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BDO Indirect Tax News - December 2017

Mon, 12/11/2017 - 12:00am
During 2017, the UK government has issued a number of position papers on the impact of Brexit on customs duty and VAT. Currently, these are no more than statements of intention and subject to negotiation between the UK and EU. However, cross border businesses should take note of these proposals as they are the firmest indication so far of how their VAT and customs position might change after Brexit.
  View the Newsletter

2017 Year-End Tax Planning for Businesses

Wed, 12/06/2017 - 12:00am


The time to consider tax-saving opportunities for your business is before its tax year-end. Some of these opportunities may apply regardless of whether your business is conducted as a sole proprietorship, partnership, limited liability company, S corporation, or regular corporation. Other opportunities may apply only to a particular type of business organization.

This Tax Letter discusses proposed tax reform legislation and is organized into sections discussing year-end, and year-round, tax-saving opportunities for:
  • All businesses
  • Partnerships, limited liability companies, and S corporations
  • Regular (C) corporations

Tax planning for businesses also requires consideration of the tax consequences to the individual owners. Accordingly, we suggest you also review our November Tax Letter entitled 2017 Year-End Tax Planning for Individuals.
  Download
 
Contact Us:
  Matthew Becker
Managing Partner - Central Region   Ron Martin
Managing Partner - Southwest Region   Joe Johnson
Managing Partner - West Region   Chris Orella
Managing Partner - Northeast Region   Paul Heiselmann
Managing Partner - Southeast Region   William Eisig
Managing Partner - Atlantic Region  

Senate Passes Its Version of Tax Reform Setting Stage For Conference Committee Action and Possible Enactment Before the New Year

Mon, 12/04/2017 - 12:00am

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Summary In the very early hours of Saturday morning December 2, 2017, the Senate passed its version of proposed tax reform legislation, the “Tax Cuts and Jobs Act” 51-49, with Senator Bob Corker (Tenn.) as the only Republican voting against the bill. The House previously passed its own tax bill on November 16, 2017. With Saturday’s Senate action, the House will meet Monday, December 4, 2017, and vote whether to send both bills to a conference committee for reconciliation or to move forward with the Senate’s version of the bill. This sets the stage for a possible enactment of a final bill before the New Year.
  Details The Senate bill is similar to that passed by the House; however, there are some significant differences that must be reconciled between the two houses. The Senate bill, for example, provides seven individual rate brackets with the highest at 38.5 percent, while the House bill provides for four rates with the top rate at 39.6.  Both bills raise the standard deduction, with the House doubling the deduction to $24,400 and the Senate raising the deduction to $24,000 for married couples filing a joint return, and both bills eliminate personal exemptions.  Regarding state and local taxes, both bills would repeal the individual state and local income tax deduction, while allowing individuals to deduct up to $10,000 of U.S. property taxes.  The Senate bill increases the child credit to $2,000; the House bill increases the credit to $1,600.  Mortgage interest would be deductible for debt up to $1 million in the Senate bill; the House would cap debt at $500,000 and only for indebtedness on taxpayers’ principal residence.  The House bill repeals the individual alternative minimum tax (“AMT”), while the Senate bill retains the AMT but raises the exemption amount.  The Senate bill also repeals the individual health insurance mandate.
 
Estate and generation-skipping transfer (“GST”) taxes would be repealed after 2024 under the House bill. Prior to repeal, the House proposes to double the lifetime exemption amounts.  The Senate would similarly double the exemption amounts, but would not repeal the estate and GST taxes.
 
Both bills would reduce the corporate tax rate to 20 percent, with the Senate bill delaying that reduction for one year (2019).  The Senate bill provides a 23-percent deduction for income from pass through entities – the House would tax such income at a 25-percent rate. The Senate version would permit certain small service businesses to take advantage of the pass through deduction; the House version does not permit service businesses from applying their proposed lower pass through rate. Further, the Senate pass through deduction would not apply to trusts and estates, the House version permits trusts and estates to take advantage of the lower pass through rate.
 
While the House bill repeals the corporate AMT, the Senate bill retains the corporate AMT.  With the new 20-percent rate on corporations, retention of the corporate AMT may reduce or eliminate many of the remaining deductions for corporations.
 
Some of the key international tax provisions contained in the Senate bill relating to the establishment of a participation exemption for taxation of foreign income include rules relating to (i) a dividend exemption system which generally provides for a 100 percent dividend received deduction for the foreign-sourced portion of dividends received by a domestic corporation from specified 10-percent owned foreign corporations with respect to which the domestic corporation is a U.S. shareholder when certain conditions are satisfied, (ii) certain sales or transfers involving specified 10-percent owned foreign corporations (including rules designed to limit losses on certain sales or exchanges of such foreign corporations in situations involving  a domestic corporation eligible for the dividends received deduction), (iii) requiring branch loss recapture when substantially all of the assets of a foreign branch are transferred by a domestic corporation to specified 10-percent owned foreign corporations with respect to which the domestic corporation is a U.S. shareholder, and (iv) a transition tax requiring U.S. shareholders of certain foreign corporations to include as subpart F income their deferred foreign income of such foreign corporations (the tax rates for such inclusion have changed in the final Senate bill—for instance, a U.S. corporation with the mandatory inclusion would be taxed at a 14.5 percent rate with respect to E&P represented by cash or cash equivalents and a 7.5 percent rate with respect to illiquid assets).
 
There are also provisions in the Senate bill addressing passive and mobile income, including rules relating to (i) taxing U.S. shareholders of CFCs on their portion of amounts treated as “global intangible low taxed income” through a complex calculation, (ii) permitting a deduction for domestic corporations for certain specified percentages of foreign-derived intangible income of the domestic corporation and global intangible low-taxed income, which is included in income of such domestic corporation (subject to limitations), and (iii) permitting transfers of certain intangible property from CFCs to U.S. shareholders in a tax efficient manner for a three-year period of time.
 
Additionally, the Senate bill includes a number of significant modifications to the CFC subpart F rules, including (i) the elimination of an inclusion of foreign base company oil-related income, (ii) an inflation adjustment of the de minimis exception for foreign base company income, (iii) the repeal of an inclusion based on the withdrawal of previously excluded subpart F income from qualified investment, (iv) the modification of the stock attribution rules for determining status of a foreign corporation as a CFC (this modification would make it more likely for a foreign corporation to be treated as a CFC as a result of stock of certain related foreign persons being attributed downward to a U.S. person), (v) the modification of the definition of U.S. shareholder by incorporating a 10-percent value test in determining who is a U.S. shareholder (thus, making it more likely for a person to be a U.S. shareholder and a foreign corporation to be a CFC), (vi) the elimination of the requirement that a corporation be a CFC for 30 days before subpart F inclusions apply, (vii) making the CFC look-thru rule of section 954(c)(6) permanent, and (viii) the modification of section 956 (which deals with investments in U.S. property) to provide that corporations that are eligible for a deduction for dividends from CFCs will be exempt from a subpart F inclusion for investments in U.S. property.
 
Moreover, the Senate bill includes a number of provisions designed to address base erosion, including rules relating to (i) limiting the deduction for interest expense of domestic corporations that are members of a worldwide affiliated group with excess domestic indebtedness when certain conditions apply,  (ii) limiting income shifting through intangible property transfers (including treating goodwill and going concern value and workforce in place as section 936(h)(3)(B) intangibles), (iii) disallowing a deduction for certain related party interest or royalty payments paid or accrued in certain hybrid transactions or with certain hybrid entities under certain circumstances, (iv) not permitting shareholders of surrogate foreign corporations to be eligible for reduced rates on dividends under section 1(h), and (v) providing for a base erosion and anti-abuse tax which requires a corporation to pay additional corporate tax in situations where the corporation has certain “base erosion payments” and certain conditions are satisfied (a complex formula is used for determining this tax).  Very generally, these rules can apply to corporations (other than a RIC, REIT or S corporation) where the average annual gross receipts of which for a three tax year testing period are at least $500 million and the “base erosion percentage” for the tax year is four percent or higher.  Base erosion payments generally are certain deductible payments to related foreign persons and certain amounts paid or accrued to related foreign persons in connection with the acquisition of depreciable or amortizable property, as well as certain payments to expatriated entities. There are several definitions, special rules and exceptions in applying this provision.
 
The Senate bill also modifies the foreign tax credit system in several ways, including (i) repealing the section 902 indirect foreign tax credit and providing for the determination of the section 960 credit on a current year basis, (ii) providing a separate foreign tax credit limitation basket for foreign branch income, (iii) accelerating the election to allocate interest on a worldwide basis, (iv) sourcing income from the sales of inventory solely on the basis of production activities, and (v) modifying section 904(g) by providing an election to increase the percentage of domestic taxable income offset by overall domestic loss treated as foreign source.
 
Finally, the Senate bill also contains rules relating to (i) restricting the insurance business exception to the PFIC rules, (ii) repealing the fair market value method of interest expense apportionment, (iii) modifying the source rules involving possessions, and (iv) codifying Rev. Rul. 91-32 relating to a foreign person’s sale of a partnership interest where the partnership engages in a U.S. trade or business.
BDO Insights The Senate’s passage of its tax reform bill paves the way for the House to choose to either move forward with the Senate version of tax reform or request a conference committee to reconcile the House’s and Senate’s bill.  If the House moves forward with the Senate version or a reconciled bill can garner the support of a majority of the Senate, it may receive quick passage by both the House and Senate, leading to enactment before the end of the year.
 
For more information, please contact one of the following practice leaders:
  Todd Simmens
Controversy and Procedure Technical Practice Leader   Joe Calianno
International Tax Technical Practice Leader   John Nuckolls
Private Client Services Technical Practice Leader    

Supreme Court of Pennsylvania Holds That the State’s Net Operating Loss Deduction Limitation as Applied is Unconstitutional

Fri, 12/01/2017 - 12:00am
Summary On October 18, 2017, the Supreme Court of Pennsylvania issued its decision in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, No. 6 EAP 2016 (Pa. Oct.18, 2017).  The Supreme Court affirmed the Commonwealth Court’s holding that the state’s net operating loss deduction (NOLD) limitation as applied to Nextel’s 2007 taxable year violated the Uniformity Clause of the Pennsylvania Constitution.  But, for purposes of a remedy, the Supreme Court only struck the $3 million flat cap limitation and not also the percentage of taxable income limitation.  See the BDO SALT Alert that discusses an earlier Commonwealth Court decision in Nextel.
  Details Background
Nextel reported taxable income of approximately $45 million before the NOLD on its 2007 Pennsylvania Corporate Net Income Tax return.  Nextel had Pennsylvania NOL carryforwards totaling approximately $150 million – the full use of which would have reduced its taxable income to zero.  However, as a result of Pennsylvania’s 2007 NOLD limitation, which limited the use of NOLDs to the greater of $3 million or 12.5 percent of taxable income, Nextel utilized only $5.6 million of its available NOL carryforwards.  As a result, Nextel reported and paid tax of $3.9 million.  Pennsylvania applies a similar NOLD limitation in other taxable years, but with different flat cap and percentage amounts, but only the 2007 NOLD limitation was at issue in Nextel.
 
Nextel was one of the 1.2 percent of Pennsylvania taxpayers that had NOL carryforwards that exceeded the amount of taxable income for the year and was unable to fully offset income due to the 2007 NOLD limitation.  It had an 8.7 percent effective tax rate for the year, whereas, those taxpayers that were not impacted by the 2007 NOLD limitation and able to fully offset taxable income had a zero percent effective tax rate.

Nextel filed petitions with the Board of Appeals and the Board of Finance and Revenue seeking refund of the tax paid on the basis of a Uniformity Clause violation – a clause in the Pennsylvania Constitution that requires all taxes be uniform upon the same class of subjects.  Each tribunal denied Nextel’s petition on grounds that the NOLD limitation was properly applied as per the statute and that they lacked the authority to consider the constitutional issue raised by Nextel.
 
On appeal, the Commonwealth Court found that, although all corporate taxpayers were subjected to the same 9.99 percent statutory tax rate, the disparate effective tax rates caused by the application of the 2007 NOLD limitation created two classes of taxpayers distinguished only because of the size of the corporations.  The court dismissed the Commonwealth’s argument that the Uniformity Clause only requires uniformity in the statutory rate applied and “rough” uniformity based on the number of taxpayers negatively impacted by the 2007 NOLD limitation (e.g., only 1.2 percent of taxpayers were impacted).  The court reasoned that the Uniformity Clause prohibits the legislature from treating similarly situated taxpayers differently with no legitimate distinction, and a method or formula for computing tax violates the uniformity requirement where it produces a discriminatory result in operation or effect.
 
The court thus held that the 2007 NOLD limitation as applied to Nextel violated the Uniformity Clause, concluded that the NOLD limitation as applied to Nextel should be eliminated in its entirety and directed the Department to refund Nextel $3.9 million.  The Department filed an appeal with the Pennsylvania Supreme Court, which the court granted as a matter of right.

The Court’s Analysis
In what appeared to be a slightly more narrow holding than the Commonwealth Court’s, the Supreme Court held that the flat $3 million dollar cap created two classes of taxpayers among corporations that had NOL carryforwards that exceeded their taxable income.  However, the court agreed with the Commonwealth Court that, while the Uniformity Clause does not require absolute equality and perfect uniformity in taxation, if no legitimate distinction exists between the classes subject to differing tax treatment and a substantially unequal tax burden is imposed on similarly-situated taxpayers, the tax violates the Uniformity Clause.  The court reasoned that the only factor that distinguishes between those who paid no tax as a result of the $3 million cap and those that paid some, was the value of the property involved (i.e., the amount of taxable income) – a classification that cannot withstand scrutiny under the Uniformity Clause.  Additionally, the court agreed with Nextel that the number of taxpayers affected has no bearing on whether or not the Uniformity Clause was violated.
 
With respect to the remedy, the Supreme Court reversed this portion of the Commonwealth Court’s decision, resulting in no refund to Nextel.  The court reasoned that the remedy employed must be consistent with the legislature’s initial intent in enacting the NOLD, as identified by the legislative history of the statute.  The NOLD was initially introduced without a cap in 1980.  Upon finding that the NOLD was significantly deleterious to the state’s budget a few years later, the legislature eliminated the NOLD.  When it was reinstated in 2001, the NOLD included limits in recognition that the state budget could not sustain an unlimited deduction.  In light of this, the court determined that striking the $3 million cap, and upholding the 12.5-percent cap rectified the constitutional violation, while preserving the legislature’s intent.
 
H.B. 542, Reg. Sess. 2017-2018 (Pa. 2017)
Only 12 days after the Nextel decision, the Pennsylvania Governor signed H.B. 542, which removes the flat cap NOLD limitation and increases the percentage of taxable income limitation.  For taxable years beginning after December 31, 2017, and December 31, 2018, a net operating loss carryforward is limited to 35 percent of taxable income and 40 percent of taxable income, respectively.
 
Corporation Tax Bulletin 2017-01 (Nov. 16, 2017)
In recently issued Corporation Tax Bulletin 2017-01, the Department stated that the flat-dollar cap would not be applied for taxable years beginning 2017 and after.  The Department does not provide guidance with respect to earlier taxable years, but does note that it is taking steps to provide greater clarity for taxpayers.
  BDO Insights
  • The Supreme Court held that the 2007 NOLD limitation was unconstitutional “as applied” to Nextel.  Given that the NOLD limitation as applied to other taxpayers or in other taxable years operates no differently, presumably, if a court were to hear a case for another taxpayer or another year, it would similarly rule.
  • On November 1, 2017, Nextel filed an Application for Reargument with Application for Consolidation with R.B. Alden Corp. v. Commonwealth, 60 MAP 2017 or with Application for Remand to Correct a Factual Error, which the court may grant reargument at its discretion.  If granted, the court may restore the matter to the calendar for argument and the final outcome of this matter and guidance from the Department may be delayed for some time.
  • Taxpayers considering the effect of Nextel and the Pennsylvania NOLD limitation should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.
 
For more information, please contact one of the following practice leaders: 
  West:     Southeast: Rocky Cummings
Tax Partner
      Scott Smith
Tax Managing Director
  Paul McGovern
Tax Managing Director
      Tony Manners
Tax Managing Director
      Northeast:     Southwest: Janet Bernier
Tax Principal
      Tom Smith
Tax Partner
  Matthew Dyment
Tax Principal
      Gene Heatly
Tax Managing Director
      Central:     Atlantic: Nick Boegel
Tax Managing Director
      Jonathan Liss
Tax Managing Director
  Joe Carr
Tax Partner
      Angela Acosta
Tax Managing Director
  Mariano Sori
Tax Partner
     
  Richard Spengler
Tax Managing Director

Expatriate Tax Newsletter - November 2017

Thu, 11/30/2017 - 12:00am
BDO's Expatriate Newsletter covers timely tax-related updates and regulations from countries around the globe. The November 2017 issue highlights developments in Australia, Canada, Denmark, Ireland, Malaysia, Malta, Thailand, The Netherlands, United Kingdom, and The United States of America.

Topics include:
  • Canada – Simplification of Quebec residency
  • Denmark – Tax residence for individuals with a home available in Denmark
  • United Kingdom – Gender pay gap reporting
  Download

Webinar Recap: Short-Term Business Visitors may be Temporary, but their Tax Impact can Linger

Thu, 11/30/2017 - 12:00am
Just 20 years ago, short-term business visitors (STBV) weren’t on the radar of many companies. Now, companies engaging in global expatriate services are well-aware of STBVs, and need to consider what measures should be taken to account for these individuals.

Who are STBVs? This term refers to individuals who make work trips to other countries. This could include a UK-based financial controller who travels to a client’s Miami-based subsidiary each quarter to oversee the financial statements of the U.S. business. Or a U.S.-based tech expert who travels to Ireland to oversee the development of a new software. According to the BDO/Santa Fe global mobility survey, the number of STBV assignments is anticipated to increase 30 percent in the next year. As STBVs become common in our interconnected world, the cost of not being able to detect STBVs in your business gets increasingly significant.

Some countries apply tax rules to STBVs in different ways, and have varying immigration requirements. In recent years, several countries including the U.K., Singapore and others have issued STBV-related updates in efforts to create clarity for employers. For STBVs visiting the U.S., in order to be set up on payroll, individuals must have a social security number—a clear hurdle for companies to navigate. In addition, STBVs must deal with state and local rules depending on the location of their temporary home. The myriad jurisdictions and regulations at play mean businesses need to ensure they have policies in place to track, record and ensure compliance for employees working overseas.

Over the next few years, it’s likely that cooperation between taxing authorities and immigration departments will only grow. Until then, it’s imperative to pay close attention to the tax impacts of STBVs, as the obligation is growing every year, and could lead to a significant tax burden for your business.

To learn more about navigating the tax considerations of short-term business visitors in a more nationalistic global environment, including key country updates, view the webinar podcast and handout materials here.

If you have specific questions, please contact presenters Andrew Kelly, andrew.kelly@bdo.co.uk and Peter Wuyts, peter.wuyts@bdo.be for assistance. 

2017 Year-end Tax Planning for Individuals

Tue, 11/28/2017 - 12:00am


Download PDF Version

For many, individual income taxes are one of the largest annual expenditures. BDO’s annual Year-End Tax Planning Letter provides opportunities for individuals to consider in order to reduce or defer their annual tax obligation. The 2017 Tax Letter discusses current legislation, proposed tax reform, retirement plan distributions, and stock options among some of the considerations for individual year-end tax planning.
Proposed Tax Reform Individual Tax Rates & Adjusted Brackets

House Proposed Bill 



Senate Proposed Bill 



Download the full report to find out more. 
  Download
 
Contact Us:   Matthew Becker
Managing Partner - Central Region   Ron Martin
Managing Partner - Southwest Region   Joe Johnson
Managing Partner - West Region   Chris Orella
Managing Partner - Northeast Region   Paul Heiselmann
Managing Partner - Southeast Region   William Eisig
Managing Partner - Atlantic Region

Webinar Recap: SALT Updates and Savings Opportunities - Income Tax and Credit & Incentives

Tue, 11/28/2017 - 12:00am
The network of state and local tax regulations is both widespread and ever-changing, meaning updates and opportunities are constantly arising for companies based in the United States. In our recent webinar, SALT Updates and Savings Opportunities - Income Tax and Credit & Incentives, Deborah Kovachick, Jonathan Liss and Tim Schram explored the latest shifting regulations and incentives that may impact your business. We’ve outlined some of the key changes below, and you can listen to the full webinar here.

Income and Franchise Tax Changes
Many states have moved to an economic nexus standard for income tax. In the recent case, Target Brands, Inc. v. Dept. of Revenue, No. 2015CV33831 (Colo. Dist. Ct., Jan. 27, 2017), the Quill physical presence requirement was rejected. The trend toward economic nexus began in South Carolina with other states following suit. Similarly, in the case, Capital One Auto Finance, Inc. v. Dept. of Revenue, T.C. 5197 (Ore. Tax Ct., Dec. 23, 2016), the court adopted a “significant economic presence test,” effectively fashioning their own nexus standard.

The most recent development in the nexus world is the emergence of factor presence nexus. Under a factor presence nexus standard, a company is subject to state income tax if its in-state apportionment factors exceed the statutory threshold—otherwise known as a bright line test. So far, 10 states have adopted this standard. From a compliance standpoint, it’s important to regularly review apportionment factors as these rules are changing rapidly.

Trends in Income and Franchise Tax Apportionment
Market-Based Sourcing: Many states have adopted market-based sourcing for sales of services and intangibles. The move to market-based sourcing occurred for several reasons: it creates an advantage for in-state businesses, is consistent with the sourcing rules for sales of tangible personal property, and is thought to be less complex. Depending on the state, pay close attention to the way market-based sourcing is defined, as the sourcing rules vary considerably among the states. Be sure to take a close look at special considerations including throw-out rules, look-thru rules, due diligence requirements and more. This is an especially complex area and the application of these rules may have a significant impact on state tax liabilities.

Single Sales Factor: Single sales factor (SSF) is used as an economic development tool to help in-state businesses. It’s also reflective of larger changes within the U.S. economy—as industries shift more from manufacturing-based to service-based. Recently, legislation in Utah and Massachusetts set requirements for certain industries to use SSF apportionment.

Alternative Apportionment: Alternative apportionment generally means that there is constitutional or statutory relief from the standard apportionment formula if the standard formula does not accurately reflect the in-state activity of a taxpayer. There are certain standards that must be met to obtain relief under alternative apportionment. Look to cases like Target Brands, Inc. v. Dept. of Revenue, No. 2015CV33831 (Colo. Dist. Ct., Jan. 27, 2017), Associated Bank, N.A. v. Comm’r of Revenue, No. 8851-R (Minn. Tax Ct., Apr. 18, 2017) or Rent-A-Center West Inc. v. Dept. of Revenue, No. 2012-208608 (S.C. Oct. 26, 2016) for examples of why a taxpayer or taxing authority may invoke alternative apportionment.

Growth of Unitary Combined Reporting
Mandatory unitary combined reporting has been used to attack passive investment company planning, effectively curtailing the benefits of separate company reporting.  The use of combined reporting has increased significantly over the years. Today, 26 states mandate unitary combined reporting.

For unitary combined reporting, the “Joyce” and “Finnegan” rules refer to how the sales factor is calculated in combined reporting states. The rules established by two California court decisions, Joyce Finnegan, have been adopted by most combined reporting states. Accounting for these rules can sometimes result in errors, depending on which method the state adopts and the company’s fact pattern. One difference between Joyce and Finnegan is how a state’s sales-throwback rules are applied in the context of a unitary business group.

Waters-Edge Unitary Combined Reporting: The concept of tax havens often come up in discussions on unitary combined reporting. Most of the unitary combined reporting states require combined returns on a domestic entity basis only. There are exceptions in some waters-edge states called tax haven rules, and approaches to tax haven rules are different on a state-by-state basis. States with tax haven rules include: Alaska, Connecticut, DC, Montana, Oregon, Rhode Island and West Virginia.

Related Party Transactions, Intercompany Debt and Economic Substance
Impact of the IRC § 385 Regulations: The 385 Regulations impose document regulations on intercompany debt issued by a covered member—or U.S. corporation—to another member of the covered members’ expanded group. If these requirements are not followed, debt is recast as stock and principal interest payments, and will be recast as dividends. In addition, how your state conforms to the IRC could cause the state’s treatment of the code to be different from the federal treatment.

Transfer Pricing and Related Party Expense Add-Back: In situations where there are intercompany transactions among related companies and the related companies are not included in the state’s combined or separate return, transfer issues come into play because the state wants to be sure that intercompany pricing is not being manipulated to create a more favorable taxing situation. This could be a source of audit challenges by the Department of Revenue.

Rather than deal with transfer pricing issues, many states require add-backs of certain intercompany transactions such as interest or royalty expense. Some states that have these types of provisions provide exceptions to the criteria.

State Income/Franchise Tax Base
Net Operating Losses: A limit is placed on the amount of the federal net operating loss carryforward used each year by a taxpayer over the remaining carryforward period of the net operating loss after the year of the ownership change. The annual limit is based on a calculation that uses the value of the company at the time of the change of ownership.

Flow-Through Entities
Federal Partnership Audit Rules: These rules represent potential state issues from the new budget rules relating to state conformity with assessing partnerships and potential conflicts with nonresident partner withholding obligations or partner composite returns. The Bipartisan Budget Act of 2015 introduced significant changes to federal partnership audit rules. Under the new audit rules, underpayments of tax are now assessed and collected from the partnership, and are subject to opt-out elections for partnerships with fewer than 100 partners. This is effective for taxable years beginning on or after January 1, 2018.

Credit & Incentive Changes
There have been two important developments impacting compliance for credits and incentives: GASB Statement #77 and FASB Topic 832. GASB Topic #77 may result in changes to reporting requirements related to local grants and incentives. On a similar front, FASB Topic 382 requires financial statement disclosure for incentives. This has been introduced to increase transparency, however privacy concerns have been raised related to this requirement.

When evaluating rules, credits and incentives, consider taking inventory of existing programs to see where gaps and opportunities may exist. It may also help to build a cross-functional team of stakeholders from HR staff to tax professionals, to ensure compliance on all fronts. Creating a process to identify and track your company’s compliance with incentive programs could be useful to stay organized, especially if there are multiple incentives in the works. Various software may be helpful while working on compliance reporting.

BDO’s Take
For all the talk of impending federal tax reform, myriad state and local changes are already underway, and businesses need to keep tabs on how these changes may affect their bottom line.

For a full picture of SALT updates and savings opportunities, view and download the webinar here. And, for more on how recent updates and opportunities may impact your company, contact Deborah Kovachick at dkovachick@bdo.com, Jonathan Liss at jliss@bdo.com and Tim Schram at tschram@bdo.com.

Webinar Recap: Pitfalls and Best Practices in Property and Sales & Use Taxes

Tue, 11/28/2017 - 12:00am
Most companies face tax obligations related to their property and sales, but given that each state, and many local jurisdictions, have unique sets of laws governing these tax areas, understanding the full scope of these taxes is a daunting challenge, and failure to comply with tax codes can expose a company to significant liabilities.

On October 25 Steve Kaye and Bill Jozaitis of BDO’s State and Local Tax practice hosted a webinar, Common Pitfalls in the Administration of Property and Sales & Use Taxes. During the webinar they provided an overview of key challenges in property and sales taxes, outlined the latest updates companies should be aware of and provided best practices to shore up processes and internal controls.
 
Property Tax
Property taxes are extremely important to the state and local governments that levy them. In fiscal year 2016, property taxes on real and personal property owned or leased by businesses accounted for the largest share of total state and local business taxes in the U.S. All fifty states allow local jurisdictions to tax the ownership of real property. Thirty-eight states tax personal property, and approximately 11 of those 38 states even tax inventory.

The number of overlapping jurisdictions and regulations are incredibly challenging to navigate. Some best practices include:
  • Review property record cards from assessing officials for accuracy: Taxes on real property are based on property values, but often assessors only visit properties every few years. Discrepancies in things like square footage, use of the property or knowledge of construction or improvement efforts can lead to inaccurate taxes being levied.
  • Maintain an accurate compliance calendar: Jurisdictions that tax personal property have a number of deadlines for things like returns and bill payments throughout the year, and these dates change fairly often. Developing and tracking these dates across all available localities is crucial to ensure your company submits the required materials on time.
  • When in doubt, communicate: Management needs to regularly communicate with the tax department to facilitate awareness of any developments that might impact property taxes. Often, the tax department learns of mergers, acquisitions or property disposal far after the fact, even though these transactions can drastically impact property tax obligations.
Sales Tax
When sales taxes were first developed, the economy centered largely around the transaction of physical goods. However, the world has shifted more to focus on more on services, and many goods and services now exist solely in cyberspace, making sales tax collection increasingly complex.

Sales tax obligation is triggered when a company is determined to have nexus within a particular jurisdiction. Current law holds that physical presence is required for nexus, but that may not hold true for as long as states increasingly look to tax revenue gained online. Physical nexus is also more complex than it seems on the surface, and can be triggered by not only a company’s physical presence, but also by the presence of click-though online referrals and even affiliates operating within the state. Economic nexus, a newer form gaining increasing traction, is triggered by varying in-state annual sales and/or number of transactions.
In order to navigate the muddy waters of sales and use taxes, companies should keep these tips in mind:
  • Determine the taxability of your products and services: Regular taxability assessments are a crucial element of sales tax compliance, and these assessments rely on updated and accurate product and service descriptions. Companies should consider conducting these assessments more frequently for areas where nexus rules are quickly evolving, like services and technology.
 
Stay up-to-date on your own activities, and nexus law developments: Most companies have a good sense of their sales activities in various jurisdictions, but affiliate nexus can fly under the radar. Many states trigger nexus when affiliates provide services, like accepting returns, and some even when they promote products or brands. Nexus rules are also constantly changing, and businesses should be sure to monitor the progress and the impact of ongoing court cases, the most significant of which is currently the South Dakota Wayfair petition at Supreme Court level. Companies also need to monitor annual sales and transaction volumes to determine if they exceed state economic nexus thresholds.
  • Collect, validate, maintain exemption documentation: Many companies take advantage of available exemptions from sales taxes. However, significant documentation requirements accompany the exemptions in most cases. Businesses should collect and fully validate all the documentation to accompany various exemptions, and should maintain comprehensive records going back several years. Given the speed at which sales tax laws are changing, they should even consider collecting this documentation in jurisdictions where they currently do not have nexus, just in case nexus is triggered in the near future.
What to do in the event of an audit 
Despite their best efforts, many companies will face an audit at some point. And, in the word of Benjamin Franklin, “By failing to prepare, you are preparing to fail.” When facing down audit proceedings, its critical that companies manage the process, instead of letting the process manage them. Here are some of our top tips:
  • Maintain audit control logs and supporting files to document the audit, including correspondence received and issued, information requests and prompt responses, meetings and documented agreements/settled issues, actionable notices, timelines and actions taken
  • Establish a policy for waivers, including holding auditors accountable to agreed-upon timelines, considering reasonable requests and understanding the ramifications for refusal
  • Sometimes pushback is critical, but throughout any protests or appeals be sure to follow procedures and timelines strictly
 
To learn more about navigating the challenging world of property and sales taxes, including recent state updates, view the webinar podcast and handout materials here.

If you have specific questions, please contact presenters Steve Kaye, skaye@bdo.com and Bill Jozaitis, wjozaitis@bdo.com for assistance. 

Common Fringe Benefits that are Taxable to Employees and Two-Percent Shareholders

Tue, 11/28/2017 - 12:00am

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Summary As 2017 draws to a close, we remind you about the proper inclusion of common fringe benefits in an employee’s and/or two-percent shareholder’s taxable wages.   Fringe benefits are defined as a form of pay for performance of services given by a company to its employees as a benefit and must be included in an employee’s pay unless specifically excluded by law. Please note the actual value of the fringe benefits provided must be determined prior to December 31 in order to allow for the timely withholding and depositing of payroll taxes. Below you will find information regarding the identification and tax reporting for several fringe benefits that are customarily provided.

We also remind you that a failure to properly report to the recipient and the IRS before January 31, 2018, on Form W-2 or Form 1099 may result in lost deductions and additional tax and civil penalties.  
  Details Common Taxable Employee Fringe Benefits
 
Employer-paid group-term life insurance coverage in excess of $50,000
Group-term life insurance coverage in excess of $50,000 is subject to only the withholding of Social Security and Medicare taxes (FICA). Though the amount is included in taxable wages, withholding of federal income tax (FIT) and state income tax (SIT) is not required.
 
Employee business expense reimbursements/allowances under non-accountable plans
Any payments of an allowance/reimbursement of business expenses for which the employee does not provide an adequate accounting (i.e., substantiation with receipts or other records), or return any excess allowance/reimbursement to the company, are considered to have been provided under a non-accountable plan and are required to be treated as taxable wages for purposes of federal and applicable state and local income tax withholding; employer and employee FICA tax; and federal and state unemployment taxes (FUTA and SUTA).

However, if the employee provides an adequate accounting (i.e., substantiation with receipts or other records) of the expenses incurred, or is “deemed” to have substantiated the amount of expenses under a per diem arrangement, then the reimbursement amounts are excludable from taxable income/wages.

Value of personal use of company car
The value of the company car used for personal travel must be treated (unless reimbursed by the employee) as additional wages on any frequency chosen by the employer up to and including an annual basis.  Federal withholding tax on fringe benefit wage additions can be calculated as a combined total with regular wages or withheld at a flat 25 percent rate.  Alternatively, employers can choose not to withhold federal income tax if the employee is properly notified by January 31 of the electing year or 30 days after a vehicle is provided and the value is properly reported on a timely filed Form W-2.

For administrative convenience, an employer can calculate the value of personal use for the current year based on the 12-month period beginning November 1 of the prior year and ending October 31 of the current year (or any other 12-month period ending in November or December) if the employee is properly notified no earlier than the employee’s last paycheck of the current year and no later than the date the Forms W-2 are distributed. Once this valuation period is elected, the same accounting period generally must be used for all subsequent years with respect to the same automobile and employee.
 
Many companies have moved away from providing company cars in lieu of a cash payment to reimburse the employee for the business use of their personal automobile. Car allowances paid in cash without any substantiation of business use are fully taxable and subject to FICA, FUTA, FIT, and SIT withholdings.
 
Value of personal use of company aircraft
This fringe benefit (unless reimbursed by the employee to the extent permitted under FAA rule) is subject to FICA, FUTA, FITW, and SITW. The value calculated is based on the Standard Industry Fare Level formula provided by the IRS. Expenses related to personal entertainment use by officers, directors, and 10 percent or greater owners that are in excess of the value treated as compensation to key employees are nondeductible corporate expenses. Feel free to contact us for assistance calculating the value of the personal use of a company aircraft.
 
Benefits that exceed the de minimis exclusion
De minimis benefit amounts can be excluded when the benefit is of so little value (taking into account the frequency) that accounting for it would be unreasonable or administratively impractical. A common misconception is that if a fringe benefit is less than $25, then it is automatically considered a de minimis benefit. However, there is no statutory authority for this position. If a fringe benefit does not qualify as de minimis, generally the entire amount of the benefit is subject to income and employment taxes (FICA, FUTA, FITW, and SITW). De minimis benefits never include cash, gift cards/certificates or cash equivalent items no matter how little the amount, season tickets to sporting or theater events, use of an employer’s home, apartment, boat, or vacation home, and country club or athletic facility memberships. Gift cards/certificates that cannot be converted to cash and are otherwise a de minimis fringe benefit, which is redeemable for only specific merchandise, such as ham, turkey or other item of similar nominal value, would be excluded from income. However, gift cards/certificates that are redeemable for a significant variety of items are deemed to be cash equivalents. Any portion of such a gift card/certificate redeemed would be included in the employees’ Forms W-2 and subject to income and employment taxes as detailed above.
 
Value of employee achievement awards, gifts and prizes
This fringe benefit is subject to FICA, FUTA, FITW, and SITW. In general, employee achievement awards, gifts, and prizes that do not specifically qualify for exclusion are only deductible for the employer up to $25 per person per year, unless the excess is included as taxable compensation for the recipient. Any gifts in excess of $25 per person per year to employees in the form of tangible or intangible property are includable as a taxable fringe benefit for employees. There are two exclusions from the general rule (I) achievement awards for length of service or safety and (ii) certain non-cash achievement awards, such as a gold watch at retirement or nominal birthday gifts, that fall within the exclusion for de minimis benefits.

In order to be an excludible length of service or safety award there must be a meaningful presentation of the awards and service being recognized must exceed five years and not awarded to same employee in the prior four years. The exclusion applies only for awards of tangible personal property and is not available for awards of cash, gift cards/certificates, or equivalent items. The exclusion for employee achievement awards is limited to $400 per employee for nonqualified (unwritten and discriminatory plans) or up to $1,600 per employee for qualified plans (written and nondiscriminatory plans).

Value of qualified transportation fringe benefits
Qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are subject to FICA, FUTA, FITW, and SITW. For 2017, the statutory limits are $255 per month for qualified parking AND $255 for transit passes and van pooling. An employee can be provided both benefits for a total of $510 per month tax free with the excess being included in Form W-2. Note, that amounts exceeding the limits cannot be excluded as de minimis fringe benefits.
 
Employers can also exclude up to $20 per month for the reimbursement of qualified bicycle commuting expenses, but only for months in which the employee actually commuted to work by bicycle.  This benefit is more restrictive than the transit and parking benefits in that employees cannot make a pre-tax election to reimburse the expense and employees who receive qualified bicycle commuting reimbursements may not take advantage of any other qualified transportation fringe benefits in that same month.
 
Also, the value of any de minimis transportation benefit provided to an employee can be excluded from Form W-2. A de minimis transportation benefit is any local transportation benefit provided to an employee that has so little value, after taking into account the frequency, that accounting for it would be unreasonable. For example, an occasional taxi fare home for an employee working overtime or departing a business function such as a holiday party may be provided tax-free.
 
Pleases note that some local jurisdictions require mass transit options.  For instance, the District of Columbia requires employers with 20 or more employees to offer qualified transit benefits. While D.C. employers are not necessarily required to subsidize the cost of their employees’ commuting expenses under the new law, they are required to provide an arrangement for employees to make a pre-tax election to take full advantage of the maximum statutory limits for transit, commuter highway, or bicycling benefits. San Francisco and New York City have adopted similar laws in an attempt to promote the use of available mass transit options and to reduce automobile-related traffic and pollution. You should check your local requirements for each employee location.
 
Cell phone without business reason
Since January 1, 2010, employer-provided cell phones are no longer treated as a taxable fringe benefit as long as the cell phone is provided to the employee primarily for noncompensatory business reasons, such as the employer’s need to contact the employee at all times for work-related emergencies, or the need for the employee to be available to speak to clients when the employee is away from the office. Notice 2011-72 clarifies the exclusion of the cell phone’s value from the employee’s income as a working condition fringe benefit.  This change in the law also eliminated the need for the rigorous substantiation of the business use of employer-provided cell phones that were otherwise required for “listed property.”
 
Similarly, the employer can exclude reimbursements to an employee for business use of a personal cell phone.   According to an IRS Memorandum for All Field Examination Operations issued September 14, 2011, the analysis for exclusion is similar to the approach outlined in Notice 2011-72 provided the employer requires the employee to maintain and use their personal cell phones for substantial noncompensatory business reasons.   
 
Employer expenses related to cell phones provided to an employee that does not have a business reason for being in contact at all times for work-related emergencies or to speak to clients when away from the office, should be included in the employee’s taxable income. 
 
Rules require taxation of certain employee fringe benefits to two-percent S corporation shareholders
In addition to the adjustments previously discussed, certain otherwise excludable fringe benefit items are required to be included as taxable wages when provided to any two-percent shareholder of an S corporation. A two-percent shareholder is any person who owns, directly or indirectly, on any day during the taxable year, more than two percent of the outstanding stock or stock possessing more than two percent of the total combined voting power. These fringe benefits are generally excluded from the income of other employees, but are taxable to two-percent S corporation shareholders similar to partners. If these fringe benefits are not included in the shareholder’s Form W-2, then they are not deductible for tax purposes by the S Corporation. (See Notice 2008-1.) The disallowed deduction creates a mismatch of benefits and expenses among shareholders, with some shareholders paying more tax than if the fringe benefits had been properly reported on Form W-2.
 
The includable fringe benefits are items paid by the S corporation for:
 
Health, dental, vision, hospital and accident (AD&D) insurance premiums, and qualified long-term care (LTC) insurance premiums paid under a corporate plan
These fringe benefits are subject to FITW and SITW only (not FICA or FUTA). These amounts include premiums paid by the S corporation on behalf of a two-percent shareholder and amounts reimbursed by the S corporation for premiums paid directly by the shareholder. If the shareholder partially reimburses the S corporation for the premiums, using post-tax payroll deductions, the net amount of premiums must be included in the shareholder’s compensation. Two-percent shareholders cannot use pre-tax payroll deductions to reimburse premiums paid by the S corporation.
 
Cafeteria Plans
A two-percent shareholder is not eligible to participate in a cafeteria plan, nor can the spouse, child, grandchild, or parent of a two-percent shareholder. If a two-percent shareholder (or any other ineligible participant, such as a partner or nonemployee director) is allowed to participate in a cafeteria plan, the cafeteria plan will lose its tax-qualified status, and the benefits provided will therefore be taxable to all participating employees, therefore nullifying any pretax salary reduction elections to obtain any benefits offered under the plan.
 
 
Employer Contributions to Health Savings Accounts and Other Tax Favored Health Plans
This fringe benefit is subject to FITW and SITW only (not FICA or FUTA). If the shareholder partially reimburses the S corporation for the health plan contribution, using post-tax payroll deductions, the net amount of the contribution must be included in the shareholder’s compensation. Two-percent shareholders cannot use pre-tax payroll deductions to reimburse plan contributions paid by the S corporation. However, these two-percent owners can take a corresponding above-the-line deduction for the cost of their health plan contributions on their personal tax return.
 
 
Short-Term and Long-Term Disability Premiums
These fringe benefits are subject to FICA, FUTA, FITW, and SITW.
 
Group-Term Life Insurance Coverage
These payments should be included in line 1 of a greater than two-percent shareholder’s W-2, subject to regular federal withholding. This additional compensation is also subject to employment tax withholding (FICA and FUTA). The entire premium paid  on behalf of a two-percent shareholder under a group-term life insurance policy is treated as taxable, not just the premium for coverage in excess of $50,000. The cost of the insurance coverage (i.e., the greater of the cost of the premiums or the Table I rates) is subject to FICA tax withholding only. The cost of the insurance coverage is not subject to FUTA, FITW, or SITW. Please note that any life insurance coverage for which the corporation is both the owner and beneficiary (e.g., key man life insurance) does not meet the definition of group-term life insurance and therefore there is no income inclusion in the shareholder’s Form W-2.
 
Other Taxable Fringe Benefits
Employee achievement awards, qualified transportation fringe benefits, qualified adoption assistance, employer contributions to medical savings account (MSA), qualified moving expense reimbursements, personal use of employer- provided property or services, and meals and lodging furnished for the convenience of the employer must also be included as compensation to two-percent shareholders of an S corporation. All of the above fringe benefits are subject to FICA, FUTA, FITW, and SITW.
 
Nontaxable fringe benefits
The following fringe benefits are NOT includible in the compensation of two-percent shareholders of an S corporation: qualified retirement plan contributions, qualified educational assistance up to $5,250, qualified dependent care assistance up to $5,000, qualified retirement planning services, no-additional-cost services, qualified employee discounts, working condition fringe benefits, de minimis fringe benefits, and on-premises athletic facilities.

Pending Legislation
Pending tax legislation proposes to eliminate many of these fringe benefits for years beginning after December 31, 2017.  Therefore, it will be essential for all employers to closely monitor the legislative developments so payroll systems can be modified as needed.
 
For more information on matters discussed above, please contact one of the following practice leaders:
  Joan Vines
Managing Director   Alex Lifson
Principal   Paul Cheung
Managing Director   Thomas LeClair
Senior Manager   Erica Paul
Senior Manager    

Texas Property Tax Filing Changes Scheduled to Go into Effect in 2018; New Appeal Procedures Already Effective

Mon, 11/27/2017 - 12:00am
Summary The 85th Texas Legislature passed two bills earlier this year that directly affect property taxpayers and professionals.  House Bill 2228 was signed by the Texas Governor on June 1, 2017, and makes a number of changes to Texas property tax filing deadlines.  House Bill 455, signed by the governor on May 23, 2017, makes a change to Texas property tax appeal procedures.
  Details H.B. 2228: Texas Property Tax Filing Deadline changes 
House Bill 2228 amends Tex. Tax Code §§ 11.4391, 22.23, and 41.44 and makes a number of changes to the Texas property tax filing deadlines.  The changes are effective January 1, 2018, and the following changes to filing deadlines have been enacted:
  • Renditions and property reports in appraisal districts allowing Freeport exemptions are now due April 1, not April 15.
  • The Freeport Exemption application deadline was changed to April 1 from April 30. The Extension to file for a Freeport Exemption was changed to May 1 with an additional discretionary extension of 15 days based on good cause with approval from the chief appraiser. A written request for an extension continues to be a requirement. Owners of property regulated by the Texas Public Utility Commission, the Texas Railroad Commission, the federal Surface Transportation Board, or the Federal Energy Regulatory Commission are required to file renditions and property reports by April 30, with a 15-day extension allowed for good cause. The Late Application for Freeport Exemption was changed to June 15.  Previously, such a Late Application was required prior to the date that the ARB approves the records. The Interstate Allocation Application deadline was changed to March 31 from April 30.  The extension deadline was reduced from 60 days to 30 days. For property not listed on a prior year’s appraisal roll, the allocation application deadline is now the 30th day after receipt of the value notice. The Protest deadline was changed to May 15, from May 31, or 30 days after delivery of the notice of deficiency, whichever is later.
These filing deadline changes are effective January 1, 2018.
 
H.B. 455: Conference call allowed for ARB hearings 
Effective September 1, 2017, if a property owner gives notice to the appraisal district at least 10 days prior to a hearing date and evidence is properly submitted by affidavit, then the ARB must provide a telephone number for the owner/agent to call in order to hold the hearing. This does not prevent the owner/agent from appearing in person, and in the event of a no-show, the affidavit evidence is submitted as an appearance. A conference call ARB hearing is also permitted by agreement of the board and the property owner.
The board is responsible for holding the call in a location with equipment allowing each member and other parties to the protest who are present to hear the property owner offer argument. The property owner is responsible for providing the same to any other person that the property owner invites to participate in the hearing.
  BDO Insights
  • Professionals and taxpayers should make note that Texas property tax filing deadlines have changed beginning in 2018 and adjust their data requests and scheduling to account for the new deadlines.
  • In addition to the initial filing deadline changes, the protest and appeal deadline also occurs earlier in the calendar.
 
For more information on matters discussed above, please contact one of the following practice leaders:
  Dorothy Radicevich
Principal   Jeff Shamma
Managing Director   David Ryan
Managing Director    

Compensation & Benefits Newsletter - Fall 2017

Mon, 11/20/2017 - 12:00am


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In the fall issue of the Compensation and Benefits quarterly newsletter, we offer insights on how to utilize recent guidance regarding issues that are important for tax planning purposes. 
 
FICA Taxation of Nonqualified Deferred Compensation Plans As payroll departments prepare for year-end reporting, it may be useful to review two IRS memos released in 2017 concerning FICA taxes imposed on nonqualified deferred compensation.
  Read the Full Article
 
IRS Clarifies Rules on Employee Discounts Offered to Friends and Family IRS guidance helps clarify how the employee discount rules should be applied. 
  Read the Full Article
 
Avoiding ACA Employer and Individual Penalties for Expatriates IRS findings bear a review of the proposed regulations issued in June 2016 regarding the elements necessary for an individual to qualify as an expatriate and an employer’s plan to qualify as an expatriate health plan for purposes of avoiding ACA penalties for both employers and their employees.
  Read the Full Article
 
IRS Released 2017 ACA Information Returns Notwithstanding executive orders signed by the President and ongoing efforts to repeal and replace the Affordable Care Act, the reporting requirements still apply for 2017 with the first due date on January 31, 2018.  
  Read the Full Article
 
SUBSCRIBE Each quarter the Compensation and Benefits practice writes about important tax planning topics. Subscribe to receive this newsletter. 
 
For more information, please contact one of the following practice leaders:   Andrew Gibson
Partner and Practice Leader
    Peter Klinger
Principal
National Tax Office   Joan Vines
Managing Director
National Tax Office   Carlisle Toppin
Managing Director
National Tax Office   Paul Cheung
Managing Director      

FICA Taxation of Nonqualified Deferred Compensation Plans

Mon, 11/20/2017 - 12:00am
As payroll departments prepare for year-end reporting, it may be useful to review two IRS memos released in 2017 concerning FICA (social security and Medicare) taxes imposed on nonqualified deferred compensation (“NQDC”). The first memo released in January addresses the IRS’ unwillingness to enter into closing agreements to protect employers who mishandled the FICA “special timing” rule. The second memo released in June addresses the application of the special timing rule for nonaccount balance NQDC plans. We summarize both guidance in a two-part article below.
  Part I - IRS Declines Entering into Closing Agreement to Protect FICA Special Timing Rule In a memo released in January 2017 (AM2017-001), the IRS National Office was asked whether the IRS should enter into closing agreements with employers that had not timely included NQDC as wages in the year of vesting for FICA purposes, and are willing to pay the tax due (along with interest and penalties) even though the year is closed for assessment under the period of limitations. The memorandum concludes that IRS agents should not enter into closing agreements with these employers since the regulations already provided three years for them to correct the taxes that were due in the year of vesting.

Consequences of non-compliance with FICA special timing rule; motivation to enter into a closing agreement
Amounts deferred under a NQDC plan are subject to both a “special timing” rule and a “non-duplication” rule for FICA purposes. Under the special timing rule, deferred amounts are generally treated as wages for purposes of FICA taxes when the deferred compensation is no longer subject to a substantial risk of forfeiture (i.e., upon vesting). Under the non-duplication rule, once an amount is taken into account as wages for FICA purposes, neither that amount nor any subsequent earnings is treated as wages for purposes of FICA tax in any future year.

These rules generally result in less total FICA tax being paid than if the FICA taxes were paid under the “general timing” rule at the time the benefits were distributed. The social security portion of FICA tax is only imposed on wages up to the social security wage base. The employee often has other wages in the vesting year that equal or exceed the social security wage base, thereby making Medicare tax (and possibly the Additional Medicare tax) the only tax liability for such year. Also, less FICA tax is imposed because the future earnings on the amounts deferred avoid FICA tax pursuant to the nonduplication rule.

In contrast, paying FICA tax at the time of distribution under the “general timing” rule, rather than the year vested under the special timing rule, often results in more FICA tax being paid. To the extent the employees are retired at distribution, they are less likely to have other wages equal to or greater than the social security wage base for that year; thereby subjecting all or a portion of the distribution to social security tax as well as Medicare tax. This adverse tax consequence is amplified for employees who receive their deferred compensation in annual installments since the social security wage base must be satisfied multiple times, often resulting in the entire balance being subjected to social security taxes. Further, more FICA tax is imposed because all earnings on the amounts deferred are also subject to FICA tax.

In addition, the case of Davidson v. Henkel Corporation (2015) highlights potential employer liability under ERISA to NQDC plan participants if benefits are not taxed in the most favorable manner. In Davidson, the employer maintained a NQDC plan, but did not follow the special timing rule. As a result, plan participants experienced a reduction in net benefits due to the increased FICA taxes they incurred with respect to those benefits. The participants brought a successful class action suit under ERISA seeking to recover the benefits they lost as a result of the employer’s failure to withhold FICA tax pursuant to the special timing rule.

IRS memo advising agents to decline requests for closing agreements
The tax regulations describes the steps to be taken if an employer fails to use the special timing rule under a NQDC plan. The employer may adjust its employment tax returns for any year for which the period of limitations has not expired to report and pay the additional FICA taxes attributable to the amounts deferred and required to be included under the special timing rule. For closed years, however, the general timing rule will apply.

To reinforce the importance of adhering to the special timing rule and its correction methods, the IRS National Office advised that it is not appropriate for the IRS to enter into a closing agreement in situations where employers did not timely take NQDC into account for FICA purposes and the period of limitations has closed.

Action Items
To avoid paying significantly higher FICA taxes and potential employer liability under ERISA for not taxing the participants’ benefits in the most favorable manner, employers should ensure that account balances under NQDC plans are subject to FICA taxes at vesting. Upon any failure to timely include the deferred compensation in income for FICA purposes, remedial action should be taken immediately before the 3-year period of limitations closes. While the point of FICA taxation (i.e., the vesting date) on most deferred compensation may be readily determinable (e.g., a specified date or event), the vesting date of some provisions may not be as apparent (e.g., a “Rule of 60” provision where vesting occurs on the date in which the participant’s age plus years of service equals 60). The plan administration and payroll systems should be customized to recognize the vest date and trigger the FICA tax liability.
  Part II - Applying the FICA Special Timing Rule to Nonaccount Balance Plans In a memo released in June 2017 (AM2017-0012), the taxpayer questioned why his employer paid FICA taxes on the present value of the annuity payments in the year he began receiving distributions under the NQDC plan. The IRS National Office confirmed the employer’s method of withholding and paying FICA taxes on amounts deferred under the NQDC arrangement was proper.

The NQDC arrangement addressed in the memo was a nonaccount balance plan, which does not credit deferred amounts to a particular participant’s individual account. Under a special rule for nonaccount balance plans, an employer is permitted to delay subjecting the deferred compensation to FICA taxes until the amount is considered “reasonably ascertainable.” Reasonably ascertainable is defined as the first date on which the amount, form, and commencement date of the benefit are known, so that its present value can be computed. When the present value of a benefit becomes reasonably ascertainable, such amount is subject to FICA tax. The IRS National Office confirmed the employer’s method of withholding and paying FICA taxes on the present value of the payments upon the first distribution amounts deferred under the NQDC arrangement was proper.

Action Items
Employers should determine when nonaccount balance plans become reasonably ascertainable for purposes determining the present value of a participant’s benefits and withholding and paying FICA taxes on the amount at such time. Under some nonaccount balance plans, retirement benefits become reasonably ascertainable at the time of retirement. Notably, the present value calculation does not consider the probability that an employer will not make payments because of the unfunded status of the plan. Nor does it consider the risk associated with any deemed or actual investment of the amounts deferred under the plan, or similar risks or contingencies.


Read Next Article, "IRS Clarifies Rules on Employee Discounts Offered to Friends and Family"

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IRS Clarifies Rules on Employee Discounts Offered to Friends and Family

Mon, 11/20/2017 - 12:00am
In a Field Attorney Advice Memorandum released by the IRS on March 24, 2017, the IRS addressed the tax consequences of a fringe benefit program where a company allowed its employees to designate a limited number of individuals, without regard to their relationship to the employee, to rent property at a discount. While your facts may differ from these, this guidance helps clarify how the employee discount rules should be applied. 
  Qualified Discounts in General Under Section 132(a)(2) of the Code, gross income does not include the value of a “qualified employee discount.” A qualified employee discount is a discount provided to an employee on qualified services or property that does not exceed a threshold amount. The threshold amount for property is determined by the employer’s profit. For services, the threshold amount equals 20% of the price at which the services are offered by the employer to its customers. Any discount exceeding the threshold is taxable income to the employee. To be qualified, the services or property (excluding real estate or investment property) must be offered for sale to customers in the ordinary course of the employer’s business in which the employee normally works. The definition of “employee” for this purpose includes: (i) current and retired employees; (ii) employees who separated from service due to a disability, (iii) widows, and (iv) spouses and dependent children.
  IRS Memo Clarifying Qualified Employee Discount Rules The IRS memo addresses three issues:

1. Whether the discount is on services or property for purposes of determining the applicable threshold in which employee discounts are taxable?
While the heavily redacted memo does not reveal the nature of the employer’s business, one can gleam that the employer is in the business of renting property. Based on the facts, the IRS concluded that the rentals should be characterized as the sale of a service and the qualified employee discount could not exceed 20% of the rental price offered to the employer’s customers. Accordingly, the employer is not treated as selling property, in which the qualified employee discount would be measured by its profits.

2. Whether the entire program is tainted by the inclusion of non-employees or whether the qualifying discounts provided to “employees” (as defined by the statute) continue to be excludible under Section 132(a)(2)?
The IRS concluded that the nontaxable benefit only applies to persons who fall within the definition of “employee” (e.g., current and retired employees, spouses and dependent children). However, the value of any discount provided to an individual who does not fit within the definition of “employee” for this purpose is taxable income to the employee who designated such individual. Accordingly, extending the discount to nonemployees does not adversely affect the discounts available to employees.

3. Which offering price should be used to measure the employee discount – the employer’s published rate or the discounted price provided to discrete customers or consumer groups?
Nontaxable qualified employee discounts on services cannot exceed 20 percent of the price at which services are offered by the employer to the employer’s customers at the time of the employee’s purchase. The offering price used to determine the 20 percent limit can take into account discounts offered to discrete customers or to consumer groups, provided the sales at such discounted prices comprise at least 35 percent of the employer’s gross sales for a representative period. Since the employer failed to provide sufficient information to determine whether the 35 percent standard was satisfied, the memo concludes that the employer’s published rates must be used as the basis for determining the taxable excess discount.

Notably, the discounted price could have resulted in less taxable income. Assume, for example, an employer sells services to an employee for $70 that is ordinarily sold to its customers for $100 (a 30 percent discount). The employer would report $10 taxable income to the employee ($30 discount less the $20 limit). Assume further, that the employer sells its services to discrete customers for $90 (a 10 percent discount), which represents more than 35 percent of its gross sales. The employer would report $2 taxable income to the employee ($20 discount less the $18 limit).

Presumably, this method may also be used to determine the amount to include in an employee’s income for discounts provided the employee’s friends.
  Action Items While it is favorable that the extension of discounts to the employees’ friends as well as their family members does not make all discounts taxable, such a design diminishes the value of the program to the employees and complicates plan administration for the employer.

From an employee’s perspective, the value of the discounts provided to the employee’s friends will be treated as additional wages in which taxes on such benefits must be withheld from the employee’s paycheck; while the friends enjoy the fringe benefits without incurring any tax liability. If an employer extends its “qualified employee discount” program to nonemployees, it should notify the employees about the tax consequences of designating such individuals to participate in the program.

From the employer’s perspective, additional employment taxes attributable to the discounts provided to the employees’ friends will be incurred by the employer. Plan administration also becomes more burdensome since an employee’s relationship with each person designated to participate in the discount program must be tracked so that the employee’s taxable income can be properly calculated, reported and withheld upon.

For administrative simplification, employers may wish to limit their “qualified employee discount” programs to active employees, retirees, and their spouses and dependent children to avoid having to identify nonemployees participating in the program and imputing income to the employees for their use.

Further, if the employee’s discount is based on a discounted price provided to discrete customers or consumer groups, rather than the published rates, the employer should maintain records that (i) establish that 35 percent of the employer’s sales are comprised of discounted rates given to such customers, and (ii) show each group’s discount and the percentage of sales that each group contributes to the total sales. Absent such showing in an audit, the IRS agents are instructed to base the employee’s discount off of the published rates, which may result in higher income inclusion for the employee.

Read Next Article, "Avoiding ACA Employer and Individual Penalites for Expatriates"

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Avoiding ACA Employer and Individual Penalties for Expatriates

Mon, 11/20/2017 - 12:00am
The Affordable Care Act (“ACA”) requires individuals to have qualifying healthcare coverage (“minimum essential coverage”) for each month, qualify for an exemption from coverage for the month, or pay a penalty when filing their federal income tax return.

By a letter released June 30, 2017 (AM 2017-0011), the IRS addressed the application of this individual mandate where an individual moved from Germany to Florida in 1998 for reasons unrelated to work, and has since continued her health insurance coverage solely under the German healthcare system. The IRS concluded that the German healthcare system does not constitute an expatriate health plan that is deemed to satisfy minimum essential coverage and the individual does not qualify as an expatriate. Accordingly, the individual is subject to ACA penalties for failure to maintain minimum essential coverage, unless another exemption applies.

The IRS findings bear a review of the proposed regulations issued in June 2016 regarding the elements necessary for an individual to qualify as an expatriate and an employer’s plan to qualify as an expatriate health plan for purposes of avoiding ACA penalties for both employers and their employees.
  Qualified Expatriate Health Plans The Expatriate Health Coverage Clarification Act of 2014 exempts expatriate health plans from complying with many healthcare reform requirements, provided several conditions are met. In particular, expatriate health plans must provide coverage that meets certain standards:
  • Provide “minimum value”;
  • Cover inpatient hospital services, outpatient facility services, physician services, and emergency services in the US and the countries where the individual is transferred;
  • Offer coverage to dependent children until age 26; and
  • Satisfy other standards to ensure that coverage is administered by an expatriate health insurance carrier or expatriate health plan administrator with international operations.

To qualify as an expatriate health plan, substantially all of the primary enrollees (e.g., employees of the plan sponsor) must be “qualified expatriates.” A plan satisfies this requirement only if, on the first day of the plan year, at least 95% of the primary enrollees are qualified expatriates.
  Qualified Expatriates Generally, qualified expatriates must fit into one of the following categories:
  • Workers in the US (“Inpats”): Individuals (i) whose skills, qualifications, job duties or expertise caused the employer to temporarily transfer the individual to the US; (ii) who are reasonably determined to require access to health insurance coverage in multiple countries; and (iii) to whom the employer periodically offers other multinational benefits (e.g., tax equalization and compensation for cross-border moving expenses).
  • Workers outside the US (“Expats”): Nationals of the US who work outside the US for at least 180 days in a consecutive 12-month period that spans across two consecutive plan years
  Expatriate Plan Relief and Compliance Coverage under an expatriate health plan counts as minimum essential coverage for both the individual mandate to maintain minimum essential coverage and the employer mandate to offer the requisite coverage to substantially all of its full-time employees. The proposed regulations also relieve expatriate health plans from compliance with the healthcare reform mandates (e.g., no lifetime or annual limits, no preexisting condition exclusions, limited waiting periods before commencing coverage, coverage of preventive health services). In addition, expatriate health plans are exempt from the Patient Centered Outcome Research Institute (“PCORI”) fee and the transitional reinsurance fee.

Notably, the Affordable Care Act information reporting (Form 1095 series) is required; although to facilitate furnishing statements to individuals covered by an expatriate plan, such recipients are treated as having consented to electronic statements unless they explicitly refuse.

The proposed regulations may be relied upon for plan years beginning on or after January 1, 2017.

Read Next Article, "IRS Released 2017 ACA Information Returns"

Return To Compensation & Benefits Newsletter - Fall 2017

IRS Released 2017 ACA Information Returns

Mon, 11/20/2017 - 12:00am
Notwithstanding executive orders signed by the President and ongoing efforts to repeal and replace the Affordable Care Act (ACA), the reporting requirements still apply for 2017 with the first due date on January 31, 2018. Coverage providers and applicable large employers (ALEs) should continue their efforts to prepare the filings for the 2017 year (due in early 2018).

Providers of healthcare coverage, including employers with self-insured health care plans that are not ALEs must report the individuals (and their spouses and dependents) covered under the plan on Form 1095-B with transmittal Form 1094-B (B Forms), which are used to enforce the individual mandate. ALEs must use Form 1095-C and transmittal Form 1094-C (C Forms) to report information relevant to the employer shared responsibility penalties and the premium tax credits, as well as to report employees (and their spouses and dependents) covered under the employer’s self-insured health care plan.

The IRS released the 2017 B Forms and C Forms, which seem to have little to no changes from the 2016 forms, as summarized below: 
  Form   Purpose Change 1094-B Transmittal for Form 1095-B Unchanged 1095-B Health coverage information Unchanged 1094-C Transmittal for Form 1095-C “4980H Transition Relief” removed from Line 22. This expired provision temporarily granted ALEs with fewer than 100 full-time employees and equivalents penalty relief. 1095-C Employer-provided health insurance offer and coverage Unchanged
The first penalty notification will begin late in 2017 based on the 2015 Forms 1094-C, 1095-C and premium tax credit information. ALEs will be notified of their potential liability for an employer shared responsibility payment in Letter 226J. If you receive a Letter 226J, the information should be reconciled to the employer’s records to determine if the amount of the penalty is correct.


Return To Compensation & Benefits Newsletter - Fall 2017

House Passes Tax Reform Bill; Senate Finance Committee Considers Bill of its Own

Fri, 11/17/2017 - 12:00am

Download PDF Version

Summary  On November 9, 2017, the Senate Finance Committee released its version of proposed tax reform legislation, the “Tax Cuts and Jobs Act,” which the Committee is marking up this week.  The House of Representatives passed its tax bill on November 16; however, the bill under consideration by the Senate Finance Committee differs in several respects, including individual tax rates, itemized deductions, retaining the estate and GST taxes, the timing of changes to the corporate tax rate, and pass-through tax rates.  On November 14, 2017, Finance Chairman Hatch announced some changes to the Chairman’s Mark.  One modification now would reduce the Patient Protection and Affordable Care Act individual mandate payment to zero.  There are also other changes to rates, the child tax credit, the pass-through provisions, and international tax. 
  Details Whereas the House bill proposes four individual tax brackets at 12, 25, 35, and 39.6 percent, the modified Senate version would keep the existing number of rates at seven but lower them to 10, 12, 22, 24, 32, 35, and 38.5 percent.  Under both proposals the highest rates apply at $1 million for married taxpayers filing jointly and $500,000 for other filers.  Both plans would repeal personal exemptions but the Senate’s increase in the standard deduction is slightly lower than the House’s and proposes to increase the standard deduction to $12,000 for single filers and $24,000 for married taxpayers filing jointly.  The House and Senate differ on the child tax credit, which would increase to $1,600 or $2,000, respectively.   

Itemized deductions for mortgage interest, property tax, and medical expenses are treated differently by the proposed legislation.  Both bills would eliminate any mortgage interest deduction based on home equity indebtedness; the House bill would cap acquisition indebtedness at $500,000 (effective for debt incurred on or after November 2, 2017) whereas the Senate would retain the current $1 million limitation.  Individuals could no longer deduct personal state and local income or sales taxes under either proposal.  The Senate bill would also eliminate the local property tax deduction while the House bill would permit a deduction of up to $10,000.  Unreimbursed medical expenses that exceed 10 percent of a taxpayer’s adjusted gross income would remain deductible under the Senate plan, though any deduction for medical expenses would be repealed under the House proposal. 

Regarding the estate, gift, and generation-skipping (GST) taxes, the House bill would increase the individual estate and gift tax exclusion to $10 million (as of 2011) and then adjust for inflation annually before repealing the estate and GST tax for decedents dying and gifts made after December 31, 2024.  The Senate bill also proposes an inflation-adjusted $10 million exclusion for individuals but otherwise maintains the estate and GST taxes without repeal.

The House and Senate bills also handle business taxes differently.  Both plans present the same decrease in the maximum corporate tax rate from 35 to 20 percent, but the Senate proposes the change begin in 2019, one year later than the House’s proposal of 2018.  Furthermore, the House bill would tax certain “business income” from pass-through entities at 25 percent, while the Senate instead proposes a 17.4 percent deduction.  Both plans feature provisions designed to prevent pass-through compensation from being taxed at rates lower than the owners’ individual rates, subject to certain thresholds.

The treatment of deferred foreign earnings and profits is yet another area where both bills take a similar approach but with different rates.  The House proposal would tax certain accumulated earnings and profits represented by cash and cash equivalents at a 14 percent rate and would tax earnings and profits represented by illiquid assets at a seven percent rate, while the Senate rates would be 10 and five percent, respectively.  Additionally, the Senate bill includes proposals to address similar base erosion concerns as the proposals in the House bill but, in some cases, such proposals operate in a different manner to achieve a similar objective. The Senate bill also includes certain other proposals that were not included in the House bill, such as the repeal of the special rules for DISCs and IC-DISCs and the denial of interest or royalty deductions for certain related party amounts paid or accrued pursuant to certain hybrid transactions, or by, or to, a hybrid entity.    
The modified Senate proposal would repeal of the Patient Protection and Affordable Care Act individual mandate; the House bill does not contain this provision.
     BDO Insights Congress is moving quickly to advance tax reform legislation, although it is unclear when or if an agreed bill will be passed by both houses of Congress.  The House passed its version of tax legislation this week, while Senate Finance markup continues.  The process may slow, however, as Senate Republicans seek support, budget and expense restrictions are navigated, and differences between the bills are reconciled.
 
For more information on matters discussed above, please contact one of the following practice leaders:
  Todd Simmens
Controversy and Procedure Technical Practice Leader   Ben Willis
Corporate Tax Technical Practice Leader   Joe Calianno
International Tax Technical Practice Leader      John Nuckolls
Private Client Services Technical Practice Leader  

The BDO 600

Mon, 11/13/2017 - 12:00am


How are compensation practices of publicly traded companies different depending on company size and industry? This unique survey focuses specifically on mid-market companies and enables a year-over-year comparison of CEO and CFO pay.

Now in its eleventh year, the BDO 600 survey examines CEO and CFO compensation practices of 600 mid-market public companies and tracks trends in director compensation within eight different industry segments including: energy, financial services - banking, financial services - nonbanking, healthcare, manufacturing, real estate, retail, and technology.

Benchmark yourself against top industry peers and see what goes into a CEO's and CFO's average compensation mix, including: 
  • A breakdown of compensation by industry and company size
  • The proportions of compensation in equity versus cash
  • Trends to watch for FY 17

Overall results: 


Fill out the short form on this page to download the survey results.  
For questions, comments or suggestions, please contact: 
  Andy Gibson
404-979-7106
agibson@bdo.com Tom Ziemba
312-233-1888
tziemba@bdo.com

Summary of International Provisions Included in the Tax Cuts and Jobs Act

Mon, 11/06/2017 - 12:00am
Summary On November 2, 2017, the House of Representatives released the Tax Cuts and Jobs Act (the “Bill”). The Bill includes a broad set of proposed changes to overhaul the current U.S. tax system, including rules on how foreign income and foreign persons would be taxed. For a summary discussion of the main non-international tax proposals included in the Bill, see our November Tax Alert. The Bill’s key proposals relating to the taxation of foreign income and foreign persons are summarized below.[1]     
  Details 1. Establishment of Participation Exemption System for Taxation of Foreign Income Deduction for foreign-source portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations (Section 4001 of the Bill).  

Under the proposed exemption system, 100 percent of the foreign source portion of dividends distributed by a foreign subsidiary to a U.S. corporate shareholder that owns 10 percent or more of the voting stock of the foreign corporation would be exempt from U.S. taxation. No foreign tax credit or deduction would be permitted for any foreign taxes (including withholding taxes) paid or accrued with respect to any exempt dividend, and no deductions for expenses properly allocable to an exempt dividend (or stock that gives rise to exempt dividends) would be taken into account for purposes of determining the U.S. corporate shareholder’s foreign-source income. The Bill also includes a 6-month holding period requirement along with certain other ownership requirements for the U.S. corporate shareholder to claim the exemption. In addition, the exemption does not apply to dividends received from a passive foreign investment company (“PFIC,” as defined in IRC §1297) that is not a controlled foreign corporation (“CFC,” as defined in IRC §957(a)). This provision would be effective for distributions made after tax years ending after December 31, 2017.
 
Application of participation exemption to investments in United States property (Section 4002 of the Bill).
 
The Bill would repeal IRC §956 for U.S. corporate shareholders. IRC §956 would continue to apply to non-corporate taxpayers. This provision would be effective for tax years of foreign corporations beginning after December 31, 2017.
 
The Bill does not directly address situations where a CFC is owned by a U.S. shareholder that is a partnership with corporate partners but rather provides regulatory authority to the Department of Treasury and the Internal Revenue Service to address these types of situations.
 
Limitation on losses with respect to specified 10-Percent owned foreign corporations (Section 4003 of the Bill).
 
The Bill also provides that a U.S. parent would reduce the basis of its stock in a foreign subsidiary by the amount of any exempt dividends received by the U.S. parent from that foreign subsidiary solely for purposes of determining loss (but not the amount of any gain) on any sale or exchange of the foreign subsidiary stock by its U.S. parent. This provision would be effective for distributions made after December 31, 2017.
 
In addition, if a U.S. corporation transfers substantially all of the assets of a foreign branch (within the meaning of IRC §367(a)(3)(C)) to a specified 10-percent owned foreign corporation, i.e., any foreign corporation with respect to which any domestic corporation owns 10-percent, but does not include a PFIC that is not a CFC, the U.S. corporation would be required to include the amount of any post-2017 losses that were incurred by the branch, subject to certain limitations. Amounts included in gross income would be treated as derived from U.S. sources. This provision also includes coordination rules with IRC §367 and would be effective for transfers made after December 31, 2017. 
 
Treatment of deferred foreign income upon transition to Participation exemption system of taxation (Section 4004 of the Bill).
 
The Bill also provides that U.S. shareholders owning at least 10 percent of a foreign subsidiary, generally, would include in income for the subsidiary’s last tax year beginning before January 1, 2018 the shareholder’s pro rata share of the net post-1986 historical earnings and profits (E&P) of the foreign subsidiary to the extent such E&P has not been previously subject to U.S. tax, determined as of November 2, 2017, or December 31, 2017 (whichever is higher). The net E&P would be determined by taking into account the U.S. shareholder’s proportionate share of any E&P deficits of foreign subsidiaries of the U.S. shareholder or members of the U.S. shareholder’s affiliated group. This transition tax would apply to all U.S. shareholders (as defined in IRC §951(b)) of a specified foreign corporation. For this purpose, a “specified foreign corporation” means (1) a CFC or (2) any foreign corporation in which a domestic corporation is a U.S. shareholder (determined without regard to the special attribution rules of IRC §958(b)(4)), other than a PFIC that is not a CFC.
 
The E&P would be classified as either E&P that has been retained in the form of cash or cash equivalents, or E&P that has been reinvested in the foreign subsidiary’s business (e.g., property, plant, and equipment). The portion of the E&P comprising of cash or cash equivalents would be taxed at a reduced rate of 12 percent, while any remaining E&P would be taxed at a reduced rate of five percent. Foreign tax credit carryforwards would be fully available, however, any foreign tax credits triggered by the deemed repatriation would be partially limited to offset the U.S. tax. No deduction would be permitted for any foreign taxes that would not be allowed as a foreign tax credit under this limitation.
 
At the election of the U.S. shareholder, the tax liability would be payable over a period of up to eight years, in equal annual installments of 12.5 percent of the total tax liability due.
 
If the U.S. shareholder is an S-corporation, S-corporation shareholders may elect to defer the payment of the transition tax until the S-corporation ceases to be an S-corporation, substantially all of the assets of the S-corporation are sold or liquidated, the S-corporation ceases to exist or conduct business, or stock in the S-corporation is transferred. Annual reporting of an S-corporation shareholder’s deferred net tax liability would however, be required.
  BDO Insights The proposed exemption system does not appear to be a true territorial system in the sense that an exemption does not appear to be provided for income earned through a foreign branch or a foreign entity that is recognized as a partnership for U.S. tax purposes. In addition, the exemption system would not apply to non-corporate taxpayers. The transition tax on the other hand, would apply to all U.S. shareholders of specified foreign corporations (as defined above), with a limited deferral exception for S-corporation shareholders.
 
The proposed transition tax rates are also higher than what was previously proposed in the GOP Better Way for Tax Reform House Blueprint (the “Blueprint” included an 8.75 percent rate for cash and cash equivalents, a 3.5 percent rate otherwise).
 
The E&P determination dates for the transition tax (i.e., November 2, 2017, or December 31, 2017, whichever date has the higher E&P) may also prevent taxpayers from shifting or reducing E&P after November 2, 2017, to try to minimize the transition tax before the 2017 year end.
  2. Modification Related to Foreign Tax Credit System Repeal of Section 902 Indirect Foreign Tax Credits; determination of section 960 credit on current year basis (Section 4101 of the Bill).
 
The Bill provides that no foreign tax credit or deduction would be allowed for any taxes (including withholding taxes) paid or accrued with respect to any dividend to which the dividend exemption discussed above would apply. An indirect foreign tax credit would still be allowed for any subpart F income that is included in the income of the U.S. shareholder on a current year basis, without regards to pools of foreign earnings kept abroad. This provision would be effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.
 
Source of income from sales of inventory determined solely on basis of production activities (Section 4102 of the Bill).
 
Under current rules, to determine source of income and calculate the foreign tax credit limitation, income from the sale of inventory produced (in whole or in part) by the taxpayer is sourced partially to the jurisdiction(s) where the inventory is produced and partially to the jurisdiction where title to the produced inventory passes from the taxpayer to the purchaser.
 
The Bill provides that income from the sale of inventory produced by the taxpayer within and sold outside the United States (or vice versa) would be allocated and apportioned between sources within and outside the United States solely on the basis of the production activities with respect to the inventory. This provision would be effective for tax years beginning after December 31, 2017.
  3. Modification of Subpart F Provisions Repeal of inclusion based on withdrawal of previously excluded subpart F income from qualified investment (Section 4201 of the Bill) AND repeal of treatment of foreign base company oil related income as subpart F income (Section 4202 of the Bill).
 
Under current rules, U.S. shareholders of a CFC are required to currently include their allocable share of net subpart F income earned by the CFC even where no cash or property is actually distributed. Subpart F income includes foreign base company oil related income (as defined in IRC §954(g)). In addition, foreign shipping income earned between 1976 and 1986 was not subject to current U.S. tax under subpart F if the income was reinvested in certain qualified shipping investments. Under current law, such income becomes subject to current U.S. tax in a subsequent year to the extent that there is a net decrease in qualified shipping investments during that subsequent year.
 
Under the Bill, the imposition of current U.S. tax on previously excluded foreign shipping income of a foreign subsidiary if there is a net decrease in qualified shipping investments would be repealed. In addition, under the Bill, the imposition of current U.S. tax on foreign base company oil related income would be repealed.
 
Both provisions would be effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end. 
 
Inflation adjustment of de minimis exception for foreign base company income (Section 4203 of the Bill).
 
IRC §954(b)(2) provides a de minimis exception to subpart F income so that if the sum of foreign base company income and gross insurance income of a CFC for the taxable year is less than the lesser of five percent of the CFC’s gross income or $1 million, then none of the CFC’s gross income for the taxable year is treated as subpart F income.
 
Under the Bill, the $1 million threshold in the de minimis exception under IRC §954(b)(2)   would be adjusted for inflation. This provision would be effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.
 
Look-thru rule for related controlled foreign corporations made permanent (Section 4204 of the Bill).
 
The Bill would make the look-thru rule of IRC §954(c)(6) permanent. This provision would be effective for tax years of foreign corporations beginning after December 31, 2019, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.
 
Modification of stock attribution rules for determining status as a controlled foreign corporation (Section 4205 of the Bill).
 
For purposes of determining whether a U.S. person owns shares in a CFC and determining CFC status, IRC §958 looks at direct, indirect and constructive ownership. Under existing constructive ownership rules for purposes of determining CFC status, IRC §958(b)(4) turns off the constructive ownership rules in IRC §318(a)(3) so that a domestic partnership or estate is not treated as owning stock owned by its foreign partners or beneficiaries, a domestic trust is not treated as owning stock owned by its foreign beneficiaries and a domestic corporation is not treated as owning stock owned by its foreign shareholders.[2] The constructive ownership rules in IRC §958(b) do not apply for purposes of determining the U.S. shareholders’ subpart F income.[3]
 
The Bill would strike IRC §958(b)(4) so that the constructive ownership rules in IRC §318(a)(3) would apply to treat certain U.S. persons as owning stock owned by a related foreign person for purposes of determining CFC status. For example, under these new rules, a U.S. corporation would be treated as constructively owning stock held by its foreign shareholder if the foreign shareholder owned, directly or indirectly, 50 percent or more in the value of the stock of the domestic corporation. Subpart F income would appear to continue to be included by U.S. shareholders based on direct/indirect ownership and not constructive ownership. This provision would be effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.
 
Elimination of requirement that corporation must be controlled for 30 days before subpart F inclusions apply (Section 4206 of the Bill).
 
The Bill would remove the requirement in IRC §951(a)(1) that the foreign corporation be a CFC for an uninterrupted period of 30 days or more during the taxable year so that U.S. shareholders would be required to include their allocable share of income under IRC §951 if the foreign corporation was a CFC at any time during the taxable year. This provision would be effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.
  BDO Insights The Bill’s proposals to simplify international tax rules including subpart F rules appears to have been scaled back from previous proposals. For example, the Blueprint proposed to eliminate the bulk of the subpart F rules and retain only the foreign personal holding company rules. The Bill on the other hand appears to retain foreign base company services income and foreign base company sales income as categories of subpart F income.  In some respects, the Bill makes it more likely for certain entities to be treated as CFCs and in some instances, more likely for U.S. shareholders to have subpart F income. In addition, these proposed rules could potentially add additional compliance burdens.
  4. Prevention of Base Erosion   Current year inclusion by United States shareholders with foreign high returns (Section 4301 of the Bill).
 
To prevent base erosion, the Bill provides that a U.S. parent of one or more foreign subsidiaries would be subject to current U.S. tax on 50 percent of the U.S. parent’s foreign high returns. Foreign high returns would be measured as the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (seven percent plus the Federal short-term rate) on the foreign subsidiaries’ aggregated adjusted bases in depreciable tangible property, adjusted downward for interest expense. Foreign high returns would not include income effectively connected with a U.S. trade or business, subpart F income, insurance and financing income that meets the requirements for the “active finance exception” from subpart F income under IRC §954(h), income from the disposition of commodities produced or extracted by the taxpayer, or certain related party payments. Like subpart F income, the U.S. parent would be taxed on foreign high returns each year, regardless of whether it left those earnings offshore or repatriated the earnings to the United States.
 
Foreign high returns would be treated similarly to currently taxed subpart F income for certain purposes of the Code, including for purposes of allowing an indirect foreign tax credit. The indirect foreign tax credits allowed for foreign taxes paid with respect to foreign high returns would be limited to 80 percent of the foreign taxes paid, would not be allowed against U.S. tax imposed on other foreign-source income (i.e., such foreign tax credits would only be allowed to offset U.S. tax on foreign high return inclusions), and would not be allowed to be carried back or forward to other tax years. This provision would be effective for tax years of foreign corporations beginning after December 31, 2017, and for the tax years of U.S. shareholders in which such tax years of foreign subsidiaries end. 
 
Interest (Section 3301 of the Bill) AND Limitation on deduction of interest by domestic corporations which are members of an international financial reporting group (Section 4302 of the Bill).
 
Section 3301 was included in Title III – Business Tax Reform Subtitle D – Reform of Business-related Exclusions, Deductions, etc. section of the Bill. Section 3301 provides that every business, regardless of its form, would be subject to a disallowance of a deduction for net interest expense in excess of 30 percent of the business’s adjusted taxable income. The net interest expense disallowance would be determined at the tax filer level – for example, at the partnership level instead of the partner level. Adjusted taxable income is a business’s taxable income computed without regard to business interest expense, business interest income, net operating losses, and depreciation, amortization, and depletion. Any interest amounts disallowed under the provision would be carried forward to the succeeding five taxable years and would be an attribute of the business (as opposed to its owners). Special rules would apply to allow a pass-through entity’s unused interest limitation for the taxable year to be used by the pass-through entity’s owners and to ensure that net income from pass-through entities would not be double counted at the partner level. This provision would repeal existing interest deduction limitations in IRC §163(j) and would be effective for tax years beginning after December 31, 2017.
 
It should be noted that businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules described in Section 3301 of the Bill. This provision would be effective for tax years beginning after December 31, 2017. Additionally, Section 3301 would not apply to certain regulated public utilities and real property trades or businesses.
 
Section 4302 of the Bill includes additional interest deduction limitations applicable to certain taxpayers. The Bill provides that the deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110 percent of the U.S. corporation’s share of the group’s global earnings before interest, taxes, depreciation, and amortization. This limitation would apply in addition to the general rules for disallowance of certain interest expense under Section 3301 of the Bill. Taxpayers would be disallowed interest deductions pursuant to whichever provision denies a greater amount of interest deductions. Any disallowed interest expense would be carried forward for up to five tax years, with carryforwards exhausted on a first in, first out basis. For this purpose, an international financial reporting group is a group of entities that (1) includes at least one foreign corporation engaged in a U.S. trade or business or at least one domestic corporation and one foreign corporation, (2) prepares consolidated financial statements, and (3) has average annual global gross receipts for the three reporting year period ending with such reporting year of more than $100 million. This provision would be effective for tax years beginning after December 31, 2017.
 
Excise tax on certain payments from domestic corporations to related foreign corporations; election to treat such payments as effectively connected income (Section 4303 of the Bill).
 
The Bill provides that payments (other than interest) made by a U.S. corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable asset would be subject to a 20 percent excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business. The excise tax would be paid by the U.S. corporation. Consequently, the foreign corporation’s net profits (or gross receipts if no election is made) with respect to those payments would be subject to full U.S. tax, eliminating the potential U.S. tax benefit otherwise achieved. Exceptions would apply for intercompany services which a U.S. company elects to pay for at cost (i.e., no markup) and certain commodities transactions. To determine the net taxable income that is deemed ECI, the foreign corporation’s deductions attributable to these payments would be determined by reference to the profit margins reported on the group’s consolidated financial statements for the relevant product line. No credit would be allowed for foreign taxes paid with respect to the profits subject to U.S. tax. Further, in the event no election is made, no deduction would be allowed for the U.S. corporation’s excise tax liability.
 
The Bill also includes proposed rules regarding the treatment of partnerships so that any specified amount paid, incurred, or received by a partnership which is a member of any international financial reporting group (and any amount treated as paid, incurred, or received by a partnership) shall be treated for purposes of these rules as amounts paid, incurred, or received, respectively, by each partner of such partnership in an amount equal to such partner’s distributive share of the item of income, gain, deduction, or loss to which such amounts relate.
 
This provision would apply only to international financial reporting groups where the average annual aggregate payment amount of such group for the three reporting year period ending with such reporting year exceeds $100 million. This provision would be effective for amounts paid or accrued after December 31, 2018.
  5. Provisions Related to Possessions of the United States The Bill also includes provisions to extend (1) deductions with respect to income attributable to domestic production activities in Puerto Rico, (2) the temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands and (3) the American Samoa economic development credit.[4] The proposal regarding the extension of deductions with respect to income attributable to domestic production activities in Puerto Rico would apply retroactively to tax years beginning after December 31, 2016 and before January 1, 2018. The proposal regarding the extension of the American Samoa economic development credit would have a retroactive applicability date and apply to taxable years beginning after December 31, 2016, and be extended to tax years beginning before January 1, 2023. The proposal regarding the extension of the temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands would apply to distilled spirits brought into the United States after December 31, 2016, and be extended to rum imported into the United States before January 1, 2023.
  6. Other International Reforms Restriction on insurance business exception to passive foreign investment company rules (Section 4501 of the Bill).  
 
The Bill provides that the PFIC exception for insurance companies would be amended to apply only if the foreign corporation would be taxed as an insurance company were it a U.S. corporation and if loss and loss adjustment expenses, unearned premiums, and certain reserves constitute more than 25 percent of the foreign corporation’s total assets (or 10 percent if the corporation is predominantly engaged in an insurance business and the reason for the percentage falling below 25 is solely due to temporary circumstances). This provision would be effective for tax years beginning after December 31, 2017.
 
Limitation on treaty benefits for certain deductible payments (Section 4502 of the Bill).
 
Section 4502, which would have limited treaty benefits for certain deductible payments, was stricken from the Bill by the Joint Committee on Taxation a day after the Bill was released.
 
For more information on matters discussed above, please contact one of the following practice leaders:
  Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office   Monika Loving
Partner and International Tax Practice Leader
International Tax Services   Annie Lee
Partner
International Tax Services   Chip Morgan
Partner
International Tax Services   Robert Pedersen
Partner
International Tax Services   William F. Roth III
Partner
National Tax Office   Jerry Seade
Principal
International Tax Services   Natallia Shapel
Partner
International Tax Services     Sean Dokko
Senior Manager
National Tax Office       [1] This Tax Alert was drafted on November 6, 2017. [2] See IRC §§ 958(b)(4) and 318(a)(3) for details. [3] See IRC §951(a). [4] See Sections 4401 through 4403 of the Bill for additional details.

Perceptions of Employee Mobility in a Climate of Change

Mon, 11/06/2017 - 12:00am



This BDO sponsored report captures the findings of a comprehensive, global study of employee mobility that focuses specifically on the employee’s point of view. This report is the second of its kind, with the first having been conducted in 2012 (Mobilising talent: the global mobility challenge).

The purpose of this report is to help employers better understand the thoughts and feelings of current and potential employees. This research conducted by Ipsos on behalf of the Canadian Employment Relocation Council (CERC) and BDO is unique as it focuses on what employees are looking for when considering opportunities to relocate for employment. By providing a detailed understanding of what employees are looking for, given the current global environment, we believe that organizations will be better equipped to make the right decisions regarding their employee mobility programs going forward.
 

Download the Report
This article was originally published by BDO Global

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