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The U.K. Growth Plan 2022

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The U.K. Growth Plan 2022

Three weeks after Liz Truss became Prime Minister of the U.K., the Chancellor of the Exchequer, Kwasi Kwarteng, announced the new Government’s Growth Plan. Billed as a “Mini Budget,” it became a far greater set of announcements than expected. Among other items, tax rates are slashed at the corporate and individual levels, allowances for businesses are increased, and investment zone benefits enhanced. Kevin Offer, a Partner at Hardwick and Morris L.L.P., London summarizes the provisions.

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Foreign Tax Credit Regulations: Nexus as the New Credo

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Foreign Tax Credit Regulations: Nexus as the New Credo

A U.S. taxpayer that is subject to income tax in both the U.S. and a foreign country can reduce the amount of tax payable to the U.S. by claiming a credit for foreign income taxes paid or accrued to one or more foreign countries. The principle is simple: taxpayers should not pay tax twice with regard to the same item of income. The application of the principle is not so easy, requiring a taxpayer to overcome several hurdles, including a determination of the source of income and whether the tax is a creditable income tax. Faced with Pillar 1 of B.E.P.S. and digital services taxes, both of which look to the location of customers when determining the source of income – and the primary right to impose tax – the I.R.S. adopted a new set of foreign tax credit regulations. They warn U.S. taxpayers that until U.S. tax law is changed, foreign income taxes imposed on the basis of customer location will not be allowed as a credit against U.S. tax when nexus does not exist between the foreign country imposing tax and the place where the income generating activity takes place. Wooyoung Lee explains the new “nexus” requirement for a tax to be considered an income tax under U.S. concepts and provides a real-life illustration of how the tax result may have changed.

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Perenco v. Ecuador and Achmea B.V. v. The Slovak Republic: Practical Limitations When Seeking Relief Under a B.I.T.

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Perenco v. Ecuador and Achmea B.V. v. The Slovak Republic: Practical Limitations When Seeking Relief Under a B.I.T.

While resorting to a B.I.T. provides a corporation access to an independent body when seeking to resolve a dispute with a foreign government, success is not always obtained easily or at all. Stanley C. Ruchelman and Marie de Jorna, a member of the Paris Bar learning U.S. tax law during a period of training with Ruchelman P.L.L.C., dive into two cases where relief has either been denied for over a decade (Perenco v. Ecuador) or where access to a B.I.T. was eliminated as a mechanism to resolve disputes for corporations that are resident in an E.U. Member State with the government of another E.U. Member Sate (Achmea B.V. v. The Slovak Republic).

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Bilateral Investment Treaties: A Potential Legal Remedy in International Tax Disputes

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Bilateral Investment Treaties: A Potential Legal Remedy in International Tax Disputes

Traditionally, international tax disputes tend to focus on provisions in treaties for the avoidance of double taxation. Typically, income tax treaties reduce withholding tax on various types of investment income, provide an increased threshold for imposing tax on business profits, and offer procedures to claim relief in the event of double taxation or the imposition of tax that is not in accordance with the terms of the relevant treaty. However, income tax treaties are not the only legal remedy available in an international tax dispute. Countries also conclude bilateral investment treaties (“B.I.T.’s”) with the aim of protecting and stimulating cross-border investment. In comparison to an income tax treaty, disputes under B.I.T.’s generally are settled by an independent arbitration panel. While a country may “dig in its heals” during the course of the arbitration process, it cannot follow a strategy of agreeing to disagree with its counterpart in the treaty partner country. Once an arbitration panel renders its decision against a government, the award can be converted into a judgment that is enforceable through seizure of assets owned by the government. Paul Kraan, a tax partner at Van Campen Liem in Amsterdam has authored the quintessential monograph on the use of a B.I.T. to obtain relief from confiscatory taxes or unfair treatment imposed by a signatory to an applicable B.I.T.

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Dividend Income from India: Tax Treaty Issues for Nonresident Shareholders

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Dividend Income from India: Tax Treaty Issues for Nonresident Shareholders

Effective April 1, 2020, the dividend distribution tax (“D.D.T.”) imposed on Indian companies paying dividends was abolished. While Indian politicians may say otherwise, tax advisers outside India viewed the D.D.T. as a workaround allowing India to collect the equivalent of dividend withholding tax without having to take into account a lower rate provided by an income tax treaty. With the demise of the D.D.T., the Indian tax authorities are challenging claims for dividend withholding tax benefits. Sakate Khaitan, the senior partner of Khaitan Legal Associates, Mumbai, and Abbas Jaorawala, a Senior Director and Head-Direct Tax of Khaitan Legal Associates, Mumbai, review issues that have been raised by the Indian tax authorities at the time dividends are declared and paid to residents of several countries that are treaty partners of India. Terms such as G.A.A.R., P.P.T., and M.L.I. are often raised. In addition, treaties that have most-favored-nation (“M.F.N.”) provisions are now regularly challenged.

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Adventures in Cross-Border Tax Collection: Revenue Rule vs. Cum-Ex Litigation→

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Published in Tax Notes Federal Volume 175, No. 3 & Tax Notes International Volume 106, No. 3: April 18, 2022. Copyright © 2022, Sunita Doobay and Stanley C. Ruchelman.

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The Economic Substance Doctrine: A U.S. Anti-Abuse Rule→

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Re-printed as part of LexisNexis’s Practical Guidance product on April 26, 2022.

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New Subpart F and P.F.I.C. Regulations – Ex Uno Plures

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New Subpart F and P.F.I.C. Regulations – Ex Uno Plures

Is a partnership an entity for certain tax purposes or is it an aggregate of the partners? U.S. tax law was never consistent on this point. In 2017, a foreign taxpayer won a major victory when the U.S. Tax Court held that a partnership is an entity when determining the tax exposure of a foreign partner selling its partnership interest or having its interest redeemed. Almost immediately, Congress changed the law. From that moment, the I.R.S. reviewed the way partnerships and their partners are treated for purposes of the Subpart F, G.I.L.T.I., and P.F.I.C. provisions of U.S. tax law. Regulations were revised, the Schedule K-1 reporting form was modified with the addition of Schedule K-2 and Schedule K-3, and elections once made by domestic partnerships and binding on all members were now to be made by individual partners. Stanley C. Ruchelman and Wooyoung Lee explain these and other changes in the treatment of partnerships for the international provisions of U.S. tax law.

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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

The U.S. tax system is a “self-assessment” system: upon determining how tax provisions apply to their transactions, taxpayers pay the tax they determine is due, and report the transactions to the I.R.S. in sufficient detail to permit the I.R.S. to confirm that liability was correctly calculated. Paradoxically, the tax system is so complex that it incessantly creates ambiguity and opportunity for abuse. Determining one’s tax obligations is often difficult, even for taxpayers with simple profiles. In a lighthearted article, Andreas A. Apostolides looks at two recent events – the first is a letter written by Senate Finance Committee Chairman Ron Wyden to the Chairman of Bristol-Myers Squibb questioning a ten-year-old transaction and the second is a court decision striking down the I.R.S. system of listed transactions and transactions of interest, both part of the anti-tax shelter provisions of U.S. tax law.

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The Price is Right: Former I.R.S. Attorney Discusses Information Return and F.B.A.R. Penalties

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The Price is Right: Former I.R.S. Attorney Discusses Information Return and F.B.A.R. Penalties

Ever wonder what happens to well-crafted reasonable cause statements attached to late-filed I.R.S. information returns, such as Forms 5471, 5472, and 3520? In a presentation before the San Francisco Tax Club, a retired long-term I.R.S. attorney named Daniel Price provided the answer: nothing happens to them. Over the years, the I.R.S. has increased the number of information returns that must be filed by taxpayers. To keep up the pace, I.R.S. delegates many tasks to lower-level employees who may not have been trained sufficiently to make discretionary judgments. Moreover, they are managed by relatively inexperienced supervisors. Stanley C. Ruchelman and Wooyoung Lee explain the problem and several suggestions offered by Mr. Price. Recent experience with F.B.A.R. penalty inconsistencies are also discussed.

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The Last Days of Dummy Companies

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The Last Days of Dummy Companies

The use of anonymous shell companies or “dummy companies” that may be availed of to conceal the true identities of the ultimate beneficial owners is viewed by financial regulators as a tool to facilitate money laundering and the financing of terrorism. The benefit of anonymity may soon be a thing of the past in the U.S. as well as in Europe. Amendments made to Recommendation 24 by the Financial Action Task Force, proposed regulations by FinCEN to require reporting on “beneficial owners,” and pronouncements on the I.R.S. website that explain the meaning of the term “responsible party” that must be reported when applying for an employer identification number in the U.S. all demand that a U.S. corporation report its controlling person. Ibn Spicer, an experienced attorney whose practice focuses on entertainment and corporate law, and who is currently enrolled in the LLM in Taxation Program of New York Law School, observes that the opportunities for hidden ownership are shrinking rapidly.

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Expanded I.R.S. Reporting Obligations for Digital Assets

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Expanded I.R.S. Reporting Obligations for Digital Assets

If DeFi is the Ying in the crypto world, new I.R.S. reporting obligations are the Yang. I.R.S. reporting requirements for cryptocurrency and other digital assets have been substantially expanded, and as a result, are expected to have a significant impact on the wide range of businesses and individuals to which they apply. Among other things, information reporting requirements for certain brokers now include digital assets, and digital assets valued at more than $10,000 are treated as “cash.” Lawrence S. Feld, a New York attorney whose practice concentrates on Federal and State criminal and civil tax controversies, explains all.

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The Door to a New World: Decentralized Finance (DeFi)

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The Door to a New World: Decentralized Finance (DeFi)

1. The world of crypto is fast-moving. An exciting development in this space is Decentralized Finance (“DeFi”), which entered the scene in March 2020. Its use has exploded ever since. The term refers to the offering of traditional financial services not by centralized players such as banks, insurance companies, and exchanges, but through smart contracts running on blockchains. Niklas Schmidt, a partner of the Vienna office of Wolf Theiss and leader of the firm-wide tax team, and Lioba Mueller, a Rechtsreferendarin at the Regional Court of Aachen and PhD student at the University of Bonn, Germany, explain the ups and downs of this relatively new financing vehicle.

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Use it or Lose it: The Future of Shell Entities in the E.U.

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Use it or Lose it: The Future of Shell Entities in the E.U.

Shortly before Christmas, the European Commission published a proposal for a directive laying down rules to prevent the misuse of shell entities for improper tax purposes. The “Unshell Directive” applies to any company or other “undertaking,” regardless of its legal form that (i) is considered tax resident in an E.U. Member State and (ii) is eligible to receive a tax residency certificate. Targeted by the Unshell Directive are entities that have the following characteristics: (a) they lack real economic activities, (b) they are involved in certain cross-border arrangements forming a scheme to avoid and evade taxes, and (c) they allow their beneficial owners or parent company to access a tax advantage. Paul Kraan, a tax partner at Van Campen Liem in Amsterdam, explains the general exemptions, the gateway indicators, the reporting obligations, the presumptions, and potential rebuttals in this attack on certain special purpose vehicles.

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Off to New Shores: Tax Extern at Ruchelman P.L.L.C.

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Off to New Shores: Tax Extern at Ruchelman P.L.L.C.

· Ruchelman P.L.L.C. actively participates in the extern arrangement for students in the LLM Program at New York Law School. We provide real life professional experience to the extern and the extern receives two credits towards his or her degree requirement. Our younger lawyers benefit by providing hands-on supervision of the extern, a needed step in professional development. Recently, we expanded our extern program to include European externs and trainee lawyers. Lioba Mueller spent two months with us as an extern, sponsored by the University of Bonn. She also qualified for a PROMOS scholarship, offered by the German Academic Exchange Service, under the German Ministry of Education and Research. In her article, Ms. Mueller tells of her experience in the U.S., both professionally with us and socially with others. Our experience with Ms. Mueller is that doing a good deed is, indeed, its own reward.

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Goodwill and Mister Donut – A Going Concern?

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Goodwill and Mister Donut – A Going Concern?

· A sale of a business often involves an element of goodwill, a term that can have different meanings in different contexts, depending on whether the term relates to (i) purchase price allocations for financial statement purposes or income tax purposes or (ii) attempting to compute the source of income for foreign tax credit purposes. Compounding the definitional inconsistency, the meaning of the term has changed over time. In a 25-year old case, the overseas Mister Donut franchising business was sold to a foreign buyer in an asset-sale transaction. Although only intimated in the case, the taxpayer likely had significant amounts of deferred assets on its balance sheet arising from unused foreign tax credits. Because the seller was a U.S. company, gain from the sale of business generally results in the generation of domestic source income. Under the law in effect at the time, goodwill was sourced where business was carried on. Was that provision the key to access deferred foreign tax credits? The U.S. Tax Court said no. Sometimes, goodwill is not goodwill for foreign tax credit planning purposes. Michael Peggs and Wooyoung Lee look at the court’s reasoning and comment on certain contemporary aspects of the decision in light of provisions in the Tax Cuts and Jobs Act and several I.R.S. pronouncements on goodwill.

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Canada and the U.S. – Two Countries, One Border, Divergent Rules on Wealth Transfers

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Canada and the U.S. – Two Countries, One Border, Divergent Rules on Wealth Transfers

Canadians and Americans share many things in common. Common language, one border, a love for teams in the National Hockey League, a slew of dual citizen individuals in Canada and Canadian residents in the U.S., and a common history up to the time of the American Revolution. But many differences exist, nonetheless. To illustrate, when wealth is transferred, the U.S. imposes gift and estate taxes based on value. Canada imposes capital gains tax. The U.S. imposes income taxes on global income based on citizenship as well as residence. Canada imposes income tax on global income based only on residence. Canada imposes departure taxes when any resident leaves the country to establish a residence elsewhere. The U.S. imposes departure tax only when citizenship is renounced, or when a long-term green card holder relinquishes his or her green card. These differences trigger several tax traps, many of which can be avoided by unique provisions in the Canada-U.S. Income Tax Treaty. But the treaty is not perfect. In his article, Andreas Apostolides explains the taxation rules for wealth transfers in both countries, the applicable provisions in the income tax treaty designed to be helpful, and most importantly, a solution that is followed by many Canadian tax advisers when the treaty fails to provide a solution for disparities in adjusted cost basis for certain assets received as a gift or a bequest.

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The More You Know, The More You Don't Know – U.S. Tax Issues on a Disposition of a Foreign Business

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The More You Know, The More You Don't Know – U.S. Tax Issues on a Disposition of a Foreign Business

When a U.S. person disposes of a business situated in a foreign country, the nature of the gain as capital or ordinary and the source of the gain may sound like simple issues that require simple tax advice. It may, however, turn out to be far more complex as one begins to review the relevant provisions of U.S. tax law in light of the facts and circumstances that exist. It is not uncommon for issues to pop up, one after the other and on a never-ending basis. In their article, Neha Rastogi and Stanley C. Ruchelman discuss the various U.S. Federal income tax issues that must be addressed by a U.S. seller in connection with a sale of a business as a going concern held indirectly through an entity that is treated as a disregarded entity for U.S. tax purposes. Mind-blowing complexity is not an overstatement.

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A C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act

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A C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act

The C.T.A. was enacted on Jan. 1, 2021, ad to shed light on the beneficial owners of certain entities by requiring those entities to report information on their beneficial owners and other individuals known as company applicants. Many think of it as “Son of F.B.A.R.,” but its application is much wider and is focused on small companies. FinCEN published proposed regulations on December 27, 2021, which are intended to answer questions left open in the legislation. What companies must report? What companies are exempt? Who is a control person? What are the penalties for noncompliance? Andreas Apostolides, Nina Krauthamer, and Wooyoung Lee explain all. Those who ignore the obligations to report do so at their peril.

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Israeli Start-Up Expansion to the U.S.: Who Should Be On Top?

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Israeli Start-Up Expansion to the U.S.: Who Should Be On Top?

Israeli high-tech companies have been quite successful in the past year in developing new technologies in Med Tech and Fin Tech spaces. Naturally, liquidity events followed. In their article, Anat Shavit and Yuval Peled, partners in the tax practice of FBC & Co., Tel Aviv, and Galia Antebi address the tax planning decision points that must be addressed in Israel and the U.S. Where should the I.P. be owned? What structures are demanded by angel investors? What tax issues are raised by the Israeli tax authorities? Can structures be revised? Is there a taxable presence in the U.S. for an Israeli company? What U.S. anti-deferral regimes could apply with a U.S. company as parent? When should planning take place for Q.S.B.S. tax benefits in the U.S.? Is there a cookie-cutter solution that fits all situations? These and other questions are addressed.

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