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A Look at the House G.O.P.’s “Destination-Based Cash Flow with Border Adjustment”

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A Look at the House G.O.P.’s “Destination-Based Cash Flow with Border Adjustment”

Last June, the House Ways and Means Committee released its tax reform plan, which includes sweeping changes to the U.S. corporate income tax.  The plan repeals the current corporate income tax and replaces it with a new regime, commonly referred to as the border adjustment tax.  This regime, which taxes imports and exempts exports, is viewed to be the principal funding mechanism for reductions in the corporate and individual tax rates.  Elizabeth V. Zanet explains the anticipated workings of the proposal.

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New Developments in the World of Reverse Like-Kind Exchanges

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New Developments in the World of Reverse Like-Kind Exchanges

Tax planners to New York City real estate families understand that real estate should never be sold.  Rather, it should be exchanged in a tax-free, like-kind exchange.  The exchange can be bifurcated into two independent transactions – one a purchase and the other a sale – without affecting tax-free treatment, provided certain well identified rules are followed.  Moreover, the replacement can be acquired before the sale of an existing parcel is effected.  In a recent advisory opinion affecting property in New York State, the Department of Taxation and Finance issued a taxpayer-friendly advisory opinion involving real estate transfer tax exposure in a reverse like-kind exchange.  Rusudan Shervashidze and Nina Krauthamer explain the ruling. 

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Proposed Directive on the E.U. Common (Consolidated) Corporate Tax Base – A Primer

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Proposed Directive on the E.U. Common (Consolidated) Corporate Tax Base – A Primer

For decades, European bureaucrats looked with disdain at the way the various states within the U.S. compute state tax.  The arm’s length principle within Europe trumped state apportionment.  Now, however, the European Commission has issued three proposal directives that deal with (i) the Common Corporate Tax Base (“C.C.T.B.”) and the Common Consolidated Corporate Tax Base (“C.C.C.T.B.”), (ii) resolution of double tax disputes, and (iii) mismatches with non-E.U. countries. To the surprise of many, the C.C.C.T.B. includes a three-factor apportionment rule for the sharing of global income by the members of a corporate group operating throughout the E.U.  Stefano Grilli of Gianni, Origoni, Grippo, Cappelli & Partners, Milan, explains proposals that have been introduced.

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Insights Vol. 4 No. 2: Updates & Other Tidbits

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Insights Vol. 4 No. 2: Updates & Other Tidbits

This month, Astrid Champion and Nina Krauthamer look briefly at several timely issues, including (i) the expansion of the European Commission’s attack on illegal State Aid to the French multinational group Engie (formerly G.D.F. Suez), (ii) the request for review by the French Constitutional Court of the penalties imposed under Article 1736, IV bis of the French Tax Code, regarding the failure to disclose a connection with a foreign trust, and (iii) the decision of the European Commission in World Duty Free Group, which affirms the criteria for judging whether a measure by a Member State is selective in relation to certain companies and not others and, for that reason, constitutes illegal State Aid. 

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I.R.S. Rules Subpart F & P.F.I.C. Income Inclusions Are R.E.I.T. Qualifying Income

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I.R.S. Rules Subpart F & P.F.I.C. Income Inclusions Are R.E.I.T. Qualifying Income

A R.E.I.T. is a tax-favorable investment entity used for investment in real estate and real estate mortgages.  R.E.I.T.’s that invest in non-U.S. real estate often make such investments through foreign corporate entities that may be classified as C.F.C.’s or P.F.I.C.’s.  Qualification as a R.E.I.T. requires the entity to meet certain income and passive asset tests designed to ensure that a R.E.I.T.’s gross income is largely composed of passive income related to real estate or real estate mortgage investments.  In a recent private letter ruling, income from a R.E.I.T.’s ownership of C.F.C.’s and P.F.I.C.’s was determined to be passive investment income, thereby providing favorable treatment for the R.E.I.T.  Elizabeth V. Zanet and Philip R. Hirschfeld explain the R.E.I.T. rules and the private letter ruling.

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Italy Introduces a 15-Year Preferential Tax Regime for Wealthy Individuals Taking Up Tax Residence in Italy

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Italy Introduces a 15-Year Preferential Tax Regime for Wealthy Individuals Taking Up Tax Residence in Italy

As non-domiciled (“Non-Dom”) residents of the U.K. scramble to restructure in light of the new rules for persons holding Non-Dom status for more than 15 years, Italy has adopted new measures to attract high net worth individuals.  The rules are clearly derived from the Non-Dom rules in the U.K., but the weather is better.  Fabio Chiarenza of Gianni, Origoni, Grippo, Cappelli & Partners explains the new provisions.

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Swiss Corporate Tax Reform Postponed

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Swiss Corporate Tax Reform Postponed

Through the first ten days of February, Swiss tax advisers were contemplating life after the adoption of the Corporate Tax Reform III (“C.T.R. III”). Then, the bottom dropped out from under their feet as Swiss voters defeated the tax reform package by an almost 60-40 majority.  Peter von Burg and Dr. Natalie Peter of Staiger Attorneys at Law in Zurich explain the benefits that were contemplated under C.T.R. III and ponder about what will be adopted in its place.  Switzerland must act promptly to cobble together a replacement package that will appease opponents of C.T.R. III and meet the deadline under its agreement with the E.U. for eliminating existing special benefits allowed to base companies. How much of C.T.R. III can be salvaged?

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§338(g) Election in the Cross-Border Context: I.R.S. Targets Foreign Tax Credit Enhancer

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§338(g) Election in the Cross-Border Context: I.R.S. Targets Foreign Tax Credit Enhancer

Code §338(g) allows a taxpayer to elect to treat certain share purchases as if the transactions were asset purchases.  As a result, the premium paid for the shares can be pushed down to increase the basis in operating assets of the acquired company.  The step-up in depreciable basis results in steeper depreciation and amortization deductions for U.S. tax purposes.  Because a comparable tax benefit is not obtained in the jurisdiction where the target operates, the Code §338(g) treatment magnifies the effective tax rate in the foreign country when looked at from a U.S. tax viewpoint.  This creates mountains of excess foreign tax credits that can be used to reduce U.S. tax on other items of foreign-source income, provided those items are subject to little or no foreign tax and fall within the same foreign tax credit limitation basket.  A similar result can be achieved through a check-the-box election, which acts as a poor man’s Code §338(g) election.  Code §901(m) attempts to disallow the enhanced level of the foreign tax credit, and the I.R.S. recently issued temporary and proposed regulations.  Rusudan Shervashidze and Stanley C. Ruchelman explain the labyrinth of rules.

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India – Guidelines Issued for Determining Place of Effective Management

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India – Guidelines Issued for Determining Place of Effective Management

In Circular No. 6/2017, dated January 24, 2017, the Central Board of Direct Taxes issued final guidelines regarding the factors that will be looked to under Indian income tax treaties when determining the place of effective management (“P.O.E.M.”) of a foreign company that is part of an Indian-based group.  Almost as important as the substantive rules, the Circular establishes the procedure that must be followed before a tax officer may determine that the P.O.E.M. of a foreign company is in India.  There are winners and there are losers in the Circular.  Ashutosh Dixit, Parul Jain, and Kaushik Saranjame of BMR & Associates L.L.P. explain the new rules.

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Debt v. Equity: Judicial Factors Still Applicable Post-§385 Regulations

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Debt v. Equity: Judicial Factors Still Applicable Post-§385 Regulations

The last quarter of 2016 saw the introduction of final regulations establishing benchmarks for treating a debt instrument as true debt for U.S. income tax purposes.  These regulations apply to companies over a certain size issuing debt instruments exceeding $50 million.  Debt issued by owner-managed companies are not covered by the regulations and, as a result, tests established by case law will continue to apply.  Galia Antebi and Kenneth Lobo look at a relatively recent case, Sensenig v. Commr., in which the standard tests were applied – the equivalent of comfort food for tax lawyers.

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Accumulated Earnings Tax Will Hit Taxpayers, Despite Lack of Liquidity or Control

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Accumulated Earnings Tax Will Hit Taxpayers, Despite Lack of Liquidity or Control

Even absent a distribution, shareholders of U.S. corporations may, under certain circumstances, be subject to a second layer of tax: the accumulated earnings tax (“A.E.T.”).  The tax is imposed on the accumulation of earnings beyond the reasonable needs of the business.  Although rarely imposed on well-advised taxpayers, the A.E.T. could become increasingly important if the tax rate disparity between the corporate and individual income taxes increases under proposals put forth by the current administration.  Fanny Karaman and Beate Erwin look at a recent Chief Counsel Advice Memorandum where the absence of liquidity within the corporation was found to be an irrelevant factor in determining that earnings were unreasonably accumulated by the corporate taxpayer.

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Insights Vol. 4 No. 1: Updates & Other Tidbits

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This month, we look briefly at several timely issues, including (i) the termination of foreign acceptance agent agreements used to confirm copies of passports outside the U.S. when a non-U.S. individual obtains an I.T.I.N., (ii) a court order in Canada upholding a demand for disclosure of client names and documentation relating to participation in a discredited tax shelter, (iii) E.U. steps that identify potentially blacklisted low-tax or no-tax countries, and (iv) worsening relations between the U.S. and the E.U. stemming from widening differences in tax policies.

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Corporate Matters: Joint Venture Considerations

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The term “joint venture” is more a term of art than a legal concept.  Joint ventures have been described by the courts as an association of two or more persons, in the nature of a partnership, to carry on a business enterprise for profit.  Simon H. Prisk examines the decision points faced when drafting a joint venture agreement. 

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New Regulations Imminent for Triangular Reorganizations and Inbound Nonrecognition Transactions

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In Notice 2016-73, the I.R.S. announced that it intends to issue regulations preventing certain taxpayer abuses incident to triangular reorganizations involving foreign corporations.  These are transactions in which a subsidiary is the acquisition vehicle and the shares used to acquire the target are shares of the parent company, hence the reference to a triangle.  The Notice is another step in the saga of “Killer B” reorganizations in which U.S. corporations attempt to take cash out of foreign subsidiaries without paying significant U.S. tax.  Transactions occurring in the past two years have been found to be abusive because they apply recently issued regulations in a way that was not intended at the time of publication.  Fanny Karaman and Stanley C. Ruchelman explain the approach enunciated in the Notice.

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S.T.A.R.S. Transactions – Jury Is In, Foreign Tax Credit Disallowed

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S.T.A.R.S. Transactions – Jury Is In, Foreign Tax Credit Disallowed

As a litigation strategy, a large corporation that is important to a community may decide that it is better to pay the tax and demand a jury trial in U.S. District Court as part of its claim for refund, rather than to defer payment while it argues the case before the Tax Court. The basic theory is that the jury will not be sympathetic towards the I.R.S. In a recent jury trial involving Wells Fargo, it found that the strategy did not work when the issue involved a tax shelter knows as a S.T.A.R.S. (structured trust advantaged repackaged securities) transaction. Rusudan Shervashidze and Galia Antebi explain.

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Transfer Pricing Adjustment Does Not Reduce Dividend Received Deduction from C.F.C.

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When the I.R.S. successfully maintains an adjustment to transfer pricing within an intercompany group, taxable income is increased to one participant but cash remains at the level that existed at year-end prior to the I.R.S. adjustment.  To avoid a second tax adjustment, the party with excessive cash – as determined after the I.R.S. adjustment – may be treated as if it incurred an account payable, which can be repaid free of additional tax.  In Analog Devices, the I.R.S. attempted to argue that the account payable of the C.F.C. should be treated as an actual borrowing.  The effect of an actual borrowing limited the favorable tax treatment under Code §965.  That provision temporarily allowed an 85% dividends received deduction for a U.S. corporation receiving a dividend from a controlled foreign corporation.  The Tax Court disagreed with the I.R.S. position. Kenneth Lobo and Beate Erwin explain.

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Foreign Charities active in the U.S. – Public? Or Private Foundations?

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Foreign nonprofit organizations have become more active in the U.S. in carrying out their charitable mandates.  Such activities include performances in the U.S. by foreign artistic companies and the use by U.S. charities of technology and know-how developed by foreign charities.  Fees earned by foreign charities could be subject to U.S. income or withholding taxes, but those taxes can be reduced or eliminated if specific procedures are followed. Much will depend on the status of organization as a “public charity” or a “private foundation,” terms that make reference to the organization’s funding sources.  Nina Krauthamer and Galia Antebi explain the U.S. rules that are applicable.

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New Zealand Foreign Trust Disclosure Regime

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In April 2016, the New Zealand government convened an independent inquiry into the use of New Zealand foreign trusts.  Following this inquiry, a new foreign trust disclosure regime was proposed to obtain information on ultimate beneficial ownership.  Heather Howell, who heads the office of Trident Trust Group in Auckland, New Zealand, explains.

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Looking to the Future: European Efforts Against Tax Evasion Take Center Stage – Where Will It Take Us?

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A globalized economy has been the driving force behind cross-border tax transparency and increased dissemination of tax information in recent years.  The importance of F.A.T.C.A. reporting has paled as the O.E.C.D. Common Reporting Standard has taken effect in the E.U., State Aid cases are progressing, and country-by-country reports may be publicly available.  Europe and the U.S. are moving in different directions.  Philip R. Hirschfeld and Stanley C. Ruchelman explain.

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Trump and the Republican-Led Congress Seek Overhaul of International Tax Rules

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Trump and the Republican-Led Congress Seek Overhaul of International Tax Rules

Elizabeth V. Zanet and Beate Erwin compare the proposals that comprise the Trump tax plan and the House Republican Tax Reform Blueprint, which will be submitted to Congress as part of a massive overhaul of U.S. tax law.  Tax rates for individuals and corporations would likely be lowered, the standard deduction would be increased, and capital gains tax rates would remain at the same level.  The net investment income tax would be repealed.  The estate tax and generation skipping tax would be repealed.  The gift tax would remain.  Other provisions are discussed, also.

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