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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.
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State and Local Tax Alert - December 2015

Tue, 12/15/2015 - 12:00am
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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

Transfer Pricing News - December 2015

Tue, 12/15/2015 - 12:00am
Transfer pricing is increasingly influencing significant changes in tax legislation around the world. This 18th issue of BDO’s Transfer Pricing Newsletter focuses on recent developments in the field of transfer pricing in Australia, Israel, the Netherlands, and India. Transfer pricing is becoming increasingly important for both tax authorities and tax payers around the world, with various countries introducing new legislation and guidance with respect to transfer pricing. As you will read, various countries are also showing initiatives following the finalization of OECD’s BEPS project, which are expected to expand over the coming months.
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Year-end Tax Alert for Employers

Thu, 12/03/2015 - 12:00am
Fringe Benefit Items to Include on 2015 Forms W-2
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As 2015 draws to a close, we would like to remind you about the proper inclusion of fringe benefits in an employee’s and/or shareholder’s taxable wages. Fringe benefits are defined as a form of pay for performance of services given by a company to its employees and/or shareholders as a benefit. Fringe benefits must be included in an employee’s pay unless specifically excluded by law. Please note the actual value of the fringe benefits provided must be determined prior to December 31 in order to allow for the timely withholding and depositing of payroll taxes. Below you will find important information regarding the identification and accounting for several customarily provided fringe benefits.
 
The failure to include taxable fringe benefits in an employee’s/shareholder’s Form W‑2 may result in lost deductions and additional tax and civil penalties.
  Common Taxable Fringe Benefits  
Employer-paid group-term life insurance coverage in excess of $50,000
 
This fringe benefit is subject to the withholding of Social Security and Medicare taxes (FICA) only. Though the amount is included in gross wages, federal and state income tax withholding is not required.
 
Employee business expense reimbursements/allowances under non-accountable plans
 
Any payments of an allowance/reimbursement of business expenses for which the employee does not provide an adequate accounting (i.e., substantiation with receipts or other records), or return any excess allowance/reimbursement to the company, is considered to have been provided under a non-accountable plan and are required to be treated as taxable wages for purposes of federal, state and local (if applicable) income tax withholding, employer and employee FICA tax, and federal and state unemployment taxes (FUTA and SUTA). However, if the employee provides an adequate accounting (i.e., substantiation with receipts or other records) of the expenses incurred, or is “deemed” to have substantiated the amount of expenses under a per diem arrangement, then the reimbursement amounts are excludable from taxable income/wages.
 
Value of personal use of company car
 
This fringe benefit (unless reimbursed by the employee) is subject to FICA, FUTA, FITW and SITW. However, you may elect not to withhold FITW and SITW on the value of this fringe benefit if the employee is properly notified by January 31 of the electing year or 30 days after a vehicle is provided. For administrative convenience, an employer can elect to use the 12-month period beginning November 1 of the prior year and ending October 31 of the current year (or any other 12-month period ending in November or December) to calculate the current year’s personal use of a company car if the employee is properly notified no earlier than the employee’s last paycheck of the current year and no later than the date the Forms W-2 are distributed. Once elected, the same accounting period generally must be used for all subsequent years with respect to the same auto and employee.
 
Many companies have moved away from providing company cars in lieu of a cash payment to reimburse the employee for the business use of their personal auto.  Car allowances paid in cash without any substantiation of business use are fully taxable and subject to all of the tax withholdings of FICA, FUTA, FIT and SIT.
 
Value of personal use of company aircraft
 
This fringe benefit (unless reimbursed by the employee [to the extent permitted under FAA rule]) is subject to FICA, FUTA, FITW and SITW. The value calculated is based on the Standard Industry Fare Level formula provided by the Internal Revenue Service. Expenses related to personal entertainment use by officers, directors and 10-percent or greater owners that are in excess of the value treated as compensation to key employees are nondeductible corporate expenses. Feel free to contact us for assistance calculating the value of the personal use of company.
 
Value of employee achievement awards, gifts and prizes
 
This fringe benefit is subject to FICA, FUTA, FITW and SITW. In general, employee achievement awards, gifts and prizes that do not specifically qualify for exclusion are only deductible for the employer up to $25 per person per year, unless the excess is included as taxable compensation for the recipient. Any gifts in excess of $25 per person per year to employees in the form of tangible or intangible property are includable as a taxable fringe benefit for employees. There are two exclusions from the general rule for employee achievement awards:
 
1.There are exclusions that exist for length of service (must be greater than five years and not awarded to same employee in the prior four years) and safety achievement awards, each of them being made as part of a meaningful presentation. The exclusion applies only for awards of tangible personal property and is not available for awards of cash, gift cards/certificates or equivalent items. The exclusion for employee achievement awards is limited to $400 per employee for nonqualified (unwritten and discriminatory plans) or up to $1,600 per employee for qualified plans (written and nondiscriminatory plans).
2. De minimis benefit amounts can be excluded when the benefit is of so little value (taking into account the frequency) that accounting for it would be unreasonable or administratively impractical. A common misconception is that if a fringe benefit is less than $25, then it is automatically considered a de minimis benefit. However, there is no statutory authority for this position. If a fringe benefit does not qualify as de minimis, generally the entire amount of the benefit is subject to income and employment taxes as detailed above. De minimis benefits never include cash, gift cards/certificates or cash equivalent items no matter how little the amounts. Gift cards/certificates that cannot be converted to cash and are otherwise a de minimis fringe benefit, which is redeemable for only specific merchandise, such as ham, turkey or other item of similar nominal value, would be excluded from income. However, gift cards/certificates that are redeemable for a significant variety of items are deemed to be cash equivalents. Any portion of such a gift card/certificate redeemed would be included in the employees’ Forms W-2 and subject to income and employment taxes as detailed above.
 
Value of qualified transportation fringe benefits
 
Any qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are subject to FICA, FUTA, FITW and SITW. For 2015, the statutory limits are $250 per month for qualified parking. The statutory limits for transit passes and van pooling are substantially lower at $130 per month for 2015.
 
The statutory limits for 2016 will be $255 per month for qualified parking, and will remain unchanged at $130 per month for mass transit and vanpool benefits.
 
Employers can also exclude up to $20 per month for the reimbursement of qualified bicycle commuting expenses.
 
District of Columbia Requires Pre-Tax Employee Transit Arrangements Starting January 1, 2016
 
D.C. employers are not required to subsidize the cost of their employee’s commuting expenses, but under a new law that goes into effect  January 1, 2016,  D.C. employers with 20 or more employee must    provide an arrangement for employees to make a pre-tax election at least equal to the maximum statutory limits for transit, commuter highway, or bicycling benefits.
 
Value of personal use of employer-provided cell phones
 
Since January 1, 2010, employer-provided cell phones are no longer treated as a taxable fringe benefit as long as the cell phone is provided to the employee primarily for noncompensatory business reasons, such as the employer’s need to contact the employee at all times for work-related emergencies, or the need for the employee to be available to speak to clients when the employee is away from the office.  Notice 2011-72 clarifies the exclusion of the cell phone’s value from the employee’s income as a working condition fringe benefit.
 
This change in the law also eliminated the need for the rigorous substantiation of the business use of employer-provided cell phones that were otherwise required for “listed property.”
 
Rules require taxation of certain fringe benefits to 2-percent S corporation shareholders
 
In addition to the adjustments previously discussed, certain otherwise excludable fringe benefit items are required to be included as taxable wages when provided to any 2-percent shareholder of an S corporation. A 2-percent shareholder is any person who owns directly or indirectly on any day during the taxable year more than 2 percent of the outstanding stock or stock possessing more than 2 percent of the total combined voting power. These fringe benefits are generally excluded from income of other employees, but are taxable to 2-percent S corporation shareholders similar to partners. If these fringe benefits are not included in the shareholder’s Form W-2, then they are not deductible for tax purposes by the S-Corporation. (See Notice 2008-1.) The disallowed deduction creates a mismatch of benefits and expenses among shareholders, with some shareholders paying more tax than if the fringe benefits had been properly reported on Form W-2.
 
The includable fringe benefits are items paid by the S corporation for:
 
Health, dental, vision, hospital and accident (AD&D) insurance premiums, and qualified long-term care (LTC) insurance premiums paid under a corporate plan.
 
These fringe benefits are subject to FITW and SITW only (not FICA or FUTA). These amounts include premiums paid by the S corporation on behalf of a 2-percent shareholder and amounts reimbursed by the S corporation for premiums paid directly by the shareholder. If the shareholder partially reimburses the S corporation for the premiums, using post-tax payroll deductions, the net amount of premiums must be included in the shareholder’s compensation. 2-percent shareholders cannot use pre-tax payroll deductions to reimburse premiums paid by the S corporation.
 
Cafeteria plans
 
A 2-percent shareholder is not eligible to participate in a cafeteria plan, nor can the spouse, child, grandchild or parent of a 2-percent shareholder. If a 2-percent shareholder (or any other ineligible participant, such as a partner or nonemployee director) is allowed to participate in a cafeteria plan, the cafeteria plan will lose its tax-qualified status, and the benefits provided will therefore be taxable to all participating employees, therefore nullifying any pretax salary reduction elections to obtain any benefits offered under the plan.
 
Employer contributions into health savings accounts (HSA)
 
This fringe benefit is subject to FITW and SITW only (not FICA or FUTA). If the shareholder partially reimburses the S corporation for the HSA contribution, using post-tax payroll deductions, the net amount of the contribution must be included in the shareholder’s compensation. 2‑percent shareholders cannot use pre-tax payroll deductions to reimburse HSA contributions paid by the S corporation.  However, these 2-percent owners can take a corresponding above-the-line deduction for the cost of their HSA contributions on their personal tax return.
 
Short-term and long-term disability premiums
 
These fringe benefits are subject to FICA, FUTA, FITW and SITW.
 
Group-term life insurance coverage
 
All group-term life insurance coverage is treated as taxable, not just coverage in excess of $50,000. The cost of the insurance coverage (i.e., the greater of the cost of the premiums or the Table I rates) is subject to the withholding of FICA taxes only. The cost of the insurance coverage is not subject to FUTA, FITW or SITW. Please note that you should not include the cost associated with any life insurance coverage for which the corporation is both the owner and beneficiary (e.g., key man life insurance) in the shareholder’s Form W-2.
 
Other taxable fringe benefits
 
Employee achievement awards, qualified transportation fringe benefits, qualified adoption assistance, employer contributions to medical savings account (MSA), qualified moving expense reimbursements, personal use of employer-provided property or services, and meals and lodging furnished for the convenience of the employer must also be included as compensation to 2‑percent shareholders of an S corporation. All of the above fringe benefits are subject to FICA, FUTA, FITW and SITW.
 
Nontaxable fringe benefits
 
The following fringe benefits are NOT includible in the compensation of 2-percent shareholders of an S corporation: qualified retirement plan contributions, qualified educational assistance up to $5,250, qualified dependent care assistance up to $5,000, qualified retirement planning services, no-additional-cost services, qualified employee discounts, working condition fringe benefits, de minimis fringe benefits and on-premises athletic facilities.
  Accounting for the Adjustments Once you have identified the fringe benefits subject to tax, you must choose a method to account for them. The following are methods generally used to account for fringe benefits:
 
Method 1: Gross-up the fringe benefit to cover payroll taxes and add the grossed-up amount to the Form W-2.
 
Method 2: Treat the fringe benefit amount as the gross pay and withhold the corresponding payroll taxes from the employee’s last paycheck.
 
Method 3: Have the employee reimburse the company for the amount of the fringe benefit.
 

For more information on the taxation of employee benefits, please contact:

Ira B. Mirsky
Senior Director
    Joan Vines
Senior Director
  Carl Toppin
Senior Manager    

Federal Tax Alert - December 2015

Wed, 12/02/2015 - 12:00am
IRS Increases De Minimis Safe Harbor Threshold for Taxpayers Without Applicable Financial Statements Beginning in 2016 Download the PDF Version
Summary On November 24, 2015, the Internal Revenue Service issued an advance version of Notice 2015-82, which increases the de minimis safe harbor threshold for deducting certain capital items from $500 to $2,500 for small businesses without applicable financial statements. The increased threshold will simplify the paperwork and recordkeeping requirements of small businesses by enabling the immediate deduction of amounts paid or incurred to acquire, produce, or improve tangible property. The new $2,500 limit applies to any such item substantiated by an invoice.

This notice is effective for costs incurred during taxable years beginning on or after January 1, 2016. Additionally, the IRS will provide audit protection to eligible businesses by not challenging amounts deducted up to the $2,500 threshold in tax years prior to 2016. The de minimis safe harbor threshold for taxpayers with an applicable financial statement remains at $5,000.
Details Background

On September 17, 2013, the Treasury Department and IRS issued final regulations (T.D. 9636) to provide guidance on the application of sections 162(a) and 263(a) of the Internal Revenue Code (“Code”) to amounts paid to acquire, produce, or improve tangible property (“final tangible property regulations”). The final tangible property regulations are applicable to taxable years beginning on or after January 1, 2014. 

One of the more favorable components of these regulations is the provision of a de minimis safe harbor election.  Intended as an administrative convenience for small dollar expenditures, the de minimis safe harbor election permits a taxpayer to not capitalize, or treat as a material or supply, certain amounts paid for tangible property that it acquires or produces during the taxable year provided the taxpayer meets certain requirements and the property does not exceed certain dollar limitations.  If the requirements are met, amounts paid for the qualifying property generally may be deducted under section 162, provided the amount otherwise constitutes an ordinary and necessary business expense in carrying on a trade or business. See Treas. Reg. section 1.263(a)-1(f). 
 
A taxpayer with an applicable financial statement (“AFS”), such as a financial statement required to be filed with the Securities and Exchange Commission or a certified audited financial statement accompanied by the report of an independent CPA, may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice) and the taxpayer treats the amount paid as an expense on its AFS in accordance with its written accounting procedures.  In contrast, a taxpayer without an AFS may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property subject to the de minimis safe harbor does not exceed $500 per invoice (or per item as substantiated by the invoice). 

After the final tangible property regulations were issued, the Treasury Department and the Service received more than 150 comment letters from representatives of small business taxpayers without an AFS requesting an increase in the de minimis safe harbor threshold.
 
Increased Limit and Audit Protection

Based on the feedback and balancing the goal of the final regulations to reduce administrative burden, the Service announced in Notice 2015-82 that the de minimis safe harbor threshold for a taxpayer without an AFS is increased from $500 to $2,500.  Taxpayers can elect annually to expense costs up to $2,500 without an AFS.  The new $2,500 threshold is effective for costs incurred during taxable years beginning on or after January 1, 2016.

Aside from the increased threshold, the remaining regulatory requirements for the de minimis safe harbor remain in place for taxpayers without an AFS.  That is, the de minimis safe harbor may be followed up to the $2,500 level per invoice (or per item as substantiated by the invoice) if the taxpayer:
  1. Does not have an AFS,
  2. Has accounting procedures as of the beginning of the year specifying a dollar amount beneath which amounts will be expensed for non-tax purposes,
  3. Expenses the amount paid for the property on its books and records in accordance with the accounting procedures, and
  4. Elects annually to apply the de minimis expense safe harbor by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which the amounts are paid.
Note: The de minimis safe harbor is not intended to limit a taxpayer’s ability to deduct otherwise deductible repair and maintenance costs that exceed the safe harbor threshold.  As before, small businesses without an AFS can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

In addition, the Service states in Notice 2015-82 that it will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.  For taxable years beginning before January 1, 2016, the Service will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor for an amount not exceeding $2,500 per invoice (or per item as substantiated by invoice) provided the regulatory requirements are otherwise satisfied.  Going a step further, if the taxpayer’s use of the de minimis safe harbor is an issue under consideration in an examination, appeals, or before the U.S. Tax Court in a taxable year beginning after December 31, 2011, and ending before January 1, 2016, and the issue pertains to the qualification of an amount not exceeding $2,500, then the Service will not further pursue the issue, provided the regulatory requirements are otherwise satisfied.

The de minimis safe harbor threshold for taxpayers with an applicable financial statement remains at $5,000.
BDO Insights The increased de minimis safe harbor threshold in Notice 2015-82 is welcome relief to many small businesses that do not have audited financial statements.  As a result of the higher threshold, small businesses will be able to immediately deduct many small dollar expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions, thereby simplifying paperwork and easing the burden of complying with the tangible property regulations. 
 

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

Travis Butler 
Senior Director  
Yuan Chou
Senior Director
  Nathan Clark
Senior Director   Dave Hammond
Partner       Marla Miller
Senior Director
    Heather Bradshaw
Senior Manager
  Phil Hofmann
Senior Director          

International Tax Newsletter - December 2015

Wed, 12/02/2015 - 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:
 
  • Clarification on Issues Relating to Follow-up Administration After Cancellation of Approval Items for Application of Simplified Levying and Sparing Credit for Overseas Income of Enterprises
  • Nationwide Implementation of the Relevant Tax Collection Pilot Policies of the National Innovation Demonstration Zone
  • Notice on Zero-rated Value-added Tax Policies Applicable for Certain Export Services Including Movies and Television Programs
  • Improvements to Policies of Pre-tax Additional Deduction of Research and Development ("R&D") Expenses

Download

State and Local Tax Alert - December 2015

Tue, 12/01/2015 - 12:00am
Chicago Enacts Amendments to the Personal Property Lease Transaction Tax Code that Reduce the Rate on Certain Nonpossessory Computer Leases and Provide Relief to Qualifying Small New Businesses
Download the PDF Version
Summary
On October 28, 2015, the City of Chicago passed the Revenue Ordinance for Fiscal Year 2016 (the “Fiscal Year 2016 Budget”), which amends the Personal Property Lease Transaction Tax (the “Lease Tax”) Code to reflect a reduced 5.25-percent tax applied to certain nonpossessory computer leases, as well as provide relief from the tax on nonpossessory computer leases to qualifying small new businesses.   These amendments to the Code are a response to Lease Tax Ruling #12 issued by the Department of Finance on June 9, 2015, and are intended to mitigate the negative reaction in the business community resulting  from the imposition of Lease Tax on cloud-based services as provided in that ruling. See BDO SALT Alert that discusses Lease Tax Ruling #12.
Details Background
 
Lease Tax Ruling #12, among other things, amended the definition of a “nonpossessory computer lease” to apply the generally 9-percent tax to a charge:
  • To obtain information or data that has been compiled, entered, and stored on a provider’s computer, provided that it is not for access to information or data which is entirely passive without interactive use (e.g., streaming data), or materials that are primarily proprietary (e.g., copyrighted newspapers); and
  • For services such as cloud computing, cloud services, a hosted environment, software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS). 
The Department has postponed the effective date of Ruling #12 until January 1, 2016.
 
Amendments to the Lease Tax on a Nonpossessory Computer Lease
 
The Fiscal Year 2016 Budget makes the following amendments to the Lease Tax as it applies to a nonpossessory computer lease:
  • Provides for a reduced 5.25-percent rate where the customer’s use of the provider’s computer and software is limited to inputting, modifying, or retrieving data or information that is supplied by the customer.
  • Exempts the lessor in a nonpossessory computer lease arrangement from collecting tax, and the lessee from payment of the tax, if the lessor or lessee meets the following criteria: (i) holds a valid, current business license issued by the City or another jurisdiction; (ii)has under $25 million in gross receipts or sales during the most recent full calendar year prior to the current year for which the exemption is sought; and (iii) has operated for fewer than 60 months.  For these purposes, gross receipts or sales has the same definition as for federal income tax purposes and the $25 million dollar limit is based upon gross receipts or sales of a unitary business group as defined for Illinois Income Tax purposes.  The 60-month limit begins with the month in which the taxpayer first receives receipts, and the 60-month limit is calculated to include a predecessor business and a member of the same unitary business group even if that member is no longer in operation.
  • Expands the definition of lessor to include “any person . . . who, directly or indirectly, receives or collects the consideration for the lease or rental of personal property.” (Emphasis added.)
  • Codifies the use of the Illinois Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, as amended, for purposes of ascertaining which customers and charges are subject to tax where the customer accesses the provider’s computer from a mobile device.
  BDO Insights
  • Taxpayers that have not already done so will need to adopt procedures and/or set-up their systems to collect, report, and remit Lease Tax on a charge for a nonpossessory computer lease in accordance with Lease Tax Ruling #12 and the Fiscal Year 2016 Budget beginning on January 1, 2016.  Due to the expanded definition of lessor, taxpayer for this purpose includes those that indirectly receive or collect consideration for the lease or rental of personal property.
  • A lessor, including one that indirectly receives or collects consideration for the lease or rental of personal property, must obtain and retain an exemption certificate from a lessee claiming exemption from the tax on a nonpossessory computer lease.
  • Taxpayers that engage in a nonpossessory computer lease with a lessor that is an exempt small new business will be required to self-assess and remit the applicable tax.
 

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

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

2015 Year-End Tax Planning for Businesses

Tue, 12/01/2015 - 12:00am


The time to consider tax-saving opportunities for your business is before its tax year-end. Some of these opportunities may apply regardless of whether your business is conducted as a sole proprietorship, partnership, limited liability company, S corporation, or regular corporation.  Other opportunities may apply only to a particular type of business organization. This Tax Letter is organized into sections discussing year-end, and year-round, tax-saving opportunities for:
  • All businesses
  • Partnerships, limited liability companies, and S corporations
  • Regular (C) corporations

Download

2015 Year-End Tax Planning for Individuals

Tue, 12/01/2015 - 12:00am


Individual income taxes, whether paid through employer withholding or quarterly estimates, are probably one of your largest annual expenditures. So, just as you would shop around for the best price for food, clothing, or merchandise, you want to consider opportunities to reduce or defer your annual tax obligation. This Tax Letter is intended to assist you in that effort.
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Federal Tax Alert - November 2015

Mon, 11/23/2015 - 12:00am

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Summary On November 19, 2015, the Internal Revenue Service issued Revenue Procedure 2015-56, which provides certain retailers and restaurants a safe harbor method of accounting for remodel or refresh expenditures on qualified buildings. The safe harbor helps eliminate confusion around which costs may be deducted immediately and which must be capitalized and depreciated over time. The Revenue Procedure also provides instruction for obtaining automatic consent to convert to the safe harbor method of accounting.
 
Under the safe harbor, retailers and restaurants with applicable financial statements are able to take 75 percent of qualifying expenditures as an immediate deduction. The remaining 25 percent is capitalized and depreciated over time.
 
This revenue procedure is effective immediately for tax years beginning on or after January 1, 2014.
  Details Definition of a Remodel-Refresh Project
A remodel-refresh project is defined as a planned undertaking on a qualified building to alter its physical appearance and/or layout for one or more of the following purposes:
 
  • To maintain a contemporary and attractive appearance
  • To more efficiently locate retail or restaurant functions and products
  • To conform to current retail or restaurant building standards and practices
  • To standardize the consumer experience if a taxpayer operates more than one qualified building
  • To offer the most relevant and popular goods in the industry
  • To address changes in demographics by altering product or service offerings and their presentations
 
A qualified building is one that is used primarily for selling merchandise at retail or for preparing and selling food or beverages to customers for sit-down or to-go consumption. Leased buildings will generally qualify.
 
Qualifications and Exclusions
To qualify for the safe harbor, a taxpayer must have an Applicable Financial Statement and conduct activities within NAICS codes 44, 45 or 722 with some specific exceptions such as gas stations, automotive dealers and caterers.
 
In general, a taxpayer may not take partial disposition losses and must also make a general asset account election for the applicable buildings.
 
Remodel-refresh costs are amounts paid for remodel, refresh, repair, maintenance or similar activities performed on a qualified building as part of a remodel-refresh project. Examples include:
  • Painting, polishing or finishing interior walls
  • Adding, replacing, repairing, maintaining or relocating permanent floor, ceiling or wall coverings or kitchen fixtures
  • Adding, replacing or modifying signage or fixtures
  • Relocating or changing the square footage of departments, eating areas, checkout areas, kitchen areas, beverage areas, management space or storage space within the existing footprint of a qualified building
  • Moving, constructing or altering walls within the existing footprint of a building
  • Adding, relocating, removing, replacing or re-lamping lighting fixtures
  • Making non-structural changes to exterior facades
  • Repairing, maintaining or replacing the roof or a portion of the roof within the existing footprint of a qualified building
 
Examples of excluded remodel-refresh costs include Section 1245 property, intangibles, land improvements and the initial build-out costs of a qualified building.
 
Benefit

The safe harbor method minimizes the need to perform a detailed factual analysis to determine whether each remodel-refresh cost is a repair or maintenance deduction or should be capitalized. The safe harbor allows 75 percent of qualified expenditures to be deducted and 25 percent to be capitalized.
 
Automatic Change in Accounting Method
The Revenue Procedure adds two new automatic change numbers:
 
  1. Change number 221 – “Revocation of partial disposition election under the remodel-refresh safe harbor described in Rev. Proc. 2015-16”
  2. Change number 222 – “Remodel-refresh safe harbor method”
  BDO Insights
  • The Revenue Procedure is a welcome safe harbor to address unique remodel issues and challenges in the retail and restaurant industries.
  • The safe harbor method reduces the need for taxpayers to spend significant resources to determine whether remodel costs should be deducted or capitalized.
  • The Revenue Procedure provides a helpful appendix for documentation standards and computation of qualified costs. See pages 49-51 of Revenue Procedure 2015-56.
  • The eligibility for smaller retailers and restaurants will be limited by the Applicable Financial Statement requirement.

If you have questions related to matters discussed above, please contact Phil Hofmann or Randy Frischer.

International Tax Alert - November 2015

Mon, 11/23/2015 - 12:00am

FDI Update
In order to boost the foreign investment environment in India, the Government of India has brought in through a Press Note, FDI related reforms and liberalisation touching upon 15 major sectors of the economy.

The main intention of these reforms is to further ease, rationalise and simplify the process of foreign investments in the country and to put more and more FDI proposals on automatic route and save the time and energy of the investors. Further, the Department of Industrial Policy & Promotion (DIPP) has also been advised to consolidate all FDI related instructions contained in various notifications & press notes and prepare a booklet for ease of reference.

Changes introduced in the policy include increase in sectoral caps, bringing more activities under automatic route and easing of conditionalilities for foreign investment. Further new sectors have also been opened to foreign investments.
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International Tax Alert - November 2015

Fri, 11/13/2015 - 12:00am
The Organisation for Economic Co-operation and Development (“OECD”) issues final report on Action Item 7: Preventing the Artificial Avoidance of Permanent Establishment Status
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The Organisation for Economic Co-operation 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 7: Preventing the Artificial Avoidance of Permanent Establishment status.
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. Generally, under tax treaties, the business profits of a foreign enterprise are taxable in a State only to the extent that the enterprise has a permanent establishment (“PE”) in that State to which the profits are attributable. Multinational companies often utilize certain strategies to minimize the risk of PE and taxation in a particular country in which business transactions occur. Action Item 7 of the BEPS project focuses on the prevention of artificial avoidance of PE status.

The Report includes changes that will be made to the definition of PE in Article 5 of the OECD Model Tax Convention (the “Convention”).  Article 5 of the Convention is widely used as the basis of treaty negotiations relating to PE issues.  Together with Action Item 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, the changes will impact the taxation of cross-border income that may otherwise go untaxed or is taxed at very low effective rate of tax.

Through the utilization of different strategies to conduct cross-border business activities, multinationals have been able to avoid PE status in particular jurisdictions.  These strategies include the use of:  commissionaire arrangements; specific exceptions such as preparatory and auxiliary activities to avoid PE status; and the construction site exception to avoid PE status.

Action Item 7 discusses how the use of commissionaire arrangements has been used to minimize PE status in certain jurisdictions and describes how a commissionaire arrangement has been used in global transactions.  A commissionaire arrangement may be loosely defined as an arrangement through which a person sells products in a State in its own name but on behalf of a foreign enterprise that is the owner of these products. The Report provides that, in using such arrangements, a foreign enterprise is able to sell its products in a jurisdiction without technically having a permanent establishment to which such sales may be attributed for tax purposes and without, therefore, being taxable in that State on the profits derived from such sales. Since the person that concludes the sales does not own the products that it sells, that person cannot be taxed on the profits derived from such sales and may only be taxed on the remuneration that it receives for its services (usually a commission). A foreign enterprise that uses a commissionaire arrangement does not have a PE because it is able to avoid the application of Article 5(5) of the Convention, to the extent that the contracts concluded by the person acting as a commissionaire are not binding on the foreign enterprise. Since Article 5(5) relies on the formal conclusion of contracts in the name of the foreign enterprise, it is possible to avoid the application of that rule by changing the terms of contracts without material changes in the functions performed in a jurisdiction. Commissionaire arrangements have been a major preoccupation of tax administrations in many countries, as shown by a number of cases dealing with such arrangements that were litigated in OECD countries. In many of the cases that went to court, the tax administration’s arguments were rejected, and the affected multinationals enterprise’s arguments prevailed.  The Report recommends changes to Article 5 to address these types of arrangements.

Since the introduction of these treaty-defined exceptions many years ago, there have been dramatic changes in the way that business is conducted. This is outlined in detail in the report on Action Item 1: Addressing the Tax Challenges of the Digital Economy. Depending on the circumstances, activities previously considered to be merely preparatory or auxiliary in nature may now correspond to core business activities. In order to ensure that profits derived from core activities performed in a country can be taxed in that country, Article 5(4) of the Convention is modified to ensure that each of the exceptions included therein is restricted to activities that are otherwise of a “preparatory or auxiliary” character.

The Report also addresses concerns related to Article 5(4) which arise from what is typically referred to as the “fragmentation of activities.” Multinational enterprises (MNEs) may alter their structures to obtain tax advantages by fragmenting or splitting the various activities being conducted in the same jurisdiction to avoid a PE. Action Item 7 now provides that the substance of all the activities may be considered in determining whether a PE exists.

The exception in Article 5(3), applicable to construction sites, has also given rise to abuses through the practice of splitting-up contracts between closely-related enterprises. The Principal Purposes Test (PPT) rule that will be added to the Convention as a result of the adoption of the report on Action Item 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, will address the BEPS concerns related to such abuses.
BDO Insights Multinationals should review their activities and transactions and how the changes recommended in Action Item 7 impacts their business operations and tax liability. Some countries have taken action in advance of the final report. For instance, the United Kingdom enacted its diverted profits tax earlier in 2015 to combat some of the tax planning used to avoid a PE. Other countries have indicated that they may enact similar laws to strengthen their general anti-abuse statutes. The risk for double taxation will exist for multinationals depending on how individual countries implement any changes from Action Item 7. 
 
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

Federal Tax Alert - November 2015

Fri, 11/13/2015 - 12:00am
New Partnership Audit Regime Substantively Changes Existing Rules and May Result In Partnership-Level Payment Obligations
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Summary On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (“the Act”).1  The Act repeals both the partnership audit rules under the Tax Equity and Responsibility Act of 1982 (TEFRA) and the special rules for electing large partnerships (“ELP”).  The TEFRA rules are replaced with a completely new regime for auditing partnerships. Under the new regime, tax adjustments resulting from partnership audits will generally be assessed at the partnership level. This enables the Internal Revenue Service (“IRS”) to collect tax due on partnership adjustments at the entity level, thereby, effectively imposing an entity-level tax on partnerships. 

The new regime generally applies to all partnerships regardless of size or number of partners unless the partnership is eligible to elect out and does so in a timely manner.  The new procedures are effective for tax returns filed for partnership taxable years beginning after December 31, 2017, unless the partnership elects to have the new procedures apply sooner.
Details Partnerships to Which the New Regime Applies
Unlike the TEFRA rules, the new regime applies to all partnerships regardless of size or number of partners unless the partnership is eligible to elect out and does so in a timely manner. 

An election out of the new procedures is available only to partnerships which have 100 or fewer partners and only if each of the partners is an individual, a C corporation, any foreign entity that would be treated as a C corporation if it were domestic, an S corporation, or an estate of a deceased partner.  The election out must be made on an annual basis with a timely filed return for such taxable year.  The election must include a disclosure of the name and taxpayer identification number of each partner of the partnership and each partner of the partnership must be notified of the election. The Act instructs Treasury to provide procedures describing the manner in which the partners must be notified.

If a partner is an S corporation, special rules apply.  The partnership must disclose the name and taxpayer identification number of each S corporation shareholder for the taxable year of election, and each S corporation shareholder will count toward the 100 partner rule. 

Determination at the Partnership Level
Under the new regime, the IRS will audit items of income, gain, loss, deduction, or credit of the partnership at the partnership level.  Any taxes, interest, or penalties relating to the adjustments will also generally be assessed and collected at the partnership level.

If the IRS determines that there are adjustments to a partnership return, the partnership will pay the “imputed underpayment” with respect to such adjustment in the year of adjustment.  An adjustment that does not result in an imputed underpayment is taken into account by the partnership in the year of adjustment as a reduction in non-separately stated income or as an increase in non-separately stated loss.  If the adjusted item is a credit, the adjustment is treated as a separately stated item.

An imputed underpayment is calculated by netting all adjustments of items of income, gain, loss, or deduction and multiplying the net amount by the highest tax rate in effect for the reviewed year under Section 1 or 11.  Any net increase or decrease in a loss is treated as a decrease or increase in income and any adjustment to a credit is treated as an increase or decrease in the imputed underpayment.

The law applies the highest tax rate in effect for the year reviewed for individuals and corporations regardless of the type of partners in the partnership.  Under the current law, the tax rate used to calculate the initial imputed underpayment would be 39.6 percent.  However, if sufficient information is provided to the IRS within 270 days of the notice of proposed adjustment, the imputed underpayment can be modified for the following:
 
  • If one or more partners file returns which reflect the adjustments determined by the IRS for the reviewed year and pay the applicable tax increase, such adjustments are disregarded in determining the amount of the imputed underpayment ;2
  • To the extent that the partnership demonstrates that a portion of the adjustment is allocable to a partner that would not owe tax by reason of its status as a tax-exempt entity; and
  • Taking into account a lower rate of tax to the extent that the partnership demonstrates that a portion is allocable to a partner which:
    • Is ordinary income, in the case of a C corporation, or
    • Is capital gain or qualified dividend income in the case of an individual or an S corporation.

The Act authorizes the Secretary to issue regulations to provide for additional procedures to modify imputed underpayment amounts based on other factors as determined necessary or appropriate.

Interest on the imputed underpayment amount will be determined based on interest that would be calculated by treating the imputed underpayment as an underpayment of tax imposed in the adjustment year.  Penalties on the imputed underpayment amount will be determined by applying Section 6651(a)(2) to such failure to pay, and by treating the imputed underpayment as an underpayment of tax.  Section 6651(a)(2) assesses a 0.5 percent penalty per month (or fraction thereof) up to a maximum of 25 percent. 

The partnership is required to pay the imputed underpayment by the due date of the partnership’s tax return.  No deduction is allowed for any payment required to be made by a partnership under the new regime.  This appears to include interest as well as the imputed underpayment and any penalties.  The non-deductibility of the interest portion of the payment would be in contrast to a C corporation’s ability to deduct interest on an underpayment of tax.

Alternative to Payment of Imputed Underpayment by the Partnership
Since an imputed underpayment under the new regime is paid by a partnership in the year of adjustment rather than the reviewed year, the economic burden of the underpayment for a prior year can be shifted to current partners who may not have been partners in the reviewed year. 

The Act provides that the partnership may within 45 days of receiving a notice of final partnership adjustment irrevocably elect to have the partners take the adjustments into account on their separate tax returns.  If this election is made and the partnership properly notifies its partners of the election, the partnership will not incur an imputed underpayment and the burden of the underpayment is put on the partners who were partners in the reviewed year.  This election appears to apply only to an imputed underpayment.  A favorable adjustment would continue to be taken into account at the partnership level.  If elected, the partnership will issue adjusted Schedules K-1 reflecting each partner’s share of any audit adjustments.

If this election is made, each partner will increase its taxes owed to reflect the adjustment amount, plus any interest and penalties, in the year that the statement is furnished to the partner by the partnership.  The adjustment amount is calculated by adding:
 
  1. The amount that the partner’s tax would increase for the taxable year which includes the end of the reviewed year, if the partner’s share of any adjustment to income, gain, loss, deduction, or credit were taken into account for such taxable year, and
  2. The amount that the partner’s tax would increase for any taxable year after the taxable year that includes the reviewed year and before the adjustment year, if the partner’s tax attributes would have been affected had the adjustment been made in the reviewed year.

Additionally, any subsequent year tax attribute that would have been affected if the adjustment had been made in the reviewed year would need to be adjusted for future tax years.  The Act also requires that when this election is made, the partners pay an interest rate on the underpayment that is two percentage points higher the regular underpayment interest rate.

Partnership Representative
The Act requires that each partnership designate (in the manner prescribed by the Secretary) a partner (or other person) with a substantial presence in the United States as the partnership representative.  The partnership representative shall have the sole authority to act on behalf of the partnership.   If the partnership does not make a designation, the IRS may select any person as the partnership representative.

A partnership and all partners of such partnership shall be bound by actions taken by the partnership and by any final decision in a proceeding brought with respect to the partnership.

Administrative Adjustment Request (“AAR”) by Partnership
The Act provides that a partnership may file a request for an administrative adjustment in the amount of one or more items of income, gain, loss, deduction, or credit of the partnership for any partnership taxable year.  The approach is similar to underpayments in the case of an IRS exam.

Any such adjustment shall be determined and taken into account for the partnership taxable year in which the AAR is made (not the year being adjusted).  The AAR adjustment can be made:
  1. By the partnership (under rules similar to the new rules under which the IRS can adjust partnership items) for the partnership taxable year in which the administrative adjustment request is made, or
  2. By the partnership and partners under rules similar to the new alternative payment of imputed underpayment rules (e.g. the payments are pushed to the partners).

In the case of an adjustment that would not result in an imputed underpayment, paragraph (1) shall not apply and paragraph (2) shall apply with appropriate adjustments. Where the AAR results in a refund, the partnership will be required to issue adjusted Schedules K-1 presumably enabling the partners to file a separate amended return in order to obtain the refund.

Period of Limitations on Making Adjustments
Under the Act, no adjustment may be made after the later of the date which is 3 years after the latest of:
  1. The date on which the partnership return for such taxable year was filed,
  2. The return due date for the taxable year, or
  3. The date on which the partnership filed an AAR with respect to such year.

The period of limitations will also remain open for adjustments as indicated below: 
  • In the case of any modification of an imputed underpayment, the period of limitations remains open until the date that is 270 days after the date on which everything required to be submitted to the IRS, and
  • In the case of any notice of a proposed partnership adjustment, the period of limitations remains open until the date that is 270 days after the date of such notice.

BDO Insights
  • The Act fundamentally changes the partnership audit rules and creates the potential for imposition of an entity-level federal income tax obligation. However, partnerships will have the option to pass adjustments through to their partners to avoid entity-level tax.  
  • The statute contains a number of unanswered questions that will need to be addressed by the IRS and Treasury through regulations and instructions. For example, under the new regime, partnerships may be subject to tax on an “imputed underpayment” that is calculated based on the highest marginal federal tax rates. While the rules provide for certain modifications, the Act relies on Treasury regulations to determine the actual mechanics.
  • Because the imputed underpayment is imposed at the partnership level, it’s possible that partners will be left to shoulder the burden of adjustments attributable to other partners’ distributive shares.  Equity investors should consider the potential impact of these rules.
  • Certain partnerships will be eligible to elect out of the new regime. However, whereas under the TEFRA rules certain small partnerships were automatically excluded from the unified audit rules, the new regime requires proactive steps to elect out.
  • Under the Act, a “partnership representative” replaces the concept of a “tax matters partner.” The partnership representative will have the power to act on behalf of the partnership.
 
For questions related to matters discussed above, please contact:
  Julie Robins
Senior Director   Jeffrey N. Bilsky
Senior Director   David Patch
Senior Director   Todd Simmens
Partner
1 P.L. 114-74(2015)
2 For adjustments that reallocate the distributive share from one partner to another, this adjustment shall only apply if amended returns are filed by all of the affected partners. 

BDO Transfer Pricing Alert - November 2015

Fri, 11/13/2015 - 12:00am
India Transfer Pricing Update Introduction of range concept and use of multi-year data
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Summary On October 19, 2015, the Indian Central Board of Direct Taxes (CBDT) issued notification S.O. 2860 (E), to amend the Income Tax Rules, 1962 thereby introducing the “range” concept and allowing use of multi-year data.
  Date/Timing The new rules will determine the arm’s-length price (ALP) for transactions under certain situations and apply to transactions entered on or after April 1, 2014.
  Background and Details Prior to the amendment, Indian Transfer Pricing Regulations (Regulations) required the ALP to be calculated as the arithmetic mean of comparable prices determined most appropriate under the specified methods. The Regulations allowed a tolerance band of plus or minus three percent of the taxpayer’s intercompany transaction price (one percent in the case of wholesale traders) in comparing against the ALP. One drawback of this approach was that it assigned equal weight to comparable companies with excessive profitability (or outliers). Further, the Regulations required taxpayers to rely only on the current year (CY) data of comparable companies, where CY is defined as the year in which the intercompany transaction took place. If CY data for a comparable company was unavailable, then the company was excluded from the set of comparable companies.  
                                                                                                                                                                
Multi-Year Data
The amended rules allow the use of prior year data (i.e., the year immediately preceding the CY) if CY data is unavailable at the time of filing the tax return.  However, if CY data is subsequently available during the course of a tax audit, then CY data shall be used irrespective of its unavailability at the time of tax return filing.
 
The table below shows the data construction for comparable companies in application of the Resale Price Method, Cost Plus Method, or Transactional Net Margin Method:
  Year of Data Used Additional Years to be Considered* Price to be Included in Dataset Current Year Preceding two fiscal years: [CY-1] and [CY-2] Weighted average of prices of CY, [CY-1], and [CY-2] Immediately preceding CY [CY-1] [CY-2] Weighted average of prices of [CY-1] and [CY-2] *with exceptions

Range Concept
Under the amended rules, the ALP range extends from the 35th percentile to the 65th percentile, if the set of comparables consists of six or more companies. If the taxpayer’s transaction price falls within this range, then that price is considered arm’s-length. However, if the transaction price falls outside this range, then the ALP will be the median (50th percentile). The new rules also allow the application of the range concept to the dataset when the Comparable Uncontrolled Price (CUP) method is selected as the most appropriate method.
 
If the number of comparable companies is less than six, the use of arithmetic mean to determine the ALP will continue to apply.
  BDO Insights With the introduction of the amended rules, it is evident that the Indian Government is steadily taking steps towards aligning the Indian Transfer Pricing Regulations with accepted international practices, including the United States Regulations. It is important to note that the Indian ALP range (between 35th and 65th percentiles) is narrower than the United States interquartile range (between 25th and 75th percentiles). Another noteworthy point about the amended rules is that CY data of comparable companies, if subsequently available, will be taken into account at the time of audit. As a result, benchmarking results may change at the time of audit.
 
Taxpayers with intercompany transactions in India should carefully review their Indian financials and benchmarking results for fiscal years April 1, 2014 - March 31, 2015, and onward to assess how the amended rules may affect their transfer pricing positions.
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

Sean Kim
Senior Director

 

Michiko Hamada
Senior Director

 

Veena Parrikar
Principal

 

Kirk Hesser
Senior Director, Transfer Pricing

 

 

International Tax Newsletter - November 2015

Thu, 11/12/2015 - 12:00am
The Indian Tiffin V A bi-monthly publication from BDO India, "The Indian Tiffin" brings together business information, facilitating decision-making from a multi-dimensional perspective. The unique name of this thought leadership piece is inspired most literally by Indian tiffins, referring to homecooked lunches delivered to the working population by 'dabbawalas' – people who deliver the packed lunches (tiffins). In that same sense, the purpose of “The Indian Tiffin” newsletter is to deliver a variety of news to satiate your palate, from domestic and cross-border updates to India business perspectives. Each issue will feature a/an:
 
  • Indian Economic Update - How the economic and political variables are impacting business exchange and maneuvering macro economics
  • M&A Tracker - International business activity to reflect investment sentiment and tracking cross border commercial statistics
  • Feature Story - An update on current subjects of industry relevance showcasing the Topical forerunners in India -GST / Make in India / Union Budget / Corporate Law
  • Guest Column -  A dedicated Guest Column from our business associates adding flavor to the breadth of information complimenting the Services provision that we make as a One Stop Shop

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International Tax Alert - November 2015

Thu, 11/12/2015 - 12:00am
United Kingdom Tax Authority Issues Consultation Document Seeking Views From All Stakeholders on How the United Kingdom Should Respond to Action Item 4 of the Organisation for Economic Co-operation and Development (“OECD”)/G20 Base Erosion and Profit Shifting Project (the BEPS Project) with Respect to Interest Deductibility
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Summary On October 22, 2015, the United Kingdom tax authority, Her Majesty’s Revenue & Customs (“HMRC”), issued the consultation document “Tax deductibility of corporate interest expense: consultation.” 
 
The consultation document is in response to Action Item 4 of the BEPS Project with respect to interest deductibility, which sets out a best practices approach of how interest deductions should be limited to prevent base erosion through the use of interest expense. 
 
The consultation document seeks views on how and when the United Kingdom should address BEPS issues, arising through interest deductions, for consideration in the development of a future business tax roadmap. 
  Background and Details On October 5, 2015, the OECD released the final report (the “Report”) of the BEPS Project.  Action Item 4 of the Report sets out a best practices approach to the design of domestic rules to prevent base erosion through the use of interest expense.
 
The recommended approach is for countries to adopt a mandatory fixed ratio cap on interest deductions, whereby net interest is disallowed where it exceeds more than a fixed percentage (suggested as somewhere in the range 10 percent to 30 percent) of earnings before interest, tax, depreciation and amortization (“EBITDA”). 
 
The report also suggested that countries may want to include an alternative restriction calculated by reference to the net interest/EBITDA ratio of the worldwide group, as well as a de-minimis threshold, targeted rules, if considered necessary and optional rules around carry forward/back of excess interest capacity and/or disallowed deductions.
 
The consultation document issued makes it clear that the UK Government wishes to tackle BEPS involving interest expense, but, at the same time, there is a strong desire that the UK remains competitive and an attractive place for inbound investment.
 
The consultation document therefore sets out the key aspects of Action Item 4 and poses questions to stakeholders designed to frame a discussion around the UK domestic policy in this context.  The responses to the consultation document, due January 14, 2016, will be considered in the development of a future business tax roadmap.
 
At this stage, the UK Government has not given any indication as to whether it will introduce any changes to the UK interest deductibility rules in response to Action Item 4 of the BEPS Project given that this would be a major change to the UK corporate tax regime.  However, the document does state that if changes are to be made then these will not be effective until at least April 1, 2017.
  How BDO Can Help Companies will need to carefully monitor how the UK and other OECD countries adopt the recommendations detailed in the Report and evaluate their current financings and structures. BDO will provide updated alerts as more guidance is released.
 
For more information, please contact one of the following practice leaders:
  Ingrid Gardner
Managing Director UK/US Tax Desk   Chip Morgan
Partner  

Robert Pedersen
International Tax Practice Leader

 

Brad Rode
Partner

 

Bob Brown
Partner

 

William F. Roth III
Partner, Washington National Tax Office

  Scott Hendon
Partner  

Jerry Seade
Principal

  Monika Loving
Partner  

Joe Calianno
Partner, Washington National Tax Office

International Tax Alert - November 2015

Thu, 11/12/2015 - 12:00am
United Kingdom Tax Authority Issues a Consultation Document Setting Out the Preferred Approach of the United Kingdom Government for Amendments to the UK Patent Box Regime
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Summary On October 22, 2015, the United Kingdom tax authority, Her Majesty’s Revenue & Customs (“HMRC”), issued the consultation document “Patent Box: substantial activities.”  This document sets out the UK Government’s preferred approach to changes in the design of the UK patent box rules so that they comply with the new international framework for preferential tax regimes for intellectual property (“IP”) set out by the Organisation for Economic Co-operation and Development (“OECD”). 
 
The intent of the proposed changes to the UK patent box regime is to ensure that businesses can only benefit from the preferential tax rate where they have conducted the substantial activities that generated the income benefitting from the regime.  The agreed approach uses research & development (R&D) expenditure as a proxy for substantial activity and links benefits to the requirement to have undertaken the R&D expenditure incurred to develop the IP.
  Background The UK Government is committed to creating the most competitive tax system in the G20.  As part of that commitment corporate tax rates have been cut to 20 percent and will drop to 18 percent by April 1, 2020.  The UK patent box, which provides for a 10-percent corporate tax rate on profits arising from qualifying IP, is a key part of this initiative. 
 
In order to comply with the OECD’s Base Erosion and Profit Shifting (“BEPS”) project, in particular to ensure that preferential tax regimes such as the patent box have sufficient economic substance such that they cannot be used for profit shifting, the UK patent box rules require amending.
  Details The UK patent box was introduced on April 1, 2013, and provides for a reduced rate of corporation tax (10 percent) on profits arising from qualifying IP.  While the current patent box rules require that certain conditions be met with respect to ownership and active development of the IP qualifying for the patent box, the rules do not align with the now mandatory “nexus” approach, which requires that benefits under the regime must be linked to the level of R&D expenditure incurred to develop the IP as a proxy for substantial activity in relation to that development.
 
The consultation document sets out the UK Government’s proposals that, in the future, IP profits be required to be tracked and traced to the level of the IP (the patent) itself, a product or a product family.  It will then be necessary to apply a “nexus fraction” to each IP profit parcel to ensure that companies can only benefit from the patent box in proportion to the activity they have performed on that IP. 
 
The nexus fraction (“N”) uses R&D expenditure as a proxy for substantial activities and is calculated as:
 
N = D + S + U/ D + S + A + R
 
Where:
 
D is in-house direct R&D spend
S is expenditure on R&D subcontracted to third parties
A is expenditure on acquiring IP
R Is expenditure on R&D subcontracted to related parties
 
U is an allowed uplift to qualifying R&D expenditure, (making UK rules an allowable “modified nexus approach”), which is calculated as the lesser of A + R and 30 percent of (D +S). 
 
The nexus fraction is a rebuttable presumption, i.e., in exceptional circumstances a company may be allowed to challenge the outcome of the nexus fraction where it does not align with the underlying principle of nexus to link the patent box benefit with substantial activity.
 
The new rules will operate beginning July 1, 2016.  Companies that are already elected into the current UK patent box regime, or elect in prior to June 30, 2016, will continue to benefit from the existing patent box rules until June 30, 2021, but only in respect of IP that exists at June 30, 2016, after which they will switch to the new regime.
 
The consultation document asks for comments on various issues including: whether streaming should be required in all circumstances; how R&D should be defined; how joint development should be dealt with; the timing in relation to expenditure included in the nexus fraction; and what circumstances should be regarded as exceptional to allow companies to challenge the nexus fraction.
 
The consultation period will take place from October 22, 2015, to December 4, 2015, with draft legislation expected in December 2015.  A response to the consultation should be published during spring 2016, at which time, any amendments to the draft legislation will also be published, including those arising from changes required in response to comments received in the consultation period.
  BDO Insights The UK patent box should continue to provide benefits for companies with qualifying patent income.  For groups not already elected into the regime, consideration should be given to ensuing that relevant patents are registered and the election made prior to June 30, 2016, to allow for qualification under the old regime through June 30, 2021. 
 
For companies coming into the new proposed regime, consideration should be given to whether R&D can be incurred in the UK to maximize the nexus fraction and hence associated patent box benefit.  However, companies should also be prepared for a significant increase in the compliance burden associated with the new patent box regime.
 
For more information, please contact one of the following practice leaders:
  Ingrid Gardner
Managing Director UK/US Tax Desk   Chip Morgan
Partner  

Robert Pedersen
International Tax Practice Leader

 

Brad Rode
Partner

 

Bob Brown
Partner

 

William F. Roth III
Partner, Washington National Tax Office

  Scott Hendon
Partner  

Jerry Seade
Principal

  Monika Loving
Partner  

Joe Calianno
Partner, Washington National Tax Office

International Tax Newsletter - November 2015

Thu, 11/05/2015 - 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:
 
  • Amendments to Cai Shui [2015] No.3 by the Ministry of Finance
  • Circumstances Where Real Estate Sales Invoice Is Not Required for Declaration of Deed Tax
  • Further Improvements to Enterprise Income Tax Policies on Accelerated Depreciation of Fixed Assets
  Download

State and Local Tax Alert - November 2015

Wed, 11/04/2015 - 12:00am
A California Court Of Appeal Has Held That the Board of Equalization Erred In Its Assessment of Sales Taxes on Sales of Software Transferred Via Tangible Media Pursuant To a Technology Transfer Agreement
Download PDF Version
Summary On October 8, 2015, the California Court of Appeals, Second Appellate District issued its decision in Lucent Technologies, Inc. v. State Board of Equalization, Docket No. B257808, a case which involves facts identical to those in Nortel Networks Inc. v. State Board of Equalization 191 Cal. App. 4th 1259 (2011), and in which it held, like Nortel Networks Inc., that the Board of Equalization’s assessment of sales taxes in connection with a sale of software transferred via magnetic tapes and compact discs under the terms of a technology transfer agreement (or “TTA”) was erroneous.
Details Background
Lucent Technologies, Inc. (“Lucent”), a New Jersey headquartered telecommunications equipment manufacturer, was formed February 1, 1996, when AT&T Corporation (“AT&T”) spun-off its Network Services Division that was responsible for manufacturing telecommunication industry switches.  These switches were used by telecommunications companies to connect their land-based and wireless telecommunication and data networks.  Each switch was operated by a computer, which, in turn, was run by two types of software – one switch-specific and the other generic in nature.  AT&T and Lucent designed the software that operates the switches.  The software was copyrighted and embodied in at least one of eighteen different patents held
by AT&T/Lucent.

AT&T/Lucent had contracted with its telephone company customers to: (i) sell switches; (ii) provide instructions for installing and using them; (iii) develop and copy the software needed to operate them; and (iv) grant the right to copy the software for use with their switches.  The software was provided to its customers on magnetic tapes or compact discs. The Board of Equalization conducted a sales tax audit covering the period January 1, 1995, through September 30, 2000, and assessed AT&T/Lucent $24,773,185.38 for the total amount related to software licensed under the customer contracts.  AT&T/Lucent paid the assessed sales tax and filed a claim for refund, which the Board denied.  AT&T/Lucent sued the Board for a refund of the tax paid in Los Angeles Superior Court.  The Superior Court concluded that the contracts constituted non-taxable TTAs under California law, notwithstanding the fact that the software was transferred to customers using tangible media, and granted AT&T/Lucent’s motion for summary judgment.  The Board appealed the Superior Court decision to the California Court of Appeals and the Court of Appeals affirmed the lower court’s decision.
 
The Court of Appeals’ Decision
In its decision, the Court of Appeals addressed the following two questions: (i) whether the software was tangible personal property, the sale of which is taxable in California, rather than a sale of intangible property, the sale of which is not taxable in California; and (ii) whether the contracts qualify as TTAs, the sale of which is not taxable in California. 

Is the Sale a Taxable Sale of Software Tangible Personal Property?
The Board first argued that, logically, AT&T/Lucent’s placement of the software on tangible media (i.e., magnetic tapes and CDs), physically altered/changed the transaction from a non-taxable sale of intangible property to a taxable sale of tangible personal property.  The court disagreed with the Board for two reasons.  First, California courts on multiple occasions have held that choosing to transfer software on tangible media in conjunction with a granting of a license to copy or use that software where the tape or disc merely represent a convenient storage medium to transfer the copyrighted content does not establish a taxable transaction.  Second, ascribing sales tax consequences to the manner in which a software program is transferred when the method of transfer is secondary to the ultimate use of the software and easily manipulated by the seller and end-user would lead to an absurd result.  That is, if the court accepted the Board’s argument that the software at issue was tangible property, AT&T/Lucent would be liable for nearly $25 million in sales tax, rather than $0, simply because it or the customer chose to transfer the software on tangible media rather than electronically (e.g., e-mail or Internet).

The Board also advanced the following four other reasons in support of its position that the software at issue is tangible personal property – each of which the court rejected:
 
  • The sale of software on physical media is a transaction subject to sales tax as per Navistar Internat. Transportation Corp. v. State Board of Equalization, 8 Cal. 4th 868 (1994), and Touche Ross & Co. v. State Board of Equalization, 203 Cal. App. 3d 1057 (1998), which the court found to be inapplicable because those cases addressed the sale of computer software for its own sake and not in conjunction with the concurrent sale of intellectual property rights.
  • The exclusion of the type of sale at issue from the exceptions to sales tax for certain types of transactions involving the sale of software found under Cal. Rev. & Tax Code §§ 6010.9 (relating to the service of creating custom software) and 6377.1 (relating to software necessary to operate equipment used to stimulate economic development as part of California’s enterprise zone program), implies that the sale at issue is taxable; otherwise, these two sections would be superfluous.The court found each statutory provision to be contextually distinct and neither rendered a nullity by its decision.
  • Likely in an attempt to get the court to follow Louisiana law, Louisiana courts treat software as tangible personal property, which the court found to be at odds with California law, and, therefore, lacked even persuasive value.
  • The court should overturn precedent that dictates a ruling against it, which the court was hesitant to do because the issue was a statutory one that the legislature has the power to alter, the court was bound by California Supreme Court precedent, and the potential for the absurd result noted above.

Do the Contracts Qualify as Nontaxable Technology Transfer Agreements (TTAs)?
The Board next argued that even if the software itself is not tangible personal property, the AT&T/Lucent transactions with customers are taxable because: (i) the underlying contracts do not satisfy the statutory elements of a TTA; and (ii) the nontaxable intangible aspect of the each transaction is essential or physically useful to the tangible portion of the transaction.  The court did not entertain the Board’s argument with respect to the latter point because the court found that the AT&T/Lucent contracts met each of the requirements needed to qualify as nontaxable TTAs.  First, the software was copyrighted and patented.  Second, AT&T/Lucent granted its customers a license to reproduce its software.  Third, the products sold by AT&T/Lucent customers were subject to the licensor’s copyright or patent interest.  Here, the court pointed out that its earlier decision in Nortel Networks Inc. was directly on point.

Similar to the issue of whether the software is tangible personal property, the Board advanced several arguments in support of its position that the contracts did not meet the requirements for a TTA, including AT&T/Lucent transferred insufficient rights, and the TTA statutes require prima facie evidence showing that it was more likely than not that, absent the right-to-use license agreements, its customers would have infringed on AT&T/Lucent’s patent or copyright interests when using the software.  Also, similar to the other issue, the court systematically rejected each of the Board’s arguments.
BDO Insights
  • Lucent Technology, Inc., like Nortel Networks Inc., is a huge win for taxpayers and tremendous loss for the State of California.  Amounts in each of these decisions were enormous, but the refund claims pending before the Board on these issues, as well as those that may be filed as a result of the publication of this decision, could be devastating for an already strapped California budget.
  • The Court of Appeals took a page from the majority opinion and Justice Scalia’s concurring opinion in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) when it wrote, “[c]ourts are especially hesitant to overturn prior decisions where, as here, the issue is a statutory one that our Legislature has the power to alter.”The Board foresaw the potential for a material degradation of the tax base when the TTA statutes were proposed by the California legislature in 1993, and asked that they not be enacted.Will the legislature make statutory changes whereby this exemption will no longer be available?
  • After this second loss on an identical issue as that which was decided in the Nortel Networks, Inc., the Board will now be faced with deciding how they will treat these transactions in current and future audits assuming no further legislative changes are made or the Board prevails on an appeal to the California Supreme Court.
 


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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