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International Tax Alert - February 2016

Tue, 02/09/2016 - 12:00am
31 Countries Sign Tax Co-Operation Agreement to Enable Automatic Sharing of Country-By-Country Reports
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Summary On January 27, 2016, the Organisation for Economic Cooperation and Development (“OECD”) announced that 31 countries have signed the Multilateral Competent Authority Agreement (“MCAA”), which will allow automatic sharing of Country-by-Country (“CbC”) reports.
Details In an unprecedented move towards implementation of the new CbC transfer pricing reporting requirements developed under Action Item 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting of the OECD/G20 Base Erosion and Profit Shifting Project (the BEPS Project), 31 countries signed the MCAA, a tax cooperation agreement that will allow for automatic exchange of CbC reports. The signing of the MCAA is part of continuing efforts by tax administrations to make it harder for multinational enterprises (“MNEs”) to engage in cross-border corporate tax avoidance. The 31 countries that are signatories to the MCAA are:
  Australia
Austria
Belgium
Chile
Costa Rica
Czech Republic
Denmark
Estonia
Finland
France
Germany Greece
Ireland
Italy
Japan
Liechtenstein
Luxembourg
Malaysia
Mexico
Netherlands
Nigeria
Norway Portugal
Slovak Republic
Slovenia
South Africa
Spain
Sweden
Switzerland
United Kingdom


 
Action Item 13 seeks to enhance transparency of MNEs by providing tax administrations with adequate information to conduct transfer pricing risk assessments and audits. It contains detailed recommendations for transfer pricing documentation, including the new CbC reporting. Specifically, MNEs with consolidated annual revenues equal to or in excess of €750 million will be mandated to file CbC reports with tax administrations in their country of residence, disclosing specific information including identification of each entity within the MNE group operating in a particular tax jurisdiction, and information about the business activities each entity is engaged in. In his speech at the signing ceremony, the OECD Secretary-General Angel Gurria stated that under the MCAA, tax authorities will have “a single, global picture on the key indicators – profits, tax, and economic activities – of multinational businesses… allowing them to better assess transfer pricing and other BEPS risks, and deploy audit resources where they will be most effective.”

The OECD recommended that the first CbC reports be filed for MNEs with fiscal years beginning on or after January 1, 2016, and that MNEs be allowed one year from the close of the fiscal year to which the CbC report relates to prepare and file it, meaning the first reports are expected to be filed by December 31, 2017, for calendar year MNEs.

Under the MCAA, the information collected through the CbC report by an MNE’s country of residence will be automatically exchanged with other countries in which the MNE operates that are also party to the MCAA. The MCAA also allays concerns of many businesses about tax and commercially-sensitive information by ensuring that the confidentiality of such information is safeguarded. The first exchanges under the MCAA are expected to start in 2017/2018 on the 2016 tax year information.  

The next step in the process is the development of an electronic data transmission platform with encryption and a related User Guide to facilitate the electronic exchange of the CbC reports.
BDO Insights The signing of the MCAA reaffirms the anticipation that many countries are moving forward with implementation of the CbC reporting requirements consistent with recommendations under OECD Action Item 13. The U.S. Treasury Department and Internal Revenue Service have signaled the United States’ commitment to Action Item 13 recommendations with the release of Proposed Regulations on CbC reporting in December 2015. The implication for United States resident MNEs remains unclear until the regulations are finalized or further guidance is provided with regards to obligations of United States MNEs.

It should be noted that where information cannot be exchanged, Action Item 13 provides an alternative filing approach tagged the ”secondary mechanism,“ which transfers the filing obligation to a ”constituent entity” of an MNE group operating in a country adopting the OECD’s recommendation. United States MNEs that have business operations in any of the 31 countries that are signatory to the MCAA can anticipate their constituent entities may be required to file CbC reports for the 2016 tax year. The MNEs should start assessing their ability to comply with the CbC reporting requirements as well as the potential for increased transfer pricing disputes and penalties for non-compliance.
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Michiko Hamada
Senior Director

  Brad Rode
Partner   Chip Morgan
Partner   Veena Parrikar
Principal   Sean Kim
Senior Director, Transfer Pricing

International Tax Alert - February 2016

Fri, 02/05/2016 - 12:00am
Organisation for Economic Co-Operation and Development (OECD) Issues Final Report On Action Item 5: Countering Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance
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The Organisation for Economic Cooperation and Development (OECD), a non-governmental forum established to promote economic growth, has developed a 15-point action plan to shape “fair, effective and efficient tax systems.” The OECD’s project regarding Base Erosion and Profit Shifting (BEPS) has addressed issues arising from tax planning strategies that exploit gaps or mismatches in member countries’ tax rules.
Summary This alert is one installment in a series of alerts on the release of the OECD/G20 Base Erosion and Profit Shifting Project (the BEPS Project).

On October 5, 2015, the OECD released the final report (the “Report”) of the BEPS Project. This alert discusses Action Item 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance.  
Background and Details In an effort to address BEPS issues in a coordinated and comprehensive manner, the G20 finance ministers called upon the OECD to develop an action plan to equip countries with instruments that will better align tax with economic activity. Action Item 5 aims to “revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings relating to preferential regimes, and on requiring substantial activity for any preferential regime.” In 1998, the OECD published its report “Harmful Tax Competition: An Emerging Global Issue,” which set out to discuss the area of harmful tax practices that unfairly erode the tax bases of other countries. The report targeted geographically mobile activities, such as financial, intangibles and other services, which can easily move from one country to another and benefit from favorable tax regimes. These “preferential regimes” continue to be a cause for concern and, therefore, have been identified as an area for further work in the Report.

The OECD’s Report is outlined under three subheadings or pillars: coherence, substance and transparency. Under the second pillar, which is to align taxation with the real substance of transactions, Action Item 5 focuses on the need for there to be a stronger definition of substantial activity in order for companies to benefit from a preferential tax regime. The substantial activity requirement as defined within the Report, is in the context of Intellectual Property (IP) regimes, and is later applied to other non-IP regimes. Specifically, the need for an appropriate approach to address the situation of artificially moving IP away from where value is created and as such, the “nexus approach” was developed. This approach uses expenditures to determine where substantial activity takes place and provides that a taxpayer can benefit from a favorable tax regime only to the extent to which a taxpayer has itself incurred the qualifying research and development expenditures which gives rise to IP income.

As a result of the new requirements, countries with existing favorable tax regimes will now undertake a review of their current rules and determine whether any amendments are necessary in order for their regime to comply with the nexus approach and therefore strengthen the importance of substantial activity. This process will see OECD countries follow the same framework for operating preferential regimes, thereby encouraging an environment in which free and fair tax competition can take place.  

In addition to the substantial activity and nexus approach, Action Item 5 identifies the need for increased transparency in tax rulings relating to preferential regimes. Therefore, a framework covering rulings that could give rise to BEPS concerns has been agreed to and a mandatory exchange of information under this framework will take place beginning April 1, 2016.
  BDO Insights Action Item 5 will have a significant impact on existing IP regimes in OECD countries. Tax authorities will need to review their existing IP regimes in the context of Action Item 5 and may make changes to allow companies to benefit based on the new definition of substantial activity using the nexus approach. Companies with large amounts of IP which currently participate in preferential tax regimes will need to monitor developments in these regimes to ensure that they are still able to claim the benefits. Transparency in tax rulings may require multinationals to change their legal and tax structures as well as the form and format of transactions.
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Michiko Hamada
Senior Director

  Brad Rode
Partner   Chip Morgan
Partner

State and Local Tax Alert - February 2016

Thu, 02/04/2016 - 12:00am
Commonwealth Court of Pennsylvania Holds That the State’s Net Operating Loss Deduction Limitation as Applied is Unconstitutional
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Summary On November 23, 2015, the Commonwealth Court of Pennsylvania issued a decision in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, Docket No. 98 F.R. 2012 (Pa. Commw. Ct. 2015).  Reversing a contrary Board of Finance and Revenue decision, the Commonwealth Court held that the state’s 2007 net operating loss deduction (“NOLD”) limitation as applied to the taxpayer violates the Uniformity Clause of the Pennsylvania Constitution.  The court granted the taxpayer full use of its net operating loss carryovers and a $3.94 million refund.
Details Background
Nextel Communications filed its 2007 Pennsylvania corporation income tax return reporting state taxable income before NOLD of $45 million.  Nextel Communications had Pennsylvania net operating loss carryforwards totaling $150 million – the use of which would have reduced its taxable income to zero.  However, as a result of Pennsylvania’s 2007 NOLD limitation, which limits the use of NOLDs to the greater of $3 million or 12.5-percent of taxable income, Nextel Communications utilized only $5.6 million of its available NOL carryovers, and reported and paid a corporation income tax liability of $3.94 million for the year.

Nextel filed petitions with the Board of Appeals and the Board of Finance and Revenue claiming a Uniformity Clause violation – a clause in the Pennsylvania Constitution which requires all taxes be uniform upon the same class of subjects – seeking refund of the tax paid.  Because these tribunals do not have jurisdiction to declare a state law unconstitutional or invalid, each tribunal denied Nextel Communications’ petition.  Nextel Communications appealed to Commonwealth Court.

Arguments of Nextel Communications and the Commonwealth
At Commonwealth Court, Nextel Communications argued that the 2007 NOLD limitation favors businesses with taxable income of $3 million or less.  If one of these smaller taxpayers has available net operating loss carryovers in excess of taxable income, it may reduce its taxable income to zero.  However, a taxpayer such as Nextel Communications, with taxable income greater than $3 million and available net operating loss carryovers, would not be able to similarly reduce its taxable income to zero.  Nextel contended that the disparate treatment of taxpayers is based solely on the size of the business, and the larger the taxpayer the more disparate the impact – the effect of which is a progressive tax structure.

The Commonwealth contended that, because 98.8 percent of taxpayers were not disadvantaged by the limitation, the statute meets the constitutional test of “rough uniformity.”  In addition, the Commonwealth argued that: (i) even if the NOLD limitation creates a classification, the classification is rationally related to the legitimate state interest of budgetary planning; (ii) the legislature has the authority to enact legislation that benefits small business, and (iii) the 20-year carryover provision should allow Nextel Communications the benefit of any NOL not used to offset 2007 taxable income due to the $3 million limitation.

The Court’s Analysis
The Commonwealth Court held that the 2007 NOLD limitation as applied to Nextel Communications violates the Uniformity Clause.  The court reasoned that, while the Uniformity Clause does not require absolute equality and perfect uniformity in taxation, if no legitimate distinction exists between the classes subject to differing tax treatment, and a substantially unequal tax burden is imposed on similarly-situated taxpayers, the tax violates the Uniformity Clause.  The court determined the only factor that distinguishes between those who paid no tax as a result of the 2007 NOLD limitation provision and those that paid some, was the amount of taxable income – a classification that cannot withstand scrutiny under the Uniformity Clause. 

The court rejected the Commonwealth’s arguments regarding the legislature’s legitimate interest of budgetary planning, and Nextel Communication’s ability to use unused NOLs in later years due to the 20 year carryover period.  As per the court, the legislature is not permitted to enact budget-related legislation that violates the state constitution, and a taxpayer should not have to wait 20 years to take the same deduction another taxpayer was able to take currently because of a legislatively-imposed cap.

The Commonwealth Court also held that the only practical remedy for the unequal treatment in this case is a refund to Nextel Communications.  Payment of tax by the taxpayers that were not subject to the NOLD limitation was the other option.
BDO Insights
  • Because the court found the 2007 NOLD limitation to be unconstitutional as applied to the taxpayer, as opposed to being facially unconstitutional, the remedy in this case was limited to relief for Nextel Communications.  The court did not strike down the NOLD limitation provision as unconstitutional (or address the NOLD limitation applied in other taxable years), because the court felt that statutory revision would not remedy the wrong suffered by Nextel Communications.
  • The Commonwealth filed a notice of appeal with the Supreme Court of Pennsylvania on January 20, 2016, seeking review of the Commonwealth Court’s decision.  Appeals to the Supreme Court of Pennsylvania from the Commonwealth Court are as a matter of right and not subject to the court’s discretion.
  • Even though the court limited its decision to Nextel and the 2007 NOLD limitation, the NOLD limitation applied in other taxable years or to other large taxpayers operates no differently.  Thus, taxpayers affected by the NOLD limitation applied in other taxable years should consider filing protective refund claims preserving their right to a refund under the state’s three-year refund limitations period in the event Nextel Communications ultimately prevails.
 

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 - February 2016

Mon, 02/01/2016 - 12:00am
Organisation for Economic Co-Operation and Development (OECD) Issues Final Report On Action Item 2: Neutralize the Effects of Hybrid Mismatch Arrangements
Download PDF Version

The Organisation for Economic Cooperation and Development (OECD), a non-governmental forum established to promote economic growth, has developed a 15-point action plan to shape “fair, effective and efficient tax systems.” The OECD’s project regarding Base Erosion and Profit Shifting (BEPS) has addressed issues arising from tax planning strategies that exploit gaps or mismatches in member countries’ tax rules.
Summary On October 5, 2015, the Organisation for Economic Co-operation and Development (OECD) issued the Final Report on Action Item 2: Neutralize the Effects of Hybrid Mismatch Arrangements (the “Report”). 
The OECD, a non-governmental forum established to promote economic growth, has developed a 15-point action plan to shape “fair, effective and efficient tax systems.” The OECD’s project regarding BEPS has addressed issues arising from tax planning strategies that exploit gaps or mismatches in member countries’ tax rules.

This alert is one installment in a series of alerts on the release of the OECD/G20 Base Erosion and Profit Shifting Project (the BEPS Project).
Background and Details In an effort to address BEPS issues in a coordinated and comprehensive manner, the G20 finance ministers called on the OECD to develop an action plan to equip countries with instruments that will better align tax with economic activity. Action Item 2 aims to “neutralize the effects of hybrid mismatch arrangements.”

Specifically, the Report targets hybrid mismatch arrangements—arrangements that exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral. The Report notes that such arrangements are widespread and result in a substantial erosion of the taxable bases of the countries concerned.

With a view toward increasing the coherence of corporate income taxation at the international level, the OECD/G20 BEPS Project called for recommendations regarding the design of domestic rules and the development of model treaty provisions that would neutralize the tax effects of hybrid mismatch arrangements. As a result, the Report provides recommendations to neutralize these arrangements---Part I of the Report addresses changes to domestic law, and Part II of the Report recommends changes relating to the OECD Model Tax Convention.

Specifically, Part I of the Report provides a recommendation for rules to address mismatches in tax outcomes where they arise in respect of payments made under a hybrid financial instrument or payments made to or by a hybrid entity. It also recommends rules to address indirect mismatches that arise when the effects of a hybrid mismatch arrangement are imported into a third jurisdiction. The recommendations take the form of linking rules that align the tax treatment of an instrument or entity with the tax treatment in the counterparty jurisdiction but otherwise do not disturb the commercial outcomes. The rules apply automatically and there is a rule order in the form of a primary rule and a secondary or defensive rule. This prevents more than one country applying the rule to the same arrangement and also avoids double taxation.

The recommended primary rule is that countries deny the taxpayer’s deduction for a payment to the extent that it is not included in the taxable income of the recipient in the counterparty jurisdiction or it is also deductible in the counterparty jurisdiction. If the primary rule is not applied, then the counterparty jurisdiction can generally apply a defensive rule, requiring the deductible payment to be included in income or denying the duplicate deduction depending on the nature of the mismatch.

The Report provides a common set of design principles and defined terms intended to ensure consistency in the application of the rules. 

Part II of the Report addresses the part of Action item 2 aimed at ensuring that hybrid instruments and entities, as well as dual resident entities, are not used to obtain unduly the benefits of tax treaties and that tax treaties do not prevent the application of the changes to domestic law recommended in Part I of the Report.

First, Part II examines the issue of dual-resident entities (i.e., entities that are residents of two States for tax purposes). It notes that the work on Action Item 6 (Preventing Treaty Abuse) will address some of the BEPS concerns related to the issue of dual resident entities by providing that cases of dual residence under a tax treaty would be solved on a case-by-case basis rather than on the basis of the current rule based on the place of effective management of entities. This change, however, will not address all BEPS concerns related to dual-resident entities; that is, domestic law changes will be needed to address other avoidance strategies involving dual residence.

The Report also deals with the application of tax treaties to hybrid entities (i.e., entities that are not treated as
taxpayers by either or both States that have entered into a tax treaty, such as partnerships in many countries). The Report proposes to include in the OECD Model Tax Convention (OECD, 2010) a new provision and detailed Commentary that will ensure that benefits of tax treaties are granted in appropriate cases to the income of these entities but also that these benefits are not granted where neither State treats, under its domestic law, the income of such an entity as the income of one of its residents.

Finally, Part II of the Report addresses potential treaty issues that could arise from the recommendations in Part I of the Report. It first examines treaty issues related to rules that would result in the denial of a deduction or would require the inclusion of a payment in ordinary income and concludes that tax treaties would generally not prevent the application of these rules. Next, the impact of the recommendations of Part I of the Report with respect to tax treaty rules related to the elimination of double taxation are examined and it is noted that problems could arise in the case of bilateral tax treaties that provide for the application of the exemption method with respect to dividends received from foreign companies. The Report describes possible treaty changes that would address these problems. The last issue dealt with in Part II of the Report is the possible impact of tax treaty rules concerning non-discrimination on the recommendations of Part I of the Report; the Report concludes that, as long as the domestic rules that will be drafted to implement these recommendations are properly worded, there should be no conflict with these non-discrimination provisions.

The Report provides some guidance on asset transfer transactions (such as stock-lending and repo transactions), imported hybrid mismatches, and the treatment of a payment that is included as income under a controlled foreign company (CFC) regime. The consensus achieved on these issues is reflected in the Report.
  BDO Insights Multinational groups (especially U.S.-based multinational groups) frequently employ hybrid entities, hybrid instruments and/or dual resident companies in their organizational structure.  The rules discussed in the Report above can have significant tax implications to the multinational group once a jurisdiction decides to implement such rules.   Some countries have announced plans to restrict the use of hybrid entities or hybrid instruments. Consequently, multinational groups will need to monitor both domestic law and treaty developments to determine what the specific implications will be on their particular group.  In some instances, multinational groups may need to consider some form of restructuring to avoid any negative impact the rules described above may have on their group.

It is worth noting that the United States currently has some rules addressing hybrid entities under domestic law (e.g., regulations under sections 894(c) and 1503(d)) and has incorporated rules addressing the use of hybrids in certain treaties (e.g., treaties containing articles similar to Article 1(6) of the 2006 Model Income Tax Convention).  Additionally, there have been proposals by the Administration to specifically address the use of hybrid entities and “stateless income.”
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Michiko Hamada
Senior Director

  Brad Rode
Partner   Chip Morgan
Partner

International Tax Newsletter - February 2016

Mon, 02/01/2016 - 12:00am
The latest edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, including the following topics and issues:
  • Further clarification on VAT issues that emerged during the implementation of the pilot program of switching from business tax to VAT
  • Promulgation of the stamp duty policy of financial leasing contracts
  • Application Measures of Value-added Tax Refund
  Download

International Tax Alert - January 2016

Mon, 01/25/2016 - 12:00am
Canada Revenue Agency Announces Effective Date of January 1, 2016, for Non-Resident Employer Certification Program 
Download PDF Version
Affecting Non-Canadian employers with non-Canadian employees conducting business travel in Canada
  Details ​On January 12, 2016, the Canada Revenue Agency (CRA) announced the launch of the Non-Resident Employer Certification Program, as originally announced in the 2015 Federal Budget. The program will become operative on January 1, 2016, for certification applications received by the CRA by February 1, 2016. This is welcome news for non-resident employers who send employees, who are exempt from Canadian tax because of provisions of a tax treaty, to Canada for short periods of time. This new program will greatly reduce the administrative burden associated with these short-term stays.

Employers must register with the CRA to be part of this program, and the registration form, with instructions on how to apply, is now available on the CRA website.

To qualify for the program, a non-resident employer must meet the following conditions:
  • Be resident in a country with which Canada has a tax treaty (special rules apply for employers who are partnerships); and
  • Be certified by the Minister of National Revenue (which is done through the registration process which is now available).It is anticipated that the approval process will take about 30 days and will be granted for a two-year period.

Prior and current legislation

Under prior tax legislation, non-resident employers were required to obtain employee-specific waivers from the CRA in order to be relieved from their obligation to withhold income tax on wages paid. In addition, the employer had to comply with reporting requirements such as obtaining Canadian tax numbers and Form T4 reporting, for all employees who spent time in Canada, even if they ultimately were not subject to Canadian tax.

Now, non-resident employers, who are certified under this program, will get relief from the requirement to obtain a waiver for qualifying non-resident employees and the obligation to do reporting for these employees if they make less than $10,000 in a year related to their Canadian activities.

A qualifying non-resident employee is defined as one whom:
  • Is resident in a country with which Canada has a tax treaty at the time of payment;
  • Is exempt from Canadian tax in respect of the payment because of a tax treaty; and
  • Either works in Canada for less than 45 days in the calendar year that includes the time of the payment or is present in Canada for less than 90 days in any 12-month period that includes the time of the payment.

Note that this program only applies to income tax withholdings on employee remuneration; and it is possible that withholding of Canada Pension Plan (CPP) and/or Employment Insurance (EI) premiums will continue to be required. CPP premiums are not required, however, for non-resident employees if they have a certificate of coverage under a Social Security Agreement between Canada and the country of residence of the employer; and EI premiums are not required if the employee is covered under a similar program in his or her country, while working in Canada. Most United States resident employees, for example, should meet these conditions.

A qualifying non-resident employer will have a number of obligations under the program.  Such employers must, first, track the number of days each qualifying non-resident employee is either working in Canada or is present in Canada.  Non-resident employers must also account for the income attributable to such days on a proactive basis. Qualifying non-resident employers are also required to make certain that employees are resident in a country which has a tax treaty with Canada and that the wages attributable to time spent in Canada is, in fact, treaty exempt.
BDO Insight This announcement is seen as a positive development for employers that have employees traveling and conducting business activities in Canada. Employee activities may also create other tax filing obligations in Canada.  BDO can assist employers with applying for and complying with the Non-Resident Employer Certification Program and other tax filing obligations.
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Chip Morgan
Partner

  Brad Rode
Partner    

International Tax Alert - January 2016

Fri, 01/22/2016 - 12:00am
The United Kingdom Government Releases Draft Legislation That, When Enacted, Will Require Certain Large Businesses to Publish Their Tax Strategy Annually Download PDF Version
Summary On December 9, 2015, the United Kingdom tax authority, Her Majesty’s Revenue & Customs (“HMRC”), issued draft legislation that sets out the requirements for certain large companies to publish a UK tax strategy document annually.  The document must be freely available on the internet before the end of the year to which it relates and must remain accessible for a year after publication, unless the tax strategy for the following year is published within that period.  While the UK tax authorities expect that only the largest 2000 businesses in the UK will be within the scope of the new rules, the current draft of the legislation is likely to impact many more UK subsidiaries of United States groups.
  Background The United Kingdom Government is committed to creating the most competitive tax system in the G20 and has taken measures, such as lowering the rate of corporation tax dramatically, to achieve this.  However, the Government also wants to ensure that the tax system is not open to abuse and that everyone pays their “fair share” of tax.   In order to encourage transparency and compliance, legislation is being introduced that will require certain large companies to make their tax strategy for the UK public.
  Details The draft legislation published on December 9, 2015, sets out the requirements for the publication of UK tax strategy.
 
Entities to which the rules apply
 
Businesses within the scope of the new legislation are:
 
  • UK headed groups where either: (1) the aggregate group turnover is more than GBP200m or the aggregate group balance sheet total is more than  GBP2bn, i.e. the size requirements for inclusion in the “Senior Accounting Officer (“SAO”) regime; or (2) the group is of the size where country-by-country reporting would apply,  i.e. those groups with consolidated group revenue of GBP586m or more (“Qualifying MNE Group”);
  • UK sub-groups of foreign headed groups where the group is either a Qualifying MNE Group or meets the SAO size requirements;
  • UK companies where there is no UK group/UK sub-group, and either the company itself meets the SAO size requirements, or any foreign headed group to which the UK company belongs is a Qualifying MNE Group; and
  • UK partnerships that meet the SAO size requirements. 

The key point for United States multinationals to note is that, as currently drafted, the legislation means that relatively small UK subsidiaries or UK Sub-groups could be brought into the remit of the rules by virtue of the size of the worldwide group rather than with respect to the size of the UK entity or UK sub-group itself.
 
Key requirements
 
Businesses subject to the new legislation will be required to publish their tax strategy as it relates to all UK taxes (including, but not limited to, corporation tax, income tax, diverted profits tax, value added tax (“VAT”), stamp duty, customs duty) annually.
 
There are four key elements related to the UK group/sub-group or UK company strategy that are required to be published:
 
  1. Approach to risk management and governance arrangements in relation to UK tax;
  2. Attitude towards tax planning, so far as it affects UK tax;
  3. Level of risk that the group/sub-group or company is prepared to accept in relation to UK tax; and
  4. Approach towards dealings with HMRC. 

It should be noted that details of the effective tax rate, which at the consultation state had been put forward to be included in the tax strategy publication, are not required under the legislative requirements.

The strategy may be published as a separate document or a self-contained part of a wider document, but must be made available on the internet free of charge.  It must be published before the end of the year to which it relates, and must remain accessible for a year after publication unless the tax strategy for the following year is released within that period.

Penalties
 
The head UK entity (or UK company where there is no UK group or sub-group) will be subject to penalties where the requirements of the legislation are not met. 
 
For the financial year in question, the penalty is GBP7, 500 for failing to publish a document that meets the statutory requirements on time, or for failing to keep the document accessible for the required year following initial publication.   A further GBP7, 500 will apply if the required strategy document is not then published within six months after the end of the year to which it relates, and to each subsequent month that the tax strategy document remains unpublished.
 
Effective Date
 
The new rules will apply to financial years commencing after the UK’s 2016 Finance Bill is passed.  The expectation is, therefore, that for groups with December 31 year ends, the first tax strategy document must be published before December 31, 2017, for that year.
  BDO Insights United States multinational groups with either stand-alone UK subsidiaries or UK sub-groups will need to consider whether they have to comply with the legislation and publish their UK tax strategy annually.  Although the legislation is squarely aimed at compliance for larger businesses, the way that the legislation is currently drafted means that small UK subsidiaries or UK sub-groups of large Unites States multinational groups that meet the qualifying requirements will fall within the new legislation. 
 
BDO has contacted the UK tax authorities to confirm whether the legislation was intended to have such broad scope; it is clear from the Policy Document that HMRC anticipate that only the UK’s 2,000 largest businesses would be within the scope of the new rules.  HMRC have said that they still consulting on the details of the legislation internally, and have, subsequent to BDO’s communication, refocused on this particular aspect.  While they are not able to clarify the position right now, we anticipate further guidance on this point in due course.
 
For further information or a discussion about the impact of the proposed new rules on your particular circumstances please contact Ingrid Gardner or your usual BDO tax advisor. 


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

Robert Pederson
International Tax Practice Leader
  Brad Rode
Partner
  Robert M. Brown
Partner
  Jerry Seade
Partner
  Scott Hendon
Partner
  Chip Morgan
Partner
  Monika Loving
Partner
  Michelle Murphy
Senior Manager
  Ingrid Gardner
Managing Director
  William F. Roth III
Partner
  Joe Calianno
Partner and International Technical
Tax Practice Leader
   

International Tax Alert - January 2016

Wed, 01/20/2016 - 12:00am
Major Reforms to the Foreign Investment in Real Property Tax Act (FIRPTA) Download PDF Version
Summary

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015, which includes major reforms to the Foreign Investment in Real Property Tax Act of 1980.

FIRPTA imposes United States federal income tax on foreign investors on gain from the disposition of a United States real property interest (USRPI). To guarantee the collection of tax under FIRPTA, a withholding obligation is imposed on certain transferees of USRPIs.

Among the key provisions, the PATH Act increases the FIRPTA withholding rate on the purchase of a USRPI from a foreign person from 10 percent to 15 percent and provides an exemption for foreign pension funds from taxation under FIRPTA when certain conditions are satisfied. 


Background Introduced in 1980, FIRPTA subjects foreign persons to United States federal income tax on gain from USRPIs. Subject to certain exceptions, a USRPI includes stock in a United States corporation that holds USRPIs, the value of which equals or exceeds 50 percent of the value of the corporation’s total real property holdings (foreign and U.S.) plus other assets which are used or held for use in a trade or business (such corporations are known as United States real property holding corporations or USRPHCs).

Under FIRPTA, upon the disposition of a USRPI by a foreign person, such person must report the gain or loss as if it were effectively connected with a United States trade or business (ECI) and pay tax on any net gain at rates applicable to United States persons. The FIRPTA rules also impose a withholding obligation on persons acquiring USRPIs (transferees) from foreign persons.

Narrow exemptions from FIRPTA exist.  The PATH Act expands available exemptions and thereby increases the appeal of United States real property investments for many investors. 
Key FIRPTA Reforms FIRPTA Withholding Rate Increased to 15 Percent
As discussed above, the PATH Act increases the FIRPTA withholding rate from ten percent to 15 percent on the purchase of a USRPI from a foreign person and is effective 60 days after enactment of this provision.

New FIRPTA Exemption for Foreign Pension Funds
The PATH Act also provides a new and complete exemption for qualified foreign pension funds (including their wholly-owned subsidiaries) from taxation under FIRPTA.  Specifically, the PATH Act provides an exemption from FIRPTA for foreign pension funds meeting the following requirements: the fund is created or organized under the law of a country other than the United States; the fund is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (or persons designated by those employees) of one or more employers in consideration for services rendered; the fund must not have a single participant or beneficiary with a right to more than five percent of its assets or income; and the fund must be subject to government regulation and provide annual information reporting about its beneficiaries to the relevant tax authorities in the country in which it operates, and under such laws either (i) contributions made to it are deductible or excluded from the gross income or taxed at a reduced rate, or (ii) taxation of any of its investment income is deferred or taxed at a reduced rate.  

Increased Exemption for Publicly Traded Interests
The PATH Act also increases the size of shareholdings of publicly-traded REITs that are exempt from FIRPTA to ten percent, from the previous five percent exemptions.
Foreign  investors can now hold up to ten percent of a publicly traded REIT’s stock without triggering FIRPTA upon the disposition of such stock or upon distributions from the REIT that are attributable to gain from the sale or exchange of a USRPI.

New Exemption for Qualified Shareholders of REITs
The PATH Act provides another new exception from FIRPTA for certain “qualified shareholders” of REITs. Only certain foreign persons can be eligible for “qualified shareholder” status, provided they meet a series of specific requirements.  For instance, if it meets the necessary criteria, a publicly traded foreign mutual fund may be able to qualify. 

Cleansing Rule No Longer Applies to REITs and RICs
Generally speaking, FIRPTA does not apply to the gain recognized upon the sale of shares of a USRPHC if all of the USRPHC’s USRPIs were disposed of in transactions in which the full amount of the gain was recognized during a testing period, and the USRPHC did not hold any USRPIs as of the date of the share sale. This is known as the “FIRPTA cleansing rule,” and is based on the rationale that tax on the gain from USRPIs has already been imposed.  The PATH Act provides that the cleansing rule no longer applies to United States corporations that have been REITs or regulated Investment Companies (RICs) during the relevant testing period.

Domestically Controlled REIT Criteria Clarified
Under FIRPTA, a foreign investor does not treat stock of a “domestically controlled” REIT as a USRPI.  The PATH Act provides for some guidance in determining whether or not a REIT is domestically controlled.  Most notably, less-than-five percent shareholders of any class of REIT stock that is regularly traded on a recognized United States securities market are generally presumed to be United States persons.  Special rules apply to REIT stock owned by other REITs or RICs. 
How BDO Can Help

BDO has the knowledge and expertise to help clients evaluate their FIRPTA exposure and comply with FIRPTA tax and withholding obligations.  


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

Robert Pederson
International Tax Practice Leader
  Brad Rode
Partner
  Robert M. Brown
Partner
  Jerry Seade
Partner
  Scott Hendon
Partner
  Chip Morgan
Partner
  Monika Loving
Partner
  Michelle Murphy
Senior Manager
  Martin Karges
Senior Director
  William F. Roth III
Partner
  Joe Calianno
Partner and International Technical
Tax Practice Leader
   

State and Local Tax Alert - January 2016

Wed, 01/20/2016 - 12:00am
The Supreme Court of California Unanimously Holds That the State is Not Bound to Allow the MTC Apportionment Election Download PDF Version
Summary On December 31, 2015, the Supreme Court of California decided Gillette Co. et al. v. Franchise Tax Board, Docket No. S206587 (Cal. December 31, 2015) in which the court reversed a California Court of Appeal decision in favor of the taxpayers, and unanimously held that the state is not bound to allow the use of the Multistate Tax Commission (the “MTC”) election to use an evenly-weighted, three-factor apportionment formula (the “MTC Formula”).  Counsel for the taxpayers has indicated that it intends to file a petition for a writ of certiorari with the Supreme Court of the United States seeking review of the decision.
Details California adopted the MTC Compact (the “MTC Compact”) in 1974 by enacting section 38006 of the of the California Revenue and Taxation Code (“Section 38006”) which contained the MTC Formula and permitted a taxpayer an election to use the MTC Formula or any other apportionment formula provided by state law.  Since California had already required an equally-weighted, three-factor formula for apportioning income, the enactment of Section 38006 effectively resulted in a single method of apportioning income to California. However, in 1993, the California Legislature amended section 25128(a) of the California Revenue and Taxation Code (“Section 25128”) to read as follows to give double-weight to the sales factor under the state’s apportionment formula: “[n]otwithstanding Section 38006, all business income shall be apportioned to this state by multiplying the business income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four[.]”

Gillette and other taxpayers took the position that the 1993 amendment of Section 25128 did not eliminate the ability to elect to use the MTC Formula in lieu of the state’s formula.  However, the Franchise Tax Board (“FTB”) took the position that the enactment of Section 25128 eliminated the elective option contained in Section 38006.  This difference in opinions ultimately lead to the decision in Gillette Co. et al. v. Franchise Tax Board, 209 Cal.App.4th 938, 147 Cal.Rptr.3d 603 (2012), in which the California Court of Appeal, First District unanimously held that the MTC Compact was a valid and enforceable interstate compact the terms of which the California Legislature could not unilaterally repudiate.  Thus, according to the California Court of Appeal, Section 25128 did not eliminate the ability to make an election to use the MTC Formula.  The FTB appealed the decision to the California Supreme Court.

The Supreme Court of California’s Decision
The court commenced its analysis by addressing whether the MTC Compact was in fact a valid and enforceable interstate compact which the California Legislature could unilaterally repudiate.  Based upon the indicia of an interstate compact found in Northeast Bancorp v. Board of Governors, 472 U.S. 159 (1985), the court concluded that it was not because: (i) the MTC Compact creates no reciprocal obligations among member states; (ii) the MTC Compact does not depend on the conduct of other members; (iii) no provision in the MTC Compact prohibits unilateral member action; and (iv) the MTC is not a regulatory organization.  The court reasoned as follows:
  • The taxpayers in Gillette Co. admitted that the MTC member states do not perform or deliver obligations to one another and have no incentive to enforce the MTC Compact.
  • The MTC Compact expressly grants the authority to join and leave the MTC Compact at will, and only seven of the MTC Compact’s current sixteen members employ the MTC Formula.
  • No provision in the MTC Compact or California law proscribes unilateral amendment of state law.
  • As the MTC observed, its powers are limited to an advisory and informational role.  For example, each MTC Compact member state has the power to reject, disregard, amend or modify any rules of regulations promulgated by the MTC.  In addition, any auditing power of the MTC is derived from state law.
The court then analyzed whether Section 25128 is invalidated by the Reenactment Rule in section 9, article IV of the Constitution of California (the “Reenactment Rule”), which provides that “[a] section of statute may not be amended unless the section is re-enacted as amended.”  The court found that the reference to Section 38006 in Section 25128 satisfied a purpose of the Reenactment Rule, which is to make sure legislators do not operate blindly when they amend legislation and the public is apprised of the changes in the law.  Thus, the court concluded that Section 25128 was not invalidated by the Reenactment Rule. 

The court then considered whether the California Legislature intended to eliminate the MTC Formula when it enacted Section 25128.  The court found no ambiguity in the “[n]otwithstanding Section 38006” language in Section 25128 as indicative of the California Legislature’s intent to eliminate the MTC Formula election.  In addition, the court found the need for amendment expressed in the legislative history accompanying Section 25128 supported the intent of the California Legislature to eliminate the election to use the MTC Formula.  As such, the court concluded that there was no credible argument that the Legislature intended to retain the MTC Election.
BDO Insights
  • The decision of the Supreme Court of California in Gillette Co. may represent the end of a saga that could ultimately lead to the disallowance of the use of the MTC Formula to apportion income to California in taxable years beginning on or after the effective date of the 1993 amendment to Section 25128.  It is estimated that the court’s decision could save the state from issuing an estimated $750 million in refunds.  However, there is some possibility that the Supreme Court of the United States would accept a petition for writ of certiorari filed by the taxpayers in Gillette Co. regarding the potential federal Contracts Clause violation (see U.S. Const. art. I, § 10, cl. 1) raised by the FTB in their petition for review filed with the Supreme Court of California, and addressed by the parties in their briefs filed with the court, and hold in the taxpayers’ favor.
  • The Supreme Court of California’s decision in Gillette Co. could have significant ASC 740 implications for financial reporting purposes for those reporting entities that elected to apply the MTC Formula to reduce their California apportioned income and corresponding tax liability.  The decision is considered new information which means reporting entities affected by this decision should consider: (i) whether the position is still sustainable at a “more likely than not” level of assurance; and (ii) the appropriate disclosures that explain their accounting conclusions.
 


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 Principal
    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 - January 2016

Fri, 01/08/2016 - 12:00am
Download PDF Version
Summary On December 29, 2015, Connecticut Governor Dan Malloy (D) signed into law S.B. 1601, Gen. Assem., Spec. Sess. (Conn. 2015) (“S.B. 1601”), which, effective beginning in 2016, enacts single sales factor apportionment for corporate tax purposes, and excludes compensation paid to a nonresident individual from personal income tax if the individual spent fewer than 16 days in the state during the taxable year.  In addition, S.B. 1601 increases the credit cap enacted as part of the Summer 2015 budget legislation from 50.01 percent to 70 percent with respect to corporate taxpayers possessing certain credits, and makes several changes to the rules applicable to unitarycombined reporting. See the BDO alert that discusses the Summer 2015 budget legislation.
Details Corporate Tax Changes
Single Sales Factor Apportionment.
S.B. 1601 requires single sales factor apportionment for taxable years beginning on or after January 1, 2016.
 
Combined Reporting Changes.  
S.B. 1601 adopts the following revisions to the Summer 2015 budget legislation as it pertains to unitary combined reporting:
  • Excludes a limited partner’s distributive share of income from an investment partnership from the unitary business, unless the limited partner and the general partner share common ownership.
  • Applies the “principles” of the federal consolidated return regulations promulgated under Internal Revenue Code Section 1502 to transactions occurring between members of a Connecticut combined group to the extent consistent with Connecticut combined group membership and unitary combined reporting.  Previously, the Summer 2015 budget legislation only conformed to the narrower set of deferred intercompany transaction regulations set forth in Treas. Reg. § 1.1502-13.
  • Extends the right to apportion to each taxable member of a unitary combined group if a member of the group is a “financial service company.”
  • Requires the elimination of assets and liabilities attributable to transactions with another member of the untiary combined group when computing the capital tax base.
  • Provides that the tax of a unitary combined group, prior to the surtax and the application of credits, may not exceed the “nexus combined base tax” by $2.5 million.  The “nexus combined base tax” generally equals the sum of the tax of each taxable member as determined on a separate company basis.
  • Eliminates the requirement imposed on the Commissioner to publish a list of jurisdictions determined to be tax havens, and excludes a jurisdiction that has entered into a comprehensive income tax treaty with the United States from the definition of “tax haven.”  For purposes of determining whether to include a corporation that is incorporated in a tax haven jurisdiction in a unitary combined group, taxpayers will have to rely on the criteria in the Summer 2015 budget legislation for the time being.
  • Provides that a non-U.S. corporation that is a member of a unitary combined group includes income in the combined report based on its profit and loss statement, not limited to income effectively connected with the conduct of a U.S. trade or business.
  • Eliminates the from the list of non-taxable members required to be included in a unitary combined group one that earns more than 20 percent of its gross income from intangible property or service-related activities the costs of which are deductible against the income of other members of the group.
Tax Credit Cap Increase.   
Starting with taxable years commencing in 2016, Connecticut incrementally increases the credit cap applied to a corporate taxpayer that possesses a credit for expenditures on research and development or a credit for investments in urban and industrial sites development projects from 50.1 percent to 70 percent over a four-year period.  Other corporate taxpayers will continue to be subject to the current 50.1-percent cap.
 
Personal Income Tax Nonresident Exclusion
For taxable years beginning after December 31, 2015, Connecticut excludes compensation paid to a nonresident individual from income tax if the individual spent fewer than sixteen part or whole days in the state during the taxable year (other than solely for purposes of transit).  This exclusion does not apply to an athlete, entertainer, performing artist, or member of an athletic team. 
BDO Insights
  • With the enactment of S.B. 1601, Connecticut becomes one of many states that have adopted single sales factor apportionment.  However, unlike many of the states that have adopted single sales factor apportionment, Connecticut has not adopted market-based sourcing for sales of services.
  • The personal income tax nonresident exclusion provides individuals that travel for work and employers with a mobile workforce with a definitive safe harbor rule to be used for purposes of determining when an individual is subject to tax on services performed in the state, or when, if at all, an employer may be required to withhold on an employee.

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 Newsletter - January 2016

Tue, 01/05/2016 - 12:00am
The January 2016 edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, including the following topics:
  • Loosened Criteria for Entitlement to Tax Exemption or Reduction for Income Derived from Transfer of Technology Use Right
  • Implementation of the Pilot Scheme of Individual Income Tax Policies for Commercial Health Insurance
  • Promulgation of Tax Policies for Funds Mutually Recognized by Mainland China and Hong Kong

Download

Federal Tax Alert - January 2016

Mon, 01/04/2016 - 12:00am
2015 Tax Year in Review: 2015 Tax Developments Help Prepare the Way for 2016 Tax Planning and Compliance 2015 was undeniably the most significant year for tax legislation since the American Taxpayer Relief Act of 2012, despite starting out with the assumption that significant tax legislation would be in a holding pattern until after the 2016 Presidential elections. For starters, December 2015 legislation made permanent certain tax provisions, such as the research credit, that required annual renewal. 2015 also closed with a long list of regulations and rulings to its credit, despite concerns that a reduced IRS budget would slow guidance to a crawl. And the Supreme Court, appellate courts and the U.S. Tax Court all showed that taxpayers could still score some decisive victories.
  Download

Compensation & Benefits Alert - December 2015

Wed, 12/30/2015 - 12:00am
IRS Extends Deadlines for Affordable Care Act Reporting Forms 1094-B, 1095-B,  1094-C, and 1095-C
Summary The Internal Revenue Service (IRS) released Notice 2016-4 on December 28, 2015, granting an automatic extension of the due dates for the distribution and filing deadlines for the 2015 Forms 1094 and 1095 for all those required to file under the Affordable Care Act (ACA).

The extended due dates are:
  • Forms 1095-B/1095-C that must be provided to individuals is extended from February 1, 2016, to March 31, 2016
  • Forms 1094-B with copies of Forms 1095-B; and 1094-C with copies of Forms 1095-C that must be provided to the IRS is extended as follows
    • from February 29, 2016, to March 31, 2016, if not electronically filed
    • from March 31, 2016, to June 30, 2016,  if electronically filed
Notice 2016-4 also provides guidance to individuals who might not receive a Form 1095-B or Form 1095-C by the time they file their 2015 tax returns.
Discussion Extension of Reporting Requirements
Under Internal Revenue Code (IRC) Section 6055, health coverage providers are required to file with the IRS and distribute to covered individuals, forms showing the months in which the individuals were covered by “minimum essential coverage.”  Under IRC Section 6056, applicable large employers (generally, those with 50 or more full-time employees and equivalents) are required to file with the IRS and distribute to employees, forms containing detailed information regarding offers of, and enrollment in, health coverage.  The chart below shows the new deadlines.
    Old Deadline New Deadline Deadline to Distribute Forms to Employees and Covered Individuals 
  Feb. 1, 2016 March 31, 2016 Deadline to File with the IRS Feb. 29, 2016 (paper)

March 31, 2016 (electronic) May 31, 2016

June 30, 2016
Further, the IRS informed that, due to the new extended deadlines, no additional automatic or permissive extensions will be granted.

While the Notice states that IRS is ready to receive the forms, IRS understands that some employers, insurers, and other providers of the minimum essential coverage will need additional time to gather, analyze and report the required information.   Employers and other coverage providers are encouraged to furnish statements and file the information returns as soon as they are ready.

Guidance to Individuals
Notice 2016-4 also provides guidance to individuals who might not receive a Form 1095-B or Form 1095-C by the time they file their 2015 tax returns.

For 2015 only, individuals who rely upon other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit when filing their income tax returns need not amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C. Individuals need not send this information to IRS when filing their returns but should keep it with their tax records.

Similarly, some individual taxpayers may be affected by the extension of the due date for providers of minimum essential coverage to furnish information under IRC Section 6055 on either Form 1095-B or Form 1095-C. Because, as a result of the extension, individuals may not have received this information before they file their income tax returns, for 2015 only, individuals who rely upon other information received from their coverage providers about their coverage for purposes of filing their returns need not amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections. Individuals need not send this information to the Service when filing their returns but should keep it with their tax records.

The Notice also discusses the procedures that can be used by individual taxpayers who may need the information to claim certain tax credits.
For questions related to matters discussed above, please contact one of the following practice leaders:
  Kim Flett
Sr. Director, National Tax
Compensation & Benefits Carl Toppin
Sr. Manager, National Tax
Compensation & Benefits

Joan Vines
Sr. Director, National Tax
Compensation & Benefits

Linda Baker
Sr. Manager, National Tax
Compensation & Benefits

Expatriate Tax Newsletter - December 2015

Wed, 12/23/2015 - 12:00am
BDO's Expatriate Newsletter covers timely tax-related updates and regulations from countries around the globe. The December 2015 issue highlights developments in Australia, Malta, Germany, and more.
  Download

Federal Tax Alert - December 2015

Tue, 12/22/2015 - 12:00am
Research & Development Tax Credit Made Permanent Download PDF Version
Introduction On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes (“PATH”) Act of 2015, which includes a provision making permanent the Research & Development (“R&D”) tax credit under Section 41.  This is a very significant development, as the R&D credit generally has required annual legislative renewal.  A permanent R&D credit will provide businesses and investors the stability needed to enhance long term planning and decision making.
Added Benefits In addition to being made permanent, for tax years beginning after December 31, 2015, the R&D tax credit will have two added benefits.  First, eligible small businesses (those that are privately held and with $50 million or less in average gross receipts for the three preceding tax years) may utilize the R&D tax credit against their Alternative Minimum Tax (“AMT”). Historically, businesses could only use the R&D tax credit to offset ordinary tax liability and only to the extent this liability exceeded their AMT, with one exception to this rule in 2010.

Additionally, startup companies (those with gross receipts of less than $5 million for the current tax year and no gross receipts for any tax year before the five tax years ending with the current tax year) may utilize the R&D tax credit against employer’s payroll tax (i.e., FICA) up to $250,000. This is an important added benefit, as startup companies investing in new technologies often do not pay income taxes.
Conclusion With a permanent R&D tax credit, businesses now face a more reliable and predictable future. Moreover, the extension of the credit to small businesses and startups broadens its availability to taxpayers. The PATH Act now provides economic stability that can help spur long-term innovation and investment in new and improved ideas.
 
For questions related to matters discussed above, please contact:
  Chris Bard
National Leader   Chad Paul
Senior Director   Jonathan Forman
Principal   Patrick Wallace
Senior Director   Jim Feeser
Senior Director   David Wong
Principal   Hoon Lee
Partner    

Federal Tax Alert - December 2015

Mon, 12/21/2015 - 12:00am
Congress Renews Extenders, Makes Many Permanent; IRS Budget Also Approved
Just before recessing for the holidays, the House and Senate passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). President Obama is expected to sign the bill as soon as it reaches the White House. The Act does considerably more than the typical tax extenders legislation seen in prior years. It makes permanent over 20 key tax provisions, including the research tax credit, enhanced Code Sec. 179 expensing, and the American Opportunity Tax Credit. It also extends other provisions, including bonus depreciation, for five years; and revives many others for two years. In addition, many extenders have been enhanced. Further, Act imposes a two-year moratorium on the ACA medical device excise tax. The House passed the Act on December 17 by a vote of 318-109; The Senate approved the Act along with a FY 2016 omnibus on December 18 by a vote of 65 to 33.
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State and Local Tax Alert - December 2015

Thu, 12/17/2015 - 12:00am
Illinois Circuit Court Holds That Significant Economic Presence is Proper Test for Corporate Income Tax Nexus
Download PDF Version
Summary On May 11, 2015, the Illinois Circuit Court of Sangamon County granted the Illinois Department of Revenue’s cross motion for summary judgment in Capital One Financial Corporation v. Brian Hamer, Director of the Illinois Department of Revenue, Docket No. 2012-TX-0001/02, and held that Capital One had sufficient nexus with the state for corporate income tax purposes.  In so holding, the court adopted and applied the “significant economic presence” test used in Tax Comm'r v. MBNA Am. Bank, N.A., 220 W. Va. 163, 640 S.E.2d 226 (2006).
  Details Capital One filed a motion for summary judgment, and the Department filed a cross motion for summary judgment – each asking the court to interpret whether Capital One had substantial nexus with the state under the Commerce Clause of the Constitution of the United States.  Neither Capital One nor the Department could point to a specific Illinois case interpreting substantial nexus for corporate income tax purposes.  Capital One urged the court to adopt a physical presence standard for this purpose.  The Department urged the court to adopt a substantial economic presence standard “as being the fairest test of corporate income tax given the current internet based world.” 
 
The court sided with the Department and adopted and applied the significant economic presence test used in MBNA.  Under this test, the court found that Capital One had nexus with the state by reason of: (i) collecting millions in fees and interest from Illinois residents; (ii) systematically and continuously engaging Illinois consumers via telephone, email, and direct mail solicitation to apply for credit; (iii) use of Illinois courts to recover debts on delinquent accounts; and (iv) filing and enforcing judgment liens in Illinois.
 
Capital One filed a notice of appeal on June 4, 2015.
  BDO Insights
  • If the court’s holding stands on appeal, Illinois could be yet another state to limit the physical presence standard in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) to sales and use taxes. 
  • The management of a corporation with sales into Illinois should assess whether the corporation may have an income tax reporting and payment responsibility with the state under this decision, and, if necessary, discuss with their tax advisor whether there is a need to begin reporting and paying Illinois income tax or accrue for a liability under ASC 740.
 


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

BDO Indirect Tax News - December 2015

Thu, 12/17/2015 - 12:00am
The latest edition of BDO International's Indirect Tax News covers current global developments in relation to indirect tax, including the overview of an important change to Dutch tour operator margin scheme regulation,  and global VAT updates.
Download

State and Local Tax Alert - December 2015

Tue, 12/15/2015 - 12:00am
Download PDF Version
Summary The Alabama Department of Revenue recently issued a notice reminding taxpayers that Alabama Administrative Code section 810-6-2-.90.03 went into effect on October 22, 2015.  This regulation requires an out-of-state seller with no physical presence in the state to collect and remit seller’s use tax if: (i) its Alabama sales for the preceding calendar year exceeded $250,000; and (ii) it engages in certain mail order or other remote activities.
Details According to Alabama Administrative Code section 810-6-2-.90.03, a seller with Alabama sales that exceed $250,000 is required to collect and remit seller’s use tax if it engages in one of the activities under Alabama Code section 40-23-68 in the state.  These activities include the following:
  • Qualifying to do business or registering for sales and tax;
  • Maintaining a temporary office, distribution, warehouse or storage place or other place of business through an agent or subsidiary;
  • Employing a representative or agent, directly or through a subsidiary, for the purpose of selling, delivering, or taking orders for the sale of tangible personal property or taxable services;
  • Advertising primarily to Alabama customers through a broadcaster, publisher, or cable television operator located in Alabama for orders for tangible personal property;
  • Soliciting orders for tangible personal property by mail, if the retailer benefits from any banking, financing, debt collection, telecommunication or marketing activities occurring in Alabama, or benefits from authorized installation, servicing or repair facilities located in Alabama;
  • Having a franchisee or licensee operating under its trade name;
  • Soliciting orders for tangible personal property via a television shopping system when intended to be broadcasted to Alabama customers; and
  • Distributing catalogs or other advertising matter and, as a result, receive and accept orders from Alabama residents.

BDO Insights
  • Effective October 22, 2015, remote sellers will need to consider whether they have an obligation to report and pay seller’s use tax under this regulation.
  • Some commentators have suggested that this regulation could be challenged on grounds that it violates the U.S. Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in which the Court held that a seller must have an in-state physical presence for a state to have jurisdiction to impose a use tax collection and remittance responsibility.  Similar “factor presence nexus” statutes are being challenged in other states, including at least three cases that are pending before the Ohio Supreme Court.  However, if challenged on these grounds, the Court may follow Justice Kennedy’s suggestion in his concurring opinion in Direct Mktg. Ass'n v. Brohl, 575 U. S. ____ (2015) that, in light of “dramatic technological and social changes” since the decision in Quill, a retailer “doing extensive business within a state” may have nexus absent a physical presence.

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 - December 2015

Tue, 12/15/2015 - 12:00am
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Summary On November 20, 2015, the Delaware Department of Finance filed a Complaint for Injunctive and Declaratory Relief in the Court of Chancery for the State of Delaware to enforce an administrative summons the Department had issued to Blackhawk Engagement Solutions (DE), Inc. (f/k/a Parago, Inc.) more than 9-months earlier in connection with an ongoing unclaimed property audit.  According to the Complaint, Blackhawk did not comply with the Department’s summons, which seeks sworn testimony and the production of documents as it relates to certain uncashed rebate check payments.  The Department requests an injunction from the court compelling delivery of the requested information.
Details Background
Blackhawk is a Delaware-formed and Texas-headquartered corporation that provides global rebate fulfillment capabilities to its retail clients, including Bed, Bath & Beyond, Macy’s, Verizon, Staples, and others.  In 2014, Blackhawk Network acquired all of the stock of Parago, Inc. and changed Parago’s name to Blackhawk Engagement Solutions (DE), Inc.   
 
The Audit and Summons
On February 18, 2011, the State Escheator issued a notice of examination to Blackhawk.  Pursuant to its authority to examine records under Del. Code Ann. tit. 12, sec. 1155 (1974), the Department issued a summons on February 12, 2015, seeking sworn testimony and the production of documents as it relates
 to uncashed rebate check payments that were returned to Blackhawk’s clients or subject to an express per-transaction fee to its clients representing anticipated slippage.  Delaware alleges that Blackhawk did not respond to the summons other than to indicate that it would not comply unless a court directed it to do so. 
 
The Department’s Request for Relief
The Department filed the complaint seeking an injunction restraining Blackhawk from disregarding Delaware’s escheat law and compelling the delivery of the requested information.  In addition, the Department seeks an order that establishes, among other things, that Blackhawk is subject to Delaware escheat law and that Blackhawk has no legal authority to disregard the summons.
BDO Insights
  • It is unclear from the complaint whether Blackhawk’s refusal to respond to the summons relates to an outright objection to Delaware’s ability to summons the requested information or more nuanced issues that may arise in a rebate context, such as whether Blackhawk is the holder that is subject to audit or whether it has title to the records being requested.
  • While the decision of the court to issue the requested relief in this case may not have precedential authority, backing from the court in this case regarding its summons power could embolden the Department to use injunctive relief more often when dealing with a holder who refuses to respond to requests for information.  This, in turn, may increase the audit costs to such a holder.
  • This complaint should serve as an example of the lengths to which the Department may go to obtain unclaimed property records – i.e., more than simply issuing a letter request or a summons.

BDO’s National Unclaimed Property Practice is comprised of over 20 professionals dedicated to assisting clients with its escheatment matters.  With over 100 years of combined experience in our team, our practice has helped organizations voluntarily comply with multi-state escheatment laws, defend against multi-state audits, prepare policy and procedures, file and manage compliance return process, along with other planning and consulting.  Should you have additional questions regarding the Blackhawk case or other escheatment issues generally, please contact Joe Carr, National Unclaimed Property Practice leader at 312-616-3946 for further information.

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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