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Compensation & Benefits Alert - August 2016

Mon, 08/15/2016 - 12:00am
Taxpayers No Longer Need to Attach Copy of Section 83(b) Election to Form 1040 Download PDF Version
Summary The IRS finalized regulations on July 25, 2016, adopting the  2015 proposed regulations, without change, that eliminate the requirement to file a copy of an 83(b) election with an individual’s income tax return for the year.  An 83(b) election allows the taxpayer to report as income when nonvested property is transferred in connection with the performance of services rather than when the property becomes substantially vested as provided under Section 83(a).

There are both pros and cons to making an 83(b) election that should be discussed with your tax advisor prior to making such an election.
 
The final regulations apply to property transferred on or after January 1, 2016.  For transfers of property on or after January 1, 2015, and before January 1, 2016, taxpayers may rely on the guidance in the proposed regulations, which is identical to the guidance contained the final regulations.
Details When property is transferred to a taxpayer in connection with the performance of services, Section 83(a) generally requires inclusion of the excess of the fair market value of the property over the amount paid for the property in the year in which the taxpayer's rights in the property are transferable or are not subject to a substantial risk of forfeiture.

Under Section 83(c)(1) and regulations thereunder, a substantial risk of forfeiture  exists if the full enjoyment of the property is conditioned on the future performance of substantial services or  the occurrence of a condition  that provides a substantial  possibility of forfeiture.  Property often increases in value between the transfer date and the time when there is no longer a substantial risk of forfeiture, resulting in an increased amount taxed as ordinary income. 

As an alternative to delaying the taxation until there is no longer a substantial risk of forfeiture, Section 83(b)(1) allows the  person who performs services in connection with which property is transferred to elect inclusion of the excess fair market value of the property over the amount paid for it in gross income for the tax year of the transfer.

Prior to these new regulations, an 83(b) election was made by filing a written statement within 30 days of the transfer date with the IRS office with which the taxpayer’s return would be filed (a copy was also furnished to the service recipient).  An additional copy of the statement had to be submitted with the taxpayer’s income tax return for the year of transfer.  The requirement to attach a copy of the 83(b) election with the taxpayer’s income tax year proved to be an impediment to IRS’s preferred electronic filing.  The final regulations eliminate the requirement to attach a copy to the taxpayer’s income tax return.  Generally, a copy of any Section 83(b) election must be kept until the period of limitations expires (generally, three years from the due date of the return) for the return that reports the sale or other disposition of the property. 
  BDO Insights Taxpayers are not relieved of their general recordkeeping responsibilities under Section 6001 and accordingly must keep sufficient records to support the original cost of the property and the tax treatment as reported on their income tax returns.
 
For questions related to matters discussed above, please contact one of the following practice leaders: 
  Peter Klinger
Principal, National Tax - Compensation & Benefits Joan Vines
Senior Director, National - Tax Compensation & Benefits Carl Toppin
Senior Manager, Tax - Compensation & Benefits 

International Tax Alert - August 2016

Mon, 08/15/2016 - 12:00am
Observation by BDO China — Interpretation of New Regulations Issued by State Administration of Taxation Regarding Related-Party Transactions Reporting and Contemporaneous Documentation Download PDF Version
Overview On June 29, 2016, the State Administration of Taxation (“SAT”) issued new regulations to improve the related-party transactions reporting and contemporaneous documentation (SAT Bulletin [2016] No.42) (“Bulletin 42”). Bulletin 42 updates the chapters of related-party transactions reporting and contemporaneous documentation in the existing “Implementation Measures of Special Tax Adjustment (Provisional)” (Guoshuifa [2009] No. 2) (“Circular 2”). Meanwhile, the applicable sections in the Circular 2, i.e., Chapter 2 and 3, Article 74 and 89, and the current Annual Related-party Transactions Reporting Forms (Guoshuifa [2008] No.114) have been repealed.

On September 17, 2015, SAT released “Discussion Draft of Implementation Measures of Special Tax Adjustment” (“Discussion Draft”), which is seen as an upgrade to Circular 2. Bulletin 42 only focuses on the revision and clarification of related-party transactions reporting and contemporaneous documentation. It is expected that SAT will release additional announcements to regulate other matters in the discussion draft, such as intangible assets and anti-avoidance.

The issuance of Bulletin 42 marked a success for the SAT in implementing Action 13 of the Base Erosion and Profit Shifting (“BEPS”) project in China. It also marks the conclusion of China’s transfer pricing practice under Circular 2. The issuance of Bulletin 42 signals the beginning of a new chapter for China’s transfer pricing practice, and is in accordance with international standards.
Bulletin 42 Highlights Bulletin 42 sets out more detailed regulations on related-party transactions reporting; the definition of a related-party relationship; types of related-party transactions; reporting party and content for Country-by-Country reports (“CbCR”) and types, contents, thresholds, and submission of contemporaneous documentation.

1. Clarification on Reporting party Obligations
Bulletin 42 clarifies that any resident enterprise subject to tax levied on auditing and any non-resident enterprise that has establishments or offices in domestic China is required to report its related-party transactions in a fiscal year (“FY”).

2. Revision of Related-Party Relationship Definition
Bulletin 42 refines the existing definition of a related-party relationship. For example, it clarifies the calculation of debt-toequity ratio to define whether two parties involved in capital borrowing and lending are in a related-party relationship.

3. Expanding the Types of Related-Party Transactions
Bulletin 42 updates the existing types of related-party transactions under Circular 2 by including the transfer of financial assets between two related parties. Financial assets include account receivables, note receivables, other receivables, equity investment, debt investment and the assets formed by derivative
financial instruments.

4. Specification of the Reporting Party and Content of CbCR
CbCRs form an important part of BEPS Action 13. Bulletin 42 has included the CbCR as part of Annual Related-party Transactions Reporting Forms in the annual corporate income tax (“CIT”) filing,
and requires taxpayers who meet one of the following conditions to submit a CbCR:
  • The ultimate holding company of a multinational enterprise (“MNE”), with consolidated revenues greater than RMB 5.5 billion in the precedent fiscal year; or
  • The entity nominated by its MNE group as the reporting entity.
The ultimate holding company refers to the entity with the ability to consolidate financials of all other member entities within the group, and its financials cannot be consolidated by any other
member entity.

The definition of a member entity refers to:
  • An entity that has been included in the consolidated financial statements;
  • An entity that has not been included in the consolidated financial statements but should have been included according to the requirements of the Securities Exchange Commission;
  • An entity that has not been included in the consolidated financial statements due to the size and importance of its business; or
  • Permanent establishments with independent accounting system for financial reporting.
In addition, Bulletin 42 specifies that Chinese tax authorities have the right to request taxpayers to provide a CbCR under any of the following circumstances:
  • MNEs that have not submitted a CbCR in any countries;
  • MNEs that have submitted a CbCR in other countries, but China has not established the information exchange regime with other countries; or
  • MNEs that have submitted a CbCR in other countries and China has established the information exchange regime with those countries, but the Chinese tax authorities have not obtained the CbCR.
5. Improvement of the Contemporaneous Documentation Management
Bulletin 42 modifies the detailed requirements of contemporaneous documentation reports, including the structure, content, thresholds of the transactions and submission deadlines. Comparing with Circular 2 that is currently in force, Bulletin 42 implements a three-tiered framework for transfer pricing documentation, i.e., master file, local file and special issue file, according to Action 13 of BEPS Action Plan. Compared to the
discussion draft, Bulletin 42 introduces the requirements for preparing a master file, sets additional thresholds for the local file regarding the transfer of financial and intangible assets between related parties, removes the requirement to prepare special issue file for related-party service transactions, and identifies the deadline for the preparation and submission of the three-tiered transfer pricing documentation report.

The following table summarizes the requirements and exemption of preparing contemporaneous documentation report and the submission deadlines set out in Bulletin 42.
  Item                             Bulletin 42 Documentation type       Master file, local file and special issue file       Preparation requirements       Master file should be prepared:
  • Where the taxpayer has related-party transactions with overseas related parties during the year, and the taxpayer’s ultimate holding company, which consolidates the financial statements of the taxpayer, has prepared a master file; or
  • Where the annual amount of related-party transactions conducted by the taxpayer exceeds
  • RMB 1 billion.
                Local file should be prepared:
  • Where the amount of purchase/sales of tangible assets is more than RMB 200 million (for toll manufacturing activities, the amount is calculated based on the import/export customs declaration prices);
  • Where the amount of transfer of financial assets is more than RMB 100 million;
  • Where the amount of transfer of intangible assets is more than RMB 100 million; or
  • Where the amount of other related-party transactions is more than RMB 40 million.
                Special issue file should be prepared:
  • Where the taxpayer enters or implements cost sharing agreements;
  • Where the taxpayer violates the thin capitalization rules for thresholds (non-financial institutions - 2:1, financial institutions – 5:1).
      Exempt from preparation      
  • A taxpayer with an Advanced Pricing Arrangement (“APA”) is exempted from the preparation of a local file and special issue file if the related-party transactions are covered under the APA;
  • A taxpayer is exempted from the preparation of a master file, local file and special issue file if its related-party transactions are conducted with domestic related parties only.
      Deadline for preparation      
  • A master file should be completed within twelve months of the fiscal year end of the group’s ultimate holding company;
  • A local file and special issue file should be completed by June 30 of the following year.
      Deadline for submission        Within 30 days upon the request from the tax authorities.

In addition, Bulletin 42 clarifies the information to be disclosed in the three-tiered transfer pricing documentation. Since master file aims at large-scaled enterprises with tremendous amounts of related-party transactions, the disclosure requirements focus more on the group information, such as the global shareholding structure, group business description, group strategic plan for intangible assets, group financing arrangement and group financial and tax information.

As for local file, Bulletin 42 makes revisions based on Circular 2 by including a value chain analysis, which requires taxpayers to disclose the allocation principles and actual allocation results of group’s value chain from research and development to after-sales services, as well as the impact of location-specific factors on the pricing of transactions, and the portion of value creation from location specific factors shared by taxpayers. In addition, Bulletin 42 adds disclosure requirements for overseas investment and
related-party equity transfers. Compared to Circular 2, Bulletin 42 places greater emphasis on related-party services transactions, including the methodology for the determination of services costs, allocation standards, calculation process, as well as the information on any same or similar service transactions that the taxpayer and its group enters into with third parties.

The disclosure requirements of special issue file for cost sharing agreements and thin capitalization in Bulletin 42 are mostly the same as those in Circular 2.

6. Update the Annual Related-party Transactions
Reporting Forms Bulletin 42 attaches a FY2016 version of Annual Related-party Transactions Reporting Forms of the People’s Republic of China (“FY2016 RPT Reporting Forms”) with detailed filing instructions. FY2016 RPT Reporting Forms increase the total number of forms from nine to twenty-two, with increased information disclosure requirements under the CbCR. Taxpayers that are required to file a CbCR should complete the forms in both English and Chinese. The CbCR forms include the allocation of related-party and third-party sales revenues, earnings before tax, the CIT paid and withheld, registered capital, retained earnings, number of employees, and tangible assets, as well as the registered address and primary functions of the member entities.

Furthermore, FY2016 RPT Reporting Forms adds a Financial Asset Transaction Form, an Equity Investment Form, a Cost Sharing Agreements Form, an Overseas Related Party Information Form and a Related-Party Transactions Financial Analysis Form, which were previously required by Circular 2 to be disclosed in the local file.
Observation by BDO China The release of Bulletin 42 enables the Chinese tax authorities to obtain more comprehensive information on taxpayers to increase the selection of the transfer pricing audit targets. The implementation of Bulletin 42 demonstrates the Chinese tax authorities determination to strengthen international tax cooperation and to combat tax evasion by actively participating in the BEPS Project.

Bulletin 42 sets higher requirements for disclosing information in contemporaneous documentation. It requires more resources for MNEs with large amounts of related-party transactions to prepare master files. To most Chinese subsidiaries of MNEs, the most significant impact is the additional scope for preparing a local file, especially the disclosure of value chain analysis and related-party service transactions. We expect many taxpayers will have difficulties in collecting, analyzing, and integrating information when preparing the master file or local file for the first year.

It seems that FY2016 RPT Reporting Forms require a significant increase in the amount of information to be disclosed. However, most of the new reporting forms, such as CbCRs, are not applicable to the Chinese subsidiaries of MNEs. In addition, the Enterprise Information Form, Related-party Relationship Form, Overseas Related Party Information Form, and MNE Entity Information Form can be shared in the following years after first-year reporting.

With the adoption of country-by-country reporting and other related-party disclosure requirements, and the new requirements set out for the three-tiered transfer pricing documentation reports, Bulletin 42 not only improves the transparency of taxpayer’s information, but also increases the compliance cost of taxpayers. Bulletin 42 is applicable to contemporaneous documentation and related-party reporting in year 2016 and after. To avoid the hassles in reporting related-party information and preparing contemporaneous documentation report in year 2017, it is recommended that taxpayers, especially large MNEs that are required to prepare master files and local files, communicate with their global headquarters to start the information collection and preparation process as early as possible to ensure the consistency in the disclosure of its transfer pricing arrangement(s) on a global scale. If taxpayers experience uncertainty in information disclosure or difficulty in information preparation, it is suggested that they consult professional firms for advice, and perform a health check on the current transfer pricing arrangement to better cope with and to manage the transfer pricing risks.

Please contact BDO China International Tax team should you have any questions regarding Bulletin 42.
 
Should this topic affect your current situation, or should you require further information, then please do not hesitate to contact one of the following professionals: 
  Gordon Gao
Tax Partner        Jay Tang
Transfer Pricing Director

Private Client Services Tax Alert – August 2016

Fri, 08/12/2016 - 12:00am


Issuance of Proposed Regulations Impacting Valuation of Family Controlled Businesses for Estate, Gift and Generation Skipping Tax Purposes Download PDF Version  
Summary Gift, estate and generation skipping taxes are imposed on the value of property transferred.  Proposed regulations regarding estate planning and valuation discounts were released on August 2, 2016, and if they become final, would significantly impact the availability of minority or lack of control discounts for transfers of family controlled business interests among family members.  In general, the effective date will be the date the regulations are published as final regulations.  Prop. Treas. Reg. Section 25.2704-3, concerning transfers subject to disregarded restrictions, will apply to transfers occurring 30 or more days after the date of publication. 
  Details On August 2, 2016, the IRS and Department of Treasury issued proposed regulations amending current regulations under IRC sections 2701 and 2704.  If these proposed regulations are made final they will have a profound impact on estate planning and valuation discounts with respect to family controlled entities.
Effective Date of Proposed Regulations.

In general, the effective date will be the date the regulations are published as final regulations.  Prop. Treas. Reg. Section 25.2704-3, concerning transfers subject to disregarded restrictions, will apply to transfers occurring 30 or more days after the date of publication.  A hearing is scheduled to receive comments concerning the proposed regulations on December 1, 2016, thus the regulations will not become final until after that date.
Substantive Changes The preamble and proposed amendments to the regulations contain 50 pages of complex technical discussions and rules.  A full discussion of the rules and issues raised are beyond the scope of this Alert. 
In brief, the proposed regulations would accomplish the following:
  1. Expand definition of entities beyond simply a corporation and partnership to include LLCs and other entities and arrangements;
  2. Create a bright-line test for deathbed transfers (within 3 years of death) that result in a lapse;
  3. Treat assignee interests as a lapse subject to transfer tax;
  4. Redefine “applicable restriction” to eliminate the state law safe harbor; and
  5. Add a new provision disregarding certain restrictions that are not “applicable restrictions,” including any restrictions that prevent an owner from causing a redemption of his or her interest after 6 months’ notice.
Item 5 of this list will have the most impact on estate planning because the focus is on the ability of the owner to have his or her interest redeemed rather than restrictions on the ability to liquidate the entity.  
BDO Insights The proposed regulations would have a significant impact on lack of control and minority discounts for estate, gift and generation skipping tax purposes when clients transfer interests in family controlled entities.  Given that the regulations, as proposed, may become final as early as the end of this year, clients holding interests in family controlled businesses may want to complete estate planning transfers of such interests prior to the date the regulations could be published as final.
 
For more information, please contact one of the following regional practice leaders: 
  Jeff Kane
National Managing Partner - Private Client Services                      Marty Cass
Regional Practice Leader - Private Client Services   Brooke Anderson
Regional Practice Leader - Private Client Services   Jerry Guillott
Regional Practice Leader - Private Client Services   Chuck Barragato
Regional Practice Leader - Private Client Services   Jack Nuckolls
Technical Director - Private Client Services   Sharon Berman
Regional Practice Leader - Private Client Services   Traci Kratish
Managing Director - Private Client Services     Mike Campbell
Regional Practice Leader - Private Client Services    

State and Local Tax Alert - August 2016

Tue, 08/09/2016 - 12:00am
Pennsylvania Adopts Corporate Tax Amended Return Provisions, Subjects Digital Goods to Sales/Use Tax, Establishes a Tax Amnesty Program, and Creates New Tax Credits and Incentives Download PDF Version
Summary On July 13, 2016, Pennsylvania Governor Tom Wolf (D) signed into law H.B. 1198, 2015-2016 Reg. Sess. (Pa. 2016), which broadens the sales and use tax base to include digital goods (whether digitally or electronically delivered, streamed, or accessed), and includes provisions that require the Department of Revenue to revise the tax due upon review of an amended corporate tax return.  In addition, H.B. 1198 makes various changes to the Bank and Trust Company Shares Tax, establishes a 60 day tax amnesty program, and amends and creates several tax credits and incentives.
  Details

Sales/Use Tax on Digital Goods
Effective as of August 1, 2016, H.B. 1198 broadens the sales and use tax base to include digital goods whether digitally or electronically delivered, streamed, or accessed.  Specifically, H.B. 1198 defines tangible personal property to include video, photographs, books, music, games, canned software, applications (or “apps”), satellite radio service, and any other taxable tangible personal property digitally or electronically delivered, streamed, or accessed.  These items, including updates, support, and maintenance, are subject to tax whether purchased by subscription, singly, or in any other manner.  Previously, the Department had administratively taxed canned software accessed electronically.

Amended Corporate Tax Returns
Pursuant to H.B. 1198, for amended Corporate Net Income Tax, Capital Stock/Franchise Tax, Bank and Trust Company Shares Tax, Title Insurance Companies Shares Tax, Insurance Premiums Tax, Gross Receipts Tax, and Mutual Thrift Institutions Tax returns filed after December 31, 2016, Pennsylvania requires the Department to act on the return and provide written notice explaining whether it accepts the return within one year of filing, unless the taxpayer consents to an extension.  Currently, the Department is not obligated to revise the tax due upon review of an amended return.

If the Department does not provide timely notice, the return is deemed accepted as filed, and the Department must adjust its records accordingly.  A taxpayer who disagrees with the Department’s decision with respect to an amended return may, under most circumstances, file a petition for review with the Board of Appeals within 90 days of the Department’s written notice.  Where prohibited from filing a petition for review, the taxpayer may pay the tax, interest and penalties due, and request a refund within the statute of limitations.  Currently, a failure of the Department to revise the tax due is not an appealable action.

However, H.B. 1198 prohibits a taxpayer from filing an amended return if: (i) the taxpayer may file a timely petition for reassessment, unless the taxpayer would be entitled to an adjustment of tax liability as defined by the Department’s regulations; (ii) an administrative appeal board or court has already addressed an issue raised in an amended return for the taxable year; or (iii) the taxpayer takes a position on the return contrary to law or published Department policy.  In addition, the filing of an amended return extends the statute of limitations on the Department’s authority to assess tax to the later of 1 year after the amended return was filed or 3 years after the original return was filed.

Corporate Net Income Tax Return Due Date
Effective for taxable periods beginning after December 31, 2015, H.B. 1198 amends the return due date of a calendar year taxpayer to 30 days after the federal income tax return due date.  For other taxable periods, a calendar year taxpayer is required to report and pay by April 15th following the close of the taxable year.

Bank and Trust Company Shares Tax Changes
H.B. 1198 makes various changes to the Bank and Trust Company Shares Tax.  For example, H.B. 1198: (i) increases the Bank and Trust Company Shares Tax rate to 0.95 percent; (ii) extends the option to use Method I to source investment income receipts to taxpayers without trading receipts; (iii) includes receipts of non-bank subsidiaries in the apportionment factor; (iv) eliminates the $100,000 minimum receipts nexus threshold; (v) makes a clarifying adjustment to the U.S. obligations subtraction; and (vi) provides an exclusion from bank equity for the equity in a foreign bank.  See BDO Knows Financial Institutions & Specialty Finance Alert - July 2016 for a more detailed discussion of these changes.

Tax Amnesty Program
H.B. 1198 requires the governor to establish a 60 day tax amnesty program for a period ending no later than June 30, 2017.   In addition, H.B. 1198 requires the Department to develop and publish guidelines for the program within 60 days of July 13, 2016. 

The amnesty program applies to any tax administered by the Department and to liabilities delinquent as of December 31, 2015, including a liability related to an unfiled return.  H.B. 1198 imposes a 5-percent non-participation penalty.

The amnesty program entitles a participating taxpayer to waiver of all penalties and 50 percent of interest and a limited look back period for any unknown liabilities due prior to January 1, 2011.  However, the amnesty program requires the taxpayer to file all original and amended returns for all required years, and bars a participating taxpayer from participating in a future amnesty program.

New and Amended Tax Credits and Incentives
Under H.B. 1198, Pennsylvania creates and amends many credits and incentives that apply to various taxpayers and tax types.  Most of the new tax credits and incentives are available beginning July 1, 2017.  The charts on the following pages provide a brief summary of the credits and incentives addressed in H.B. 1198.


BDO Insights
  • Taxpayers should consider updating their sales and use tax systems to collect the appropriate tax on sales of digital goods beginning August 1, 2016.  In addition, taxpayers should assess whether use tax is due on a purchase of a digital good where no sales tax has been paid.

  • The amended return provisions enacted under H.B. 1198 are a welcome change.  As noted, the Department is currently not obligated to revise the tax due upon review of a corporate tax amended return.  This typically requires a taxpayer to file a more costly petition for refund with the Board of Appeals or risk the Department not acting on the amended return before the statute of limitations to file a petition for refund expires.  Taxpayers contemplating filing an amended return (or a petition for refund), should consider whether to wait until December 31, 2016, to file, provided waiting would not impact any refund rights under the statute of limitations.

  • The amnesty program provides an opportunity for a taxpayer with a delinquent liability to qualify for 100-percent penalty waiver and 50-percent interest waiver.  However, Pennsylvania, like most states, has a Voluntary Disclosure Agreement (or “VDA”) program for taxpayers with liabilities unknown to the state that voluntarily come forward and report and pay tax.  Under the VDA program, a taxpayer typically only receives penalty waiver, and the state applies look back periods as follows: (i) corporate taxpayers – 5 years, plus the current year; and (ii) non-corporate taxpayers – 3 years, plus the current year.  Taxpayers considering voluntarily reporting unknown liabilities should assess whether amnesty or a VDA is more advantageous.

  • Pennsylvania taxpayers should consider whether they may benefit from any of the tax credits and incentives addressed in H.B. 1198, including, where applicable, through sale or assignment.
     


For more information, please contact one of the following regional practice leaders:

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 


Southeast:

  Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director
    Richard Spengler
Tax Senior Director
  Tony Manners
Tax Senior Director






   


Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner

Compensation & Benefits Alert - July 2016

Mon, 08/01/2016 - 12:00am
Newly Proposed Section 457(f) Regulations Provide Plan Design Opportunities for Tax-Exempt Employers Download PDF Version
Summary Recently, the IRS released proposed regulations that provide guidance for the nonqualified deferred compensation arrangements of tax-exempt organizations (as well as state or local governments).   These long-awaited rules address the interplay between Section 457 and Section 409A governing the nonqualified deferred compensation arrangements of all employers (including tax-exempts).  The newly proposed Section 457 regulations provide plan design opportunities for tax-exempt employers. 

Tax-exempt and governmental employers should review their deferred compensation arrangements, severance plans, and welfare benefit plans in light of these proposed regulations, and consider plan design changes that enhance their objectives within the confines of these rules. 

The proposed regulations become effective upon finalization, but may be relied upon in the meantime.
Details There are several plan design opportunities included in the proposed regulations. Section 457(f) requires the immediate taxation of nonqualified deferred compensation upon vesting.  Its newly proposed regulations contain plan design features that effectively delay the vesting event, thereby avoiding immediate taxation under Section 457(f).   
 
  • Rolling Risk of Forfeiture:  The proposed regulations permit an upcoming vesting date (and the point of taxation) to be extended, provided:  (i) the extension is made at least 90 days before the  vesting date; (ii) the extended vesting is conditioned upon the employee’s provision of substantial services for at least two years (absent an intervening event such as death, disability, or involuntary severance from employment); and (iii) the present value of the amount to be paid at vesting must be more than 125% of the amount the employee otherwise would have received in absence of the extended vesting date. 
 
  • BDO Insight:  Section 409A similarly disregards an extended risk of forfeiture, unless the present value of the deferral is materially greater than the amount otherwise payable absent such extension.  However, Section 409A does not provide a bright line test to determine “materially greater” and does not require a two-year, service-based minimum extension.  The Section 457 proposed regulations are more rigid with respect to tax-exempt employers.  Where an employer is exempt from US taxation, the employee derives a tax benefit from the deferral while the employer is indifferent.  The additional payout required under the Section 457 proposed regulations is designed to constrain tax-motivated deferrals by employees.  A tax-exempt employer may not be as willing to agree to the additional vesting period if the payout is significantly higher (e.g., pay the employee $100,000 in 2018 or more than $125,000 in 2020).
     
  • Salary Deferrals:  Under prior guidance, current compensation (e.g., salary, commissions, and certain bonuses) was considered vested and therefore ineligible for deferral under Section 457(f).  However, the proposed regulations permit current compensation to be deferred under Section 457(f), provided the following  rules are met:  (i) the deferral election must be made in writing before the beginning of the calendar year in which any services that give rise to the compensation are performed (or within 30 days after a new employee’s hire date for pay attributable to services rendered after the deferral election),  (ii) payment of the deferred amounts must be conditioned upon the employee’s substantial services for at least two years (absent an applicable intervening event), and (iii) the present value of the amount to be paid at vesting must be more than 125% of the amount the employee otherwise would have received in absence of the deferral.
 
  • BDO Insight:  The two-year minimum deferral period applies separately to each payroll deferral.  Also, an employer match of more than 25% may be required to satisfy the 125% rule for salary deferrals. 
 
  • Noncompete Agreements:  Under prior guidance, the vesting schedule for deferred compensation served as a retention mechanism, requiring the employee’s continuous services through the vesting date as a condition to receive the amount.  Under the newly proposed regulations, vesting may also serve as an enforcement mechanism for a noncompete covenant, requiring an employee to refrain from providing services to a competitor for a specified period.  Provided the noncompete is a written, bona fide, and enforceable covenant, the vesting period may be extended through the end of the restrictive period, allowing tax-exempt employers to make post-employment payments during such period.  In addition, deferred compensation payable upon a voluntary termination is no longer treated as fully-vested at all times if the amounts could be forfeited in accordance with the terms of a bona fide noncompete covenant
 
  • BDO Insight:  Among other factors applied to determine a bona fide noncompete covenant, the facts and circumstances must show that the employer has a substantial interest in preventing the employee from performing the prohibited services.  To the extent the compensation paid to the employee for entering into a noncompete agreement exceeds the value of such agreement (measured, for example, by the economic damages the organization would incur from an employee’s violation of that covenant), then the restrictive covenant may not be a bona fide noncompete agreement for purposes of Section 457.  A valuation of the noncompete agreement may be in order to support an extension of the vesting date to the end of the restrictive period.
​  
  • Short-Term Deferrals:  The proposed regulations provide that Section 457(f) does not apply to an arrangement in which payment is made within the “2 ½ month short-term deferral period” under Section 409A (generally, March 15 of the first calendar year following the year of vesting).
 
  • BDO Insight:  The Section 457 proposed regulations apply the Section 409A definition of short-term deferral, but substitute its own definition for “substantial risk of forfeiture.”  Accordingly, a short-term deferral under Section 457 may not constitute a short-term deferral under Section 409A (as in the case of a plan with a noncompete vesting provision).  Technically, income taxes are due upon vesting under Section 457(f).  However, the proposed regulations make clear that short-term deferrals are not subject to Section 457(f), thereby allowing income taxes to be collected upon distribution, which is administratively convenient where there is a gap between the vesting and distribution dates.
   
  • Severance Pay:  The proposed regulations provide that Section 457(f) does not apply to severance pay in connection with an involuntary separation from service (including a voluntary termination by the employee for a pre-established, good reason condition that has not been remedied by the employer) or pursuant to a window program or an early retirement incentive plan.  Payments under such “bona fide severance pay plans” must not exceed two times the employee’s annualized compensation for the preceding calendar year (or the current calendar year if the employee had no compensation from the employer in the preceding year) and payment must be made by the last day of the second calendar year following the calendar year in which the severance occurs. 
 
  • BDO Insight:  Pay due to an involuntary separation from service or participation in a window program is similarly exempt from Section 409A in limited amounts (the lesser of two times the employee’s annual rate of pay for the preceding year or two times the compensation limit set forth under Section 401(a)(17) for the year of separation).    
​  
  • Other Welfare Plans:  The proposed regulations clarify that Section 457(f) does not apply to bona fide death benefit, disability pay, sick leave, and vacation leave plans.
 
  •  BDO Insight:  Section 409A similarly exempts such welfare plans from its deferred compensation rules. 

Additional Provisions The proposed regulations also confirm that Section 457(f) applies separately and in addition to Section 409A, address recurring part-year compensation for educational institutions, provide methods to calculate the present value of deferred compensation (which are similar to the rules set forth in the existing Section 409A proposed regulations), and reflect other statutory changes impacting Section 457 since the publication of its final regulations in 2003. 
 
For questions related to matters discussed above, please contact one of the following practice leaders:
  Peter Klinger
Principal, National Tax - Compensation & Benefits Joan Vines
Senior Director, National - Tax Compensation & Benefits Carl Toppin
Senior Manager, Tax - Compensation & Benefits

State and Local Tax Alert - July 2016

Fri, 07/29/2016 - 12:00am
South Carolina Issues Guidance on the Application of the IRC § 382 Limitation Download PDF Version
Summary On July 6, 2016, the South Carolina Department of Revenue issued Revenue Ruling No. 16-7 (“Rev. Rul. No. 16-7”), in which the Department discusses the application of IRC § 382 as it relates to a multi-state South Carolina taxpayer.  The revenue ruling addresses the apportionment of the federal IRC § 382 limitation (“382 Limitation”), the adjustment to the South Carolina 382 Limitation for a recognized built-in gain (“RBIG”), and the adjustment to the South Carolina pre-ownership net operating losses (“NOL”) for a recognized built-in loss (“RBIL”).  Rev. Rul. No. 16-7 applies to all periods open under the statute.
  Details Background1
South Carolina, a separate company reporting state, allows a deduction for a post-apportioned NOL, applies a 20 year carryforward period, and adopts IRC § 382.  However, until the issuance of Rev. Rul. No. 16-7, South Carolina has not provided guidance regarding the application of IRC § 382 to a multi-state South Carolina taxpayer, including the apportionment of the federal 382 Limitation, the determination of net unrealized built-in gains (“NUBIG”), RBIGs, net unrealized built-in losses (“NUBIL”), and RBILs for South Carolina income tax purposes.

Very generally, following an “ownership change,” as that term is defined for federal income tax purposes, IRC § 382 applies an annual limitation to a loss corporation’s use of an NOL carryforward attributed to a pre-ownership change NOL.  The amount of the annual limitation is the product of the loss corporation’s value at the time of the ownership change, and the published federal long-term tax-exempt rate, where the loss corporation’s value is based on the fair market value (“FMV”) of its stock.

The federal 382 Limitation may be increased for a NUBIG recognized (i.e., an RBIG) by the loss corporation during the 5 year period following the ownership change, provided that a threshold is met, and the aggregate increases do not exceed the loss corporation’s NUBIG at the time of the ownership change.  A NUBIL recognized (i.e., an RBIL) during the 5 year recognition period may be added to the pre-ownership change NOLs, provided that a threshold is met, and the aggregate RBILs do not exceed the loss corporation’s NUBIL.
A NUBIG arises when the fair market value of the loss corporation’s assets (other than cash and certain cash equivalents) at the time of the ownership change exceeds their adjusted bases.  A NUBIL arises when the adjusted bases of the assets at the time of the ownership change exceeds their fair market value.

South Carolina 382 Limitation

Since South Carolina typically requires separate company reporting, the South Carolina 382 Limitation of a multi-state corporation is the product of the federal 382 Limitation of the loss corporation as calculated on a separate company basis, and the loss corporation’s South Carolina apportionment percentage for the year in which the ownership change occurs.2  South Carolina NUBIGs, RBIGs, NUBILs, and RBILs are also calculated on a separate company basis.

South Carolina Net Unrealized Built-In Gains and Recognized Built-In Gains

Federal NUBIG threshold – For federal income tax purposes, a loss corporation meets the NUBIG threshold where its NUBIG exceeds either one of the following: (1) $10 million; or (2) 15 percent of the FMV of the loss corporation’s assets (other than cash and certain cash equivalents) on the date of the ownership change.

South Carolina NUBIG threshold if federal threshold is met – South Carolina deems the NUBIG threshold met if met for federal income tax purposes.  In that case, South Carolina provides the following two methods for purposes of calculating the South Carolina NUBIG:
  1. Simplified Method – The product of the federal NUBIG, and the South Carolina apportionment percentage for the year in which the ownership change occurs; or
  2. Detailed Method – The federal NUBIG attributed to real property of the loss corporation located in South Carolina, plus the product of the federal NUBIG attributed to the loss corporation’s other assets and the South Carolina apportionment percentage for the year in which the ownership change occurs, where the bases of the assets are adjusted for any federal-state depreciation differences.
South Carolina NUBIG threshold if federal threshold is not met – If the federal NUBIG threshold has not been met, a loss corporation must determine whether or not it meets the South Carolina NUBIG threshold.  A loss corporation meets the South Carolina NUBIG threshold if its South Carolina NUBIG exceeds either of the following: (1) the product of $10 million, and the loss corporation’s South Carolina apportionment percentage for the year in which the ownership change occurs; or (2) the product of 15 percent of the FMV of the loss corporation’s assets (other than cash and certain cash equivalents), and the South Carolina apportionment percentage for the year in which the ownership change occurs.

South Carolina RBIG – If the loss corporation meets the South Carolina NUBIG threshold requirement, then it may increase its South Carolina 382 Limitation by a South Carolina RBIG arising during the 5 year recognition period to the extent the aggregate increase in the South Carolina 382 Limitation does not exceed the South Carolina NUBIG.  The South Carolina RBIG is calculated using an approach similar to the one described under the Detailed Method above, regardless of whether the loss corporation opted to use the Simplified or the Detailed Method to calculate its South Carolina NUBIG.

South Carolina Net Unrealized Built-In Losses and Recognized Built-In Losses

Federal NUBIL threshold – For federal income tax purposes, a loss corporation meets the NUBIL threshold where its NUBIL exceeds either of the following: (1) $10 million; or (2) 15 percent of the FMV of the loss corporation’s assets (other than cash and certain cash equivalents) on the date of the ownership change.

South Carolina NUBIL threshold if federal threshold is met – If the federal NUBIL threshold is met, a loss corporation must determine its South Carolina NUBIL threshold, which is the lesser of either of the following: (1) the product of $10 million, and the South Carolina apportionment percentage for the year in which the ownership change occurs; or (2) the product of 15 percent of the FMV of the loss corporation’s assets (other than cash and certain cash equivalents), and the South Carolina apportionment percentage for the year in which the ownership change occurs.

If the South Carolina NUBIL of a loss corporation, calculated in a manner similar to the South Carolina NUBIG, does not exceed the applicable threshold amount, then none of the loss corporation’s South Carolina RBILs are subject to the South Carolina 382 Limitation.  Alternatively, if the South Carolina NUBIL exceeds the applicable NUBIL threshold, then an RBIL arising during the 5 year recognition period is subject to the South Carolina 382 Limitation.

South Carolina RBIL – The South Carolina RBIL is calculated using an approach similar to the one described under Detailed Method above.
  BDO Insights
  • South Carolina is among the minority of states that have provided detailed guidance related to the application of IRC § 382.  South Carolina taxpayers that have undergone an ownership change should refer to Rev. Rul. No. 16-7 for purposes of calculating their South Carolina 382 limitation or, given the significant complexities associated with this topic, consult with their tax advisor.
   
For more information, please contact one of the following regional practice leaders:
  West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director
    Richard Spengler
Tax Senior Director
  Tony Manners
Tax Senior Director






   
Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner
 
[1] For a detailed discussion regarding IRC § 382, including the terms contained herein, see Rev. Rul. No. 16-7.
[2] Rev. Rul. No. 16-7 advises that if a South Carolina nexus consolidated return is elected, aspects of the South Carolina 382 Limitation are calculated on a separate company basis in that case as well, because a South Carolina nexus consolidated return is a “post-apportionment-style” consolidated return.

BEPS Netherlands Profile

Wed, 07/27/2016 - 12:00am



1) Has the Netherlands implemented any BEPS recommendations? If so, which Action Items? 
Regarding BEPS Action Items 2, 3 and 4, the Dutch government believes that only multilateral initiatives can address these issues effectively.  In this respect, the Netherlands has no plans to tighten regulations unilaterally in these areas.
 
The Netherlands has already updated its legislation or international policy regarding Action Items 6, 7, 13 and 14, or has plans to update these Action Items.  The Netherlands has started exchanging rulings with other tax authorities, beginning 2016.  The Dutch innovation box regime will be adjusted on January 1, 2017, as a result of Action Item 5.  Additional transfer pricing documentation legislation was introduced on January 1, 2016.
 
2) What is the Dutch expected timeline for implementing country-by-country reporting? 
On September 15, 2015, the Dutch State Secretary of Finance released a new law containing modifications to the Dutch Corporate Income Tax Act 1969.  The new legislation includes additional (mandatory) transfer pricing documentation requirements in line with the three-tiered approach of Action Item 13, including country-by-country reporting.

On December 22, 2015, the Dutch Senate approved a new law detailing transfer pricing documentation requirements.  It is effective as of January 1, 2016. 

3) If the Netherlands has already implemented CbC, what has been the reaction from taxpayers? 
In June and December of 2015, BDO provided a large seminar for clients and potential clients regarding the BEPS project and the changing tax environment.  The seminar was well attended, indicating that the BEPS project and future changes in legislation are important to our clients.  In this respect, most of clients are well aware and/or interested in the proposed changes, and would like to know how they should respond to this new tax environment.

4) What measures are multinationals in the Netherlands taking to prepare for country-by-country reporting?  
From our experience, multinationals have taken various measures to prepare for country-by-country reporting. Some of our clients take immediate measures to prepare country-by-country reporting, such as a dry run, and make sure they are compliant with the new tax regulations.  Other multinationals have not taken measures yet to prepare for country-by-country reporting, as they have the impression they have more time to prepare and execute the actual tax framework.  Overall, it seems that most taxpayers are taking measures, or plan to take measures, to address country-by-country reporting. 

5) If the Netherlands has already implemented CbC, what challenges are taxpayers facing or anticipated to face? 
The new country-by-country reporting law takes effect from January 1, 2016.  The law requires a master file and local file to be submitted by Dutch entities that are part of a multinational group with a consolidated turnover exceeding the €50 million.  The country-by-country reporting requirements apply to Dutch tax resident entities that are members of a multinational group with a minimum consolidated group turnover of €750 million.  The multinational group is obliged to provide a country-by-country report within one year after the end of the reporting financial year to the tax authorities where the ultimate head of the group is located.  Under certain circumstances, such as gross negligence, non-compliance with the country-by-country report filing requirement could result in an administrative fine.  In addition, in case of non-compliance with any of the new transfer pricing documentation requirements, criminal sanctions may be imposed.

The challenges they may face are reporting issues (i.e., different IT systems) and implementation guidance.

6) Are the Dutch taxing authorities taking any measures to prepare for any changes brought about by BEPS (e.g., changes in staffing, increases in budgets)? 
The Dutch tax authorities have a team focusing on transfer pricing-related issues.  The Dutch tax authorities also intend to form a new team that will predominately focus on country-by-country reporting.  The Dutch tax authorities are looking to hire approximately 20 full time employees for this team.

7) How will country-by-country reporting affect how you provide services to your clients? 
Historically, BDO Netherlands has a strong focus on small and medium sized clients/companies.  Thus, BDO Netherlands does not have many clients reporting turnover exceeding €750 million. 

State and Local Tax Alert - July 2016

Wed, 07/27/2016 - 12:00am
Nevada Issues Commerce Tax Regulations Defining "Engaging in Business" and "Intangible Investments," Situs of Gross Receipts, Reporting Requirements, and Other Provisions Download PDF Version
Summary Effective June 28, 2016, Nevada adopts regulations to accompany the Commerce Tax that was enacted in June 2015, and which applies to taxable years beginning on or after July 1, 2015. See the BDO SALT alert. The regulations address the definitions of “engaging in business” and “intangible investments,” reporting requirements (including for an entity that falls under the four million dollars Nevada gross revenue threshold), the situs of gross receipts, the method for determining business category, the Payroll Tax credit, and a penalty waiver in the event the taxpayer relied on its most recent federal income tax or Commerce Tax return.
Details Background
Starting with the taxable period beginning July 1, 2015, Nevada imposes the Commerce Tax measured by the Nevada gross revenue of a business entity engaging in business in the state if the entity has Nevada gross revenue in excess of four million dollars during a taxable year. Nevada gross revenue is generally defined as gross revenue (as adjusted for various deductions) sitused to the state. The rate of tax, which ranges from 0.051 percent to 0.331 percent, depends on the designated business category. A taxable year for all purposes is a 12-month period beginning on July 1 and ending on June 30, and returns and payments are due 45 days after year end (excluding an extension).

Engaging in Business
The statute defines “engaging in business” to include such activities as commencing, conducting, or continuing a business, and the exercise of corporate or franchise powers regarding a business. The regulation expands on the definition in the statute by listing approximately 20 activities that may constitute engaging in business in the state, including: (i) entering the state to purchase, place, or display advertising for the benefit of another person; (ii) using a business entity’s own vehicles to deliver items into the state, which the business entity sold; (iii) holding inventory in the state, including consigned goods or materials sent to the state to be stored while awaiting orders for the shipment of materials; (iv) having employees or representatives in the state conduct the taxpayer’s business; (v) having an independent contractor or agent in the state to promote the sale of goods or services; and (vi) engaging in any other activity that constitutes nexus under the U.S. Constitution.
 
Reporting Requirements
The regulation clarifies that an entity doing business in the state that has Nevada receipts under the four million dollar gross revenue threshold must file a return. However, the regulation permits such an entity to file an abbreviated report that only includes the following: (i) the name, address, and Nevada tax identification number of the entity; (ii) the NAICS code that corresponds with the entity’s primary business; (iii) the taxable year; and (iv) an affirmation that the entity’s Nevada receipts for the taxable year were less than four million dollars. In addition, the regulation imposes the electronic registration, reporting, payment, and record retention requirements applicable to other taxes to the Commerce Tax.
 
Situs of Gross Receipts from Services
For Commerce Tax purposes, Nevada generally requires a taxpayer to source receipts from the sale of a service to the state to the extent the purchaser received benefit from the service in Nevada. The regulation provides specific rules for the situs of receipts of approximately 50 services under this general rule, including accounting and financial, computer programming, data processing, legal, management consulting, and web hosting services.
 
Intangible Investments
Nevada exempts a business from its Commerce Tax if it confines its activities in the state to the owning, maintenance, and management of “intangible investments.” The regulation specifies that an intangible investment includes an interest in any entity, including an S corporation, a partnership, or limited liability company.
 
Method of Determining Business Category
A taxpayer must designate its business category (based on NAICS classification) on its initial return for purposes of applying the proper tax rate on its initial and subsequently filed returns. For a taxpayer engaged in more than one business category, the business category in which the highest percentage of the taxpayer’s Nevada gross revenue is generated is the one that is designated.

The regulations allow a taxpayer that engages in more than one business to elect to use one of the following two methods to determine its business category: (i) the business category with the greatest percentage of the taxpayer’s Nevada gross revenue for the taxable year for which the initial return is filed; or (ii) the business category with the greatest average percentage of the taxpayer’s Nevada gross revenue for the three fiscal years immediately preceding the filing of the initial return. In addition, the regulations provide procedural rules for filing a written request for change in business category, including the due date for the request (i.e., “on or before the date on which the Nevada Commerce Tax Return for the taxable year”), the contents of the request, and the required time period for the Department of Taxation to respond (i.e., 60 days or a deemed approval applies).

Payroll Tax Credit
Nevada allows an employer to take a credit against the Nevada Payroll Tax, a two percent excise tax imposed on the wages paid by the employer, equal to 50 percent of the Commerce Tax paid for the preceding taxable year.

The regulation both expands and limits the credit under certain circumstances. The regulation expands the credit by authorizing a business entity that qualifies as a payroll provider to take a credit against its payroll tax for 50 percent of the Commerce Tax paid by each qualifying member of the affiliated group. The regulation limits the credit to the extent an employer has a Commerce Tax deficiency.

For purposes of the credit, the regulation generally defines a payroll provider as an employer that is a member of an affiliated group that provides payroll services and reports and pays wages on behalf of one or more members of the affiliated group. In this case, a qualifying member of the affiliated group is generally a member that would be subject to the payroll tax if the employees were treated as employees of the member rather than as employees of the payroll provider.
 
Penalty Waiver
In addition to the traditional grounds for penalty waiver (e.g., a late payment caused by circumstances beyond the control of the taxpayer despite the exercise of ordinary care and without intent), the regulation allows the Department to waive or reduce penalties and interest where the Department determines that the late payment was made because the taxpayer relied upon its most recent federal income tax return or Commerce Tax return to calculate Nevada gross revenue.
 
Compromise, Penalties, and Voluntary Disclosure
The regulation applies the compromise, penalties, and voluntary disclosure provisions of general application under Chapter 360 of the Nevada Administrative Code to the Commerce Tax.
  BDO Insights
  • Nevada adopted the Commerce Tax regulations just in time for the first report due August 15, 2016 (i.e., August 14, 2016, falls on a Sunday). A business unprepared for this due date may request a 30 day extension of time to pay the tax, subject to a 0.75 percent per month interest charge.
  • Currently, Nevada appears to adopt a physical presence nexus standard for purposes of the Commerce Tax. However, given the provision in the regulation that extends the definition of “engaging in business” to “any other activity that constitutes sufficient nexus to subject the business entity to the commerce tax in a manner consistent with the United States Constitution,” and pending litigation in other states regarding the application of an economic nexus standard to sales and use and gross receipts taxes, this could change.
 
For more information, please contact one of the following regional practice leaders:
  West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director
    Richard Spengler
Tax Senior Director
  Tony Manners
Tax Senior Director






   
Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner
 

State and Local Tax Alert - July 2016

Thu, 07/21/2016 - 12:00am
Tennessee Department of Revenue Issues Final Franchise and Excise Tax Market Sourcing Regulations
Download PDF Version
Summary On June 28, 2016, the Tennessee Department of Revenue filed final Franchise and Excise Tax regulations with the Secretary of State to assist with the implementation of Tennessee’s switch to market sourcing (Rule 1320-06-01-.42). The regulations apply to taxable years beginning on or after July 1, 2016, but do not become effective until September 26, 2016 (90 days after filed with the Secretary of State as per the Tennessee Administrative Procedures Act, T.C.A. § 4-5-207).
Details Background and General Sourcing Framework

Tennessee abandoned the costs of performance method for assigning sales of services and licenses and sales of intangibles for Franchise and Excise Tax purposes in favor of market sourcing upon enactment of the Revenue Modernization Act of 2015 in June 2015. See BDO SALT alert. Pursuant to that law, for taxable years beginning on or after July 1, 2016, Tennessee generally assigns sales of services to Tennessee to the extent the service is delivered to a location in the state, and licenses and sales of intangibles to the extent the intangible property is used in the state.

The regulations, which are based on the model regulations issued by the Multistate Tax Commission (“MTC”), even though those model regulations (the “MTC Model”) remain a “working draft” and have not been adopted by the MTC’s Executive Committee in final form, follow the MTC Model’s hierarchy approach to sourcing services. As such, the regulations apply a complicated set of cascading sourcing rules, distinguish between in-person services, professional services, and services delivered to, or on behalf of, or through a customer, adopt a throw-out rule, and impose documentation requirements on taxpayers to substantiate their sourcing determinations. The new market sourcing regulations also distinguish between marketing and production intangibles. The regulations make extensive use of examples to illustrate the application of Tennessee’s market sourcing provisions.

With respect to sales of services, the regulations permit the use of reasonable approximation methods to assign receipts, but generally require reasonable approximation to reflect an effort by the taxpayer to approximate the results that would be obtained under a specific method for the type of service set forth in the regulations. In addition, many of the specific types of services assignment rules provide specific reasonable approximation methods used to source sales where sales may not be reasonably assigned under a higher priority rule.
 
In-Person Services

The regulations assign sales from the performance of in-person services to the location where the service is delivered in the physical presence of the customer or the customer’s property.
 
Professional Services

Professional services require specialized knowledge, license or degree, and include legal, accounting, management, financial, investment, fiduciary, payroll, data processing, consulting, and engineering services. Tennessee assigns sales of professional services depending on whether they are provided to an individual or business customer. In the event there is an overlap between an in-person service and a professional service (e.g., medical or dental services), then the in-person services sourcing rules apply, except with respect to legal, accounting, financial, and consulting services for which the professional services sourcing rules apply.

Professional services provided to an individual - The regulations assign sales of professional services provided to an individual to the individual’s primary residence, or, if the service provider does not have information regarding the customer’s primary residence, then to the customer’s billing address. However, a taxpayer that derives more than 5 percent of its sales of services from a customer must assign the sales to that customer to the customer’s state of primary residence.

Professional services provided to a business - The regulations assign sales of professional services provided to a business customer according to the following hierarchy: first, to the place where the contract of sale is principally managed by the customer; then to the customer’s place of order if the sales have not been assigned; and, if the sales still have not be assigned, then to the customer’s billing address. However, similar to where the customer is an individual, a taxpayer that derives more than 5 percent of its sales of services from a customer must assign the sales to that customer to the state where the contract of sale is principally managed by the customer.

Professional services billing address safe harbor - The regulations provide a billing address safe harbor for sales of professional services that may be utilized to assign sales of professional services, regardless of the rules discussed above. Specifically, sales of professional services may be assigned to customer billing addresses if the service provider engages in substantially similar services with more than 250 customers, and does not derive more than 5 percent of its sales from that customer. Accordingly, if a customer accounts for more than 5 percent of the service provider’s sales, then the billing address safe harbor cannot be used to assign sales to that large-volume customer.

Architectural, broadcasting advertising and engineering services - The regulations provide special sourcing provisions for architectural, broadcasting advertising, and engineering services. Specifically, the regulations assign sales of architectural and engineering services provided with respect to tangible personal property or real estate improvements to the state(s) where and to the extent the property is or expected to be located. A television broadcast network, cable program network, or television distribution company that sells advertising services to a broadcast customer assigns sales to the customer’s state of commercial domicile.
 
Services Delivered To or On Behalf of a Customer, or Delivered Electronically Through the Customer

With respect to sales of services delivered to or on behalf of a customer, or delivered electronically through the customer, the regulations distinguish between business and individual customers. A taxpayer that cannot reasonably make this determination must treat the customer as a business customer.

Services delivered to or on behalf of a customer by physical means - The regulations assign sales of services delivered to or on behalf of a customer by physical means to the location where the service is physically delivered to the customer, or to a third-party on behalf of the customer. If the actual delivery location is unknown, then it may be approximated.

Services delivered electronically to an individual customer - The regulations assign sales of services that are delivered electronically to an individual customer to the location where the service is actually received. If the actual location of receipt is unknown or cannot be reasonably estimated, then the sale is assigned to the customer’s billing address.

Services delivered electronically to a business customer - The regulations assign sales of services delivered electronically to a business customer to the location where the service is directly used by the customer’s employees or designees. Under a “secondary rule of reasonable approximation” sales are assigned according to the following hierarchy: first, to where the contract of sale is principally managed by the customer; then to the customer’s place of order; and, if the sale has still not been assigned, then to the customer’s billing address. A similar billing address “safe harbor” (and same large-volume customer exclusion) that may be applied for assigning sales of professional services also applies to services delivered electronically to a business customer.

Services delivered electronically through or on behalf of a customer - The regulations apply a “look-through rule” to sales of services delivered electronically through or on behalf of a customer, and assign such sales to the state of the customer’s end users or third-party recipients (i.e., the customers of the customer). If a taxpayer cannot determine the state(s) in which the services are actually delivered to end users or third-party recipients, a reasonable approximation method may be used to assign the sales. In addition, under an “intermediary rule,” if a service is delivered to a customer that acts as the taxpayer’s intermediary in reselling the service to end users or other third-party recipients, and the taxpayer lacks information to determine or reasonably approximate the end users’ locations, then the taxpayer must use a population ratio based on the state’s population in the specific geographic area in which the intermediary resells the service to assign sales. A similar rule applies where the taxpayer’s service is the direct or indirect electronic delivery of advertising on behalf of its customer to the customer’s intended audience.
 
Software Transactions

The regulations treat prewritten software for purposes of other than commercial reproduction as tangible personal property when delivered on a tangible medium, and generally apply the traditional “destination state” assignment rule applicable to sales of tangible personal property to assign sales therefrom. In all other software transactions, including electronically-delivered software, the regulations apply the rules applicable to services (e.g., custom software), the license of a marketing intangible, or the license of a production intangible, depending on the facts.
 
Digital Goods and Services

The regulations assign sales and licenses of digital products according to the rules for assigning sales of services delivered electronically to, or through or on behalf of, a customer, including the “look-through rule.”
 
Licenses of Intangibles

The regulations assign royalties and license fees from intangibles according to the sourcing methodologies in the
following chart: INTANGIBLE PROPERTY TYPE SOURCING METHODOLOGY Marketing intangibles (e.g., trademarks and service marks) Assigned to each state to the extent attributable to the sale of goods, services, or other items in the state Production intangibles (e.g., patents, copyrights, and manufacturing trade secrets) Assigned based on where they are used in the production process Mixed intangibles Assigned based on the license agreement if royalty or license fees are reasonably and separately established for each intangible component. Otherwise, a mixed intangible is treated as a marketing intangible. Intangibles licensed as part of the sale or lease of tangible property Apply the provisions that relate to the sale or lease of tangible property Intangibles that resembles a sale of goods or services Apply the provisions that relate to services delivered electronically to, or through or on behalf of, the customer  
Sales of Intangibles

If a sale of an intangible resembles a license or the sale of goods and services, the intangible licensing sourcing rules discussed above apply. Otherwise, except for intangibles that authorize business activity in a specific geographic area, sales of intangibles are excluded from the sales factor, including sales of goodwill, partnership interests, and covenants not to compete.
 
Throw-Out Rule

If the taxpayer cannot determine the state(s) of assignment of a sale based on the rules set forth in the regulations using a reasonable amount of effort, including the use of a reasonable approximation method, then the regulations require the taxpayer to exclude the sale from the numerator and denominator of the apportionment factor.
 
Documentation and Retention of Contemporaneous Records

As a taxpayer proceeds through its assignment determinations, the new regulations, like other states that adopted the MTC Model, require the taxpayer to make a good faith and reasonable effort to apply the applicable assignment rule under the hierarchy. Further, a taxpayer must document the basis for its determination that a higher priority rule did not apply in favor of applying a lower priority rule in the sourcing hierarchy. A taxpayer must also retain contemporaneous records that explain the determination and application of its method of assigning sales.
 
Ability of Taxpayer to Change Method of Services Receipts Sourcing

The Tennessee regulations provide that a taxpayer’s method of assigning sales must be applied consistently with respect to similar transactions from year-to-year.
  BDO Insights
  • Since market sourcing goes into effect for the Tennessee Franchise and Excise Tax for taxable years beginning on or after July 1, 2016, taxpayers have some time to consider the impact that the new Tennessee market sourcing regulations will have on them for tax reporting purposes, as well as the data that they will need to gather and evaluate to make their sourcing determinations. Regardless, however, since the new regulations and market sourcing are effective for taxable periods beginning on or after July 1, 2016, Tennessee taxpayers should assess what, if any, impact these regulations may have on their existing deferred tax balances for financial reporting purposes, and adjust accordingly as of the enactment date.
  • Given the requirement to consistently apply a sourcing methodology year-to-year, taxpayers should take deliberate steps as part of a defined process of making sourcing determinations under the new Tennessee regulations. For this reason, taxpayers should consider developing a fact-specific market sourcing study tailored to each of their revenue streams and markets, and substantiate with relevant books and records, including contracts and other factual data to support the underlying sourcing determinations. Under certain circumstances, receipts and other sourcing data collection, systems, and procedures may need to be modified to comply with the due diligence requirements being imposed by Tennessee.
  • The new Tennessee market sourcing regulations represent just one of several “models” being applied by different states that have also recently switched from sourcing services and intangibles receipts from the traditional costs of performance method to the market sourcing method. As a result of varying state approaches and complexities among the states, there is a significant risk for inconsistent and duplicative sales sourcing results for multistate intangible and services businesses, and, thus, a heightened risk for multiple taxation. Accordingly, multistate service providers, regardless of size, must apprise themselves of the increased sourcing analysis and documentation burden that the new Tennessee market sourcing regulations (and similar administrative rules issued by other states) will have on their tax compliance and tax planning.


For more information, please contact one of the following regional practice leaders:

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director
    Richard Spengler
Tax Senior Director
  Tony Manners
Tax Senior Director






   
Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner
 

State and Local Tax Alert - July 2016

Wed, 07/20/2016 - 12:00am
Louisiana and Vermont Enact Use Tax Notification/Reporting Requirements and Vermont Enacts Sales Tax Economic Nexus
Download PDF Version
Summary On June 17, 2016, Louisiana Governor John Bel Edwards (D) signed into law H.B. 1121, 2016 Regular Session (La. 2016), and, on May 25, 2016, Vermont Governor Peter Shumlin (D) signed into law H.B. 873, 2015-2016 Sess. (Vt. 2016) by which each state enacts use tax notification and/or reporting requirements that apply to remote sellers.  Vermont also adopted a sales/use tax economic nexus standard.
  Details Louisiana – Use Tax Notification and Reporting

By way of the enactment of H.B. 1121, Louisiana adopted use tax notification and reporting requirements that apply to “remote retailers,” effective July 1, 2017.  A remote retailer is generally defined as an out-of-state vendor that is not subject to sales tax where the cumulative Louisiana sales of the retailer and its affiliates exceed $50,000 per calendar year. 
 
Under H.B. 1121, a remote retailer is subject to the following use tax notification and reporting requirements:
         
  • At the time of the sale - A remote retailer must provide a Louisiana purchaser with notice that its purchase is subject to use tax, unless it is specifically exempt.  The notice must specify that there is no exemption based on the fact that a purchase is made over the Internet, by catalog, or by other remote means, and include a statement that Louisiana law requires that use tax be paid annually on the individual income tax return or through other means.
  • By January 31st of each year - A remote retailer must send an annual notice to a Louisiana purchaser that contains the amount paid for purchases in the preceding calendar year.  This notice must: (i) if available, contain a list of dates and amounts of purchases; (ii) if known, note whether the property or service is exempt; (iii) disclose the name of the retailer; and (iv) include a statement that Louisiana law requires that use tax be paid annually on the individual income tax return or through other means.
  • By March 1st of each year - A remote retailer must file an annual statement with the Department of Revenue that includes the total amount paid by the purchaser in the past calendar year.  It must not contain other detail as to the specific property and services purchased.
 
Vermont – Use Tax Notification

By way of enactment of H.B. 873, Vermont has adopted use tax notification requirements that apply to “noncollecting vendors,” effective the earlier of July 1, 2017, or beginning on the first day of the first quarter after the sales and use tax reporting requirements challenged in Direct Marketing Assoc. v. Brohl, 814 F. 3d 1129 (10th Cir. 2016) are implemented by Colorado.  A noncollecting vendor is generally defined as a vendor that makes taxable sales to Vermont purchasers, but does not collect sales tax. 
 
Under H.B. 873, a noncollecting vendor is subject to the following use tax notification requirements:
 
  • No specified due date - A noncollecting vendor must notify a Vermont purchaser that sales or use tax is due, and that Vermont requires the tax to be paid on his or her tax return.  Failure to provide the required notice may result in a $5 penalty for each instance of noncompliance. 
  • On or before January 31st of each year - A noncollecting vendor must send notification to a Vermont purchaser who had made $500 or more of purchases in the preceding calendar year that shows the total amount paid by the purchaser.  In addition, the notice must state that Vermont requires the reporting and payment of sales or use tax on nonexempt purchases.   Failure to provide the required notice may result in a $10 penalty for each instance of noncompliance.
 
Vermont – Economic Nexus
 
Also by way of enactment of H.B. 873, Vermont adopts a sales and use tax economic nexus standard.  According to this standard, a vendor has sales and use tax nexus in Vermont if:
 
  • During any 12 month period, its Vermont taxable sales are at least $100,000, or it has 200 or more individual sales transactions with Vermont customers; and
  • Engages in regular, systematic, or seasonal sales of tangible personal property in the state by the display of advertisements, the distribution of catalogues, periodicals and flyers, or by radio, television, mail, Internet, telephone, computer database, cable optic, cellular, or other communication systems.
 
This provision is effective the later of July 1, 2017, or beginning on the first day of the first quarter after a U.S. Supreme Court decision, or federal legislation is enacted, that overturns  the physical presence requirement of Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
 
 
BDO Insights
  • Beginning July 1, 2017, Louisiana remote retailers should consider whether they have a use tax notification and reporting obligation.  If so, such a remote retailer should ensure it has the systems in place to notify and report as required by the new law.
  • Beginning July 1, 2017, or if Colorado implements its use tax notification and reporting law, whichever first occurs, Vermont noncollecting vendors should make a similar assessment.  It is understood that a state court injunction prohibits Colorado from enforcing its use tax notification and reporting law, which Colorado won’t seek removal of until final resolution of Direct Marketing Assoc. v. Brohl.
  • Louisiana and Vermont are among a few states, including Kentucky, Oklahoma, South Carolina, South Dakota, and Vermont, that have enacted use tax notification and/or reporting laws.
  • States other than Vermont that have adopted a sales and use tax economic nexus standard include Alabama and South Dakota.  See the BDO SALT alert that discusses the Alabama economic nexus standard, and the BDO SALT alert that discusses the South Dakota economic nexus standard.  Tennessee also recently issued Proposed Rule 1320-05-01-.129, which, if promulgated, would establish a sales and use tax economic nexus standard in that state.  So, Tennessee may be the next state to adopt a sales and use tax economic nexus standard.
  • On June 8, 2016, Newegg, Inc. filed a Notice of Appeal in the Alabama Tax Tribunal challenging Alabama’s economic nexus regulation.  In addition, on April 29, 2016, American Catalog Mailers Association and Netchoice filed a Complaint for Declaratory Judgment in the Sixth Circuit Court of South Dakota challenging that state’s economic nexus law, which has the effect of staying enforcement of the law during the pendency of that action.
 


For more information, please contact one of the following regional practice leaders:

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director
    Richard Spengler
Tax Senior Director
  Tony Manners
Tax Senior Director






   
Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner
 

BDO Indirect Tax News - July 2016

Mon, 07/18/2016 - 12:00am
The latest edition of BDO International's Indirect Tax News covers current global developments in relation to indirect tax, including an update on the Gulf Cooperation Council States.
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State and Local Tax Alert - July 2016

Mon, 07/18/2016 - 12:00am
Massachusetts Appellate Court Holds Deferred Subscription Arrangement Did Not Constitute True Indebtedness and Disallows Interest and Liability Deductions
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Summary On June 8, 2016, the Massachusetts Appeals Court issued its decisions in companion cases National Grid Holdings, Inc. v. Commissioner of Revenue, No. 14-P-1662 (Jun. 8, 2016) (“Grid Holdings”) and National Grid USA Service Co., Inc. v. Commissioner of Revenue, No. 14-P-1861 (Jun. 8, 2016) (“Grid USA”).  In Grid Holdings, the court held that deferred subscription arrangements (“DSA”) between a UK parent corporation and various U.S. subsidiaries did not constitute true indebtedness.  In Grid USA, the court held that a closing agreement entered into between the taxpayer and the I.R.S. pursuant to which a portion of the interest expense on a DSA was allowed as a deduction for federal income tax purposes was not binding on the state.
  Details General Background

The taxpayers in Grid Holdings and Grid USA implemented a corporate structure that uses DSAs to replace and maintain the income tax benefits of a domestic reverse hybrid structure following the issuance of U.S. Treasury regulations that restricted the use thereof.  The DSAs were structured to be debt for U.S. tax purposes and equity for UK tax purposes so as to achieve related income tax benefits in both countries without subjecting certain UK entities to criminal sanctions for running afoul of UK law.  UK law prohibits debentures between UK entities and foreign subsidiaries.
 
On its combined Massachusetts Corporation Excise Tax return for the taxable year ended March 31, 2002, National Grid USA Service Company, Inc. (“NG Service”) deducted debt owed and payments made to related UK entities under the DSAs.  The Massachusetts Commissioner of Revenue denied the deductions because it had determined that the related debt did not constitute true indebtedness.1 The taxpayers, National Grid Holdings, Inc. (“NGHI”), National Grid USA (“NGUSA”), and NG Service, who are members of the Massachusetts combined group, filed an application or abatement with the Commissioner who denied it.  The taxpayers then appealed the Commissioner’s determination to the Massachusetts Appellate Tax Board where it was upheld.  The taxpayers then appealed to the Massachusetts Appeals Court.
 
Grid Holdings Background

In Grid Holdings, the court of appeal analyzed the following representative DSA structure in connection with its holding.
 
  • A UK parent corporation, National Grid plc (“NGPLC”) organized a UK subsidiary, National Grid Eight Limited (“NG8”), to enter into a DSA with NGHI, a U.S. subsidiary of NGPLC.
  • NGHI subscribed for 10 million shares of stock of NG8 for $2.695 billion under deferred payment terms.
  • After oral acceptance by NGHI of the subscription offer, NGHI made an initial payment to NG8 in the amount of $15 million and agreed to four additional deferred payments, referred to as “call payments.”  The call payments represented the remaining amounts due for the subscribed NG8 stock, plus interest.  The first three call payments represented interest only, and the fourth represented principal and interest.
  • Pursuant to a separate sale and purchase agreement (“S&P agreement”), NGHI then sold the shares to another U.S. affiliate, National Grid (US) Investments 4, Inc. (“NGUSI4”), in the amount of $2.68 billion and used the proceeds from the sale to repay loans related to the reverse hybrid structure.  NGHI remained liable to make the call payments to NG8.
  • NGHI was obligated to make the call payments after specified dates only after NG8 made a call for the payments by issuing a call payment notice.  If NG8 failed to issue a call payment notice, NGHI could request, through NGUSI4, that NG8 issue the call.
  • Under a clause in the S&P agreement between NGHI and NGUSI4, if NGHI failed to make a call payment or if NGHI failed to exercise its right to request a call from NG8, then NGUSI4 could exercise a right under the S&P agreement to require NGHI to repurchase the NG8 shares from NGHI.  The interpretation of this clause was central to the dispute.
  • All calls and call payments were made, and the clause in the S&P agreement was never implicated.
 
Grid USA Background

With respect to this separate but related matter, NG Service had filed a second application for abatement to report changes made by the I.R.S. for federal income tax purposes pursuant to a closing agreement, which allowed NG Service to deduct a portion of its DSA payments.  The Commissioner did not act on the application for abatement, and NG Service appealed to the Board who ruled that the closing agreement did not entitle NG Service to the deductions for Massachusetts Corporate Excise Tax purposes.  NG Service appealed the Board’s decision to the Massachusetts Appeals Court.
 
True Indebtedness Requires an “Unqualified Obligation to Repay”

The court of appeal in Grid Holdings first ruled that the Board applied the correct legal standard – whether NGHI had an “unqualified obligation to pay a sum certain at a reasonably close fixed maturity date.”  Although the question related to putative interest expense paid by NGHI to NG8, the court focused on whether or not NGHI’s obligation to repurchase NG8 shares from the NGUSI4 was a mandatory obligation, or discretionary in the absence of the issuance of a call payment notice by NG8 or the failure of NGHI to exercise its right to procure a call payment.
 
Ambiguous Agreement

Upon review of the S&P agreement, the court of appeal in Grid Holdings agreed with the Board’s ruling that the relevant clause was ambiguous due to an inconsistency in language.  On the one hand, the S&P agreement provided that NGUSI4 “shall” serve notice on NGHI to repurchase the NG8 shares if a call payment was not made by NG8 or call payment notice not requested by NGHI.  However, another sentence in the same clause provided that NGUSI4 could “exercise its rights” and demand repurchase of the NG8 shares.
 
After siding with the Board regarding the ambiguity, the court looked at extrinsic evidence such as the parties’ circumstances, and their intentions at the time of formation as had the Board.  However, the court was willing to give little credence to such factors given the tax motivation behind the DSA structure, the sophistication of the parties, and the fact that when the parties drafted the agreement they could have used more appropriate language.  Accordingly, the court ruled that the taxpayer failed to carry its burden of proof that the DSA constituted an unqualified obligation to repay.
 
DSAs Were Not “Liabilities” for Purposes of Computing Taxable Net Worth

The court of appeal in Grid Holdings similarly sided with the Board and held that the DSAs could not properly be treated as debt (or liabilities) for purposes of the net worth tax component of the Corporation Excise Tax.  The court refused to adopt the taxpayer’s financial accounting practice of treating the DSAs as debt as the sole evidence of the proper treatment of the DSAs.  Instead, the court of appeal allowed the income tax treatment to dictate the result in this case.
 
IRS Closing Agreement Not Binding on Massachusetts Department of Revenue2

In Grid USA, the court of appeal ruled that the I.R.S. closing agreement was not binding on the Commissioner and did not establish that the call payments were deductible interest.  The closing agreement provided that only a portion of the expenses were allowed as deductible interest expenses and, as the Board observed and the court of appeal agreed, “either all of the payments are interest or none is.”  Further, based on case law precedent, a change in federal taxable income does not automatically result in a change in Massachusetts taxable income, and the Commissioner engages in an independent review when there is a change for federal income tax purposes, which it had done here.
  BDO Insights
  • The Grid Holdings decision is the latest in a number of Massachusetts (and other state) court decisions disallowing the deduction of intercompany interest expenses on the basis that the underlying obligations were not debt. 
  • Grid Holdings highlights the importance of proper drafting of intercompany debt agreements, as well as the importance of considering state and local tax implications when structuring cross border arrangements. 
  • The Grid Holdings decision also demonstrates the significance of debt or equity characterization for net worth tax purposes.
  • Massachusetts taxpayers should be mindful of the court’s holding in Grid USA that a change in federal taxable income does not automatically result in a change in Massachusetts taxable income and be sure to conduct a careful analysis of any such changes before reporting them to Massachusetts.


For more information, please contact one of the following regional practice leaders:

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director
    Richard Spengler
Tax Senior Director
  Tony Manners
Tax Senior Director






   
Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner
    1 The related party interest and intangible expense add-back statute did not impact any interest deductions in this case because the add-back statute applies to taxable years beginning on or after January 1, 2002, and the taxable year at issue began before that effective date. 2 In Grid Holdings, the taxpayers had tried to introduce the closing agreement as evidence that the DSA’s were debt, but, here too, the court agreed with the board that it was inadmissible on grounds that no evidence of settlement is admissible to prove liability or the amount of a claim.

State and Local Tax Alert - July 2016

Mon, 07/18/2016 - 12:00am
Louisiana Adopts Single Sales Factor and Market Sourcing For Corporation Income Tax
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Summary On June 28, 2016, John Bell Edwards (D) signed into law H.B. 20, 2016 2nd Extra. Sess. (La. 2016), which adopts single sales factor apportionment, market sourcing, and a throwout rule for purposes of the Corporation Income Tax.  These provisions in H.B. 20 apply to taxable years beginning on or after January 1, 2016.
  Details  Single Sales Factor
 
For taxable years beginning on or after January 1, 2016, Louisiana apportions the income of a corporation, except a corporation that derives net apportionable income primarily from the exploration, production, refining, or marketing of oil and gas, using a single sales factor.  Oil and gas taxpayers apportion income based on a four factor formula comprised of property, payroll, and double-weighted sales.
 
Market Sourcing
 
Also for taxable years beginning on or after January 1, 2016, Louisiana adopts market sourcing for sales of services and licenses or sales of intangibles.  In general, gross receipts from sales of services are sourced to Louisiana to the extent the service is delivered to a location in the state.  Gross receipts from licenses of intangibles are sourced to Louisiana to the extent the intangible is used in the state.  The following market sourcing framework is adopted for assigning a corporation’s receipts from sales of other than tangible personal property held primarily for sale:

  Receipt From Property/Service Type Customer Type Source to Louisiana Sale, rental, lease, or license Immovable property Not applicable To the extent the property is located in the state Rental, lease, or license Tangible personal property Not applicable To the extent the property is located in the state Lease or license Intangible property Not applicable To the extent the intangible property is used in the state Sale Intangible property contingent upon productivity, use, or disposition Not applicable To the extent the intangible property is used in or otherwise associated with the state Sale Intangible property where property is not contingent upon productivity, use, or disposition of the property and the property sold is a contract right, government license, or similar intangible property Not applicable To the extent the intangible property is used in or otherwise associated with the state Sale Intangible property, other Not applicable Exclude from sales factor Sale Service, general Not applicable To the extent the service is delivered to a location in the state Sale Direct personal service Natural person To the extent the customer received the service in the state Sale Service that is not a direct personal service Natural person If the customer has a Louisiana billing address Sale Service with a substantial connection to geographic location Unrelated entity To the extent the service receipts have a substantial connection to a geographic location in the state Sale Service without a substantial connection to geographic location Unrelated entity Commercial domicile of the taxpayer is in the state  
If one of the foregoing sourcing methodologies fails to clearly reflect the taxpayer’s market in the state, the taxpayer may utilize, or the Department of Revenue may require, the use of an alternate methodology that reasonably approximates the taxpayer’s market in the state.  In such a case, the taxpayer is required to provide a detailed explanation of why it was unreasonable to utilize one of the prescribed methodologies.
 
H.B. 20 does not address the sourcing of receipts for services between related entities.  However, the new law requires the Secretary of Revenue to promulgate regulations for this purpose.
 
Throwout
 
If a taxpayer is not taxable in the state of receipt assignment, or the state of assignment cannot be reasonably determined under the market sourcing rules, Louisiana requires the taxpayer to exclude the sale from the apportionment factor.
  BDO Insights
  • Louisiana becomes the 23rd state to adopt market-based sourcing; however, this apportionment change does not extend to Louisiana’s franchise tax.
  • Since the new law was enacted on June 28, 2016, but is effective retroactively to taxable periods beginning on or after January 1, 2016, Louisiana taxpayers should assess what, if any, impact these law changes may have on their existing deferred tax balances, and adjust accordingly as of the enactment date.
  • Although H.B. 20 generally follows the Multistate Tax Commission’s model market sourcing statute, we anticipate that the Department, like other states that have adopted market sourcing, will need to issue further administrative guidance regarding its interpretation for determining the extent a service is received or delivered, or intangible property is used, in the state.
  • Louisiana taxpayers should note that the apportionment changes under the new law affect the Corporation Income Tax only, and when determining their Corporation Franchise Tax for taxable years beginning on or after January 1, 2016, should be careful to apply the apportionment provisions under that tax and not those under the Corporation Income Tax. 
 


For more information, please contact one of the following regional practice leaders:

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director
    Richard Spengler
Tax Senior Director
  Tony Manners
Tax Senior Director






   
Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner
 

Compensation & Benefits Alert - July 2016

Fri, 07/15/2016 - 12:00am
Reminder to Self-Insured Plan Sponsors Deadline to Pay PCORI Fees is July 31st 
Download PDF Version
Summary July 31st is a major compliance deadline for sponsors of retirement and welfare benefit plans with a December 31 year end. In addition, July 31st is the deadline for employer sponsored group health care plans to fund the Patient-Centered Outcomes Research Institute (“PCORI”). Sponsors of self-insured health care plans including health reimbursement accounts must complete Form 720, Quarterly Excise Tax Return (“Form 720”) for the 2nd quarter and remit the applicable PCORI fee before July 31st.
Details One of the many provisions of the 2010 Patient Protection and Affordable Care Act (“PPACA”) was the creation of PCORI, a private, non-profit corporation to conduct research and to evaluate health outcomes, clinical effectiveness, risks, and benefits of medical treatments, etc. The PPACA requires that the Institute will be funded, in part, by a fee collected from health plan providers. For fully insured health plans, the PCORI fee is paid by the health insurance issuer. However, for self-insured health plans,1 including health reimbursement accounts, the PCORI fee is paid by the plan sponsor and it is due by July 31st each year and paid by filing a Form 720 with the IRS.

The Form 720 is designed to report and remit a variety of excise taxes. The PCORI fee is on page 2, Part II, item no. 133. If the plan sponsor has other excise taxes reportable for the second quarter of the year, the PCORI fee lines should be completed on the Form 720 in addition to any other reportable excise tax. This typically requires coordination between the human resources department and the tax department.

If the plan year of your group health care plan ended between January 1, 2015 and September 30, 2015, the PCORI fee is $2.08 per “covered person.” If the plan year ended between October 1, 2015 and December 31, 2015, the PCORI fee is $2.17 per “covered person.”

“Covered person” for this purpose includes employees, spouses, and dependents that are covered under the plan. The number of covered persons is determined after the end of the plan year under one of the following three methods, as provided in the regulations:
  1. Actual count method – Sum the actual number of covered persons on each day of the year and divide by 365 days;
  2. Snapshot method – Select a day or days from each calendar quarter and sum the actual number of covered persons on each of those days, then divide by the number of days selection as the snapshot; or
  3. The Form 5500 method – Use the participant counts on the 2015 Form 5500 to interpolate the number of covered persons.  If the plan offers coverage only for the employee (self-only coverage without any coverage offered to spouses or dependents), the average number of covered persons is determined by adding together the number of participants as of the beginning of the plan year reported on Line 5 of the Form 5500, plus the end of the year participant count reported on Line 6f of the Form 5500, divided by two. If the plan offers dependent coverage, the number of covered persons is determined by adding together the beginning of the year participant count (Line 5) and the end of the year participant count (Line 6f).
NOTE: Employers may use the Form 5500 method only if the Form 5500 is filed no later than July 31 of the year following the last day of the plan year. Therefore, plan sponsors who are subject to the PCORI fee and extend the Form 5500 beyond July 31st will need to determine the number of covered persons under the actual count method or the snapshot method.
 
For questions related to matters discussed above, please contact one of the following practice leaders:
  Joan Vines
Senior Director, National Tax Office
Compensation and Benefits Linda Baker
Senior Manager, 
Compensation and Benefits

Kim Flett
Sr. Director, National Tax
Compensation & Benefits

Don Hughes  
Manager,
Compensation & Benefits

Penny Wagnon  
Senior Director,
Compensation & Benefits
1 The PCORI fee generally will apply to major medical benefits, while many other benefits such as dental plans, vision plans and health flexible spending arrangements are usually accepted. 
 

International Tax Alert - July 2016

Thu, 07/14/2016 - 12:00am
Country-by-Country Reporting Regulations Finalized Download PDF Version
Affecting

The Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) finalized Treasury Regulations under Internal Revenue Code (“IRC”) Section 6038 (the “Finalized Regulations”) that require large United States (“U.S.”) parent companies of multinational enterprise (“MNE”) groups to report certain information to the Service on a country-by-country (“CbC”) basis. The Finalized Regulations apply to taxable years beginning on or after June 30, 2016.


Background

On December 23, 2015, Treasury and the Service released proposed regulations on CbC reporting, which were largely based off the Organization for Economic Co-operation and Development (“OECD”) recommendations for CbC reporting in Action Item 13 of the Base Erosion and Profit Shifting Action Plan (“BEPS”)
Final Report.

The proposed regulations on CbC reporting provide that U.S. parent companies of MNE groups with annual revenue of $850 million or more for the immediately preceding annual accounting period would be required to file a CbC return listing certain information such as revenue, profit, or loss before income tax, total income tax paid, total number of employees, total accumulated earnings, along with other items, on a CbC basis. 

Essentially, these reporting requirements are supposed to provide transparency to tax authorities around the world to identify situations where companies may be improperly shifting profits to low or no tax jurisdictions, a possible sign of tax avoidance.
 

Details

The Finalized Regulations largely follow the proposed regulations on CbC reporting, but some changes were made to take into account comments received by Treasury and the Service relating to the proposed regulations. Certain key developments and clarifications in the Finalized Regulations and the preamble to the Finalized Regulations (“Preamble”) are discussed below.

  1. Form 8975, Country-by-Country Report

The Finalized Regulations amend the proposed regulations to reflect the official number of the form, Form 8975, Country-by-Country Report, (“Form 8975” or “CbCR”). Form 8975 is still being developed.

  1. Applicability Date and Voluntary Filings

Other countries have adopted CbC reporting requirements for annual accounting periods beginning on or after January 1, 2016, that would require reporting of CbC information by constituent entities of MNE groups with an ultimate parent entity resident in a tax jurisdiction that does not have a CbC reporting requirement for the same annual accounting period. The Finalized Regulations apply to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after the first day of a taxable year of the ultimate parent entity that begins on or after June 30, 2016. Thus, the Finalized Regulations are not applicable for tax years of ultimate parent entities before June 30, 2016.

However, the Preamble indicates that Treasury and the Service intend to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. territory ultimate parent entity to file CbCRs for reporting periods that begin on or after January 1, 2016 but before June 30, 2016, under a procedure to be provided in separate, forthcoming guidance.

Treasury and the Service also indicated that they are working to ensure that foreign jurisdictions implementing CbC reporting requirements will not require constituent entities of U.S. MNE groups to file a CbC report with the foreign jurisdiction if the U.S. MNE group files a CbCR with the Service pursuant to this voluntary procedure, and the CbCR is exchanged with such foreign jurisdiction pursuant to a competent authority arrangement.

Separately, the OECD released guidance on June 29, 2016, relating to the implementation of CbC reporting, which sanctions voluntary CbC reporting during this transitional period by providing that if specified requirements are met, foreign countries should not require additional local filings by constituent entities.

  1. Permanent Establishments

The Finalized Regulations modify the term permanent establishment included in the definition of business entity. The Finalized Regulations provide that the term permanent establishment includes (i) a branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a permanent establishment under an income tax convention to which that tax jurisdiction is a party, (ii) a branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located pursuant to the domestic laws of such tax jurisdiction, or (iii) a branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owners’ tax jurisdiction of residence.

The Finalized Regulations revise the term permanent establishment so that it is more in line with the definition of permanent establishment that will be incorporated in the OECD Model Tax Convention per the recommendations provided in Action Item 7 (Preventing the Artificial Avoidance of Permanent Establishment) of the BEPS Final Report.

  1. Grantor Trusts and Decedent’s Estates

The Finalized Regulations exclude decedents’ estates, individuals’ bankruptcy estates, and grantor trusts within the meaning of IRC Section 671, all the owners of which are individuals, from the definition of business entity.

  1. National Security Exception

Treasury and the Service received comments requesting a national securities exception for reporting CbC information.  The Preamble states that Treasury and the Service consulted with the Department of Defense regarding the information collected on the CbCR and that the Department of Defense concluded such information reporting generally does not pose a national security concern. Accordingly, the Finalized Regulations do not provide a general exception for information that may relate to national security.

Nonetheless, the Department of Defense continues to consider the national security implications of the CbCR in particular fact patterns, and future guidance may be issued to provide procedures for taxpayers to consult with the Department of Defense regarding the appropriate presentation of CbC information in such fact patterns.

  1. Source of Data and Reconciliation

The Finalized Regulations provide that the reporting period covered by Form 8975 is the period of the ultimate parent entity’s annual applicable financial statement that ends with or within the ultimate parent entity’s taxable year, or, if the ultimate parent entity does not prepare an annual applicable financial statement, then the ultimate parent entity’s taxable year.

The Finalized Regulations do not limit the constituent entity information to applicable financial statements of the constituent entity but rather, provide that the source of the tax jurisdiction of residence information on the CbCR must be based on applicable financial statements, books and records, regulatory financial statements, or records used for tax reporting or internal management control purposes for an annual period of each constituent entity ending with or within the reporting period.

The proposed regulations stated that the amounts provided in the CbCR should be based on applicable financial statements, books and records maintained with respect to the constituent entity, or records used for tax reporting purposes. The term “books and records” was intended to be broad enough to include all sources of information that the BEPS Final Report allows. In order to clarify this intent, the Finalized Regulations provide that the source of data may also include regulatory financial statements and records used for internal management control purposes.

  1. Partnerships and Stateless Entities

A business entity that is treated as a partnership in the tax jurisdiction in which it is organized, and that does not own or create a permanent establishment in that or another tax jurisdiction generally would have no tax jurisdiction of residence under the definition in the proposed regulations, other than for purposes of determining the ultimate parent entity of a U.S. MNE group. Under the proposed regulations, tax jurisdiction information with respect to constituent entities that do not have a tax jurisdiction or residence, or “stateless entities,” would be aggregated and reported in a separate row of the CbCR. The preamble to the proposed regulations indicated that partners of a partnership that is a stateless entity would report their respective shares of the partnership’s items in their respective tax jurisdiction(s) of residence.

A comment requested clarification as to whether the partnership or its partners, or both, should report the partnership’s CbC information.  The Finalized Regulations provide that the tax jurisdiction of residence information with respect to stateless entities is provided on an aggregate basis for all stateless entities in a U.S. MNE group and that each stateless entity-owner’s share of the revenue and profit of its stateless entity is also included in the information for the tax jurisdiction of residence of the stateless entity-owner. In the case in which a partnership creates a permanent establishment for itself or its partners, the CbC information with respect to the permanent establishment is not reported as stateless, but instead is reported as part of the information on the CbCR for the permanent establishment’s tax jurisdiction of residence.

The Final Regulations also clarify that distributions from a partnership to a partner are not included in the partner’s revenue and that remittances from a permanent establishment to its constituent entity-owner are not included in the constituent entity-owner’s revenue.

  1. Time and Manner of Filing

The Finalized Regulations provide that the CbCR for a taxable year must be filed with the ultimate parent entity’s income tax return for the taxable year on or before the due date, including extensions, for filing that person’s income tax return.

Treasury and the Service did not adopt the Finalized Regulations recommendations to permit taxpayers to file a CbCR up to one year from the end of the ultimate parent entity’s taxable year or annual accounting period to facilitate the taxpayer’s ability to use statutory accounts or tax records of constituent entities to complete the CbCR. The Finalized Regulations do provide, however, that Form 8975 may prescribe an alternative time and manner for filing, leaving open the possibility that the Form 8975 filing instructions may offer some flexibility for filing the CbCR after the tax return due date.

  1. Other Items

Among other items, the Finalized Regulations clarify certain terms and definitions, address certain comments to the proposed regulations, and confirm the confidentiality protections of IRC Section 6103 to CbC reporting.

 
How BDO Can Help

BDO can assist our clients with (i) determining CbC reporting obligations, (ii) identifying the steps needed in preparation of CbC reporting, (iii) understanding terms and definitions in the Finalized Regulations and (iv) developing a framework for collecting the necessary data to be reported on a CbC basis.
 


For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax/Transfer Pricing Practice Leader          Chip Morgan
Partner    Joe Calianno
Partner and International Technical Tax Leader, National Tax Office   Brad Rode
Partner    Monika Loving
Partner   William F. Roth III
Partner, National Tax Office
    Scott Hendon
Partner    Jerry Seade
Principal         

China Tax Newsletter - July 2016

Thu, 07/14/2016 - 12:00am
The July 2016 edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, including the following topics:
  • Enterprise income tax policies on charitable equity donations
  • Levying of VAT in place of business tax
  • VAT and labor dispatch services, highway tolls, etc.

Download

International Tax Alert - July 2016

Wed, 07/13/2016 - 12:00am
United Kingdom Announces Start Date for Expanded Rules on Royalty Withholding Tax Download PDF Version
Summary As part of the 2016 Budget, which was announced on March 16, 2016, the United Kingdom (“UK”) government revealed changes to the withholding tax regime with respect to royalties. Three new measures were introduced:
  1. The UK withholding tax will apply to a wider definition of royalty payments, bringing more royalties within the scope of the rules;
  2. A clear rule will be put in place to determine whether a royalty is UK source; specifically, to treat a royalty connected with a UK permanent establishment (“PE”), or “avoided PE” for Diverted Profits Tax (“DPT”) purposes as UK source; and
  3. A targeted domestic anti-treaty abuse rule.
It was originally announced that the first two measures would apply to payments made on or after the date that the 2016 Finance Bill received Royal Assent. This was expected in July 2016, but has been pushed back to November 2016. HM Revenue & Customs (“HMRC”) announced that these two measures will take effect for royalty payments on or after June 28, 2016.

The anti-treaty abuse measure is effective for payments made on or after March 17, 2016.
  Background Under the previous UK tax regime, multinational groups had the ability to derive large sums from the exploitation of intellectual property that is held in low tax, low substance locations. The UK government is concerned that groups are able to structure tax deductible royalty payments from the United Kingdom in such a way that the United Kingdom loses its right to tax those royalties, either because the legislation that requires withholding tax is not broad enough to capture such payments, and/or the payments are structured in such a way as to take advantage of one of the UK’s double tax treaties.
Details Definition of Royalties Subject to Withholding Tax
The definition of royalties that are subject to the UK withholding tax at 20 percent has been broadened under the 2016 Budget. Relevant intellectual property is now defined as:
  1. Copyright of literary, artistic or scientific work (excluding certain cinematographic or video recordings);
  2. Any patent, trade mark, design, model, plan or secret formula or process;
  3. Any information concerning industrial, commercial or scientific experience; or
  4. Public lending right in respect of a book.
The impact of this change will mean that many royalty payments that were not subject to UK withholding tax previously, e.g. royalties on trademarks or brands that were not “annual payments,” will now be within the scope of the UK withholding tax rules.
 
Definition of UK Source - Royalties Attributable to UK PEs
Withholding tax on royalties applies to payments in respect of relevant intellectual property that have a UK source. “Source” was not defined under UK tax legislation. As a result, it was often unclear whether withholding tax should apply to royalty payments attributable to UK PEs of foreign companies.

A new rule provides that the payment of a royalty by a non-UK resident will always have a UK source when the payer is a non-UK resident carrying on business in the UK through a PE in the UK, and the obligation to make the payments arises in connection with the business carried on through that UK PE. It is not necessary that the royalty payment be deductible in the UK PE under the UK’s profit attribution rules for a withholding tax obligation to arise. Rather, the test is whether the obligation of the non-resident to make royalty payments arises or is connected with the activities that the non-resident performs in the UK PE.

Where the UK has a double tax treaty with the country of residence of the beneficial owner of the royalty, that treaty will govern the taxation of the payment, subject to the anti-avoidance rule discussed below.
The proposed changes to the definition of royalties and UK source will apply to payments made on or after the June 28, 2016, subject to an anti-forestalling rule.

As well as its application to UK PEs, the rule will also apply to notional (“avoided”) UK PEs under the Diverted Profit Tax rules (“DPT”). In that case, royalties payable by the non-UK company with the avoided UK PE will be included in the diverted profits calculation and subject to DPT at 25 percent. To the extent that a double tax treaty would reduce UK withholding tax, then a credit will be allowed against that DPT in the appropriate amount.

This change also applies for accounting periods ending on or after June 28, 2016, again subject to an anti-forestalling rule.
 
Disapplication of Treaty Benefits - Purpose Based Anti-Avoidance Rule
A new rule came into effect for royalty payments made on or after March 17, 2016, where there are arrangements in place of which the purpose, or one of the main purposes, is to obtain a tax advantage by virtue of a double tax treaty in a way that is not in line with the object and purpose of the treaty. The payer and payee must be connected for the provision to apply.
BDO Insights Groups should be reviewing their royalty arrangements urgently in light of the new UK rules to determine whether UK withholding tax or DPT obligations will arise on future royalty payments.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax/Transfer Pricing Practice Leader          Chip Morgan
Partner    Joe Calianno
Partner and International Technical Tax Leader, National Tax Office   Brad Rode
Partner    Ingrid Gardner
Managing Director UK/US Tax Desk   William F. Roth III
Partner, National Tax Office
    Scott Hendon
Partner    Jerry Seade
Principal    Monika Loving
Partner     

BEPS Australia Profile

Tue, 07/12/2016 - 12:00am



1) Has Australia implemented any BEPS recommendations? If so, which Action Items?
Australia has incorporated all the new OECD guidelines arising from the BEPS project into Australian law in our latest federal budget. We also have specific legislation for Action 13.

2) What is Australia’s expected timeline for implementing country-by-country reporting?
It has been implemented and applies to periods starting after January 1, 2016.
 
3) If Australia has already implemented CbC, what has been the reaction from taxpayers?
The general public is supportive, but business sees this as a compliance burden.  This is due to the requirement to submit a masterfile, local file and CbC report to the Commissioner within 12 months of year end (unless the masterfile and CbC report can be obtained by exchange of information). There is a $450,000 fine to fail to comply with these rules under the recent budget. Most other countries don't require this upfront submission to their tax authority.
 
4) What measures are multinationals in Australia taking to prepare for country-by-country reporting?
We've not really seen enough preparation by multinationals, although it's on their radar on discussions.
 
5) If Australia has already implemented CbC, what challenges are taxpayers facing or anticipated to face?
The compliance burden in Australia as mentioned above is the challenge of identifying potential risks in existing planning structures.
 
6) Are Australia’s taxing authorities taking any measures to prepare for any changes brought about by BEPS (e.g., changes in staffing, increases in budgets)?
The ATO is investing $700 million over four years in new resources in BEPS and other similar tax avoidance to get an anticipated $3.7 billion return.
 
7) How will country-by-country reporting affect how you provide services to your clients? 
We anticipate having to do local files for overseas subsidiaries and also assist them in planning as it highlights substance risks in structures.

BEPS Brazil Profile

Tue, 07/12/2016 - 12:00am




1) Has Brazil implemented any BEPS recommendations? If so, which Action Items?
Formally, Brazil is not implementing any BEPS recommendations.  Although Action 12 was adopted through a Provisional Measure, it was not implemented into Law; thus, the Measure is no longer in effect.

2) What is Brazil’s expected timeline for implementing country-by-country reporting?
Brazil does not follow the OECD Guidelines for transfer pricing.

3) Are Brazilian taxing authorities taking any measures to prepare for any changes brought about by BEPS (e.g., changes in staffing, increases in budgets)?
As far as we know, there will not be a substantial change due to BEPS in Brazil.

BEPS Switzerland Profile

Tue, 07/12/2016 - 12:00am



1) Has Switzerland implemented any BEPS recommendations? If so, which Action Items? 
Switzerland plans to implement the minimum standards provided in the BEPS project.  In response to the BEPS project, Switzerland has drafted legislation on the abolition of tax regimes, the spontaneous exchange of tax rulings, the prevention of treaty shopping, country-by-country reporting, and dispute resolution mechanisms.
 
The Swiss Federal Council has proposed to abolish existing arrangements that no longer align with international standards, primarily the cantonal tax statuses for holding, domiciliary, and mixed companies.  To compensate for this abolition, an IP Box at the cantonal level has been announced.  This IP Box will be in line with the international recognized “nexus approach”.  It is planned that the cantons may grant a relief on IP Box profits of up to 90%.  It also seems likely that a cantonal R&D input promotion measure in the form of a super deduction for R&D costs will be introduced.
 
Switzerland also began the process for ratifying a law on administrative assistance to introduce the spontaneous exchange of information into Swiss law.  A draft decree was submitted to the Parliament in June 2015 for approval.  Under this decree, Switzerland will exchange information on tax rulings according to the OECD minimum standards, with affected tax authorities.  Switzerland will not accept that foreign authorities are allowed to conduct tax audits in the country.  This decree is anticipated to enter into force in 2017.  This should also be possible if a referendum is called.  Switzerland is expected to exchange the content of tax rulings that have been agreed upon after January 1, 2010, and that are still in force on January 1, 2018.  It is possible that Switzerland will sign bilateral agreements with some states and, based on such agreements, the content of tax rulings could already be exchanged in 2017 if the rulings are still in force on January 1, 2017.
 
Switzerland already has implicit unwritten rules to prevent treaty shopping.  Based on a detailed questionnaire, the Swiss taxing authorities evaluate whether the foreign recipient of income, subject to withholding tax, has the right to use the relevant Double Tax Agreement (“DTA”).  In light of the BEPS project, this practice will become more rigid.
 
On January 27, 2016, Switzerland and 31 other countries signed the multilateral country-by-country reporting agreement in Paris.  Based on this agreement, the Swiss Federal Council published a decree that forms the legal basis for the automatic exchange of country-by-country reporting.  The corresponding consultation procedure will be held in the spring or summer of 2016.
 
Regarding the access to dispute resolution mechanisms, no changes seem necessary.  Switzerland has already implemented the mutual agreement procedure clause in its newer DTA, and plans to adjust the older ones to the OECD standard.
 
2) What is Switzerland’s expected timeline for implementing country-by-country reporting? 
Switzerland expects country-by-country reporting to become effective from January 1, 2018.  Exchanging country-by-country reports will take place beginning in 2010, for the fiscal year 2018.
 
The fact that Switzerland is not ready to exchange country-by-country reports from FY 2016 onwards is seen as a failure.  Therefore, a secondary mechanism will be applicable.  The Swiss Federal Council has planned to implement a clause in the legal basis that allows Swiss multinational enterprises to share country-by-country reports with foreign states, if requested in a subsidiary’s country.
 
3) What measures are multinationals in Switzerland taking to prepare for country-by-country reporting?  
It is too early to say, but we expect to see a higher demand for transfer pricing services.  Several multinationals are also hiring more transfer pricing specialists and constantly expanding their transfer pricing teams.
 
4) Are Switzerland’s taxing authorities taking any measures to prepare for any changes brought about by BEPS (e.g., changes in staffing, increases in budgets)?
Switzerland’s taxing authorities have not yet announced that they are taking any measures to prepare for changes brought about by BEPS.
 
5) How will country-by-country reporting affect how you provide services to your clients? 
It is too early to tell.

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