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Updated: 17 hours 2 min ago

BEPS Germany Profile

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



1) Has Germany implemented any BEPS recommendations? If so, which Action Items? 
Germany has not implemented any BEPS recommendations.
 
2) What is Germany’s expected timeline for implementing country-by-country reporting? 

Country-by-country reporting has not yet been implemented.  An exact timeline for implementation is not yet available.  It is assumed that the first country-by-country report must be provided in 2018 for the FY 2017.
 
3) What measures are multinationals in Germany taking to prepare for country-by-country reporting?  
Although country-by-country reporting has not yet been implemented, multinationals often do a country-by-country reporting trial run to be aware of tax risks, and to take measures to reduce those risks.
 
4) Are Germany’s taxing authorities taking any measures to prepare for any changes brought about by BEPS (e.g., changes in staffing, increases in budgets)? 

The German taxing authorities intend to increase competent authority staff, as cases of double taxation are expected to increase.  Detailed information on proposed measures is not available, however.
 
5) How will country-by-country reporting affect how you provide services to your clients? 

Most of our clients do not exceed the threshold of annual consolidated group revenue of €750 million. Nevertheless, tax risk management becomes critical when structuring clients’ business operations and reviewing existing transfer pricing structures.

State and Local Tax Alert - July 2016

Mon, 07/11/2016 - 12:00am
Oklahoma Reduces Time to File Sales and Use Tax Refund Claims to Two Years
Download PDF Version
Summary On June 6, 2016, Oklahoma Governor Mary Fallin (R) signed into law H.B. 3205, 55th Leg., 2nd Reg. Sess. (Okla. 2016), which reduces the statute of limitations to file a sales and use tax refund claim to two years for all claims filed on or after August 25, 2016.
  Details H.B. 3205 reduces the statute of limitations for filing a sales and use tax refund claim from three years to two years from the date of payment for refund claims filed on or after August 25, 2016.  A sales or use tax refund claim filed before that date is subject to the current three year statute of limitations.
  BDO Insights
  • An Oklahoma taxpayer should assess whether it may have paid sales or use tax on sales or purchases that might be eligible for a refund claim as soon as possible, and file the claim before August 25, 2016.  A taxpayer that files after that date may risk losing a year’s worth of refund to which it would otherwise be entitled, due to the enactment of H.B. 3205.
  • Oklahoma taxpayers that have typically followed a three year period for purposes of assessing refund claims will have to consider refund claims based on a two year period for claims filed after August 25, 2016.
  • H.B. 3205 does not change the three year statute of limitations that applies to sales or use tax assessments.  Thus, H.B. 3205 creates an inequity as between taxpayers and the Oklahoma Tax Commission.

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
 

Federal Tax Alert - July 2016

Fri, 07/08/2016 - 12:00am
California Competes Tax Credit Opportunity Download PDF Version
What It Is The California Competes Tax Credit is a negotiated tax credit between the taxpayer and the State of California. The credit is to be applied against California income tax owed and may be carried forward to each of the succeeding five taxable years. It is not a refundable tax credit. However, the credit can be assigned to a unitary taxpayer corporation in the combined reporting group.
Application Periods For each of the fiscal years 2015-16 and 2017-18, the tax credit awards will be $200 million. For fiscal year 2015-16, applications for the California

Competes Tax Credit will be accepted during the following periods:
  • July 25, 2016, through August 22, 2016 ($75 million available)
  • January 2, 2017, through January 23, 2017 ($100 million available)
  • March 6, 2017, through March, 27, 2017 ($68.3 million plus any remaining unallocated amounts from the previous application periods)
Application Proccess The application process will take approximately 90 days from application to award. The application is done in two phases.

Phase One
The information provided in the Phase One application includes the company information (name, annual gross receipts, North American Industry Classification System code, federal employer information number, etc.), and information to complete a formula: the amount of the credit requested over the total proposed benefit the company is to provide over the next five years. The total benefit is comprised of the aggregate employee compensation package and the aggregate investment project. The application is reviewed based on this formula and is a quantitative analysis.

The aggregate employee compensation package takes into consideration the number of annual full-time equivalent employees hired during the period of investment. In calculating the aggregate employee compensation package, both gross salary and fringe benefits are included. Additionally, the calculation is based on projected taxable year of hire and annual salary.

The aggregate investment package takes into consideration the “investment” in real and personal property purchased related to the applicant’s business that is placed in service in California during the period of investment. The total investment includes purchases up to one year prior to the date the applicant files its California Competes Tax Credit Application and projected purchases during the 2014-2018 taxable years.
In evaluating the application, the ratio of the requested credit to the sum of the aggregate employment compensation package and the aggregate investment package is reviewed. The closer the ratio is to one, the less likely the application is to be approved for consideration in Phase Two.

Phase Two
The qualitative analysis takes place. This process includes an interview of the company applying for the credit. Phase Two facilitates a review of factors that are less quantitative.

The credit is based on 11 factors:
  • Number of jobs created or retained;
  • Compensation paid to employees;
  • Amount of investment;
  • Extent of unemployment or poverty in business area;
  • Other incentives available in California;
  • Incentives available in other states;
  • Duration of proposed project and duration of commitment to remain in this state;
  • Overall economic impact;
  • Strategic importance to the state, region, or locality;
  • Opportunity for future growth and expansion; and
  • Extent the benefit to the state exceeds the amount of the tax credit.
BDO Insights Applicants should be mindful of the fact that, inasmuch as this is a negotiated contract credit, the terms must be met or the credit can be cancelled or reduced (e.g., the company projected creating 15 jobs in next five years and only created two jobs).

We believe that, while the ease of acceptance may be less stringent for the initial fiscal year application process, the credit may be more favorable to taxpayers (perhaps by doing away with limitations based on tentative minimum tax) in future years.
 
For more information on matters discussed above, please contact one of the following practice leaders:
  Janet Bernier
STS-SALT Principal   Tanya Erbe-German
STS-SALT Senior Director   Tom Alberte
STS-SALT Senior Director

State and Local Tax Alert - July 2016

Fri, 07/08/2016 - 12:00am
California Competes Tax Credit Opportunity Download PDF Version
What It Is The California Competes Tax Credit is a negotiated tax credit between the taxpayer and the State of California. The credit is to be applied against California income tax owed and may be carried forward to each of the succeeding five taxable years. It is not a refundable tax credit. However, the credit can be assigned to a unitary taxpayer corporation in the combined reporting group.
Application Periods For each of the fiscal years 2015-16 and 2017-18, the tax credit awards will be $200 million. For fiscal year 2015-16, applications for the California

Competes Tax Credit will be accepted during the following periods:
  • July 25, 2016, through August 22, 2016 ($75 million available)
  • January 2, 2017, through January 23, 2017 ($100 million available)
  • March 6, 2017, through March, 27, 2017 ($68.3 million plus any remaining unallocated amounts from the previous application periods)
Application Proccess The application process will take approximately 90 days from application to award. The application is done in two phases.

Phase One
The information provided in the Phase One application includes the company information (name, annual gross receipts, North American Industry Classification System code, federal employer information number, etc.), and information to complete a formula: the amount of the credit requested over the total proposed benefit the company is to provide over the next five years. The total benefit is comprised of the aggregate employee compensation package and the aggregate investment project. The application is reviewed based on this formula and is a quantitative analysis.

The aggregate employee compensation package takes into consideration the number of annual full-time equivalent employees hired during the period of investment. In calculating the aggregate employee compensation package, both gross salary and fringe benefits are included. Additionally, the calculation is based on projected taxable year of hire and annual salary.

The aggregate investment package takes into consideration the “investment” in real and personal property purchased related to the applicant’s business that is placed in service in California during the period of investment. The total investment includes purchases up to one year prior to the date the applicant files its California Competes Tax Credit Application and projected purchases during the 2014-2018 taxable years.
In evaluating the application, the ratio of the requested credit to the sum of the aggregate employment compensation package and the aggregate investment package is reviewed. The closer the ratio is to one, the less likely the application is to be approved for consideration in Phase Two.

Phase Two
The qualitative analysis takes place. This process includes an interview of the company applying for the credit. Phase Two facilitates a review of factors that are less quantitative.

The credit is based on 11 factors:
  • Number of jobs created or retained;
  • Compensation paid to employees;
  • Amount of investment;
  • Extent of unemployment or poverty in business area;
  • Other incentives available in California;
  • Incentives available in other states;
  • Duration of proposed project and duration of commitment to remain in this state;
  • Overall economic impact;
  • Strategic importance to the state, region, or locality;
  • Opportunity for future growth and expansion; and
  • Extent the benefit to the state exceeds the amount of the tax credit.
BDO Insights Applicants should be mindful of the fact that, inasmuch as this is a negotiated contract credit, the terms must be met or the credit can be cancelled or reduced (e.g., the company projected creating 15 jobs in next five years and only created two jobs).

We believe that, while the ease of acceptance may be less stringent for the initial fiscal year application process, the credit may be more favorable to taxpayers (perhaps by doing away with limitations based on tentative minimum tax) in future years.
 
For more information on matters discussed above, please contact one of the following practice leaders:
  Janet Bernier
STS-SALT Principal   Tanya Erbe
STS-SALT Senior Director   Tom Alberte
STS-SALT Senior Director

State and Local Tax Alert - July 2016

Fri, 07/01/2016 - 12:00am
Connecticut Adopts Market Sourcing For Corporation and Personal Income Tax, and Single Sales Factor for Personal Income Tax
Download PDF Version
Summary  On June 6, 2016, Connecticut Governor Dannel P. Malloy (D) signed into law S.B. 502, 2016 Gen. Assem., May Spec. Sess. (Conn. 2016), which adopts single sales factor apportionment for Personal Income Tax purposes, and market sourcing for Corporation and Personal Income Tax purposes.  These provisions in S.B. 502 apply to taxable years beginning on or after January 1, 2016, for Corporation Income Tax purposes and taxable years beginning on or after January 1, 2017, for Personal Income Tax purposes.
  Details Single Sales Factor Apportionment

For taxable years beginning on or after January 1, 2017, under the Personal Income Tax, Connecticut apportions items of income, gain, loss, and deduction attributable to a business, trade, profession, or occupation carried on in the state via a single sales factor.  This provision applies to the income of a nonresident individual, including a nonresident partner’s, shareholder’s, and beneficiary’s share of income.
 
Market Sourcing for Apportionment

For taxable years beginning on or after January 1, 2016, for Corporation Income Tax purposes and for taxable years beginning on or after January 1, 2017, for Personal Income Tax purposes, Connecticut adopts the following framework for assigning receipts from sales of other than tangible personal property held primarily for sale.  For Personal Income Tax purposes, these provisions also apply to the income of a nonresident individual, including a nonresident partner’s, shareholder’s, and beneficiary’s share of income.
  Source to Connecticut Receipt Form Personal Income Tax Corporation Income Tax Service To the extent the service is used at a location in the state To the extent the service is used at a location in the state Rental, lease, or license of tangible personal property To the extent the property is situated in the state To the extent the property is situated in the state Rental, lease, or license of real property Excluded To the extent the property is situated in the state Rental, lease, or license of intangible property (marketing) To the extent the good or service is purchased by a Connecticut customer To the extent the good or service is purchased by a Connecticut customer Rental, lease, or license of intangible property (non-marketing) To the extent the property is used in the state To the extent the property is used in the state Sale or other disposition of tangible personal property Excluded Excluded Sale or other disposition of real property (not held primarily for sale) Excluded1 Excluded Sale or other disposition of intangible property (not held primarily for sale) Excluded Excluded Interest None Managed or controlled within the state Other To the extent the taxpayer’s market for the sales is in the state To the extent the taxpayer’s market for the sales is in the state
A taxpayer that cannot reasonably determine the assignment of receipts under the foregoing rules may petition the Commissioner of Revenue for approval of a methodology that reasonably approximates the assignment of such receipts.  Connecticut requires the taxpayer to file the petition within 60 days prior to the original due date for the first return to which the petition applies.  The Commissioner is required to grant or deny the petition before the original due date for the return.
  BDO Insights
  • Connecticut’s adoption of single sales factor apportionment for Personal Income Tax purposes aligns the apportionment of income under that tax with the apportionment of income under the Corporation Income Tax, at least with respect to taxable years beginning on or after January 1, 2017.  Connecticut adopted single sales factor apportionment for Corporation Income Tax purposes in December 2015, which applies to taxable years beginning on or after January 1, 2016.  See the BDO SALT alert that discusses Connecticut’s adoption of single sales factor apportionment for Corporation Income Tax purposes.
  • Connecticut’s adoption of market sourcing was expected given that most, if not all, states that have adopted single sales factor apportionment have also adopted market sourcing at the same time or shortly thereafter.
  • Since the new law was enacted on June 6, 2016, Connecticut 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.
  • We anticipate that the Department of Revenue Services, like other states that have adopted market sourcing, will need to issue further administrative guidance regarding its interpretation for determining “the extent the service is used at a location” in Connecticut.

 

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
 

International Tax Alert - June 2016

Mon, 06/27/2016 - 12:00am
The United Kingdom Votes to Withdraw From the European Union
Download PDF Version
  Summary On June 23, 2016, the public of the United Kingdom voted in a referendum to decide whether the country should remain in the European Union or whether it should leave.  In a result that was surprising to many and that has caused shockwaves across global financial markets, the UK has voted to leave the EU by a margin of 52 percent to 48 percent.
  Details David Cameron, the current Prime Minister of the UK, announced in February 2016 that the country would be holding a referendum on whether it should remain a member of the EU or whether it should begin the process of an exit.  The referendum vote held on June 23, 2016, resulted in 52 percent of the British public voting to leave.  While the majority of people in Scotland, Northern Ireland, and London voted to stay, the total number of “leave” votes cast across the nation means that the UK will now likely start the process of withdrawing from the EU.
 
The result of the referendum does not itself give effect to any legal obligation for the UK to leave the EU; however, it would be the government’s democratic duty to give effect to that vote.  The next step is for the country to give formal notice of its intention to leave under Article 50 of the Lisbon Treaty.  As David Cameron has announced that he is stepping down as Prime Minister, this will likely not happen until a new leader has been selected, probably in October this year, although there may be pressure from Europe to start the process sooner.
 
Once notice has been given, there is up to a two year period during which the UK Government will negotiate the terms of withdrawal with the remaining members.  A finalization of the withdrawal from the EU could occur before two years have passed in the unlikely event that negotiations are settled prior to the two year deadline.  The process of negotiation will likely take much longer, particularly if includes negotiating terms of the UK’s future relationship with Europe.  However, the two year period under Article 50 can only be extended with unanimous consent of the rest of the EU membership (a total of 27 countries).
 
Until a formal withdrawal from the EU the UK will remain a member, with all the benefits and obligations that that entails. From a corporate tax perspective, this means that companies can still rely on the Parent-Subsidiary or Interest & Royalties Directives, for example, to eliminate withholding taxes that would otherwise be payable under the relevant double tax treaty.  Further, there should be no immediate changes to the VAT or Customs Duty regimes.
 
Going forward, the expectation is that the UK will continue with its implementation of the OECD’s BEPS initiative action items, with the possible exception of the recently agreed upon EU anti-tax avoidance directive.  Companies will also want to think about planning for possible withdrawal of the Parent-Subsidiary or Interest & Royalties Directives, however, it is by no means certain if this will happen as the UK could decide to continue as a member of the EEA or negotiate a Swiss style arrangement to continue to benefit from these directives.
 
More importantly, both for existing businesses in the UK, and for businesses contemplating their first step into Europe, there is no expectation that there will be any change in the UK’s ambition to have the most competitive tax regime in the G20.  If anything, it is likely that the government will seek to bolster the UK’s attractiveness as a business location and, to that end, we could see new measures and incentives introduced to underscore that ambition.
  BDO Insights  
  • Many US groups have found the UK to be an attractive location for a regional holding company or trading base, and will wish to evaluate the potential impact of the referendum result as the specific implications of this become clearer over the coming months.  In the meantime, the UK’s relationship with the EU will not change overnight.
  • It should be remembered that many of the fiscal attractions of the UK such as its treaty network, exemptions from tax on dividends and gains, and absence of withholding tax on dividends paid to the US is unaffected.  Further, it is expected that the UK will continue to support existing business incentives, as well as introduce new measures in due course with the aim of ensuring that the country remains an attractive proposition inbound investment.
  • For further information, please contact Ingrid Gardner or your usual BDO tax advisor.
 
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, Washington National Tax Office   Brad Rode
Partner    Ingrid Gardner
Managing Director UK/US Tax Desk   William F. Roth III
Partner, Washington National Tax Office
    Scott Hendon
Partner    Jerry Seade
Principal    Monika Loving
Partner     

Federal Tax Alert - June 2016

Thu, 06/23/2016 - 12:00am
WOTC Additional Extension 2016
Download PDF Version
Summary Congress recently extended the application of the work opportunity tax credit (the “WOTC”) to an employee who began working after December 31, 2014, and before January 1, 2020. Because the extension was not enacted until December 15, 2015, and the application for pre-screening an employee must be filed within 28 days after an employee begins work, the Service granted transitional relief extending the application due date for an employee hired on or after January 1, 2015 through August 31, 2016. Other than extending the time frames of transition relief, the recent notice does not otherwise modify the terms of the original IRS Notice 2016-221.
Details Background

The WOTC is a credit available to a taxpayer that employs an individual from a targeted group, such as, very generally, a qualified IV-A recipient, a qualified veteran, a qualified ex-felon, a designated community resident, a vocational rehabilitation referral, a qualified summer youth employee, a qualified food stamp recipient, a qualified SSI recipient, a long-term family assistance recipient, or a long-term unemployment recipient hired on or after January 1, 2016.2 The amount of the WOTC is 40% (25% in the case of an employee who does not meet certain minimum employment requirements) of the first-year wages paid or incurred by an employer during the taxable year to employees who are members of a targeted group.3

While the number of employees who may qualify for the WOTC is not limited, the amount of qualified first-year wages that may be taken into account with respect to any individual during a taxable year is generally limited to $6,000 (a $2,400 maximum credit). However, the wage limitation is $12,000 (a $4,800 maximum credit) in the case of a qualified veteran with a service-connected disability who has a hiring date not more than one year after having been discharged from active duty in the armed forces,4 $14,000 (a $5,600 maximum credit) in the case of a qualified veteran without a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date which equal or exceed six months,5 and $24,000 (a $9,600 maximum credit) in the case of a qualified veteran with a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date which equal or exceed six months.6

Pre-Screening Process

An employee may not be treated as a member of a targeted group unless the employee goes through a pre-screening process. That is, the employer must either: (1) on or before the day the individual begins work, obtain certification from a designated local agency (“DLA”) that the individual is a member of a targeted group; or (2) complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, on or before the day the individual is offered employment and submit the form to the appropriate DLA within 28 days after the individual began work.7

Transitional Relief

In light of the fact that the extension of the WOTC to wages paid or incurred by an employer with respect to an employee who began work after December 31, 2014, and before January 1, 2020, was not enacted until December 15, 2015, the Service granted transitional relief with respect to the pre-screening process. Specifically, the Service has given taxpayers until September 28, 2016, to submit a completed Form 8850 to the appropriate DLA for employees hired 2015 on or after January 1, 2015 through August 31, 2016.[8]  
BDO Insights
  • The WOTC can be a valuable credit that ranges between $2,400 and $9,600 per qualifying employee who began work during the taxable year. However, as noted above, each employee is subject to a pre-screening application process and the application deadline for 2015/2016 hires is fast approaching. BDO can assist with determining which employees are from a targeted group as well as the pre-screening application process.

For questions related to matters discussed above, please contact Janet Bernier, Tanya Erbe or Tom Alberte.
 
1 Notice 2016-40 – this notice expands and extends by three months the transition relief originally provided in Notice 2016-22
2 Section 51(a), (b)(1), and (d)(1).  Each of the specified categories within this targeted group is further defined in section 51(d); ‘Protecting Americans from Tax Hikes Act of 2015, Sec. 142(b).
3 Section 51(a), (b)(1), and (i)(3).
4 Section 51(b)(3) and (d)(3)(A)(ii)(I).
5 Section 51(b)(3) and (d)(3)(A)(iv).
6 Section 51(b)(3) and (d)(3)(A)(ii)(II).
7 Tax Increase Prevention Act of 2014, Pub. L. No. 113-295, § 119.
8 Notice 2016-22.
 
 

State and Local Tax Alert - June 2016

Wed, 06/22/2016 - 12:00am
Michigan Eliminates Flow-Through Entity Withholding Requirement Download PDF Version
  Summary On June 8, 2016, Michigan Governor Rick Snyder (R) signed into law H.B. 5131, 98th Leg., Reg. Sess. (Mich. 2016), which eliminates the requirement for an entity classified as a partnership or S corporation for federal income tax purposes (“FTE”) to withhold income tax on an owner’s distributive share of Michigan income.  Elimination of this withholding requirement is effective for taxable years beginning on or after July 1, 2016.
  Details For taxable years beginning before July 1, 2016, Michigan requires an FTE to withhold income tax on the distributive share of Michigan income of an owner that is an FTE or a corporation, if the FTE’s Michigan apportioned business income for the taxable year exceeded $200,000.  FTE and corporate owners may make an election to “opt out” of such withholding requirement if they meet certain documentation and notification requirements. 
 
Also for taxable years beginning before July 1, 2016, Michigan requires an FTE to withhold income tax on a nonresident individual owner’s distributive share of Michigan income.  No minimum income threshold for the withholding requirement, or option to make an election to “opt out” of withholding, exists for a nonresident individual.
 
H.B. 5131 eliminates the requirement imposed on an FTE to withhold income tax on the distributive share of Michigan income of all owners, nonresident individuals included, for taxable years beginning on or after July 1, 2016.  H.B. 5131 does not modify the option to file a composite return on behalf of qualifying owners, or impose any new filing requirements on FTEs.
  BDO Insights
  • For taxable years beginning before July 1, 2016, an FTE should continue to follow the “old” withholding requirements.  This includes filing the quarterly withholding form (Form 4917) and annual reconciliation form (Form 4918) when required. 
  • Since Michigan does not require an FTE to file an annual income tax return, and H.B. 5131 eliminates the withholding requirement for taxable years beginning on or after July 1, 2016, an FTE will have no required filings for income tax purposes.   FTEs still should consider providing their owners with a statement or Michigan K-1 equivalent with sufficient information for their owners to determine their Michigan source income.
  • The elimination of the withholding requirement shifts the responsibility and liability for making estimated income tax payments from the FTE to the FTE’s owners.  An FTE owner is still liable for income taxes due on Michigan source income, and should consider whether estimated income tax payments are required.
  • An FTE may still file a composite tax return (Form 807) on behalf of qualifying owners.  If a composite tax return is filed, then Michigan requires the FTE to make estimated tax payments on behalf of its owners included in the composite filing.  If a nonresident individual is not included in a composite filing, then Michigan requires the individual to file his or her own individual income tax return (MI-1040) to report their Michigan source income.
 

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       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

State and Local Tax Alert - June 2016

Wed, 06/22/2016 - 12:00am
Time-Sensitive Election: New Jersey Allows Taxpayers to Convert Business Employment Incentive Program Grants to Refundable Tax Credits
Download PDF Version
Summary New Jersey Governor Chris Christie (R) recently signed into law S.B. 3232, 216th Leg., Reg. Sess. (N.J. 2015), which allows taxpayers to convert Business Employment Incentive Program (“BEIP”) grants to refundable tax credits.  A taxpayer must make an election to convert the grant into a tax credit by July 11, 2016.
  Details Background

Under the BEIP, New Jersey awarded qualifying businesses cash grants for hiring new employees in the state for a term of up to 10 years, with a maximum of $50,000 per employee.  Since the inception of the BEIP in 1996, the New Jersey Economic Development Authority (“EDA”) has approved 499 BEIP agreements, which has resulted in the creation of over 105,000 jobs and the disbursement of over $1.5 billion.  However, since 2013, the state halted any further cash grant disbursements because the BEIP has not been funded.
 
Conversion of Grant to Refundable Tax Credit

Pursuant to S.B. 3232, a taxpayer who makes an irrevocable election by July 11, 2016, may convert outstanding BEIP grants into tax credits.  A taxpayer that decides not to make the election will receive a cash grant disbursement only if New Jersey decides to fund the BEIP in the future.
 
A taxpayer makes the election to convert BEIP grants to tax credits by filing an Amendment to Agreement for their corresponding tax type with the EDA.  The Division of Taxation (the “Division”) then issues an annual certificate for the unpaid BEIP grant amounts in one to five installments, depending on the year the grant accrued, according to a schedule provided in the law.  For example, the Division will issue certificates for grants accrued during years 2008 through 2013 in five installments as follows: 30 percent in 2017 and 2018; 20 percent in 2019; and 10 percent in 2020 and 2021.  Certificates for grants accrued during 2014 or 2015 will be issued in four equal installments over a four year period.
 
Application of Tax Credit

A Corporate Business Tax (“CBT”) or Insurance Premiums Tax (“IPT”) taxpayer claims a tax credit by attaching the annual certificate to its tax return for the year and entering the credit on the appropriate line of its return.  The Division will treat any credit in excess of tax liability as an overpayment and apply it to outstanding liabilities of the taxpayer.  The Division will issue a cash refund to a CBT taxpayer whose credit exceeds the amount of its outstanding tax liabilities, but not to an IPT taxpayer.  Thus, an IPT taxpayer loses the benefit of any excess credit since New Jersey does not allow an IPT (or CBT) taxpayer to carryforward unused credits.
 
A taxpayer who is not subject to the CBT or IPT, such as a partnership or limited liability company treated as a flow-through entity for tax purposes, may apply to the EDA for a tax credit transfer certificate.  A tax credit transfer certificate may then be sold to a CBT or IPT taxpayer for not less than 75 percent of the face value of the certificate starting in 2017, thereby monetizing the unusable tax credit.  There is currently no mechanism in place for a taxpayer who is not subject to CBT or IPT to use the tax credit on its own or for its individual owners.
  BDO Insights
  • The option to convert the BEIP grant to tax credits provides a taxpayer with the opportunity to take advantage of its BEIP benefits without concern for the likelihood of a future cash grant disbursement. However, the taxpayer should carefully evaluate the consequences of converting the grant to a tax credit since the election to convert such is irrevocable.
  • A taxpayer who is not subject to CBT or IPT should balance the conversion of the grant to a tax credit transfer certificate and the amount it may receive for the sale of the credit (which may create a taxable event for income tax purposes) against opting to forego the conversion and the likelihood of receiving a cash grant disbursement in future years.
  • BDO can assist with the sale and transfer of BEIP tax credit transfer certificates through its membership in the Online Incentives Exchange (or OIX), an online marketplace for buying, selling, and processing transferrable state tax credits. 

BDO’s SALT Tax Credits and Incentives Practice has successfully assisted many clients in New Jersey and other states with tax credits and incentives opportunities, and can assist you.  Should you have any questions or would like to discuss the BEIP grant conversion, please contact Tanya Erbe, National Credits and Incentives Leader at (310) 203-1259 or terbe@bdo.com or Janet Bernier, Tax Principal at (212) 515-5405 or jbernier@bdo.com
 

 

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       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

Unclaimed Property Alert - June 2016

Mon, 06/20/2016 - 12:00am
Delaware SOS VDA Program Invitation and Audit Notice – More Letters Sent by 6/30/16 Download PDF Version
Summary Delaware Sends Additional VDA Program & Audit Letters
Delaware reached out to approximately 300 companies in a series of correspondence issued on or around 9/15/15, 2/19/16, 5/1/16 and additional waves are expected here before the close of Delaware’s fiscal year end the close of the month. These letters seek to inform holders to participate in the VDA program based on record of non-compliance or they may face being audited by the Department of Finance. Companies that do not act within 60 days are expected to receive audit letters thereafter. Accordingly, Delaware is expected to issue approximately 100 new audit letters by 6/30/16.
 
Targeted companies now include middle market companies that maintain annual revenues of $100M and above. See Sample Reach Out Letter.
  Details What to Do
Given the above, companies that receive this notice should:
  1. Determine if your organization has received prior Delaware correspondence;
  2. Determine what historical compliance, if any, has been with the state of
  3. Delaware - (1986 to current);
  4. Determine record retention policy for banking records, A/R records, general ledgers, etc.
  5. Determine if policy and procedures exist around unclaimed property (current and historical);
  6. Evaluate the VDA Decision Tree; and
  7. Take action immediately where appropriate.
If your organization has received an “audit notice”, it is important to reach out to us as soon as possible for best practices on blocking other states from joining the audit and mitigate exposures  Even if an organization has not received a notice, the above steps are best practices for addressing escheatment matters and provide for reduced look-back periods for those entering sooner rather than later. Moreover, some companies, especially decentralized organizations, may have received a letter but it was never routed to the appropriate department, which without following the steps above may lead to an audit. For those that have received audit letters, please contact BDO at your earliest convenience for best practices and steps you can take to mitigate additional state exposure if timely addressed.
 
Companies at Highest Risk
  1. Incorporated in the state of Delaware, or
  2. Located in other states with significant operations in Delaware who have not addressed or underreported their unclaimed property with the state.

BDO Insights BDO has significant experience with Delaware Secretary of State VDA Program and Audit Divisions respectively. BDO has successfully assisted many clients in Delaware VDA program and on audit. Our success is largely attributable to BDO preapproved review process and our relationships, and experience working with Delaware. Please feel free to reach out to us with any questions, request for additional information, etc. We would be happy to address these for you while sharing best practices.

 
BDO’s National Unclaimed Property Practice has successfully assisted many clients in Delaware and other states with unclaimed property audits and voluntary disclosures, and can assist you.  Should you have any questions or would like to discuss escheatment, please contact Joseph Carr, Partner & National Unclaimed Property Practice Leader at (312) 616-3946 or jcarr@bdo.com.

State and Local Tax Alert - June 2016

Fri, 06/17/2016 - 12:00am
Ohio Supreme Court Holds That Nonresident Taxpayer’s Gain from the Sale of an LLC Interest Is Not Subject to Ohio Income Tax
Download PDF Version
Summary On May 4, 2016, the Ohio Supreme Court held in Corrigan v. Testa, No. 2014-1836, slip opinion 2016-Ohio-2805 (Ohio May 4, 2016) that a nonresident individual taxpayer’s gain arising from the sale of an interest in a limited liability company that did business in the state was not subject to income tax. 
  Details Background

The taxpayer in Corrigan is a Connecticut resident that owned a 79.29 percent interest in Mansfield Plumbing, L.L.C. (“Mansfield Plumbing”) – a limited liability company that produced sanitary ware and operated in all 50 states, including Ohio.  The taxpayer was a managing member of Mansfield Plumbing that visited the company’s Ohio headquarters for board meetings and management presentations regarding operations, labor, finance, strategic positioning, and other matters, which required at least 100 hours of involvement from the taxpayer per year.  The day-to-day operations of the company were overseen by officers and managers employed by Mansfield Plumbing.
 
In 2004, the taxpayer sold his 79.29 percent interest in Mansfield Plumbing to a third-party.  The taxpayer realized a $27,563,977 gain on the sale of his interest, all of which he allocated outside Ohio for income tax purposes.  Ohio subsequently issued the taxpayer a $674,924.58 tax assessment, plus interest.  The taxpayer paid $100,000 of the assessment, and then filed a refund claim with the Tax Commissioner.  The Commissioner denied the taxpayer’s refund claim on the basis of a strict reading of Ohio Rev. Code § 5747.212, which requires a taxpayer owning at least 20 percent of a pass-through entity to apportion gain realized from a sale of an interest in that entity using the average of the pass-through entity’s apportionment fractions for the current and two preceding taxable years.
 
The taxpayer appealed the Commissioner’s refund claim denial to the Board of Tax Appeals.  The Board of Tax Appeals affirmed the Commissioner’s final determination, and the taxpayer appealed to the Ohio Supreme Court.
 
The Ohio Supreme Court’s Decision

The Ohio Supreme Court held that Ohio Rev. Code § 5747.212 as applied to the taxpayer violates the Due Process Clause in the 14th Amendment to the U.S. Constitution, reversed the decision of the Board of Tax Appeals, and remanded to the Commissioner to grant the taxpayer a refund.  The court rejected the taxpayer’s facial challenge because the taxpayer could not demonstrate that there exists no set of circumstances under which the statute would be valid, and the court thought the statute could possibly be applied when a unitary business relationship exists.
 
In holding that Ohio Rev. Code § 5747.212 as applied to the taxpayer violates the Due Process Clause, the court reasoned that the Due Process Clause requires a connection between the state and the person and activity it seeks to tax.  The former may be satisfied via purposeful availment of benefits within the taxing state, and the latter a direct connection with the state.  In finding that neither criteria was present in this case, the court distinguished the present case from Agely v. Tracy, 719 N.E.2d 951 (Ohio 1999) – a case in which the court had held that due process protections allow the state to tax an S corporation shareholder’s share of distributive income arising from business conducted in the state because the decision to invest using corporate structures and making an S corporation election satisfies the purposeful availment criterion.  Here, the taxpayer did not avail himself of Ohio’s protections and benefits in any direct way when he sold his interest in Mansfield Plumbing, and Ohio’s connection to the taxpayer’s sale of the interest in Mansfield Plumbing was indirect, as the gain was not generated from business activity conducted in Ohio.
 
The Ohio Supreme Court rejected the Commissioner’s argument that International Harvester Company v. Wisconsin Dep’t of Taxation, 322 U.S. 435 (1944) and Wisconsin v. J.C. Penney Co., 311 U.S. 435 (1940) control in this case for three reasons.  First, both of the cases addressed a privilege tax on dividends distributed by the taxpayer (i.e., the investee), not the investor.  Second, dividends have a more direct relationship to corporate earnings than a capital gain arising from the sale of corporate ownership.  Third, in MeadWestvaco Corp. v. Ill. Dep’t. of Revenue, 553 U.S. 16 (2008), the U.S. Supreme Court characterized the apportionment of intangibles based on the capital asset's unitary business relationship (i.e., operational function) connection with the state as a ground for constitutional apportionment.  Thus, the Ohio Supreme Court found the issue in this case (i.e., the imposition of an investee-apportioned tax on the gain realized from the sale by an investor) an unsettled question that the court could not properly regard as settled by International Harvester and J.C. Penney.
 
The court also was not persuaded by the Commissioner’s reliance on state court cases as support for applying Ohio Rev. Code § 5747.212 to the taxpayer.  For example, the court distinguished Johnson v. Collector of Revenue, 165 So.2d 466 (La. 1964) from the present case.  In Johnson, the Louisiana Supreme Court upheld the imposition of income tax under a statutory scheme that allowed for taxation of a nonresident taxpayer’s pro rata share of capital arising from an exchange of shares for direct ownership interests in Louisiana lands pursuant to a liquidation.  The Ohio Supreme Court found the Louisiana statutory scheme, which limited the tax to gain related to Louisiana property, did nothing more than prevent avoidance of Louisiana tax on a capital gain from the sale of a Louisiana asset through a manipulation of corporate forms.  On the other hand, the application of Ohio Rev. Code § 5747.212 to the taxpayer would broadly subject the taxpayer’s gain to tax.
 
The court also found Allied-Signal, Inc. v. Commissioner of Finance, 588 N.E.2d 731 (N.Y. 1991) and Couchot v. State Lottery Comm’n, 659 N.E.2d 1225 (Ohio 1996) to be inapposite.  In Allied-Signal, the New York Court of Appeals upheld a New York City income tax on a nonresident parent corporation’s capital gain arising from the sale of its interest in a subsidiary based International Harvester and J.C. Penney Co.  However, the Ohio Supreme Court had already declined to read those cases to allow for the imposition of a tax on a nonresident dividend recipient.  And, in Couchot, the Ohio Supreme Court had upheld a tax on a nonresident’s winnings from an Ohio lottery.  The court found the situation in Couchot to be quite different from the present taxpayer’s situation because the taxpayer in Couchot clearly enjoyed Ohio-created benefits and protections, thus, the tax was justified.
 
Lastly, the court rejected the Commissioner’s substance-over-form argument that the gain would have been taxable had the corporation sold the assets instead.  The court noted that it is not unusual for two different methods of achieving the same economic result to have drastically different results, and the Commissioner’s argument could cut against the state since a sale of assets (taxable) is in substance the same as sale of corporate ownership (not taxable).
  BDO Insights
  • A nonresident taxpayer that realized a gain from the sale of an interest in a pass-through entity should consider whether a refund opportunity or return position may be available based on the decision in Corrigan
  • Consideration should also be given as to whether or not an S corporation should make the federal election under Internal Revenue Code section 338 to treat a stock sale as an asset sale given that Ohio generally adopts federal taxable income for purposes of computing income at the state-level, and the application of Corrigan may result in a non-resident shareholder’s gain being allocated outside the state if the sale is treated as a stock sale.

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       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

State and Local Tax Alert - June 2016

Thu, 06/16/2016 - 12:00am
Oklahoma Enacts Sales and Use Tax Remote Seller Rebuttable Nexus Presumption and Use Tax Notification Provisions
Download PDF Version
Summary On May 17, 2016, Oklahoma Governor Mary Fallin (R) signed into law the Oklahoma Retail Protection Act of 2016, H.B. 2531, 55th Leg., 2d Reg. Sess. (Okla. 2016) (“H.B. 2531”), which subjects remote sellers to a sales and use tax nexus rebuttable presumption and a use tax notification requirement.  In addition, H.B. 2531 directs the Tax Commission to implement voluntary disclosure and compliance outreach programs, and voids certain rulings and agreements that specify a vendor is not subject to tax.  The provisions enacted under H.B. 2531 become effective on November 1, 2016.
  Details Sales and Use Tax Nexus Rebuttable Presumption
H.B. 2531 amends the definition of “maintaining a place of business in this state” to create a rebuttable presumption that a vendor has nexus with the state for sales and use tax purposes if:
 
  • The vendor is, directly or by subsidiary, utilizing or maintaining an in-state office, distribution house, sales house, warehouse, or other place of business owned or operated by an individual or entity (other than a common carrier) who is not the vendor;
  • The vendor has an agent operating in the state, even on a temporary basis; or
  • An individual or entity has substantial nexus in Oklahoma, and:
    • Sells a similar line of products as the vendor under the same or a similar business name;
    • Uses trademarks, service marks, or trade names in the state that are the same or substantially similar to those used by the vendor;
    • Delivers, installs, assembles, or performs maintenance services for the vendor,
    • Facilitates the vendor's delivery of property to customers in the state by allowing the vendor's customers to pick up property sold by the vendor at an in-state office, distribution facility, warehouse, storage place, or similar place of business maintained by the individual or entity; or
    • Conducts any other activities in the state that are significantly associated with the vendor's ability to establish and maintain a market for the vendor's sales. 

A vendor may rebut a presumption of nexus by demonstrating that an individual’s or entity’s activity in the state is not significantly associated with the vendor’s ability to establish or maintain a market in the state.
 
Prior to the enactment of H.B. 2531, this definition was not a rebuttable presumption and its application was limited to maintaining, directly or by subsidiary, an office, distribution house, sales house, warehouse, other place of business in the state, or having agents operating in the state.  Also, for use tax purposes, the definition of “retailer” contained language similar to what is now under the definition of “maintaining a place of business in this state,” and contained a presumption of nexus that pertained to a retailer that is a member of a “controlled group.”  As a result of the enactment of H.B. 2531, such language has been struck from the definition.
 
Use Tax Notification Requirement
H.B. 2531 requires a remote retailer or vendor that is not required to collect use tax to provide notification by February 1 of each year to an Oklahoma customer to whom tangible property was delivered during the preceding calendar year that the he or she may owe use tax on the purchase, and, if so, to report and pay it with his or her Oklahoma income tax return.  Notification may be done by mail, email, or other electronic communication.
 
Out-of-State Retailer Voluntary Disclosure Program
H.B. 2531 directs the Tax Commission to create a voluntary disclosure program for out-of-state retailers that were not registered in the state in the 12-month period preceding November 1, 2016, that register prior to May 1, 2017.  Under the program, the Tax Commission may not collect sales and use tax, or penalty or interest, from a participating out-of-state retailer on sales made prior to registration.
 
H.B. 2531 does not extend relief to sales and use taxes due from the out-of-state retailer in its capacity as a buyer.  In addition, an out-of-state retailer is precluded from participating in the program if it has received notice of commencement of an audit that is not yet finally resolved.
 
Outreach Program
H.B. 2531 requires the Tax Commission to implement an outreach program, the purpose of which is to improve compliance of out-of-state retailers, including Internet retailers, “maintaining a place of business in this state.”  Under the program, the Tax Commission must contact retailers for a review of their business activities to determine whether or not such activities require the registration and collection of use tax.
 
Void Rulings and Agreements
H.B. 2531 voids any ruling, agreement, or contract under which the vendor is not required to collect tax despite the presence of a warehouse, distribution center, or fulfillment center in the state that is owned or operated by the vendor or an affiliated individual or entity, unless it is specifically approved by a majority vote of each house of the Oklahoma legislature.  This provision was added to the definition of “maintaining a place of business in this state.”
  BDO Insights
  • A vendor that may have nexus in Oklahoma by reason of the enactment of H.B. 2531 should assess whether or not it should register, and begin collecting and reporting for sales and use tax purposes starting November 1, 2016.  A vendor with a ruling, agreement, or contract under which it is not required to collect tax should consider reviewing the ruling, agreement or contract, and make a similar assessment.
  • A vendor that may have nexus in Oklahoma that is not registered for sales and use tax purposes, and has not received a notice of commencement of an audit should assess whether or not it may benefit from participating in the voluntary disclosure program the Tax Commission is required to implement under H.B. 2531.
  • A vendor that may be subject to the new use tax notification requirement should consider whether it is necessary to implement the systems necessary to comply with first notification due date on February 1, 2017.  It should be noted that while a vendor must typically have a physical presence in a state to be subject to a sales and use tax collection requirement, the U.S. Supreme Court in Direct Marketing Association v. Brohl upheld the imposition of Colorado’s use tax notification requirement on an out-of-state vendor that lacked a physical presence in the state.

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       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

International Tax Alert - June 2016

Fri, 06/10/2016 - 12:00am
2015 Foreign Financial Account Report (FinCEN Form 114) Should Be Submitted Electronically No Later than June 30, 2016 Download PDF Version
Affecting Any United States persons with a financial interest in or signature authority over foreign bank and financial accounts with a total balance exceeding $10,000 at any time during the calendar year.
Background United States persons, as defined under applicable banking regulations (and not under federal tax law), are required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), if they have a financial interest in or signature authority over foreign bank accounts with an aggregate value exceeding $10,000 at any time during the calendar year. The definitions and rules are found in regulations issued by the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and require that the FBAR filings are received by Treasury no later than June 30th.
  Details United States persons are required to file the FBAR for certain foreign financial accounts in which they have direct or indirect ownership in or signature authority over, if such accounts have an aggregate value exceeding $10,000 at any time during the calendar year. The filing requirements for signature authority and direct and indirect ownership of reportable financial accounts are complex and should be reviewed to determine the financial accounts for which a United States person has an FBAR filing requirement.  Specific filing instructions, definitions regarding United States person and financial accounts, and other related FBAR guidance can be found on the FinCEN’s website.
 
Additionally, the Internal Revenue Service (“IRS”)  has included several items on its website that provide information regarding the filing requirements and the types of financial accounts that are required to be reported on FBAR filings. These items can be accessed at the IRS web site at the following links:
 
Report of Foreign Bank and Financial Accounts (FBAR)
 
Comparison of Form 8938 and FBAR Requirements
 
Internal Revenue Manual
 
E-Filing Requirement
The FBAR filing must be received by the Treasury Department by June 30, 2016 (for FBARs related to calendar year 2015). This filing must be done electronically. 
 
In addition to Form 114, the taxpayer must complete Form 114a, Record of Authorization to Electronically File FBARs, in order to permit a third-party to sign and submit the FBARs on their behalf electronically. This may be used in the instance of an officer or employee with signature authority, but no financial interest in an account held by its employer, to authorize said employer to file the FBAR on his behalf.
 
Filing Date Change for Form FinCEN 114 Filings Due in 2017 
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the FBAR filing due date from June 30th to April 15th and provides for an extension to October 15th, effective for the 2016 calendar year (for FBAR filings required to be filed in 2017). The proposed regulations also provide for a waiver for any late filing penalty for first-time filers who fail to timely request or file an extension (but file by October 15th.
 
Penalties
The FinCEN regulations include an anti-avoidance rule that will require FBAR reporting if an entity is created for the purpose of evading FBAR reporting. Failure to file an FBAR report may subject the non-filer to civil and criminal penalties. Penalties for a willful failure to file can be as much as the greater of $100,000 or 50 percent of the amount in the account at the time of the violation.
  How Can BDO Help Due to increased scrutiny and severe penalty regime with respect failure to file FBARs, it is important for all individuals and entities to review whether there is any financial interest in or signature authority over accounts subject to FBAR reporting. BDO can help you review these requirements and submit any FBARs electronically. 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Scott Hendon
Partner

 

Jerry Seade
Principal

  Monika Loving 
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Brad Rode
Partner  

Chip Morgan
Partner

     

International Tax Alert - June 2016

Wed, 06/08/2016 - 12:00am
United Kingdom Government Releases Consultation Document on Reforms to Corporation Tax Loss Relief Download PDF Version
Summary

On May 26, 2016, the UK government released a consultation document in respect of the delivery of the proposed reforms to corporation tax loss relief.  An outline of the proposals was previously announced by Chancellor George Osborne in his Budget speech on March 16, 2016, and the consultation document considers how best to deliver the proposed reforms in legislation, together with how to deal with interactions with other areas of the corporate tax system.

The consultation will run until August 18, 2016.  Draft legislation will then be published at the time of the Autumn Statement 2016 to allow for a period of technical consultation, prior to enactment of the new rules in Finance Bill 2017.

Details On March 16, 2016 Chancellor George Osborne announced the United Kingdom’s 2016 Budget.  At the heart of the Chancellor’s speech was a business tax road map designed to take the economy to 2020 and beyond.   The road map reinforces the UK government’s desire for a competitive and stable business tax regime, which would support small business and lower tax rates to drive growth, maintain a level playing field by countering tax avoidance and aggressive tax planning, and simplify and modernize the tax system.  As part of the modernization program, reform to the corporation tax loss regime will be enacted.

Current Corporation Tax Loss Rules
Under the current regime, where a UK company incurs a trading loss, it is able to:
  • Use that loss against its other taxable profits arising in the same taxable period;
  • Carry the loss back to the prior year for use against its total profits in that prior period; and
  • Surrender that loss to another group company as “group relief,” to the extent that the receiving group company has taxable profits available for offset in the same period.
Unrelieved trading losses that are not used as described above are then carried-forward indefinitely for offset, but only against profits arising from the same trade in the company that incurred the loss.  Certain other types of losses incurred by a UK company are also similarly restricted, and are only available for carry-forward to offset profits arising from the same activity in the same company that incurred the loss.   This restriction often leads to “trapped” or otherwise unrelievable losses.
Proposed Reforms In order to modernize the UK’s corporation tax loss relief rules, two major reforms are proposed:

Increased flexibility for use of carried-forward losses
Losses incurred from April 1, 2017, can be carried-forward and offset against future profits arising from different activities within the same company, and against the taxable profits of other group members.

Cap on use of carried-forward losses
The amount of annual profit that can be relieved by carried-forward losses (whenever those losses arose) will be limited to 50 percent from April 1, 2017.  This is subject to an annual GBP five million allowance per group.
Losses incurred prior to April 1, 2017 will continue to be available for use under the old, more restrictive carry-forward rules, subject to the new 50 percent limitation. 

Losses incurred on or after April 1, 2017, will also be subject to the 50 percent limitation, but there will be much more flexibility as to how those losses can be used when carried-forward to future years.  

Any losses carried-forward and unused because of the 50 percent cap in any year will continue to be carried-forward to future years for offset, again subject to the 50 percent limitation.

Capital losses remain ring-fenced and so are not included in the reform.

To prevent loss-buying (i.e. the acquisition of a company for its unused losses), existing restrictions that seek to prevent this will remain.   Further, the new flexible carry-forward rule will not apply.  This means that carried-forward losses of an acquired company continue only to be available for use against profits arising from the same trade/business, and are subject to the usual forfeiture rules that apply to acquired losses in certain circumstances.

The reforms are not intended to apply to carried-forward losses relating to ring-fenced oil and gas activity, nor excess Basic Life Assurance and General Annuity Business expenses, both of which are covered by separate tax regimes. 

Banking Losses
Certain losses incurred by banks prior to April 1, 2015, are already restricted under current UK tax law to 25 percent of eligible profits (50 percent prior to April 1, 2016).  Any losses not falling within the current 25 percent bank loss restriction (e.g. certain building society losses and losses arising to certain “new-entrant banks”) will be treated in the same way as losses arising to any other UK company, i.e. subject to the 50 percent restriction over GBP five million.

Areas of Consultation
The consultation document requests input from interested parties on certain detailed design points, including the definition of group for the purposes of the GBP five million allowance, how consortia should be dealt with, and what targeted anti-avoidance measures should be included in the new rules to prevent companies from manipulating, for example, the time when profits or losses arise.   
BDO Insights
  • Companies should welcome the increased flexibility for the use of carried-forward losses, which should help relieve the incidence of trapped and unused losses.  However, as the rules only apply to losses incurred on or after April 1, 2017, it may be some time before the groups begin to see the benefit. On the other hand, the restriction on the use of losses carried-forward to 50 percent of profits over GBP five million may have a more immediate impact for larger groups that were hoping to use brought-forward losses more quickly.
  • Responses to the consultation are due by August 18, 2016, with draft legislation expected to be published at the time of the Autumn Statement 2016.  The new rules are expected to be enacted in Finance Bill 2017.
  • For further information, please contact Ingrid Gardner or your usual BDO tax advisor.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax Practice Leader           Joe Calianno
Partner and International Technical Tax Practice Leader, National Tax Office   Ingrid Gardner
Managing Director UK/US Tax Desk   Scott Hendon
Partner    Monika Loving
Partner    Chip Morgan
Partner    William F. Roth III
Partner, National Tax Office   Brad Rode
Partner    Jerry Seade
Principal     

International Tax Alert - June 2016

Mon, 06/06/2016 - 12:00am
The UK Government Releases Consultation Document on Reform of the Substantial Shareholdings Exemption Download PDF Version
Summary On May 26, 2016, the UK government released a consultation document with respect to possible reform of the Substantial Shareholdings Exemption (“SSE”). 
 
The SSE was introduced in 2002 and provides an exemption from corporation tax for capital gains and losses on the disposal of certain qualifying shareholdings.  Since the introduction of the SSE there have been fundamental changes to both the domestic and international tax landscapes, as well as concerns raised about the complexity of the rules.  The consultation document has been issued as a means to consider whether there are reforms to the SSE that could be implemented to make it simpler, more coherent, and ensure that the United Kingdom remains competitive as a holding company location. 
 
The consultation will run until August 18, 2016, which will allow the UK government time to consider reform prior to the Autumn Statement.  Any changes to the SSE regime would be expected to be enacted in Finance Bill 2017.
  Details The SSE was introduced in 2002 to ensure that the application of corporation tax to capital gains on share disposals did not unduly influence business decisions on restructuring and investment.  There are three requirements that must be met in order for the exemption to apply.  These are broadly summarized below:
 
  • The substantial shareholding requirement  -  The company making the disposal must have held at least 10 percent of the ordinary share capital of the company being disposed of for a continuous 12-month period in the two years prior to disposal;
  • The investing company requirement  -  The company making the disposal must be a trading company or a member of a trading group throughout the two years prior to, and immediately after, the disposal; and
  • The investee requirement  -  The company being disposed of must have been a trading company or a holding company of a trading sub-group throughout the two years prior to, and immediately after, the disposal.
For SSE purposes, a group is defined as a principal company and all the companies in which it holds a 51-percent shareholding either directly or indirectly.  This is measured by reference to “ordinary share capital.”  Difficulties have arisen in applying the grouping rules where there are entities that do not have ordinary share capital as defined in the UK legislation, e.g. partnerships, or United States limited liability companies.  It has also been noted that the trading requirements, particularly at the level of the investing company, can often make the availability of the SSE contingent on factors outside of the UK companies’ control. 
 
It is recognized that these complexities and uncertainties create unnecessary administrative burdens for business and can deter groups from using the UK as a holding company location.   The consultation document therefore seeks views on possible amendments to the SSE that would simplify the qualification requirements for the exemption, and ensure that the United Kingdom remains competitive as a holding company location.
 
Options being considered for reform of the SSE are:
  • Implementation of a more comprehensive exemption  -  This would be subject to parameters, such as ensuring that any exemption would not be available to shelter profits arising in the ordinary trading course of a business, ensuring equal application to gains and losses, and not creating scope for the tax-free transfer of enveloped passive assets;
  • Exemption subject to investee trading test  -  This would require trading conditions to be met with respect to the company being disposed of, to ensure that the exemption could not apply to the disposal of largely passive or non-business assets, but would remove the trading requirements for the company making the disposal;
  • Exemption subject to investee test other than trading  -  This option considers whether there are alternative (wider) conditions for the company being disposed of that could provide more targeted protection against abuse of the exemption, without impacting its wider applicability. For example, the company being disposed of could be required to be trading or actively conducting business activities other than trading;
  • Amended trading tests at investee and investor level ­­ -  Consideration is being given to changes that could be made to the SSE within its existing legislative framework, for example, focusing the investing and investee trading tests on the companies involved in the transaction rather than the wider group; and,
  • Changing the definition of “substantial shareholding”  -  Here, the government would be interested in examples of disposals of large and long-term investments that have not met SSE because of the current definition of “substantial shareholding.”  However, it should be noted that it is unlikely that the current ten percent threshold will be lowered or augmented with a minimum invested capital requirement. 

BDO Insights
  • The UK government believes that the SSE is generally realizing its policy objectives of ensuring that the tax treatment of share disposals does not unduly influence business decisions.  However, it also recognizes that the current SSE is complex, can create unnecessary administrative burdens for both the taxpayer and the UK tax authorities, and could be improved to make the United Kingdom a more competitive holding company location.
  • Responses to the consultation are due by August 18, 2016, after which it is expected that a further consultation document will be issued prior to the Autumn Statement, possibly with draft legislation for implementation in Finance Bill 2017.
  • For further information, please contact Ingrid Gardner or your usual BDO tax advisor.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax Practice Leader           Joe Calianno
Partner and International Technical Tax Practice Leader, National Tax Office   Ingrid Gardner
Managing Director UK/US Tax Desk   Scott Hendon
Partner    Veena Parrikar
Principal, Transfer Pricing   Chip Morgan
Partner    Monika Loving
Partner    Brad Rode
Partner    William F. Roth III
Partner, National Tax Office   Jerry Seade
Principal 

State and Local Tax Alert - June 2016

Wed, 06/01/2016 - 12:00am
Texas Supreme Court Decision and Administrative Rulings Address Franchise Tax Apportionment and Unitary Combined Reporting Download PDF Version
  Summary In addition to the Supreme Court of Texas’s recent decision in Hallmark Marketing Co. v. Hegar that addressed the meaning of “net gain” for franchise tax apportionment purposes, the State Office of Administrative Hearings (“SOAH”) recently issued two decisions regarding franchise tax apportionment and unitary combined reporting.  One SOAH decision addresses the meaning of “centralized management” for purposes of the franchise tax’s definition of a “unitary business” group, and the other addresses the inclusion of captive insurance companies and a reinsurer in a Texas unitary combined group.  Also, the Comptroller of Public Accounts (“Comptroller”) issued a private letter ruling to address the sourcing of commission receipts received by the operator of an on-line business-to-business exchange.
  Details Hallmark Marketing Co. v. Hegar, No. 14-1075 (Tex. Apr. 15, 2016) – “Net gain” does not mean net loss
FACTS - For the taxable year at issue, the taxpayer sold some investment securities for a gain and some for a loss, resulting in an overall net loss.  The taxpayer followed the statute, and included no gain or loss in the denominator of its apportionment factor.  On audit, the Comptroller followed the language in the administrative rule, which resulted in inclusion of the overall net loss, a lower apportionment factor denominator, a higher overall apportionment factor, and a franchise tax assessment.  The taxpayer protested the assessment, and after the trial court and court of appeals decided in favor the Comptroller, the Supreme Court of Texas reversed in favor of the taxpayer.
 
LAW - Tex. Tax Code § 171.105(b) provides that only the “net gain” from the sale of investment securities are included in the Texas single sales factor apportionment formula.  However, 34 Tex. Admin. Code § 3.591(e)(2) requires a taxpayer with a net loss to net the loss against other receipts, but not below zero.
 
HOLDING - The Supreme Court of Texas decided in favor of the taxpayer because Tex. Tax Code § 171.105(b) does not require the taxpayer to include the net loss from the sale of investments in the apportionment factor.  The court declined to give deference to the administrative rule because it conflicts with the statute.  That is, since the statute only states that “net gain” is included in the Texas apportionment factor, the Comptroller’s rule added “net loss” to a clear and unambiguous statute.
 
SOAH Docket No. 304-15-4111.13 (Oct. 22, 2015) – Common ownership does not always result in strong centralized management
FACTS - A single individual owned all of the shares of Company A and Company B.  Company A operated a consulting business that offered conferences, instructional materials, and individualized consulting.  Company B operated a carpet, upholstery, and hardwood floor cleaning business.
 
The sole shareholder took a hands-off approach with respect to Company B, and gave full responsibility to its personnel to run the business.  In contrast, the sole shareholder assisted with the operations of Company A, including marketing and sales.  Company A and Company B had common payroll and software, and shared a building, one common vendor (a credit card processing company) and an employee that performed certain administrative functions for both entities (i.e., certain accounting functions and generally oversaw purchasing activities).  The shared employee did not perform purchasing, personnel, or marketing functions for Company A.
 
Company A and Company B filed separate franchise tax reports for the taxable years at issue.  On audit of Company B, the Comptroller determined that Company A and Company B were engaged in a unitary business, and should have filed combined returns because they “shared centralized management structure arising out of their common ownership.”  The Comptroller assessed franchise tax and interest, and Company B protested.
 
LAW  - The definition of “unitary business” in Tex. Tax Code § 171.0001(14) considers the following factors in determining whether a unitary business exists:
  • The activities of the affiliated group members are in the same general line of business;
  • The activities of the affiliated group members are steps in a vertically integrated operation; or
  • The affiliated group members are functionally integrated through the exercise of strong centralized management, such as authority over purchasing, financing, product line, personnel, and marketing.
In determining whether a unitary relationship exists, 34 Tex. Admin Code § 3.590(b)(6) provides that consideration should be given to “the entity's sources of supply, its goods or services produced or sold, its labor force, and market to determine whether the joint, shared, or common activity is directly beneficial to, related to, or reasonably necessary to the income-producing activities of the unitary business.”  It also creates a presumption of a unitary business in the case of affiliated entities.
 
RULING - The Administrative Law Judge (“ALJ”) ruled that Company B overcame the presumption that Company A and Company B were engaged in a unitary business, and recommended dismissal of the assessments.  The ALJ found that both entities operated independently with respect to their critical functions, and the shared administrative functions did not “amount to centralized management, much less strong centralized management.”  In addition, the Comptroller had conceded that Company A and Company B did not satisfy either of the first two factors in the statute.
 
SOAH Docket No. 304-15-0925.13 (Sept. 3, 2015) – Reinsurance company not excluded from a Texas unitary combined group; credit card interchange fees sourced to place of performance
FACTS - The taxpayer, a federal savings bank, and a common parent corporation of a Texas unitary combined group owned four captive insurance companies and a Bermuda reinsurance company.  The captives and the reinsurer were all non-admitted insurance companies in Texas.  The captives paid a gross premiums tax to the states where they were domiciled.  The reinsurer paid an annual company fee to Bermuda. 
 
For the taxable years at issue, the taxpayer filed a Texas combined return that did not include the captive insurance companies or the Bermuda reinsurance company, based on the contention that each company was exempt from tax – the captives insurance companies because they reported and paid gross premiums tax to other states, and the Bermuda reinsurance company because the companies it reinsures paid gross premiums tax on the policy premiums paid to it.   In addition, the taxpayer excluded interchange fees related to VISA credit cards it issued from Texas gross receipts for apportionment purposes, based on the contention that they were attributable to services performed outside the state.  On audit, the Comptroller included the captive insurance companies and the Bermuda reinsurer in the combined group, included the interchange fees in the apportionment factor as Texas receipts, and assessed the corresponding franchise tax.  The taxpayer protested the assessment.
 
LAW - Texas law excludes a non-admitted insurance company that pays a gross premiums tax during a taxable year from the unitary combined group of a taxpayer that is required to file a Texas combined franchise tax report.  See Tex. Tax Code §§ 171.0002(b)(4) and 171.052(a), and 34 Tex. Admin. Code §§ 3.581(d)(4), 3.583(d)(1), and 3.590(b)(2)(B).   In addition, Texas law provides that receipts from the sale of a service are sourced to Texas based on the fair value of the service that has been rendered in the state.  See Tex. Tax Code § 171.103(a), and 34 Tex. Admin. Code § 3.591(e)(26).
 
RULINGS - The ALJ ruled that the payment of gross premiums tax to any state or foreign jurisdiction satisfies the statutory requirement for exclusion of an insurance company from a Texas unitary combined group, and found that the auditor erred when it included the captive insurance companies in the taxpayer’s combined group.  However, the ALJ also ruled that the Bermuda annual company fee was not recognized as a gross premiums tax, and any gross premiums taxes remitted to Texas or other states on insurance and premiums ceded to the reinsurer do not qualify as the payment of a gross premiums tax by the reinsurer.  As a result, the ALJ found that the auditor did not err when it adjusted the taxpayer’s franchise tax reports to include the Bermuda reinsurer.
 
On the apportionment issue, the ALJ concluded that none of the interchange fees should be included in Texas receipts because all of the services were performed outside the state.  Accordingly, the ALJ recommended that the interchange fees should be removed from the taxpayer’s franchise tax assessments.
 
Private Letter Ruling No. 201604750L (Apr. 12, 2016) – Commissions received for on-line matching of shipping customers and carriers sourced to the location of the servers
FACTS - The taxpayer is an Arizona headquartered transportation management company that has a sales employee and independent contractors who are primarily engaged in solicitation activities in Texas.  These individuals also perform certain customer service activities, none of which are revenue generating.  The taxpayer matches shipping customers and transportation companies through proprietary online software stored on a server located in Arizona.  The software allows a shipping customer to post a shipping need and view bids from different transportation carriers.  Shipping customers make payments to the taxpayer, who remits the payment to the transportation carrier, less a portion retained by the taxpayer as a commission.
 
LAW - Texas law provides that receipts from the sale of a service are sourced to Texas based on the fair value of the service that has been rendered in the state.  See 34 Tex. Admin. Code § 3.591(e)(26).  The Comptroller advised in Decision No. 104,224 (2013) that the determination of where services are performed is based on the location at which the “‘specific, end-product acts for which the customer contracts’ take place, not the location at which ‘non-receipt producing, albeit essential, support activities’ are performed.”
 
RULING - The Comptroller ruled that no portion of the revenues earned by the taxpayer for matching shipping customers and transportation carriers should be apportioned to Texas.  The Comptroller reasoned that the taxpayer’s customers pay for a matching service – not the customer service activities – which are provided online through the proprietary online software located and maintained outside Texas.
  BDO Insights
  • The Hallmark Marketing decision and the other administrative rulings provide some helpful guidance on the composition and sourcing of the Texas sales factor formula.    
  • The SOAH rulings may provide planning guidance or help to identify a potential refund with respect to the composition of a unitary combined group.  However, since the unitary business principle can be a “double-edged sword,” they could also be a reminder of potential audit exposure.
 

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       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

State and Local Tax Alert - June 2016

Wed, 06/01/2016 - 12:00am
Wisconsin Senator Introduces Bill with Proposed Unclaimed Property Reform Download PDF Version
Summary On April 7, 2016, Wisconsin Senator Richard Gudex (R) introduced S.B. 799, which includes numerous proposals that would reform the unclaimed property law, such as prohibit the use of third-party audit firms, establish a voluntary disclosure program, reduce the statute of limitations for assessment from five years to three years, create a business-to-business exemption, and authorize administrative appeals.  If enacted, these changes would generally be effective on the day after publication.
  Details Unclaimed Property Audits
As it relates to unclaimed property audits, if enacted, S.B. 799 would:
  • Prohibit the use of third-party audit firms;
  • Reduce the statute of limitations for assessment from five years after the duty to report arose to three years after the duty to report arose; and
  • Apply the administrative and other appeal procedures that apply to income and franchise tax assessment determinations to unclaimed property determinations (currently, limited to bringing an action in circuit court).
Business-to-Business Exemption
If enacted, S.B. 799 would create an exemption for any of the following that is owed by a business to another business:
  • Credit balance issued to a commercial customer account, except with respect to banking deposits held by a banking organization or financial organization;
  • Customer overpayment;
  • Security deposit;
  • Refund;
  • Credit memorandum;
  • Unused airline ticket;
  • Unidentified remittance; and
  • Uncashed check, draft, or other similar instrument.
Unclaimed Property Administration
As it relates to the administration of unclaimed property, if, enacted, S.B. 799 would direct the Secretary of Revenue to create a voluntary disclosure program and promulgate rules therefore, subject to the following requirements:
  • Exclude a holder from participating in the program if the Secretary is conducting an audit;
  • Apply a look-back period of three report years;
  • Waiver of interest if the holder completes the program within the first year the program is available, and impose a three percent interest rate if the filing is completed thereafter;
  • Waiver of penalties for all filings under the program; and
  • A good faith reporting requirement for a holder entering the program.
If enacted, S.B. 799 would also:
  • Reduce the interest rate on items filed late from 18 percent to six percent;
  • Reduce the record retention requirement for all data included within a report from five years after the property is reported to three years after the property becomes reportable;
  • Require holders to report owner date of birth and social security number or other tax identification number of each apparent owner, if that information is known and readily available;
  • Change the reporting deadline to “no later than November 1 of each year”
  • Reduce the dormancy period for a money order and other similar written instruments (other than a third-party bank check) from seven years to five years;
  • Require a holder to deliver the contents of a safe deposit box to the Secretary no earlier than February 1 and no later than February 15 of the year following the year the holder was required to file the report;
  • Permit the Secretary to disclose certain details regarding a claimant where two or more claimants file a claim for the same property; and
  • Permit the Secretary to pursue collection actions and commence suit to recover property claimed in error.
BDO Insights
  • S.B. 799 was introduced on the last day for introducing new legislation in the current legislative session, and is expected to die in committee during this session.  If so, S.B. 799 will need to be reintroduced (or similar legislation introduced) at the start of the next legislative session in fall of 2016.  In addition, since Senator Gudex is not running for reelection, S.B. 799 will require a new sponsor if it is to be reintroduced.
  • Bills introduced in the fall of 2016 sessions may be ensnared in budget bill legislation and negotiations, which may result in amendments to the proposed changes in S.B. 799 or potentially delay its enactment (i.e., if it does not die or it is reintroduced).
  • S.B. 799 includes statutory language that addresses numerous proposals for unclaimed property reform circulated by the Secretary for public comment in the fall of 2015.  Several of the proposed changes vary from the ideas circulated by the Secretary in late 2015 (e.g., the Secretary was proposing an amnesty-like program with a limited time for holders to enroll and complete their voluntary filing).  BDO is not aware of commentary from the Secretary regarding the unclaimed property changes proposed in S.B. 799.
 
BDO’s National Unclaimed Property Practice has successfully assisted many clients in Wisconsin voluntary disclosures and unclaimed property audits, and can assist you.  Should you have any questions or would like to discuss escheatment, please contact Nick Boegel, Tax Senior Director at (414) 615-6773 or nboegel@bdo.com.

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       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

International Tax Alert - June 2016

Wed, 06/01/2016 - 12:00am
China Records Tremendous Progress in Tax Co-operation and Tax Transparency Download PDF Version
Overview On May 16, 2016, the heads of 44 tax administrations met in Beijing for the 10th Meeting of the OECD Forum on Tax Administration (“FTA”).

The Meeting came at a critical time, when tax co-operation and tax transparency have been a high priority for the G20 agenda under the Chinese Presidency, and there are increased expectations of progress.
The Meeting focused on the following three interlocking themes:
  • Effective implementation of the G20/OECD international tax agenda, requiring coordinated action from tax commissioners;
  • Building modern tax administrations that effectively respond to the challenges and opportunities of an increasingly digital world, and integrating it into the way tax commissioners work; and
  • Helping build capacity in tax administration so that all countries, and in particular developing countries, can benefit from the changes in the international tax landscape and better mobilize the resources they need. 
China Signed CBC MCAA 
During the FTA Meeting, China recorded tremendous progress in tax co-operation and tax transparency.

One of the key highlights is that on May 12, 2016, China signed the OECD’s Multilateral Competent Authority Agreement (“CbC MCAA”) for the Automatic Exchange of Country-by-Country (“CbC”) reports, joining a group of 38 other signatories.

China’s signing of the CbC MCAA presents a commitment to localize and implement Action 13 of the G20/OECD BEPS Project. China-based multinational companies (“MNCs”) with significant global revenues will be required to file CbC reports, in which high level information of the group and the affiliates should be disclosed on a tax jurisdiction-basis. In addition, China shall be granted the right to access and analyze CbC reports filed by foreign-based MNCs that have operations in China.

According to the discussion draft of “Implementation Measures of Special Tax Adjustment” (“Discussion Draft”) released on September 17, 2015, taxpayers that meet one of the following conditions shall prepare a CbC report form of the “Annual Reporting Forms for Related-Party Transactions”:
  • The taxpayer is the ultimate holding entity in the group, and its group consolidated revenues for the previous fiscal year exceed RMB 5 billion;
  • The ultimate holding entity of the taxpayer is outside China, but the taxpayer is assigned by the group as the reporting entity for the CbC report form.
Though the Discussion Draft is not yet finalized, it presents China’s tax authority’s positions on CbC reporting, which may give some preliminary guidance for MNCs to prepare in advance.

Signing of the CbC MCAA will expedite the release of China’s domestic regulations on CbC reporting.

A separate circular concerning related-party disclosures and transfer pricing contemporaneous documentation is expected to be issued by the end of May.

CBC Reporting Requirements 
In CbC reports, MNCs are required to report the following information on a CbC basis, aggregating information from all group entities (including permanent establishments) in each tax jurisdiction:
  • Revenues from unrelated parties;
  • Revenues from related parties;
  • Profit or loss before income tax;
  • Income tax paid (on a cash basis);
  • Income tax accrued (current year);
  • Stated capital;
  • Accumulated earnings;
  • Number of employees; and
  • Tangible assets (other than cash and equivalents).
In addition, MNCs will need to disclose the characterization of each entity in each jurisdiction and its business activities (e.g., manufacturing, sales, distribution, R&D, services, etc.).

Other Progress in International Tax Co-Operation 
During the FTA Meeting, China had concluded a series of achievements in international tax co-operation:
  • Signing the Memorandum of Bilateral Tax Co-operation with the Canada Revenue Agency;
  • Signing the Memorandum of Bilateral Tax Co-operation with Internal Revenue Service of USA;
  • Together with the Canada Revenue Agency, putting forward a number of initiatives for building capacity in tax administration;
  • Communicating with BRICS countries on in-depth tax co-operation.
Considerations
China-based and foreign MNCs are advised to pay close attention to upcoming updates on CbC reporting implementation in China.

Key considerations include:
  • Higher requirements for tax compliance and risk control capacity on MNCs’ global business;
  • Whether the current information systems of an affected taxpayer could support the compliance work;
  • How to build an appropriate procedure to collect data and information;
  • Assessments that should be made as to which accounting standards should be employed to report the required information, i.e., choosing among parent country GAAP, IFRS or local country GAAP; and
  • How to fit CbC reporting within the group’s broader transfer pricing planning and compliance frameworks.
​ ​Should the above topics affect your current situation, or should you require further information, please do not hesitate to contact the following practice leaders:
  Gordon Gao
+86 21 6313 8751
gordon.g@bdo.com.cn Jay Tang
+86 21 6313 9352 * 816
jay.t@bdo.com.cn 

BDO China SHU LUN PAN Certified Public Accountants LLP, a Chinese LLP company, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
 

BDO Transfer Pricing Alert - June 2016

Wed, 06/01/2016 - 12:00am
The Proposed Section 385 Regulations Impact On Certain Transfer Pricing Arrangements
Download PDF Version
Summary On April 4, 2016, the Internal Revenue Service (the “Service”) and the U.S. Department of the Treasury (“Treasury”) proposed new regulations under Section 385 of the Internal Revenue Code (“proposed regulations”), which address the recharacterization of certain related party debt transactions issued on or after April 4, 2016, as equity.  The proposed regulations apply to both inbound and outbound debt financing transactions between U.S. taxpayers and their foreign affiliates, as well as transactions among foreign affiliates.  The proposed regulations were released without advanced notice and will come into effect 90 days after they have been finalized.  For an in-depth discussion of the changes to debt and equity classifications, please refer to the following article. This article seeks to address the transfer pricing considerations arising from the contemporaneous requirements as contemplated in the proposed 385 regulations. Due to the immediate application date of proposed regulations, taxpayers should be aware of the impact these requirements may have on their current and future intercompany financing arrangements.  
Details On April 4, 2016, the Service and Treasury released their proposed regulations that address the treatment of interest in a related party financing transaction as debt, equity, or a combination of the two, in what appears to be an effort to limit the effectiveness of certain tax planning structures using related party debt.  The proposed regulations will apply to inbound and outbound transactions between U.S. taxpayers and their foreign affiliates, as well as outbound transactions among non-U.S. affiliates of a U.S. parent corporation.  Thus, the proposed regulations pose a significant impact to transfer pricing transactions subject to Section 482 of the Internal Revenue Code.  In particular, the proposed changes will impact traditional cross-border financing arrangements, such as cash pooling and intercompany loans, and will require rigorous contemporaneous documentation requirements for large taxpayer groups.

Contemporaneous Documentation Requirements

Section 1.385-2 of the proposed regulations implements contemporaneous documentation requirements for large taxpayer groups to substantiate their related party debt arrangements.  Under the proposed regulations, large taxpayer groups (i.e., those that contain at least one group member that is traded on a public exchange, have total assets exceeding $100 million, or have annual revenue that exceeds $50 million) must prepare and maintain certain documentation and information within 30 calendar days after the date (i) that the debt instrument becomes an expanded group indebtedness (“EGI”) or (ii) that an expanded group member becomes an issuer with respect to an EGI, each reflecting an essential characteristic of indebtedness for federal tax purposes.  The required documentation falls under the following categories:  (i) a binding obligation to repay the funds advanced, (ii) creditor's rights to enforce the terms of the EGI, and (iii) a reasonable expectation that the advanced funds can be repaid. 

The first two categories must be prepared in the form of a legally binding written agreement.  The requirement for indebtedness is a binding legal obligation to repay the funds advanced, prepared within 30 days of the indebtedness.  This written agreement must also establish that the creditor/holder of debt has the right to enforce certain terms of the agreement, such as the right to trigger a default or to accelerate payments.  The seniority of the loan should also be clearly defined as superior to that of shareholders.  

Under the third category, the taxpayer must provide timely-prepared documentation evidencing a reasonable expectation that the issuer could in fact repay the amount of a purported loan. The proposed regulations give examples of such documentation, including cash flow projections, financial statements, business forecasts, asset appraisals, determination of debt-to-equity, and other relevant financial ratios of the issuer.  In determining a taxpayer’s expectation of repayment, the proposed regulations do not provide much clarity as to how this is established aside from comparisons to industry averages.  In typical related party situations, the standard to be applied when determining the true taxable income of a related party taxpayer is defined in the Section 1.482 regulations.  Contrary to a typical intercompany debt transaction, the issue these documentation requirements seek to address is not whether the interest rate on the loan is arm’s length.  Rather, these documentation requirements aim to answer the question: Is the debt assumed by the issuer bona fide, in that the issuer can support and service the debt adequately? 

The level of debt supportable and serviceable by the issuer should in essence be arm’s length, since it will have an impact in determining the true taxable income of a controlled taxpayer.  The regulations under Section 1.482-1 specifically require that the arm’s-length standard be applied in these situations.  The level of debt an issuer can support and service should be evaluated based on financial data obtained from comparable third party companies (or transactions) under similar circumstances.  Thus, the application of the Section 1.482 regulations are necessary to demonstrate an arm’s-length level of debt capacity and debt serviceability of the issuer and satisfy the documentation criteria around an issuer’s reasonable expectation of repayment.

A fourth category of documentation must be produced 120 calendar days after the indebtedness arose that evidences a genuine debtor-creditor relationship.  This documentation must evidence that the issuer made timely interest or principal payments with respect to the EGI.  Such documentation might include a wire transfer record or a bank statement that reflects the payment.  Should the recipient default, or a similar event occurs, there must be timely written documentation that demonstrates the issuer has exercised the reasonable judgment and diligence as would a third-party creditor.

Despite satisfying these requirements, the proposed regulations leave open the chance for a related party debt instrument to be recharacterized as these requirements are not determinative.  Rather, these documentation requirements act as a threshold test for allowing the possibility of a related party instrument to be treated as debt.  If the contemporaneous documentation requirements are not satisfied, the related party debt instrument will be recharacterized as stock, and any federal tax benefit, with respect to the treatment of interest, claimed by the issuer would be disallowed.
BDO Insights
  • The proposed regulations will likely impact traditional debt instruments as well as other forms of debt such as revolving credit facilities, cash pooling, guarantee fees, and similar situations.
  • Large taxpayer groups are required to have contemporaneous documentation that identifies the rights, obligations, and intent of the parties engaged in a related party debt arrangement.  This documentation must be prepared within 30 calendar days that the debt instrument becomes an EGI or that an expanded group member becomes an issuer with respect to an EGI.  Further, documentation must be produced that evidences a genuine debtor-creditor relationship no later than 120 days after the indebtedness arises.  It is critical that taxpayers take the April 4, 2016, effective date into consideration regarding their intercompany financing arrangements.
  • The regulations under Section 482 provide the guidance necessary to adequately demonstrate an issuer’s reasonable expectation of repayment. 

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

Robert Pedersen
Partner and International Tax/Transfer Practice Leader

 

Veena Parrikar
Prinicipal, Transfer Pricing

 

Joe Calianno
Partner and International Technical
Tax Leader, Washington National Tax Office

 

Brad Rode
Partner

  Michiko Hamada
Senior Director, Transfer Pricing  

William F. Roth III
Partner, Washington National Tax Office

  Scott Hendon
Partner  

Jerry Seade
Principal

 
Kirk Hesser
Senior Director, Transfer Pricing  
Sean Caren
Senior Manager  
Chip Morgan
Partner  
Sean Dokko
Senior Manager   Monika Loving 
Partner    

State and Local Tax Alert - June 2016

Wed, 06/01/2016 - 12:00am
North Carolina Enacts Legislation Impacting Intangible Holding Companies Download PDF Version
Summary On May 11, 2016, North Carolina Governor Pat McCory (R) signed S.B. 729, which, for taxable years beginning after December 31, 2015, decreases the Corporation Income Tax related member interest expense deduction from 30 percent to 15 percent, and effectively establishes a conduit exception.  S.B. 729 also requires a taxpayer that receives a royalty payment from a related member to include the receipt in the sales factor even if the payer and the recipient elects to exclude the payment from the recipient’s income. 
  Details Related Member Interest Expense Deduction
Prior to the enactment of S.B. 729, under H.B. 97, which was enacted September 18, 2015, the related party interest expense deduction was simply limited to 30 percent of the taxpayer’s taxable income.  Under S.B. 729, the amount of related party interest expense is limited to the greater of: (i) 15 percent of the taxpayer’s taxable income; or (ii) the taxpayer’s proportionate share of interest paid or accrued to a person who is not a related member during the same taxable year.  As noted, this provision is effective for taxable years beginning after December 31, 2015.

Conduit Exception 
Under S.B. 729, proportionate share of interest for purposes of the related member interest expense deduction limitation is defined to mean the amount of the taxpayer's net interest expense paid to (or through to) a related member that pays the interest to an unrelated member, divided by the total net interest expense of all related members that is paid to (or through to) the same related member that pays the interest to an unrelated member, multiplied by the interest paid to an unrelated member by the related member that pays the interest to an unrelated member.  Thus, the proportionate share of interest limitation effectively creates a conduit exception where the related member interest expense exceeds the 15-percent limitation, and payment of the related member interest can be traced to an unrelated member.

Sales Factor
Where a taxpayer elects to add-back a deduction for related party royalty expense and exclude the related income from the recipient (i.e., in lieu of taking the deduction and including the payment in the income of the recipient), under S.B. 729, the recipient may not exclude the royalty payments from its calculation of sales under S.B. 729.  This provision is effective May 11, 2016.
BDO Insights
  • While a reduction in the related member interest expense deduction limitation to 15 percent may adversely affect some taxpayers, taxpayers who can trace payment of the interest expense to an unrelated member may find the law change more beneficial.
  • The provision related to the requirement to include related party royalty payments in the sales factor, even where the income itself is excluded from the tax base, appears to be a codification of existing Department policy.
  • Since the new law was enacted on May 11, 2016, North Carolina Corporation Income Tax 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.
 

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       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

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