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I.R.S. Offers Additional Guidance on Code §965 Transition Tax

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I.R.S. Offers Additional Guidance on Code §965 Transition Tax

On the way toward a dividends received deduction for certain dividends paid by foreign subsidiaries, Congress enacted a one-shot income inclusion of all post-1986 earnings from C.F.C.’s and foreign corporations having 10% U.S. Shareholders that are corporations.  In March, the I.R.S. issued an F.A.Q. providing additional guidance on open issues for 2017 tax returns.  Rusudan Shervashidze and Stanley C. Ruchelman explain the mechanics of the income inclusion and an election to defer payments for eight years, sometimes more.

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New York Resisting S.A.L.T. Cap Under Federal Tax Reform

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New York Resisting S.A.L.T. Cap Under Federal Tax Reform

When the T.C.J.A. capped the deduction for state and local income and property taxes at $10,000 – more tax can be paid, but only $10,000 can be deducted – state governments did not take the provision lightly.  One proposal that has gained traction in Albany and other state capitals involves creating charitable funds that would raise voluntary capital for specific governmental purposes.  The goal is for taxpayers to claim the charitable contributions as a deduction for Federal tax purposes and, at the same time, benefitting from a substantial credit against their state income tax liabilities.  Another, less contentious proposal would utilize employer-side payroll taxes to offer employees a credit against state and local taxes.  Nina Krauthamer, Elizabeth V. Zanet, and Sheryl Shah assess the viability of these proposals and the likely impact of tax reform on New York State.  Opinions are not consistent.  Stay tuned.

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Can the Arm’s Length Standard Beat the R.A.P.? Transfer Pricing After the T.C.J.A.

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Can the Arm’s Length Standard Beat the R.A.P.? Transfer Pricing After the T.C.J.A.

Experienced tax litigators know that Congress often protects the I.R.S. when an important case is lost.  Yes, the taxpayer wins.  But Congress codifies the I.R.S. position by an amendment to the law.  The T.C.J.A. revised Code §482 legislatively, thereby reversing Tax Court decisions in the Amazon and Veritas cases that dismissed two arguments raised by the I.R.S. in transfer pricing litigation – mandatory use of aggregate basis of valuation (grouping of intangibles for valuation purposes) and the realistic alternative principle (challenging the business judgment for the transaction).  Michael Peggs and Sheryl Shah explain this attack on the arm’s length principle of taxation.

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When "Defective" Is Desirable – Pre-Immigration Planning for Families with U.S. Persons

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When "Defective" Is Desirable – Pre-Immigration Planning for Families with U.S. Persons

The term “intentionally defective” sounds problematic, but in reality, is quite favorable when it comes to estate planning.  Intentionally defective grantor trusts are an especially useful tool when combined with pre-immigration planning for a family where only one spouse is a U.S. citizen because these trusts are disregarded for income tax purposes but respected for estate tax purposes.  If set up and funded by a non-citizen spouse before arrival in the U.S., gift and estate tax planning can be achieved in a low tax environment.  In these trusts, the settlor continues to pay tax on the income even though not a beneficiary.  As a result, the beneficiary does not pay income tax on trust distributions and the tax payment by the grantor is not considered to be gift to the beneficiary.  Hence, no gift tax.  Fanny Karaman and Nina Krauthamer explain all.

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Investing in U.S. Real Estate on a (Possibly) Tax-Free Basis

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Investing in U.S. Real Estate on a (Possibly) Tax-Free Basis

A Real Estate Investment Trust, or R.E.I.T., is a popular type of investment vehicle.  A R.E.I.T. is an entity that generally owns and typically operates a pool of income-producing real estate properties, including mortgages.  Its investors generally look to a return on investment in two forms: (i) distributions from the R.E.I.T. and (ii) dispositions of the R.E.I.T. stock.  If certain facts exist, U.S. tax law offers foreign investors a completely tax-free avenue to invest in a R.E.I.T.  Galia Antebi and Neha Rastogi explain the ins and outs of tax-free treatment for the foreign investor.

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

T.C.J.A. changes to the Subpart F rules have the effect of deconstructing cross-border arrangements structured to prevent the creation of a C.F.C.  A change to constructive ownership rules may cause all foreign members of a foreign-based group to be treated as C.F.C.’s for certain reporting purposes merely because the group includes a member in the U.S.  A change to the definition of a U.S. Shareholder of a C.F.C. makes the value of shares owned as important as voting power in determining whether a U.S. person is a U.S. Shareholder and a foreign corporation is a C.F.C.  The 30-day requirement for a C.F.C. to be owned by a U.S. Shareholder before Subpart F applies has been eliminated.  In some instances, the changes are retroactive to the 2017 tax year.  Neha Rastogi, Sheryl Shah, Beate Erwin, and Elizabeth V. Zanet explain and provide a case study that ties everything together

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India Budget 2018-19

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India Budget 2018-19

The Indian government announced its plans for the 2018–2019 budget year.  It is the last full budget before the 2019 Parliamentary elections and the first budget following the implementation of the landmark national G.S.T. regime.  Tax is reduced to 25% for domestic companies generating income of approximately $40 million or less.  The definition of the term “business connection,” the equivalent of a P.E. under domestic law, is broadened to cover agents having and habitually concluding contracts and circumstances where a nonresident has a significant economic presence.  A 10% tax is imposed on certain stock market gains.  Incentives are given to international financial services companies in the form tax exemptions for certain gains.  These and other provisions are explored by Jairaj Purandare of JPM Advisors Pvt Ltd, Mumbai, India.

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

Italian domestic tax law has adopted the permanent establishment (“P.E.”) concept when determining whether business profits of a nonresident are taxable in the absence of an applicable income tax treaty.  Earlier this year, changes to the definition of the term broadened the scope of activity constituting a P.E.  Effective January 1, 2018, (i) a digital P.E. is treated as a fixed place P.E., (ii) the scope of the specific activity exemption has been scaled back, (iii) an anti-fragmentation rule has been adopted applicable to groups of companies, and (iv) the scope of an agency P.E. has been broadened. Stefano Loconte and Linda Favi of Loconte & Partners, Milan, explain the new rules.

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US Tax Reforms - Anti-Abuse Regime for CFCs→

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Published on Out-law.com (March 2018).

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Qualified Business Income - Are You Eligible for a 20% Deduction?

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Qualified Business Income - Are You Eligible for a 20% Deduction?

Have you ever been asked to define the undefinable?  At first glance, the new 20% Q.B.I. deduction – a reduced tax rate for the self-employed and partnerships introduced by the Tax Cuts and Jobs Act (“T.C.J.A.”) – seems to be just that: a maze in which the general rule is modified in hidden ways through subdivisions of subsections and in definitions that have substantive effect.  In their article, Stanley C. Ruchelman and Fanny Karaman logically guide the reader in detail and with illustrations.

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Doing Business Post-Brexit: What to Expect in the United Kingdom

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Doing Business Post-Brexit: What to Expect in the United Kingdom

The U.K. is firmly on course to leave the E.U., with a target date of March 29, 2019.  After a difficult period of 18 months, agreements to address two important “divorce” issues – the exit payment and the status of Brits in the E.U. and Europeans in the U.K. on Brexit Day – have been reached, while a decision has been made to defer discussions regarding the border with Northern Ireland.  Graham Busch of Gerald Edelman, Chartered Accountants, London, addresses these and other settled issues as well as those for which a decision has been kicked down the road.

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Insights Vol. 5 No. 2: Updates & Other Tidbits

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Insights Vol. 5 No. 2: Updates & Other Tidbits

This month, Tomi Oguntunde, Sheryl Shah, and Nina Krauthamer look briefly at four recent developments in international tax: (i) an I.R.S. directive temporarily halting new examinations involving cost sharing agreements that do not include stock-based compensation costs, (ii) an I.R.S. appeal of a Texas District Court case in which certain anti-inversion rules were invalidated for nonconformance with the Administrative Procedures Act, (iii) Dutch measures to eliminate intragroup dividend withholding tax and address abusive tax planning channeled through the Netherlands, and (iv) a revised timeline for implementation of withholding tax on transfers involving effectively connected gain under Code §1446(f).

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Corporate Matters: Partner Representative and the New Partnership Audit Regime

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Corporate Matters: Partner Representative and the New Partnership Audit Regime

Commencing in January 2018, the I.R.S. began a new centralized audit regime with respect to partnerships.  It replaces the concept of a “Tax Matters Partner” with a “Partnership Representative.”  This is more than a change in name.  Unless the partnership is able to elect out of the new rules and actually does so, the I.R.S. will only deal with the Partnership Representative, and the individual partners have no right to separately appeal any tax assessment.  Additionally, the I.R.S. may now collect tax at the partnership level as a result of a tax audit.  Simon Prisk examines these and other changes – including the opt-out provisions – that will affect partnerships, partners in the current taxable year, and partners at the time that year is examined by the I.R.S.

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A New Opportunity for Nonresident Aliens - Ownership in an S-Corporation

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A New Opportunity for Nonresident Aliens - Ownership in an S-Corporation

U.S. tax law allows a domestic corporation to elect pass-thru tax treatment of income by making an S-corporation election.  Several conditions must be satisfied before the election can be made, including a prohibition of any foreign ownership.  In an almost invisible provision of the T.C.J.A., U.S. tax law has been revised to allow an individual who is neither a citizen nor a U.S. resident to hold an indirect current interest in an S-corporation without causing an automatic termination of pass-thru treatment for the corporation.  The key is for the current interest to be held through an Electing Small Business Trust that qualifies as a domestic trust for U.S. tax purposes.  This may be a boon for Canadian-resident individuals who face mind and management issues when a U.S. L.L.C. is established to invest in a U.S. opportunity.  Rusudan Shervashidze and Stanley C. Ruchelman explain all.

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Non-Corporate Taxation: Individuals & Partnerships Face Highs & Lows Under the T.C.J.A.

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Non-Corporate Taxation: Individuals & Partnerships Face Highs & Lows Under the T.C.J.A.

Most cross-border tax advisers with clients that are impacted by the T.C.J.A. focus on the principal items, such as B.E.A.T., G.I.L.T.I., and the like.  However, the act contains many additional provisions that can affect the non-corporate cross-border investor.  Taxes have been reduced, a holding period for capital gains treatment now applies to carried interests, the scope of like-kind exchanges has been limited, and the tax treatment of alimony payments has been changed.  These are just a few of the items addressed by Sheryl Shah.

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B.E.A.T.-ing Base Erosion: U.S. Subjects Large Corporations to Anti-Abuse Tax

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B.E.A.T.-ing Base Erosion: U.S. Subjects Large Corporations to Anti-Abuse Tax

Cross-border payments to related parties have been an arrow in the quiver of cross-border tax planners since the time that income tax and global trade first intersected.  The new Code §59A introduces the Base Erosion and Anti-Abuse Tax (“B.E.A.T.”) on large corporations that significantly reduce their U.S. tax liability through the use of cross-border payments to related persons.  It is structured as another form of the now-repealed corporate Alternative Minimum Tax rather than a disallowance of a deduction in computing regular taxable income.  Banks that have significant interest payments and U.S. companies that pay significant royalties for trademarks, copyrights, and know-how are the targets of the tax to the extent full 30% withholding tax is not imposed.  Galia Antebi and Sheryl Shah explain how the tax is computed.  Is this another step towards a global trade war?

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Reform of the U.S. Tax Regime – The Swiss Perspective→

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Published by Prager Dreifuss, Tax Newsletter (February 2018).

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Insights Vol. 5 No. 1: Updates & Tidbits

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Insights Vol. 5 No. 1: Updates & Tidbits

This month, Neha Rastogi and Nina Krauthamer look briefly at three recent developments in international tax: (i) expired I.T.I.N.’s and how tax returns that use an expired I.T.I.N. will be treated by the I.R.S., (ii) the E.U. blacklist of uncooperative jurisdictions, which includes American Samoa and Guam, and (iii) and unanticipated tax demands on contributions to the Brexit campaign.

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Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

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Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

The Large Business and International Division of the I.R.S. (“LB&I”) periodically develops international practice units (“I.P.U.’s”) that serve as training material for international examiners.  In November 2017, an I.P.U. entitled “Common Ownership or Control Under IRC 482 – Inbound” was published.  On the same date, the I.R.S. issued a sister I.P.U. for outbound transactions, “Common Ownership or Control Under IRC 482 – Outbound.”  Together, they serve as a primer for determining whether sufficient control exists between two parties to bring the arm’s length transfer pricing rules of Code §482 into play.  Stanley C. Ruchelman explains how the I.R.S. trains its examiners when determining whether a transfer pricing adjustment is appropriate. 

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Individual, Corporate, and Trust News from France

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Individual, Corporate, and Trust News from France

The end of each year in France is marked by a fiscal legislative process to amend the current year’s finance law and to draft the law for the upcoming year.  The year 2017 was no exception.  Changes will be made to wealth tax, tax brackets, tax on investment income, corporate tax rates, and the 3% additional tax on dividend distributions (retroactively).  Fanny Karaman and Nina Krauthamer explain the tax changes.

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