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Economic Nexus Through Ownership and Use of Intellectual Property

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Economic Nexus Through Ownership and Use of Intellectual Property

For many tax advisers outside the U.S., state corporate income tax is viewed simply as an add-on to the Federal tax.  This relatively simplistic view ignores the requirements of U.S. Federal and Constitutional law that an activity must have a connection – called a nexus – to a state before tax can be imposed on profits allocated to the state.  Alvan L. Bobrow of Akerman LLP in New York explains the concept of “economic nexus,” a way by which digital activity within a state may trigger exposure to state tax.  Companies that license marketing intangibles should be particularly wary.

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Tax 101: Taxation of Intellectual Property – The Basics

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Tax 101: Taxation of Intellectual Property – The Basics

This month, Tax 101 presents an overview of the basic U.S. Federal tax considerations of transactions that occur over the life cycle of intellectual property (“I.P.”) – from its creation to its acquisition, exploitation, and ultimate sale in a liquidity event.  The article address several important questions: Should expenditures be capitalized or deducted?  If capitalized, over what period is the expenditure amortized?  How are acquisitions of I.P. reported to the I.R.S. when an entire business is acquired?  What is the character of gain on sale?  When is a sale treated as a license?  And when is a license treated as a sale?  Elizabeth V. Zanet and Stanley C. Ruchelman explain.

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Foreign Tax Credit May Not Be Available for Gains Derived Outside the U.S.

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Foreign Tax Credit May Not Be Available for Gains Derived Outside the U.S.

Merely because a foreign country imposes an income tax and the tax is creditable does not mean that effective relief from double taxation is available.  The U.S. retains the first right to tax income and gains that are domestic in character, and the income or gain on which the foreign tax is imposed must be categorized as foreign for relief to be provided.  Kenneth Lobo and Galia Antebi focus on this issue and advise that advance planning will be required.

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

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

This month, Astrid Champion, Nina Krauthamer, and Jennifer Lapper look briefly at several timely issues, including (i) instructions for Form 8975, Country-By-Country Report, and Schedule A, Tax Jurisdiction and Constituent Entity Information, for U.S.-based multinationals, (ii) tax breaks for midsized companies in China, (iii) an executive order calling for review of all I.R.S. regulations issued in 2016, with a view to their withdrawal, and (iv) the French Constitutional debate over penalties for nondisclosure of trust assets.

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LB&I Audit Insights: Using a Code §6038A Summons When a U.S. Corporation is 25% Foreign Owned

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LB&I Audit Insights: Using a Code §6038A Summons When a U.S. Corporation is 25% Foreign Owned

Code §6038A provides that a U.S. corporation that is 25% or more foreign-owned must provide the I.R.S. with information on certain transactions with its 25% foreign owner and any other foreign related party.  The goal is to obtain access to documents that are helpful in determining the correctness of the U.S. tax return.  In an I.P.U., LB&I explains how it plans to obtain documents held outside the U.S.  This may include a requested exchange under a tax information exchange agreement or a summons served on a domestic agent appointed to receive a summons that is enforceable abroad.  Galia Antebi and Stanley C. Ruchelman explain the process that will be followed by the I.R.S.

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Tax Home v. Abode – Are They the Same for Code §911 Purposes?

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Tax Home v. Abode – Are They the Same for Code §911 Purposes?

Section 911 of U.S. tax law provides certain tax benefits to persons who report foreign earned income.  To be entitled to the benefits, an individual must have a “tax home” abroad, provided that he or she does not have an “abode” in the U.S.  A recent summary opinion by the Tax Court illustrates the difference between those two terms.  Rusudan Shervashidze and Philip R. Hirschfeld explain.

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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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