect E.U. businesses as well as European operations of foreign multinationals, including those based in the United States. Examples of the latter are already under review by the E.U. Commission with regard to letter rulings issued by Ireland and the Netherlands, respectively, to local operations of Apple and Starbucks. Although the E.U. Commission, the executive body of the European Union, has no direct authority over national tax systems, it can investigate whether certain fiscal regimes, including those that issue advance private tax rulings, constitute an infringement of E.U. principles, in particular “unjustifiable” State Aid to companies. Such allegedly incompatible State Aid would comprise, inter alia, selective tax advantages granted by an E.U. Member State to companies with operations in its jurisdiction.
The Commission is very clear on its intent to use its powers and pursue its initiative vigorously. The financial press has widely reported a statement made by a spokesman for Competition Commissioner Margrethe Vestager that combating tax evasion and avoidance is a top priority of the Commission. In line with that concern, the Commission is taking a structured approach when using its State Aid enforcement powers to investigate selective tax advantages that distort fair competition.
The following provides an overview on the legislative framework with respect to State Aid, developments and an outlook on the future of tax rulings in an environment of increased tax transparency.
First published by the Canadian Tax Foundation in (2015) 23:6 Canadian Tax Highlights.
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