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Tax Concerns on Outbound I.P. Transfers: Pitfalls & Planning in Light of I.R.S. Defeat in Amazon Case

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Tax Concerns on Outbound I.P. Transfers: Pitfalls & Planning in Light of I.R.S. Defeat in Amazon Case

In the 21st century, the method of apportioning income from intangible property (“I.P.”), between the various jurisdictions in which the I.P. is developed, owned, and used or consumed, is contentious.  This was evidenced in a recent Tax Court case, Amazon.com, Inc. & Subsidiaries v. Commr., which dealt with transfer pricing rules applicable to an outbound transfer of I.P. and a related cost sharing agreement.  Philip R. Hirschfeld discusses the case in the context of Code §367(d), which relates to outbound transfers of I.P., and Treas. Reg. §1.482-7, which addresses qualified cost sharing agreements.

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Code §163(J) – Ignoring U.S. Thin Capitalization Rules May Leave Tax Advisors Thinly Prepared for Audits

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Code §163(J) – Ignoring U.S. Thin Capitalization Rules May Leave Tax Advisors Thinly Prepared for Audits

B.E.P.S. Action 4 focuses on the need to address base erosion and profit shifting using deductible payments, such as interest, that can give rise to double nontaxation in inbound and outbound investment scenarios. The U.S. addressed this problem many years ago with Code §163(j).  In light of recent I.R.S. guidance providing a step-by-step plan to assist auditors when analyzing interest payments, non-U.S. practitioners should be aware of the thin capitalization debt rules when planning for multinational structures.  Kenneth Lobo and Beate Erwin explain how the provision works in general and in several illustrative fact patterns. 

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How to Calculate Gain or Loss on Payables & Receivables Denominated in Nonfunctional Currency

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How to Calculate Gain or Loss on Payables & Receivables Denominated in Nonfunctional Currency

If all currencies were pegged to one single standard and did not fluctuate in value among themselves, the concept of currency gain and loss would not be needed.  However, no universal standard exists and major currencies tend to fluctuate.  Consequently, a uniform method must be applied to identify the amount of a transaction when the conversion rate changes between a booking date and a payment date of a transaction denominated in a non-functional currency.  In a recent International Practice Unit (“I.P.U.”), the LB&I Division of the I.R.S. provides a broad overview of how currency gains and losses are recognized for U.S. tax purposes.  Elizabeth V. Zanet and Stanley C. Ruchelman examine the applicable rules in the I.P.U.

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U.K. Drops Changes to Non-Domicile Regime, But Likely Not for Long

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U.K. Drops Changes to Non-Domicile Regime, But Likely Not for Long

After months of H.M.R.C. consultation, a new regime was put in place for non-domiciled U.K.-resident individuals (“Non-Doms”) on April 6, 2017, only to see the legislation pulled from Finance Bill 2017 on April 25.  The snap election in the U.K. put consideration of Non-Dom taxation on hold when 72 of the 135 clauses were removed from the bill.  This allowed Parliament to approve the legislation in two hours.  Gary Ashford of Harbottle Lewis, London, summarizes the short-lived provisions and those that failed to be enacted on April 6.  The proposed regime remains a work in process, and enacting legislation could be back on the table as early as this fall.

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Value-Added Tax 101 – A Far Cry from a Border Tax

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Value-Added Tax 101 – A Far Cry from a Border Tax

Although the U.S. is the world’s largest economy, it is the only world economy that does not have a national value-added tax (“V.A.T.”).  Until the border adjustment tax (“B.A.T.”) proposals were floated, most cross-border tax advisers in the U.S. only had vague concepts of the workings of a national V.A.T.   Fanny Karaman and Stanley C. Ruchelman explain the mechanics of the V.A.T. as enacted in the E.U., cautioning that the B.A.T. is not a V.A.T.

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Valuation – More Art than Science

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Valuation – More Art than Science

In a recent case, the Tax Court was asked to evaluate two Old Masters paintings from the 17th century.  Sotheby’s provided the valuation for estate tax purposes on a gratuitous basis.  The appraised value totaled $600,000 for the two works.  The estate retained the same auction house to sell one of the paintings.  The sale price at auction was $2.1 million before buyer’s premium, and the auction took place within 34 months of the issuance of the appraisal report.  Kenneth Lobo and Nina Krauthamer explain why the court had no difficulty finding that the estate’s expert was not independent and that the subsequent sale was relevant

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Cross-Border Complexities: What You Need to Know Before Your Non-U.S. Client Invests in the U.S.

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Cross-Border Complexities: What You Need to Know Before Your Non-U.S. Client Invests in the U.S.

When foreign tax counsel advises a client on a personal investment in the U.S., it is common for a U.S. tax adviser to comment on the scope of U.S. income, gift, and estate taxes.  Sometimes the investment is made through a trust and other times it is made directly.  In their article, Kenneth Lobo and Fanny Karaman answer questions raised in the context of fact patterns often used.

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Good News for REITs Investing in Non-US Real Estate→

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Good News for REITs Investing in Non-US Real Estate

Published in the GGi Insider, No. 88, March 2017 (p. 44).

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Basis Planning in the Usufruct and Bare Ownership Context

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Basis Planning in the Usufruct and Bare Ownership Context

Concepts of usufruct and bare legal ownership are widely used estate planning tools by parents resident in civil law jurisdictions in Europe.  However, when the next generation is resident in a common law jurisdiction such as the U.S., the results are not always pretty.  Fanny Karaman and Beate Erwin examine the tax consequences for the U.S. children and the steps available to the European parents that may limit adverse tax consequences in the U.S.

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Pre-Immigration Planning: Drop-Off Trusts + Private Placement Life Insurance – If the Tools Fit, Use Them

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Pre-Immigration Planning: Drop-Off Trusts + Private Placement Life Insurance – If the Tools Fit, Use Them

Wealthy persons moving to the U.S. often engage a tax adviser to craft a pre-immigration plan. Typically, the plans focus on harvesting gains, stepping up the basis in appreciated assets that cannot be sold, and simplifying structures to ensure that future gains will benefit from favorable long-term capital gains rates. However, the truly sophisticated client may wish to take a long-range approach that maximizes the accumulation of wealth during life. John F. McLaughlin and Shelly Meerovitch of Bernstein’s Wealth Planning and Analysis Group, New York, explain the benefits of forming a pre-immigration drop-off trust to invest in a private placement life insurance (“P.P.L.I.”) policy. In optimal circumstances, the P.P.L.I. investment portfolio can maximize the accumulation of wealth, provided the client obtains timely and competent legal advice in the country of residence and the U.S.  

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E.U. Data Protection and the Fight Against Tax Evasion: A Delicate Balance

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E.U. Data Protection and the Fight Against Tax Evasion: A Delicate Balance

The tax world has seen an important shift in global policies, with an emphasis on tax transparency and exchange of information.  The transparency measures are contained in tax-driven and non-tax-driven legislation, and while the goals of the legislation may be lofty, the policies may violate fundamental individual rights, including data protection.  Fanny Karaman and Astrid Champion examine the E.U.’s non-fiscally-driven approach to tax transparency and, more precisely, the legal limits of such transparency as evidenced in recent cases.

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Implementing the Border Adjustment Tax: Winners & Losers

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Implementing the Border Adjustment Tax: Winners & Losers

The border adjustment tax will harm certain companies and aid others.  To be expected, exporters like the proposal and importers hate it.  Philip R. Hirschfeld and Kenneth Lobo look at the industries that will be winners and those that will be losers if the border adjustment tax is adopted.  Strangely, each side argues that employment will be increased if its position is adopted, an example of how voodoo economics support a politicized tax proposal.

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India Budget 2017-18

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India Budget 2017-18

Provisions in Budget 2017-18 announced by the Finance Minister that relate to infrastructure, the financial sector, accountability, prudent fiscal management, and tax administration reflect a view that times are changing in India.  The government appears to remain steadfast in its efforts to bring the Indian tax and regulatory environment up to global standards.  Jairaj Purandare of JPM Advisors Pvt Ltd, Mumbai, explains the focus of the budget

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I.R.S. LB&I Announces 13 New “Campaigns” for Audit Guidance

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I.R.S. LB&I Announces 13 New “Campaigns” for Audit Guidance

The I.R.S. Large Business and International (“LB&I”) Division has announced 13 issue-based campaigns targeting specific “Practice Areas” for audit and other enforcement activity.  The campaigns involve a combination of examinations, outreach, guidance, and other approaches.  Galia Antebi and Stanley C. Ruchelman look at the new I.R.S. approach to tax examinations in an age of increased complexity and limited budgets for examiners.

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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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