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International Tax Alert - November 2015

Wed, 11/04/2015 - 12:00am
Organisation for Economic Co-Operation and Development (“OECD”) Issues Final Report On Action Item 12: Mandatory Disclosure Rules
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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 12: Mandatory Disclosure Rules.
Background and Details In an effort to address Base Erosion and Profit Shifting (“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 12 of the BEPS Project gives tax authorities the ability to obtain early information on potentially aggressive or abusive tax planning strategies and their users. The key goal of Action Item 12 is to “react rapidly to close down opportunities for tax avoidance.”

The BEPS Project recognizes that one of the key challenges faced by tax authorities is lack of timely, comprehensive and relevant information on potentially aggressive or abusive tax planning strategies. A mandatory disclosure regime provides tax administrations with the tools to obtain information much earlier than through the submission of tax returns and tax audits. Early identification of changes in taxpayer behavior and the development of tax avoidance strategies, means that tax authorities will be able to respond and counter these threats by making timely and informed decisions on legislation, policy and regulation.

The key outputs identified by the Report of Action Item 12 are:
 
  • Recommendations for the modular design of mandatory disclosure rules;
  • A focus on international tax strategies and consideration of a wide definition of tax benefit to capture relevant transactions;
  • Designing and putting in place enhanced models of information sharing for international tax strategies.

The OECD recognizes in the report that existing strategies implemented by countries such as the United States, the United Kingdom and Canada have reported a great deal of success. Action Item 12 therefore draws on the experience of these existing strategies, and sets out recommendations for designing an effective disclosure regime to counter the BEPS concerns of each country. The Report proposes a modular approach to give tax authorities the flexibility to choose hallmarks and thresholds for disclosure which can be molded to fit around the specific needs of the tax system.  This will allow for maximum consistency between the OECD countries while being sensitive to the concerns of the domestic jurisdiction, as well as the costs for tax administrations and business.

Along with the concern for domestic strategies, Action Item 12 aims to provide a way to target cross-border strategies which involves multiple parties deriving tax benefits in different jurisdictions. It has been noted that existing strategies have received fewer disclosures in relation to international strategies, partly related to the way international strategies are structured, and can therefore operate below the relevant thresholds for disclosure. In response to this, the Report recommends that countries develop specific hallmarks to target cross-border BEPS outcomes that cause them concern, rather than target the mechanisms that are used to achieve them. In addition to this, taxpayers who enter intra-group transactions should be obliged to make inquiries to ascertain if the transaction has been specifically identified as reportable under the mandatory disclosure regime adopted by the home jurisdiction.

The Report also discusses the potential of the mandatory disclosure rules to act as deterrent and hence decrease the rate of BEPS in participating countries. Taxpayers who are considering entering into tax planning strategies will need to think carefully if they know that the strategy will need to be reported to the tax authorities and that they may also be subject to penalties if they fail to comply with their disclosure obligations. The market may also see a decrease in promoters offering such strategies given that the tax authority will be aware much earlier that the strategy has been developed and therefore the opportunity to implement the strategy itself could be short lived. 

With each jurisdiction drawing their focus towards collecting comprehensive and relevant information in relation to domestic and international tax strategies, there is potential for participating tax authorities to co-operate and share this information. By increasing collaboration and transparency on an international level, the proposals set out above aim to contribute to the fundamental goals of the BEPS Project.
  BDO Insights Mandatory disclosure rules will not be a new challenge for multinational companies as it is likely that they will have come across existing rules such as those implemented in the United States, the United Kingdom and Canada. Companies will however need to be aware that as more countries decide to adopt mandatory disclosure rules, intra-group transactions which were previously not reportable may now become exposed under the jurisdictions that have chosen to adopt the rules as set out in Action Item 12.
 
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

Deducting Expenses Related to Lobbying & Government Affairs

Mon, 11/02/2015 - 12:00am
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IRC §162(e) disallows a tax deduction for lobbying expenditures. Many companies, however, are using an overly broad definition of "lobbying" to identify their nondeductible lobbying expenditures. By not identifying deductible expenses for non-lobbying but government-affairs-related activities, many companies are missing an opportunity to reduce their current tax liability.

Many companies identify their nondeductible lobbying expenditures as the amounts the Lobbying Disclosure Act (LDA) requires them to report to the federal government each quarter.

The problem with this approach is that the LDA amounts include expenditures that are deductible.
Nondeductible Lobbying Expenditures An expenditure is nondeductible under Treas. Reg. §1.162-29 if it seeks to influence legislation.

Examples include expenditures to:
 
  • Participate or intervene in any political campaign for or against any candidate for public office;
  • Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referenda;
  • Communicate directly with certain executive branch officials in any attempt to influence their official actions or positions; and
  • Research, prepare, plan, or coordinate any of the above.

Deductible Government Affairs Expenditures Expenditures for activities that do not seek to influence legislation, on the other hand, may be deductible.

Such expenditures include those typically—but not necessarily—incurred by Government Affairs departments, e.g., for monitoring, reviewing, analyzing, and trying to comply with current and proposed legislation.
Other examples include:
 
  • Ordinary and necessary business expenses paid or incurred with respect to legislation of any local or foreign council or similar governing body;
  • Activities that do not seek to influence legislation, such as determining the existence or procedural status of specific legislation, or the time, place, and subject of any hearing to be held;
  • Preparing routine summaries of the provisions of specific legislation;
  • Performing an activity for purposes of complying with the requirements of any law, and discussions regarding existing laws, regulations, policies, or governmental programs;
  • Reading any publications available to the general public or viewing or listening to other mass media communications;
  • Merely attending a widely attended speech; and
  • Other routine administrative activities performed by government affairs departments, e.g., budgeting, human resources, and expense reporting activities.

Next Steps If your company pays or incurs expenses related to lobbying, it may be understating its deductions and overpaying its taxes.

We recommend considering the following:
 
  • Does your company report lobbying expenses under the LDA?
  • If so, does your company report all LDA expenses as nondeductible?
  • Does your tax department have a process in place to review such expenditures and segregate "lobbying" expenditures from other expenses that are deductible?
  • If so, has this process been reviewed recently? Recently released regulations have led many companies to shift the focus of their Government Affairs departments from influencing legislation to determining how to assist the company in complying with new legislation. Companies that follow the same-as-last-year approach for their Government Affairs expenditures may be missing opportunities to save.
  • Do you have the time and expertise to review and properly allocate all of the expenses involved as either deductible or nondeductible?

BDO can help you think through all of these considerations. We can also help your company develop an efficient and effective process you can implement now and leverage in the future.
 

International Tax Alert - October 2015

Fri, 10/30/2015 - 12:00am
Organisation for Economic Co-operation and Development (OECD) Issues Final Report on Action Items 8-10: Aligning Transfer Pricing Outcomes with Value Creation
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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 the final report with respect to Action Items 8-10: Aligning Transfer Pricing Outcomes with Value Creation. 
  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 Items 8-10 of the BEPS Project specifically addresses the alignment of transfer pricing outcomes with value creation.

Action Items 8- 10 were released in a single report that addresses transactions involving intangibles, risk, and capital transfers between group entities, and other high-risk transactions.

The Report makes the following recommendations to employ BEPS-prevention strategies:
  • Action Item 8 concerns the movement of intangibles among related entities.  The proposed measures recommend the adoption of a broad and clearly delineated definition of intangibles, which will ensure that profits associated with the transfer and uses of intangible property are appropriately allocated in accordance with value creation.  Additional recommendations include the development of transfer pricing rules or special measures for transfers of hard to value intangibles, and updating the guidance on cost contribution (cost sharing) arrangements.
  • The transfer of risks and allocation of capital amongst related entities are covered under Action Item 9.  This action item outlines transfer pricing rules or special measures to ensure that an entity does not accrue inappropriate returns solely based on contractually assumed risk or the provision of capital.
  • Transactions that would not, or would rarely, occur between third parties are addressed under Action Item 10. The Report recommends the adoption of transfer pricing rules or special measures.  These measures are intended to clarify the re-characterization of transactions and the application of transfer pricing methods with respect to global value chains, as well as provide protection against common types of base eroding payments.

As the issues covered by Action Items 8- 10 are closely related, it may be necessary to finalize them concurrently. Therefore, certain sections within the action items are to be considered interim guidance drafts.  These sections cover special measures such as authorizing tax administrations to apply rules based on actual results when pricing hard-to-value intangible transactions; reducing the return to entities whose activities are limited to funding the development of intangibles; requiring contingent payment terms, and/or the application of profit split methods for transfers of hard-to-value intangibles; and applying rules that are analogous to Article 7 and the Authorized OECD Approach to excessive capitalization of low function entities.  The countries involved in the BEPS project intend to finalize these sections, among others, later this year.
  BDO Insights Actions 8-10 will require multinational enterprises to place more emphasis on the actual conduct of the respective parties involved when determining the pricing of an intercompany transaction.  The alignment of transfer pricing outcomes with value creation is expected to result in a greater reliance on transfer pricing documentation to describe the relationship between value drivers and the functions, assets, and risks undertaken by the parties to an intercompany transaction.  The implementation of these action items may result in disagreements among various jurisdictions.
 
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 Alert - October 2015

Fri, 10/30/2015 - 12:00am
Organisation for Economic Co-Operation and Development (OECD) Issues Final Report on Action Item 1: Addressing the Tax Challenges of the Digital Economy
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 This tax 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 1: Addressing the Tax Challenges of the Digital Economy.
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 1 specifically addresses the digital economy which, to a large extent is the genesis of the BEPS Project.  In particular, the rise of “stateless income,” which prompted many countries to join in the OECD-led effort, is perceived to be directly related to the digital economy.  It is no accident that the report on Action Item 1 is about taxing the digital economy.

A fundamental challenge is that the digital economy’s transaction structures and income streams do not fit neatly into the longstanding tax concepts and rules that have evolved over the past century of the traditional economy’s flows of tangible goods and personal services.  The difficulties facing the Action Item 1 working team are illustrated by the fact that earlier draft reports from the BEPS Project included no concrete recommendations for taxing the digital economy – only considerations for further discussion.

The primary conclusion reached in the final report is that “the digital economy is increasingly becoming the economy.”   The key players in the digital economy are not just a few high profile technology companies from Silicon Valley, but rather a large and growing number of ordinary consumers and traditional “bricks and mortar” businesses that actively participate in the digital economy on a daily basis.

A direct implication of this conclusion is that it becomes difficult, if not impossible, to ring-fence, i.e., to propose tax rules that apply just to the digital economy.  The digital economy tends to exacerbate the risks addressed by the BEPS Project rather than present unique risks that require unique rules.  Therefore, the tax rules applied to the digital economy should be the same tax rules that apply generally.

Accordingly, the report on Action Item 1 includes limited recommendations specifically directed at the digital economy.  The orientation is that every action item applies to the digital economy – rules relating to permanent establishments, treaty shopping, transfer pricing, controlled foreign companies (“CFCs”), and information reporting.  The real impact of the BEPS Project on the digital economy will be a function of how all of the action items are implemented and administered, rather than the application of Action Item 1 on a standalone basis. The report on Action Item 1 does provide some insight on how the other action items can address the issues raised by the digital economy, including the following:
  • Revised definitions of tax nexus (see the report on Action Item 7: Preventing the Artificial Avoidance of Permanent Establishment) are viewed as a critical first step to be taken in appropriately addressing BEPS issues, including the digital economy.Specifically, there are recommendations to modify the exceptions to permanent establishment status in order to ensure that they are available only for activities that are preparatory or auxiliary in nature, along with new “anti-fragmentation rules” to prevent the avoidance of tax nexus by the fragmentation of business activities among closely-related enterprises.There are also recommendations to address circumstances in which artificial arrangements relating to the sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts, such that the sales should be treated as if they had been made by that company. For example, where the sales force of a local subsidiary of an online seller of tangible products or an online provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective clients for products or services, and these contracts are routinely concluded without material modification by the parent company, this activity would result in a permanent establishment for the parent company.
  • Revised transfer pricing rules and related information reporting requirements (see the reports on Action Items 8 through 13) clarifying that legal ownership alone does not necessarily generate rights to the returns generated by the exploitation of the intangible. Instead, the entities performing the important functions, contributing the important assets, and controlling economically significant risks, as determined through the accurate delineation of the actual transaction, will be entitled to an appropriate return. The report also noted that specific guidance will ensure that the transfer pricing analysis is not weakened by information asymmetries between the tax administration and the taxpayer in relation to hard-to-value intangibles, or by using special contractual relationships, such as a cost contribution arrangement.
  • Strengthened rules for taxing controlled foreign companies (see the report on Action Item 3: Designing Effective Controlled Foreign Company Rules) to prevent ultimate parent companies from inappropriately avoiding home country tax on digital economy-related profits arising in CFCs.

The report on Action Item 1 also notes that the collection of value-added tax (“VAT”) and goods and services tax (“GST”) on cross-border transactions, particularly those between businesses and consumers, is an important issue.  Countries are thus recommended to apply the principles of the OECD’s International VAT/GST Guidelines and consider the introduction of the collection mechanisms included therein.

None of the other options analyzed by the report on Action Item 1, namely (i) a new nexus in the form of a significant economic presence, (ii) a withholding tax on certain types of digital transactions, and (iii) an equalization levy, were recommended at this stage.  The report states that this is because, among other reasons, it is expected that the measures developed in the BEPS Project will have a substantial impact on BEPS issues previously identified in the digital economy; that certain BEPS measures will mitigate some aspects of the broader tax challenges; and that consumption taxes will be levied effectively in the market country.  However, the report does note that countries could introduce any of these three options in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties.  The report further notes that adoption as domestic law measures would require further calibration of the options in order to provide additional clarity about the details, as well as some adaptation to ensure consistency with existing international legal commitments.

It is clear from the report that the digital economy continues to evolve and that rules enacted now might prove inadequate in the future.  The “next step” recommendation in the report on Action Item 1 is to monitor closely the combined effect of all of the action items on the digital economy, via “detailed mandate to be developed in 2016” and digital economy report to be produced by 2020.  The practical implication is that if implementation of the current report on Action Item 1 does not deal effectively with the problem of stateless income in the digital economy, then a new report will be drafted.
BDO Insights The BEPS Project’s critical path is clearly focused on the problem of stateless income and the general approach is to use each of the action items in this effort rather than propose a set of ring-fenced rules within the parameters of Action Item 1.  Accordingly, it is incumbent on participants in the digital economy to consider carefully each action item of the BEPS project, as well as the interaction of all the action items.  The encompassing view that the digital economy is the economy has far reaching implications that guide tax developments for years to come.   
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 Alert - October 2015

Fri, 10/30/2015 - 12:00am
Organisation for Economic Co-operation and Development (OECD) Issues Final Report on Action Item 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
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 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 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
  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 13 of the BEPS Project contains recommendations for transfer pricing documentation, which relies on a three-tiered approach and a revised template for country-by-country (“CbC”) reporting. 

Under the first tier of the approach, multinational enterprises (“MNEs”) are advised to supply tax administrations with high-level information about their global business operations and existing transfer pricing policies in a “master file.”  This file is intended to be available to each relevant tax administration upon request. 

The second tier prescribes an additional “local file,” which contains detailed, transactional transfer pricing documentation specific to each country.  The file should include information such as the identification of material related party transactions, specific transaction amounts, and any economic analyses of the transfer pricing transactions.

Finally, the third tier requires large MNEs that have consolidated annual revenues equal to or in excess of €750 million (approximately $841 million), to use a CbC template to report the amount of revenue, profit before income tax, and income tax paid and accrued.  MNEs are further required to disclose specific information including;  number of employees, value of capital, retained earnings, tangible assets, the identification of each entity within a group operating in a particular tax jurisdiction, and information about the business activities each entity is engaged in. 

The three sets of documentation (master file, local file, and country-by-country template) will help MNEs articulate a consistent transfer pricing position as well as provide tax administrations with a holistic approach to assess transfer pricing risks and proceed with audit inquiries.  The OECD and participating countries believe the consolidated information and new reporting provisions will encourage transparency and reduce BEPS activities.

The new country-by-country reporting requirements are scheduled to be implemented on or after January 1, 2016, and are subject to review in 2020.  Flexibility for implementation will be provided as some jurisdictions may need additional time to enact the appropriate domestic legislation to incorporate the action item recommendations.
  BDO Insights Action Item 13 intends to bring forth a new level of transparency for MNEs and will require an increased amount of information reporting by MNEs in connection with transfer pricing arrangements.   MNEs should begin preparations to meet the implementation targets set by the OECD by assessing their internal data gathering and retrieval processes, analyzing resources, and developing internal procedures around the new reporting requirements.
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 Alert - October 2015

Fri, 10/30/2015 - 12:00am
Organisation For Economic Co-Operation and Development (OECD) Issues Final Report on Action Item 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
Download PDF Version

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 tax alert is one installment in a series of alerts on the release of the Organisation for Economic Co-operation and Development (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 the report on Action Item 15: Developing a Multilateral Instrument to Modify Tax Treaties.
  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.  The OECD recognizes that the global economy is rapidly evolving and the need to adapt to this evolution.  The report on Action Item 15 provides for the development of a multilateral instrument designed to provide an innovative approach to international tax matters.  The goal of the report on Action Item 15 is to “streamline the implementation of the tax treaty-related BEPS measures.”

In an ever-changing global economy, the report on Developing a Multilateral Instrument to Modify Bilateral Tax Treaties recognizes the need to analyze the tax and public international law issues related to the development of a multilateral instrument.  Among the challenges of globalization is the exacerbation of the impact of gaps and frictions among different countries’ tax systems.  The current tax treaty system is based upon a set of common principles designed to eliminate double taxation, which occurs in the case of cross-border trade and investments.  However, some of the features of this system facilitate BEPS and need to be addressed.  The proposed analysis would enable those jurisdictions, which wish to do so, to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.

As a result of the report on Action Item 15, a mandate has been released for an ad-hoc group (the “Group”) to develop the multilateral instrument.  The Group is open to participation by all countries on an equal footing, and thus far, about 90 countries are participating in this endeavor.  Having commenced in May 2015, the Group aims to conclude its work and open the multilateral instrument for signature by December 31, 2016.

The key elements of the mandate are:
  • Objective - To develop a multilateral instrument to modify existing bilateral tax treaties in order to swiftly implement the tax treaty measures developed in the course of the BEPS project.
  • Participation in Developing Multinational Instrument - Open to all interested countries on an equal footing.  Participation is voluntary and does not entail any commitments to sign the instrument once it has been finalized.
  • The duration of the work - The goal is to conclude work and open the multilateral instrument by December 31, 2016.

In order to achieve the underlying goal of the BEPS Project, to develop and implement new common rules to tackle BEPS among all interested parties, the multilateral instrument would not terminate the pre-existing network of bilateral treaties. Rather, the bilateral treaties will remain in force with an aim to achieve a concurrent and integrated application of the provisions of the multilateral instrument and the bilateral treaties as they relate to BEPS.

It is anticipated that some of the potential provisions which would be introduced in the multilateral instrument include provisions addressing:  multilateral mutual agreement procedures (“MAP”); dual-residence structures; transparent entities in the context of hybrid mismatch arrangements; “triangular” cases involving permanent establishments in third states; and treaty abuse.
BDO Insights Multinational companies will need to carefully monitor the progress of the multilateral instrument and the impact it will have on existing provisions of current bilateral tax treaties.  
 
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 - October 2015

Mon, 10/26/2015 - 12:00am
North Carolina Expands Job Development Investment Grant Program and Makes Several Taxpayer-Friendly Sales and Use Tax Changes
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Summary On September 30, 2015, North Carolina Governor Pat McCrory signed into law H.B. 117, 2015-2016 Session (“H.B. 117”), which expands the Job Development Investment Grant (“JDIG”) Program and makes several taxpayer-friendly changes to North Carolina’s sales and use tax law as it relates to datacenters, aviation, motor vehicles, and motorsports.  H.B. 117, together with H.B. 97, 2015-2016 Session (enacted September 18, 2015) (“H.B. 97”), reflects North Carolina’s desire to create a more favorable tax environment for businesses operating in the state, especially with respect to those businesses wishing to expand or relocate to the State.  See the BDO SALT Alert that discusses H.B. 97.
  Details Expansion of Job Development Investment Grant Program

The purpose of the JDIG program is to stimulate economic activity and to create jobs in the state.  A JDIG may be awarded to a business for a project in North Carolina that meets certain economic development criteria in relation to the area, whether a development tier one, two, or three area, where a project will be located, including the creation of a minimum number of “eligible positions” (i.e., positions created by a business and filled by new full-time employees in the State during a base period).  The JDIG amount that may be awarded to a business is based on a percentage, as determined by the State based upon established criteria, of wage withholdings as it pertains to eligible positions over a period of years.

Some of the more notable changes to the program enacted under H.B. 117, which, except as otherwise noted, are effective July 1, 2015, include the following:
  • Increases the required minimum eligible positions for a development tier three area from 20 to 50, but leaves the required minimum positions for development tier one area at 10 and at 20 for a development tier two area.
  • Creates a new “high-yield project” category for which larger grant award amounts are allowed.For these purposes, a “high-yield project” is a project for which the business invests at least $500 million in private funds and creates at least 1,750 eligible positions.
  • Increases the maximum percentage of withholdings that may be used for purposes of determining the grant amount with respect to a development tier one area from 75 percent to 80 percent.However, H.B. 117 leaves the maximum percentage amount for development tier two and development tier three areas at 75 percent, and removes the 10 percent minimum that applies to all development tier areas.
  • With respect to a high-yield project, allows up to 100 percent of withholdings to be used for purposes of determining the grant amount, and applies a 20-year grant period as opposed to the standard 12 year period applied to other projects.
  • For an eligible position located in a development tier two area, increases the percentage of an annual grant that is allocable and payable to the business (as opposed to the State’s Industrial Development Fund Utility Account) to 90 percent.With respect to a high-yield project, the grant amount is fully allocable and payable to the business.
  • Increases the maximum total grants that may be awarded in any calendar year from $15 million to $20 million, but limits the amount that may be awarded in a single calendar year semiannual period to 50 percent of the maximum.The $20 million maximum amount increases to $35 million for a year in which a grant is awarded for a high-yield project.
  • Effective September 30, 2015, increases the State’s maximum liability cap under the program for the last six months of calendar year 2015 by $5 million.
  • Extends the program’s expiration date from January 1, 2016, to January 1, 2019.

Sales and Use Tax

Datacenters. Effective January 1, 2016, H.B. 117 provides an exemption for sales of electricity and datacenter support equipment for use at a datacenter where at least $75 million within a 5-year period beginning on or after January 1, 2012, has been or will be invested.

Aviation. Effective October 1, 2015, H.B. 117 applies the 4.75-percent general rate of tax, plus local tax, to the gross receipts from the sale of aviation gasoline and jet fuel but, until December 31, 2019, exempts sales of aviation gasoline and jet fuel to an interstate air business for use in a commercial aircraft.  In addition, H.B. 117: (i) applies the 4.75-percent general rate of tax to the gross receipts from the sale of certain jet engines, (ii) increases the rate of tax applied to the gross receipts from the sale of an aircraft from a special 3-percent rate of tax to the 4.75-percent general rate of tax, and (iii) increases the maximum tax per sale of aircraft from $1,500 to $2,500.  Lastly, H.B. 117 exempts the sale of a service contract, and related parts and accessories, applicable to a jet engine to which the 4.75-percent general rate of tax may be applied, and the sale of an aircraft with a maximum take-off weight between 9,000 and 15,001 pounds.

Manufactured and Modular Homes. Effective October 1, 2015, H.B. 117 applies the 4.75-percent general rate of tax to the gross receipts from the sale of a manufactured and a modular home, including to the gross receipts from the sale of a modular home to a modular homebuilder.  H.B. 117 allows a seller of a modular home a credit against the tax for sales tax paid to another state on tangible personal property incorporated in the modular home.

Motor Vehicles. Effective March 1, 2016, H.B. 117 applies the service contract exemption to a contract applicable to a motor vehicle, a motor vehicle body to be mounted on a motor vehicle chassis when a certificate of title has not been issued for the chassis, and a motor vehicle body mounted on a motor vehicle chassis that temporarily enters the State so the manufacturer of the body can mount the body on the chassis.  In addition, H.B. 117 exempts the sale of a replacement item, a repair part, and a service to repair or maintain tangible personal property or a motor vehicle pursuant to a manufacturer’s or dealer’s warranty.  The sale of repair and maintenance services related to a motor vehicle are otherwise subject to tax.

Motorsports. Effective September 30, 2015, and through December 31, 2019, H.B. 117 exempts the sale of an engine provided with an operator to a professional motorsports racing team or a related member of the team for use in competition in a sanctioned race series.  However, H.B. 117 applies the same January 1, 2020, expiration date, to the service contract exemption related to an item purchased by a professional motorsports racing team.
  BDO Insights
  • A business expecting to expand or relocate to North Carolina should at least consider applying for the JDIG program.
  • Taxpayers will need to assess to what extent (and when) their sales and use tax reporting and payment systems require change in light of the changes to the sales and use tax law enacted under H.B. 117.
 


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

International Tax Alert - October 2015

Mon, 10/26/2015 - 12:00am
Organisation For Economic Co-Operation And Development (OECD) Issues Final Report on Action Item 4, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
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 This tax 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 4, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments.
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.  The OECD recognizes that cash is fungible and easily transferrable, thus permitting multinational companies to reduce taxable income through financing and interest deductions. Action Item 4 of the BEPS Project specifically addresses the risk of BEPS through interest deductions, and identifies three basic scenarios involving such risk. These scenarios include groups engaging in the following:
 
  • Placing higher levels of third party debt in high tax countries;
  • Using intragroup loans to generate interest deductions in excess of the groups’ actual third party interest expense; and
  • Using third party or intragroup financing to fund the creation of non-taxable income.

The Report provides several recommendations to prevent base erosion through interest expense deductions but does not provide a definitive set of rules to apply in all situations.  Rather, it gives OECD countries great flexibility in determining their respective interest deduction restrictions.  Consequently, certain advocates of the BEPS project have criticized the Report for not providing simple rules that work.

As stated in the Report, interest deduction restrictions should apply to all forms of payment for the time value of money, including finance costs of finance leases, notional interest on derivatives, guarantee fees, imputed interest on zero coupon bonds, and gains/losses on foreign currency borrowings.  Notional interest deductions, where a company is entitled to a deemed interest deduction based on a company’s equity, is not treated as interest in the Report.  The OECD does plan to separately address notional interest deductions regimes, such as those in Belgium and Cyprus.

The OECD’s recommended approach to limit interest deductions is based on a fixed ratio rule which is similar to Germany’s interest deduction limitation rules.  Under the fixed ratio rule, a company’s net interest deduction (i.e., interest expense in excess of interest income) would be limited to a fixed ratio of the company’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”).  For purposes of calculating EBITDA, dividends exempt from tax (e.g., dividends qualifying for participation exemption), untaxed branch profits (e.g., income derived through a permanent establishment that is exempt from home country tax), and capitalized interest would have to be subtracted from EBITDA.  The Report suggests possible ratios between 10 and 30 percent.

Some multinational groups in certain industries may be highly leveraged and have large interest deductions for non-tax reasons.  As such, the Report recommends the use of a group ratio rule in addition to the fixed ratio rule.  The group ratio rule would permit a company that is limited by the fixed ratio rule an interest deduction up to the level of the net interest/EBITDA ratio of the company’s worldwide group.  The ratio would compare net outside interest expense to the aggregate EBITDA of group members rather than the group’s consolidated EBITDA.  The ratio derived would be applied to each member’s EBITDA to set a limit on each member’s interest expense deduction.  Under the recommendations provided in the Report, the company would be entitled to deduct the greater amount determined from the fixed ratio rule and the group ratio rule.

There are some exceptions, such as (1) a de minimis exception which carves out entities that have a low level of net interest expense, (2) an exclusion for interest paid to third party lenders on loans used to fund public-interest  projects (subject to certain conditions), and (3) the carry forward of disallowed interest expense and/or unused interest capacity (where an entity’s actual net interest deductions are below the maximum permitted) for use in future years where the entity’s actual net interest deductions are below the limitation.

Finally, the OECD recognizes in the Report that the role interest plays for banks and insurance companies is different compared to companies in other industries.  While the Report states that banks and insurance companies should not be exempted from interest deduction restrictions, further work will need to be conducted and completed in 2016 to take into account the particular features of the banking and insurance industries.
BDO Insights The finalized Report is similar to the discussion draft and does not include any groundbreaking concepts. As most multinational companies have intragroup borrowings and interest payments, these companies will need to carefully monitor how the OECD countries adopt the recommendations detailed in the Report and evaluate their current financings and structures.
 
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 Alert - October 2015

Mon, 10/26/2015 - 12:00am
Organisation for Economic Co-Operation and Development (OECD) Issues Final Report on Action Item 3, Designing Effective Controlled Foreign Company (“CFC”) Rules
Download PDF Version

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 tax 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 3, Designing Effective Controlled Foreign Company rules. 
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 3 of the BEPS Project specifically addresses the need for developing a global framework for CFC rules, which is consistent with the global business environment critical to counteracting BEPS.  CFC rules generally provide an anti-deferral mechanism within a taxation system to trigger current taxation of an item of income as a means to prevent shifting income between jurisdictions.

The OECD recognizes in the Report that CFC provisions are an area where significant work has not previously been undertaken.   Working toward better engagement on this issue, the OECD developed six building blocks upon which its recommendations can be utilized as a foundation for effective CFC rules.  These six building blocks are:
 
  • Definition of a CFC;
  • CFC Exemptions and Threshold Requirements;
  • Definition of income;
  • Computation of income;
  • Attribution of income; and
  • Prevention and Elimination of Double Taxation.

The Report provides broad recommendations of proposed actions as well as examples from existing CFC regimes on each of these building blocks.  Action Item 3 recommendations were designed around the principle of flexibility in allowing each country to implement CFC rules which would fit into its taxation system in a manner that best addresses the BEPS concerns of that jurisdiction.

Enacted in 1962, “Subpart F,” which commonly refers to Internal Revenue Code Section 951 through 965 and the regulations thereunder, addresses the US CFC provisions.   The recommendations contained in Action Item 3 share numerous similarities (and some differences) with the US CFC rules.
  Action Item 3 Quick Reference Guiding Comparing OECD Recommendations with US CFC Rules CFC Building Blocks OECD Recommendation US Tax Concept Definition of a CFC
  Includes corporate entities, permanent establishments (“PE”), and certain transparent entities; addresses possibility for hybrid entity mismatch arrangements; applies legal and economic control tests with a view to more than 50-percent direct and indirect control. Includes foreign corporations with a more than 50-percent ownership, by US shareholders, threshold primarily based upon direct, indirect and constructive control. Not applicable to PEs and transparent entities. Exemptions and Thresholds Utilizes a subject-to-tax exemption at an effective rate of tax substantially similar to the parent company tax rate.  Consideration could also be given to a “white list” of countries with advance approval of appropriately similar statutory tax rates to the parent jurisdiction. US CFC rules include numerous statutory exemptions including: de minimis income thresholds, same-country income exemptions, and a high-taxed income exemption. Temporary exceptions are also available for certain active financing income and certain income generated from an underlying active business in another CFC. Definition of
CFC Income Domestic legislation should take a risk-based approach to identify types of income with the greatest potential for BEPS.  The CFC rules should include a definition of CFC income that reflects this BEPS risk from the parent jurisdiction perspective.  Must capture “cash box” income and should include elements of a substance-based analysis.  Suggestion for a potential to focus on excess profits analysis. CFC income defined through domestic law provisions focused on passive-type income.  Subject to various exceptions, the following categories of CFC income are currently taxed to US shareholders as subpart F income, including but not limited to:  “Foreign base company income,” which covers certain dividends interest, rents, royalties, gains and notional principal contract income; income from certain sales involving related parties; income from certain services performed outside the CFC’s country of incorporation, for or on behalf of related parties; and certain oil related income. Computation of Income Parent jurisdiction CFC rules should control the computation of CFC income.  To the extent permitted, loss offset provisions can apply only on a CFC-by-CFC basis or CFCs in same country. US CFC rules provide mechanical guidance on computation of CFC income which includes allowance for deductions.  The rules also provide certain rules relating to qualified deficits of a CFC and chain deficits of CFCs in same country relating to certain types of income. Attribution of Income A five-step process has been developed for the process of attribution of income tied to control and is calculated by reference to ownership percentage and period of ownership. Control and ownership percentage and period tests apply in determining amount of CFC income subject to current taxation.
  Prevention and Elimination of Double Taxation CFC rules should not result in double taxation.  Recommendations include application of a foreign tax credit against CFC income as well as potential for dividend and capital gain exemptions for previously taxed income. US international tax rules contain a complex foreign tax credit system to allow for relief from double taxation.  US CFC income previously subject to taxation is exempt from secondary taxation.
 
BDO Insights It is worth noting that the final version of the Report supersedes the discussion draft issued in April 2015. Additional recommendations have been made in response to gaining consensus between jurisdictions with regards to a worldwide and territorial system of taxation.  Significant concerns were raised after the release of the April discussion draft on the need to address situations where double taxation could result, as well as how to manage administrative complexity.  Moreover, there were questions raised as to whether any global action was needed on CFC rules in light of the BEPS recommendations to be issued on the other action points.  While the Report recognizes these comments, multinational companies must still address the practical problems that may arise in the administration of the granular details of each “building block.”
 
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 Alert - October 2015

Wed, 10/14/2015 - 12:00am
Organization for Economic Cooperation and Development (OECD) Issues Final Report on Base Erosion and Profit Shifting (BEPS) Action Plan 6, Inappropriate Use of Tax Treaties
Download PDF Version

The Organization 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 OECD released its final reports for the BEPS Action Plan.  This Alert discusses “BEPS Action 6:  Prevent Treaty Abuse,” which addresses the inappropriate use of tax treaty benefits.
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.  One of the most important BEPS concerns, treaty abuse and treaty shopping, is addressed by Action 6 of the BEPS Action Plan.

In discussing treaty shopping, the OECD October 2015 Report (“Report”) observes that multinational companies have engaged in treaty shopping and other treaty abuse strategies in order to undermine tax sovereignty by claiming treaty benefits in situations where such benefits were not intended, thereby depriving countries of tax revenues.  The Report does note that contracting States have agreed to include some form of anti-abuse provisions in their tax treaties, including minimum standards to counter potential treaty shopping.  The Report does, however, recognize that some degree of flexibility is needed in the implementation of such minimum standards, as these provisions need to take into account each country’s specific laws and to the unique circumstances involved in the negotiation of bilateral conventions.

The Report makes the following recommendations to address treaty shopping:
 
  • Providing clear statements in tax treaties that the State(s) intended to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.
  • Including in the OECD Model Tax Convention a specific anti-abuse rule, i.e., a limitation-of-benefits (“LOB”) rule that limits the ability to claim treaty benefits to entities that meet certain conditions.These conditions, which are based on the legal nature, ownership structure, and general activities of the entity, seek to ensure that there is a sufficient link between the entity and its State of residence.Such LOB provisions are currently found in treaties concluded by a few countries (such as the United States) and have proved effective in preventing many treaty shopping strategies.
  • Adding to the OECD Model Tax Convention a more general anti-abuse rule in order to address other forms of treaty abuse, including treaty shopping that would not be covered by the more specific rule above.Such a general anti-abuse rule would be based on the principal purpose of transactions or arrangements (the “principal purpose test” or “PPT” rule).Under such a rule, if one of the principal purposes of transactions or arrangements is to obtain treaty benefits, such benefits would be denied, unless it is established that granting these benefits would be in accordance with the object and purpose of the provisions of the treaty.

The Report does recognize that both the LOB and PPT rules have strengths and weaknesses and may not be appropriate for – or in accordance with – the treaty policy of all countries.  Moreover, the domestic law of some countries may include provisions that would make it unnecessary to combine the two rules in order to prevent treaty shopping.

Further, the Report provides that, given the risk to revenues posed by treaty shopping, countries have committed to ensuring a minimum level of protection against treaty shopping (the “minimum standard”).  That commitment will require countries to include in their tax treaties an express statement of intent that the treaty at issue is intended to eliminate double taxation – without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including treaty shopping arrangements.  The Report states that countries will implement this minimum standard by including in their treaties either: (1) the combined approach of a LOB and PPT rule, (2) the PPT rule alone, or (3) the LOB rule supplemented by a mechanism that would deal specifically with conduit financing arrangements not already dealt with in tax treaties.

The Report also contains additional rules to be included in tax treaties so to address other forms of treaty abuse. These targeted rules cover (1) certain dividend transfer transactions that are intended to artificially lower withholding taxes payable on dividends, (2) transactions that circumvent the application of the treaty rule that allows source taxation of shares of companies that derive their value primarily from immovable property, (3) situations where an entity is resident of two Contracting States, and (4) situations where the State of residence exempts the income of permanent establishments situated in third States and where shares, debt-claims, rights, or property are transferred to permanent establishments set up in countries that do not tax such income or offer preferential treatment to that income.

In addition, the Report recognizes the need for domestic anti-abuse rules and addresses certain issues relating to the interaction of domestic anti-abuse rules with treaties.

The final version of the Report supersedes the interim version release in September 2014 and contains a number of changes to those rules proposed in the earlier version.  The Report recognizes that additional work will be needed in order to fully consider treaty proposals recently released by the United States concerning the LOB rule and other provisions included in the report.  The Report further notes that, because the United States does not anticipate finalizing its new model tax treaty until end of 2015, the relevant provisions included in the Report will need further study after release of the new U.S. model tax treaty.  The Report is, therefore, expected to be finalized in early 2016.  An examination of the issues related to the treaty entitlement of certain types of investment funds will also continue after in late 2015 with a similar deadline.      
    BDO Insights Multinational companies often rely on tax treaties to reduce their global tax burden.  Given the approach in Action Plan 6, these companies must carefully evaluate their current legal and tax structures and the ability to claim treaty benefits with respect to countries that adopt these recommendations.
 
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 - October 2015

Mon, 10/12/2015 - 12:00am
As Identity Theft Grows, IRS and Practitioners React
The volume and magnitude of identity theft incidents have grown to an alarming extent. Last year, more than 9.9 million Americans were victims of identity theft, a crime that cost them roughly $5 billion. Tax-related identity theft crimes have also risen dramatically. TIGTA reports that 2,416,773 taxpayers were affected by identity theft in 2013, nearly double the number of victims in 2012, nearly quadruple the number in 2011, and nearly ten times the number in 2010. Predictions say the number of victims will again show an increase when 2014 and 2015 tax-year return statistics come in, even though the IRS and practitioners have been reacting more aggressively to stem the tide.
  Download

State and Local Tax Alert - October 2015

Mon, 10/12/2015 - 12:00am
North Carolina Enacts Related Party Interest Addback, Phases in Single Sales Factor Apportionment, and Imposes Sales Tax on Repair, Maintenance, and Installation Services Download PDF Version
  Summary On September 18, 2015, North Carolina Governor Pat McCrory signed into law H.B. 97, 2015-2016 Session (“H.B. 97”), which, for Corporation Income Tax purposes, includes a related party interest addback provision, implements the phase-in of single factor apportionment, imposes a market-based sourcing informational reporting requirement, and reduces the Corporation Income Tax rate to 4 percent.  In addition, H.B. 97 modifies the Franchise Tax base and increases the minimum Franchise Tax to $200 and the maximum Franchise Tax on holding companies to $200,000.  Lastly, H.B. 97 imposes sales and use tax on repair, maintenance, and installation services, and it makes changes to the Individual Income Tax standard deductions, itemized deductions, and tax rate.
  Details Corporation Income Tax

Related Party Interest Addback.  Effective for taxable years beginning on or after January 1, 2016, North Carolina requires an addback to the federal taxable income starting point for net interest expense to a “related member” to the extent it exceeds 30 percent of the taxpayer’s adjusted taxable income.  However, North Carolina allows a deduction for 100 percent of net interest expense to a related member if the related member:
 
  • Is subject to North Carolina Corporation Income Tax;
  • Pays a net income or gross receipts tax to another state with respect to the interest income;
  • Is organized under the laws of a foreign country that has an income tax treaty with the U.S. and the country taxes interest income at a rate that at least equals the Corporation Income Tax rate; or
  • Is a bank.

For these purposes, North Carolina adopts the definition of “related member” used for purposes of the current royalty expense addback provision.  

Single Sales Factor Phase-In.  For taxable years beginning in 2016, the sales factor of the current three factor property, payroll, and sales apportionment fraction is triple-weighted.  Currently, the sales factor is double-weighted.  For taxable years beginning in 2017, the sales factor is quadruple-weighted.  Starting with taxable years beginning in 2018, North Carolina adopts single sales factor apportionment.  This provision also applies to Franchise Tax.

Market-Based Sourcing Informational Reporting.   While the new law does not modify the current sales sourcing provisions, a taxpayer that has more than $10 million in apportionable income must file an information return showing the calculation of the 2014 apportionment factor using market-based sourcing.  See the following table for sales sourcing under this provision.
  Receipt From... Source to North Carolina If... … Sale, rental, lease or license of real property … To the extent property located in North Carolina … Rental, lease or license of tangible personal property … To the extent property located in North Carolina … Sale of service … If delivered to a location in North Carolina … Rented, leased or licensed intangible property  … To the extent property is used in North Carolina … Sale of intangible property - contract right, government license or similar intangible that authorizes the holder to conduct a business activity in a specific geographic area … The geographic area includes all or part of North Carolina … Sale of intangible property - sales contingent on productivity, use or disposition of the intangible property … Treat as rented, leased or licensed intangible property … Sale of intangible property - other … Exclude from numerator and denominator of sales factor … Exclude from numerator and denominator of sales factor
The information return is due at the same time as the 2015 Corporation Income Tax return.  A $5,000 penalty applies for failure to timely file this return (subject to reduction or waiver at the discretion of the Department of Revenue).

Rate Reductions.  Effective for taxable years beginning on or after January 1, 2016, North Carolina reduces its Corporation Income Tax Rate to 4 percent from 5 percent.  The rate reduction is due to North Carolina meeting its state revenue target set by a 2013 law.  If North Carolina meets the $29,975,000,000 revenue target in this new law for a fiscal year, the rate must be reduced to 3 percent for the taxable year that begins on the following January.

Franchise Tax

Tax Base Changes.  For taxes due on or after January 1, 2017, the measure of the tax, which is currently based on capital stock, surplus and undivided profits, is instead based on net worth.  Net worth for these purposes is a taxpayer’s total assets (determined without regard to the deduction for accumulated depreciation, depletion or amortization), less total liabilities, the difference of which is subject to the following adjustments:
  • A deduction for accumulated depreciation, depletion and amortization as determined for federal income tax purposes;
  • An addition for indebtedness owed to a parent, subsidiary or affiliate corporation, or a non-corporate entity of which a corporation or affiliated group of corporations owns, directly or indirectly, more than 50 percent of the capital interests (subject to a proportional deduction if the creditor corporation borrowed capital from a source other than a parent, subsidiary or affiliate corporation);
  • A deduction for indebtedness owed to it by a parent, subsidiary or affiliated corporation subject to the Franchise Tax to the extent it has been added by the debtor corporation; and
  • A deduction for the cost of treasury stock.

Also for taxes due on or after January 1, 2017, in addition to certain other deductions, North Carolina no longer allows the deduction from the investment in North Carolina tangible property measure of the tax for debts existing for North Carolina real estate.

Minimum and Maximum Tax Increases.  For taxes due on or after January 1, 2017, the minimum tax increases from $35 to $200.  In addition, the maximum tax that may be imposed on a holding company in the event the net worth measure of the tax applies (i.e., and not the appraised value of or investment in North Carolina tangible property measure) increases from $75,000 to $150,000.

Sales and Use Tax

Effective March 1, 2016, North Carolina expands the sales and use tax base to include the sales price or gross receipts derived from repair, maintenance, and installation services, unless purchased for resale.  For these purposes, repair, maintenance, and installation services include services related to:
  • Keeping tangible personal property in working order;
  • Restoring tangible personal property to working order;
  • Troubleshooting the source of a problem for the purpose of determining what is needed to restore tangible property to working order; and
  • Installing tangible personal property (but not tangible personal property installed by a real property contractor pursuant to a real property contract).

Also effective March 1, 2016, North Carolina excludes from the application of sales tax: (i) a person that operates solely as a real property contractor; and (ii) a person whose only business activity is providing repair, maintenance, and installation services, and who does not derive the majority of its revenue from retailing tangible personal property, digital property, or services to consumers.

Individual Income Tax

Effective for taxable years beginning on or after January 1, 2016, the individual income tax standard deduction amounts are increased slightly and, for purposes of calculating itemized deductions, North Carolina allows a deduction for medical and dental expenses equal to the deduction taken for federal income tax purposes under I.R.C. § 213.  In addition, effective for taxable years beginning on or after January 1, 2015, the individual income tax rate is reduced to 5.499 percent from 5.75 percent.
  BDO Insights
  • The phase in of single sales factor apportionment and the 1 percent rate reduction under H.B. 97 reflects North Carolina’s desire to create a more favorable income tax environment for multistate corporations headquartered or with significant operations in the state.It would be unfortunate, however, if these same changes impede North Carolina from meeting the revenue goal which, if met, would further reduce the Corporation Income Tax rate.
  • Taxpayers that have not historically charged sales tax on repair, maintenance and installation services taxable under H.B. 97 should implement procedures to ensure the collection and remittance of sales and use tax on such services.
  • As drafted, the enactment of the Corporation Income Tax (except for the 4-percent rate, which, as noted, was enacted under a separate 2013 law), Franchise Tax and Individual Income Tax changes under H.B. 97 is pending the ratification of H.B. 117, 2015-2015 Regular Session and H.B. 943, 2015-2016 Regular Session prior to January 1, 2016.H.B. 117 and H.B. 943 were ratified on September 24, 2015, and September 30, 2015, respectively.Thus, putting aside any unforeseen circumstances, H.B. 97 should be enacted as planned.
 


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

BDO Indirect Tax News - October 2015

Wed, 10/07/2015 - 12:00am
The latest edition of BDO International's Indirect Tax News covers current global developments in relation to indirect tax, including Australia’s “Goods and Services Tax” on tangible and intangible goods, the Court of Justice of the European Union (CJEU) judgment in support of the recovery of VAT on corporate finance deals and other holding company costs, and more.
  Download

Tax Alert - October 2015

Wed, 10/07/2015 - 12:00am
Could You Be a Victim of Tax Identity Theft?

Download PDF Version

Recently, the IRS has investigated more vigorously identity theft schemes which steal taxpayers’ refunds. These acts of fraud can not only significantly delay an individual’s refund, but they can cause a great deal of time and stress to resolve. This article describes how tax identity theft typically works, information on how to protect yourself and how to proceed if you become a victim of identity theft.
How Tax Identity Theft Works A typical tax identity theft involves someone who uses another taxpayer’s identity and Social Security number to deceitfully file a tax return and receive a refund from the IRS. The victim is commonly apprised of the fraud only when he or she files a tax return and the IRS informs them that the return has been rejected because a tax return was already filed for the same year under that Social Security number. The refund is then delayed until the IRS can determine who the valid taxpayer is.
Steps to Take to Protect Yourself From Tax Identity Fraud There are a number of ways thieves can obtain your Social Security number to file a tax return:  hacking business or person computers, calling an individual under the guise of an official or business requesting confidential information or even stealing personal statements from a mailbox or trashcan. While there is no way to completely protect yourself from tax-related identity theft, there are some steps you can take to minimize your risk:
  • Be proactive by visiting the IRS website. This site has valuable information under the tab Taxpayer Guide to Identity Theft. It also reports the most current phishing and email schemes.
  • The IRS requests that you report suspicious online or emailed phishing scams to phishing@irs.gov. For phishing scams by phone, fax or mail, call 1-800-366-4484. You can also report IRS impersonation scams by filling out the Treasury Inspector General for Tax Administration form.
  • Remember that the IRS only uses the U.S. mail to contact taxpayers. It does not make contact by phone or use electronic communication or social media.
  • Shred any documents with personal identifying information.
  • Avoid divulging your personal information on the phone or through email.
  • Strengthen the security of your computers by using a variety of security programs.
  • Frequently change your online account passwords; every three months is the recommended frequency  
  • Thwart refund fraud by filing your tax return as early as possible.
  • Only provide your Social Security number to a business or medical provider if it is required.
  • Your Social Security card should always be kept in a secure place such as a safe deposit box or home safe.
  • Check your Social Security Administration earnings statement annually.
  • Check your credit report at least once a year for any suspicious activity.

What Actions to Take if Your Identity is Stolen If you are a victim of tax refund fraud, the IRS will contact you BY MAIL after it is verified that your return has been previously filed. They will provide identity confirmation via the Identity Certification Service (IDVerify) on IRS.gov or at a toll-free number provided. It is also advisable to prepare and submit an Identity Theft Affidavit on IRS Form 14039. In addition, make a report on the IRS Tax Fraud Hotline at 1-800-829-0433. Once your account has been resolved, the IRS will issue and mail to you an Identity Protection Personal Identification Number (IP PIN). This number will verify that you are legitimate when you file future tax returns and it will prevent the processing of fraudulent returns.

If you are the victim of an identity theft crime, file a complaint with the Federal Trade Commission (FTC). Also, contact your local police. Closely monitor your credit card accounts and contact one of the credit report companies (Equifax, Experian or TransUnion) to have a Fraud Alert placed on your account.

For questions related to matters discussed above, please contact Kelli Lewis.

International Tax Alert - October 2015

Tue, 10/06/2015 - 12:00am
Brazil Update - Tax Report on Tax Planning Strategies
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Date/Timing Effective date of new tax planning disclosure requirement delayed until Tax Authorities issue a Normative Instruction providing more details.
Affecting This requirement affects all Brazilian taxpayers that engage in certain transactions that result in some type of tax benefit (e.g., elimination, reduction, or deferral of taxes).
Background On July 22, 2015, the Brazilian government published Provisional Measure (“PM”) 685 which contains the rules with respect to the reporting of certain tax planning strategies.  In general, Provisional Measures are valid as of the date of the publication but require review by the Brazilian Congress within 120 days. If no further regulation is issued after this period, they lose their effect.
Details PM 685 requires taxpayers to submit a report by September 30 of each year that will disclose all relevant information on every individual transaction that was concluded in the prior year and that resulted in some type of tax benefit specifically those transactions that:
 
  • lacked any purpose other than tax savings;
  • were structured in an “unusual” manner because either the form of the transaction was abusive or structured to avoid the form of a typical contract; or
  • involved activities that will be specifically listed in regulations to be issued by the Brazilian tax authorities.

The report will be reviewed by the tax authorities. If the tax authorities conclude that the transaction or transactions should be disregarded, the taxpayer will be notified of their intention to collect, within 30 days, the amount of taxes not paid, including interest for late payment, but without any penalties. Furthermore, the failure to submit the report will be considered a willful omission resulting in the application of interest and an increased penalty of 150%, as well as potential criminal consequences.
How BDO Can Help All Brazilian taxpayers should carefully review the tax consequences of pending transactions and determine whether the transaction must be disclosed. BDO can review and consult with taxpayers to assist them to adequately decide and comply with this new requirement.   
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, Washington National Tax Office

  Monika Loving
Partner  

Fabrizia Hadlow
Senior Manager

  Brad Rode
Partner   Chip Morgan
Partner

State and Local Tax Alert - October 2015

Mon, 10/05/2015 - 12:00am
New Hampshire Reduces Corporate Tax Rates, Establishes Tax Amnesty, Formalizes Voluntary Disclosure Program, and Authorizes the Department to Participate in MTC Audits
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Summary On September 16, 2015, New Hampshire Governor Maggie Hassan signed into law Senate Bill 9, 2015 Session (“S.B. 9”) and, on the same day, the New Hampshire legislature overrode the Governor’s veto of H.B. 2, 2015 Session (“H.B. 2”), thus, making it law as well.  Together, S.B. 9 and H.B. 2 reduce the Business Profits Tax and the Business Enterprise Tax rates, establish a tax amnesty which begins December 1, 2015, formalize New Hampshire’s voluntary disclosure program, make certain penalties mandatory, and authorize the Department of Revenue Administration (the “Department”) to participate in the Joint Audit Program of the Multistate Tax Commission (“MTC”).
                                                     Details Business Tax Rate Reductions

For taxable periods ending on or after December 31, 2016, S.B. 9 reduces the Business Profits Tax rate from 8.5 percent to 8.2 percent and reduces the Business Enterprise Tax rate from 0.75 percent to 0.72 percent.  If the amount of combined unrestricted general and education trust fund revenue collected for the biennium ending June 30, 2017, meets the threshold prescribed in S.B. 9, the rates are further reduced to 7.9% and 0.675%, respectively, for taxable periods ending on or after December 31, 2018.

Tax Amnesty and Voluntary Disclosure

H.B. 2 establishes a tax amnesty program and formalizes New Hampshire’s voluntary disclosure program.  Under H.B. 2, the amnesty program runs from December 1, 2015, through February 15, 2016.  A participating taxpayer qualifies for a waiver of all penalties and 50 percent of interest for taxes due (even if previously assessed) but unpaid before February 16, 2016.

Effective July 1, 2015, the voluntary disclosure program authorized under H.B. 2 allows the Department to enter into an agreement with a self-disclosing taxpayer that has not been contacted by the Department for waiver of penalties and the settlement and compromise of taxes and interest due.  Taxpayer contact under this provision includes instances where the Department contacts the taxpayer directly and cases where the Department contacts an affiliate of the taxpayer or a member of its unitary business group.
 
Mandatory Penalties

Effective after February 2016, H.B. 2 removes the authority and/or jurisdiction to waive, abate, or reduce penalties with respect to taxes that were due before December 1, 2015, from the Department, any administrative tribunal, and New Hampshire state courts.
 
MTC Audits

Effective as of September 16, 2015, H.B. 2 authorizes the Department to contract with the MTC for participation in multistate audits performed by the MTC on behalf of its member states and other contracting states.
                                                     BDO Insights
  • The mandatory penalty provision under H.B. 2 effectively penalizes an eligible taxpayer that does not participate in the amnesty program.This is because, after February 2016, the new law removes the authority of the Department to waive penalties with respect to taxes due before December 1, 2015, that it must waive under that program.
  • More auditors equates to a greater capacity to audit and, presumably, an increased probability of a taxpayer being selected for an audit.Thus, if the Department exercises its grant of authority under H.B. 2 and enters into a contract with the MTC for participation in multistate audits, the voluntary disclosure program formalized under H.B. 2 becomes even more significant to a taxpayer with undisclosed liabilities.
 


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 - October 2015

Mon, 10/05/2015 - 12:00am
Her Majesty’s Revenue & Customs Issues Revenue and Customs Brief in Response to the United Kingdom’s Supreme Court Decision in the Anson Case  
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Summary On September 25, 2015, the United Kingdom tax authority, Her Majesty’s Revenue & Customs (“HMRC”), issued Revenue & Customs Brief 15 (“Brief 15”) in response to the United Kingdom Supreme Court’s (the “Court”) decision in the case of Anson (Appellant) v. Commissioners for Her Majesty’s Revenue & Customs (Respondent), [2015] UKSC 44.  The case concerned the United Kingdom tax treatment of a specific Delaware limited liability company (“LLC”) of which Mr. Anson was a member.  The Court found that the income of the LLC accrued to the members as it arose, and thus United States tax suffered on that income should be available for double tax relief in the United Kingdom. 

The decision that the income accrued to the members of the LLC as it arose was contrary to HMRC’s long-standing practice of treating LLCs as opaque entities. It therefore led to uncertainty over how LLCs should be treated more generally for United Kingdom tax purposes going forward. 
 
Brief 15 confirms that HMRC will not seek to challenge the tax treatment of existing LLCs and will consider claims for double tax relief from individuals in a similar position to Mr. Anson on a case-by-case basis.    
Background and Details The United Kingdom tax treatment of LLCs has often caused uncertainty for United Kingdom taxpayers, in particular, whether they should be regarded as companies with issued ordinary share capital, which is important for U.K. corporate tax grouping purposes. 
 
HMRC’s long standing view is that LLCs should be regarded as opaque entities where a Delaware LLC issues membership certificates, and other factors relating to the company (e.g. the terms of the LLC members agreement), suggest that the entity has share capital. The Court in the Anson case found that income arising in the LLC in question should be regarded as accruing directly to the members rather than belonging to the LLC itself.  While this was good news for United Kingdom resident individuals wishing to claim double tax relief for the United States taxes suffered on LLC income also taxable in the United Kingdom, it introduced uncertainty over how LLCs within corporate groups should be treated.  See the International Tax Alert - July 2015 for more details.

HMRC confirmed in Brief 15 that, in their view, the Court’s judgment in the Anson case is fact specific rather than having wider application.   As such, where LLCs have been treated as companies within a group structure in the past, HMRC will continue to treat them as such, and where an LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat it as carrying on a trade or business.

While Brief 15 has taken away the uncertainty for groups with existing LLCs, there is no specific guidance as to how HMRC will treat new, or newly acquired, LLCs.  Groups should therefore continue to seek advice where new LLCs are brought into the group.

For individuals in a similar position to Mr. Anson who may wish to rely on the case to claim double tax relief on LLC income, HMRC have said that they will consider the decision on a case-by-case basis.

For questions related to matters discussed above, please contact Ingrid Gardner.
 

State and Local Tax Alert - September 2015

Tue, 09/29/2015 - 12:00am
Texas Administrative Law Judge Grants Taxpayer’s Use of a Margins Tax Business Loss Carryforward Credit Claimed on a Late Filed Return Download PDF Version
Summary On July 17, 2015, a Texas Administrative Law Judge (“ALJ”) issued a decision in which the ALJ recommended a refund to a taxpayer (“Taxpayer”) with respect to a business loss carryforward credit preserved and elected in 2008 and claimed on a 2010 return.1 The Texas Comptroller of Public Accounts, Taxing Division had denied Taxpayer’s use of the credit because the 2010 return was filed late.  It appears that the Comptroller may be notifying similarly situated taxpayers that they will also be issued refunds due to the ALJ’s decision.
                                                     Details Background

For Franchise Tax returns due on or after January 1, 2008, Texas replaced the “old” Taxable Capital/Earned Surplus Tax, with the current Margins Tax.  Texas allows a credit against the Margins Tax, which is based on unused business loss carryforwards a taxpayer generated under the Earned Surplus Tax.2 Under the statute, a taxpayer must provide written notification to the Comptroller of its intent to take the credit on its first return due after January 1, 2008 in order to claim the credit.3 A taxpayer may thereafter elect to claim the credit on any return due after January 1, 2008 and claim it for up to twenty (20) privilege periods, unless and until the taxpayer revokes the credit or the statute under which the credit is granted expires, whichever first occurs.4 Tex. Tax Code § 171.111(a) allows a taxpayer to make only one election to claim the credit.5 A Comptroller regulation, however, requires a taxpayer to make the election on each timely filed return due on or after January 1, 2008.6
 
Facts

Taxpayer, a telecommunications service provider that filed a Texas combined Franchise Tax return, filed a form 05-172 (Franchise Tax Preservation of Temporary Credit) on February 6, 2008 for each of six affiliates to notify the Comptroller of the intent of the affiliates to preserve and take the credit for unused business loss carryforwards.  In addition, on May 9, 2008, Taxpayer timely filed an extension of time to file its 2008 return (i.e., its first return due after January 1, 2008), along with the requisite affiliate list, on which it blackened a circle on the form indicating that it would be claiming the credit on its 2008 return.  Taxpayer claimed the credit on its timely filed 2008 return and, as a result, the Tax Division issued a check to refund an overpayment of tax it made with its extension request.

Taxpayer timely filed extensions of time to file its 2009 return, which was not at issue in this matter, and its 2010 return, and noted on each election its 2008 preservation and election to claim the credit.  With respect to its 2010 return, the Tax Division granted Taxpayer an extension of time to file its return until August 16, 2010.  Taxpayer did not request to extend the due date of its 2010 return to November 15, 2010.  Thus, Taxpayer’s 2010 return, on which it claimed the credit, and which was filed on October 20, 2010, was filed late.

Based upon the language in the regulation, the Tax Division denied Taxpayer’s use of the credit claimed on its 2010 return because the return was not timely filed, and issued an assessment for unpaid tax, plus penalties and interest, due to the disallowance of the credit.  In addition, the Tax Division issued a letter stating that Taxpayer could not carry over the credit to subsequent taxable years.  Taxpayer paid the assessed amount under protest and filed a refund claim claiming that the credit taken on its 2010 return should be allowed.
 
Holding and Reasoning

The ALJ held that Taxpayer properly preserved the credit in 2008 and recommended that the credit Taxpayer claimed on its 2010 return credit should be granted.  The ALJ reasoned that: (i) the unambiguous language of the statute limits a taxpayer to one election; (ii) Taxpayer met the preservation and election requirements under the statute when it filed the forms 05-172 for each of the six affiliates and the 2008 extension; and (iii) there is no provision in the statute that allows revocation of the credit if it is claimed on a late filed return.

The ALJ further reasoned that its interpretation of Tex. Tax Code § 171.111(a) is consistent with the Comptroller’s interpretation of the “old” version of Tex. Tax Code § 171.111(a), which granted a similar credit in relation to a 1991 change in the law resulting in the adoption of the Earned Surplus Tax.  The language in the old version of Tex. Tax Code § 171.111(a) is nearly identical to the language in the current version, and, with respect to the old version, the Comptroller issued a Earned Surplus Tax regulation and a Taxability Memorandum in which taxpayers are specifically instructed that the election is a one-time election and not an annual election.7

The ALJ rejected the Tax Division’s argument that the language in Tex. Tax Code § 171.111(c), which merely allows the Comptroller to request that a taxpayer submit with its return information related to the amount of the credit, also allows the Comptroller to impose a requirement that a taxpayer make an annual election to take the credit.8 The ALJ reasoned that a plain reading of Tex. Tax Code § 171.111(c) merely authorizes the Comptroller to request information related to the amount of the credit and to construe Tex. Tax Code § 171.111(c) to allow the Comptroller to impose an annual election requirement would put it in “irreconcilable conflict” with a plain reading of Tex. Tax Code § 171.111(a).
 
Similarly Situated Taxpayers

Based upon correspondence BDO had received in relation to a client, it appears that the Comptroller may be notifying similarly situated taxpayers that it has reversed its policy that each taxable year’s return must be timely filed in order to claim the credit for that year and that it will automatically issue refunds with respect to taxable periods open under the four-year statute of limitations.
                                                     BDO Insights
  • While it appears that the Comptroller may be reviewing its records for similarly situated taxpayers and automatically issuing refunds, rather than wait for correspondence from the Comptroller and risk the lapse of the statute of limitations with respect to a taxable year, taxpayers should consider conducting their own review and taking the appropriate action.
  • The decision may also serve as a reminder to taxpayers that a regulation may not impose requirements or limitations without statutory or other authorization.
 


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
1 Texas Comptroller of Public Accounts, Hearing No. 110,191 (July 17, 2015).
2 Tex. Tax Code § 171.111(a).
3 Tex. Tax Code § 171.111(a) (“On the first report originally due under this chapter on or after January 1, 2008, a taxable entity must notify the comptroller in writing of its intent to take a credit in an amount allowed by this section on the tax due on taxable margin.”)
4 Tex. Tax Code § 171.111(a) (“The taxable entity may thereafter elect to claim the credit for the current year and future year at or before the original due date of any report due after January 1, 2008, until the taxable entity revokes the election or this section expires, whichever is earlier.  A taxable entity may claim the credit for not more than 20 consecutive privilege periods beginning with the first report originally due under this chapter on or after January 1, 2008.”).
5 Tex. Tax Code § 171.111(a) (“A taxable entity may make only one election under this section and the election may not be conveyed, assigned, or transferred to another entity.”).
6 34 Tex. Amin. Code § 3.594(e) (“The election to claim the credit shall be made on each report originally due on or after January 1, 2008 and before September 1, 2027.  A taxable entity elects the credit by: properly taking the credit on a report filed on or before the original due date; or electing the credit on a timely filed extension request and properly taking the credit on the report filed on or before the extended due date of the report.”).
7 34 Tex. Admin. Code § 3.559(d)(1); Taxability Memorandum, STAR Accession No. 9109L113A09 (September 25, 1991).
8 Tex. Tax Code § 171.111(c) (“The comptroller may request that the taxable entity submit, with each annual report in which the taxable entity is eligible to take a credit, information relating to the amount determined under Subsection (b)(1). The taxable entity shall submit in the form and content the comptroller requires any information relating to the amount determined under Subsection (b)(1) or any other matter relevant to the computation of the credit for which the taxable entity is eligible.”).
 
 

State and Local Tax Alert - September 2015

Tue, 09/29/2015 - 12:00am
Washington Enacts Legislation to Improve Administration of Unclaimed Property
Download the PDF Version
Summary On July 1, 2015, Washington Governor Jay Inslee signed into law Senate Bill No. 6057, 64th Legislature, 3rd Special Session (Wa. 2015) (“S.B. 6057”).  S.B. 6057 incorporates important changes that are intended to improve compliance with and the administration of Washington’s unclaimed property laws.  Specifically, S.B. 6057 establishes an unclaimed property amnesty program, boosts the penalty provisions, clarifies the reporting requirements with respect to gift certificates, mandates electronic reporting and payment, and creates a refund and appeal process.
                                                     Details Unclaimed Property Amnesty Program

The amnesty program established under S.B. 6057 provides waiver of penalties and interest.  In order to qualify for amnesty and the related penalty and interest waiver, the holder must, before November 1, 2016: (i) submit a completed an application for a penalty and interest waiver; (ii) file a report that includes all property for which penalty and interest waiver is requested; and (iii) pay and deliver all property identified on the report.  Penalty and interest waiver does not, however, apply to amounts or property that have been paid, delivered, or reported to the Department of Revenue prior to July 1, 2015, or any amounts included in an assessment or identified through an investigation or examination.

Revised Penalty Provisions

Effective, July 1, 2016, S.B. 6057 significantly revises Washington’s unclaimed property penalty provisions.1  These penalties are cumulative in nature.  See the following chart for the revised penalties.
  Type Amount … Failure to file, report, pay or deliver amounts or property when due … 10% of the amount unpaid and the value of property not delivered … Examination resulting in an assessment for amounts unpaid or property not delivered … 10% of the amount unpaid and the value of property not delivered … Late payment of amounts paid or property due under
an assessment … 5% of the amount unpaid and the value of property not delivered … Willful failure to file a report or to provide written notice to apparent owners … $100/day report is withheld or notice not sent, not to exceed $5,000 … Failure to file or pay electronically … 5% of the amount payable and value of property deliverable under the report
Currently, penalties are limited to a willful failure to file a report, pay or deliver property penalty and a willful refusal after written demand penalty.
 
Gift Certificates

S.B. 6057 clarifies that gift certificates presumed abandoned are not required to be reported as unclaimed property.
 
Electronic Reporting and Payment

Effective July 1, 2016, S.B. 6057 requires holders to file reports and remit funds electronically.
 
Refund and Appeals Process

Effective July 1, 2015, S.B. 6057 requires the Department to refund any amount, interest or penalty paid in excess of that which is properly due, and which it discovers upon examination of a holder’s return or records.  In addition, S.B. 6057 establishes procedures that allow a holder to request a refund of any amount, interest or penalty paid in excess of that which is properly due.  However, the Department may not refund or return property more than 6 years after the end of the calendar year in which the payment or property delivery occurred, unless the Department receives an application for refund before the expiration of the 6 years limitation period.  The Department must add interest to the amount of any refund granted, computed from the date the excess payment was received by the Department until the date the refund is issued.

Effective July 1, 2015, S.B. 6057 also establishes procedures that allow a holder to appeal the denial of a refund or an assessment.  An appeal is timely if received by the Department before the due date of the assessment or, in the case of a refund denial, 30 days after the Department rejects it.  The Department must conduct its review in accordance with the provisions of Sections 34.05.410 through 34.05.494 of the Revised Code of Washington.  A decision of the Department is subject to judicial review under Sections 34.05.510 through 34.05.598 of the Revised Code of Washington.

Also effective July 1, 2015, S.B. 6057 authorizes a holder feeling aggrieved by a payment or delivery of property to appeal to Thurston County Superior Court.  An appeal must be made within the 6 years statute for filing an application for refund or within 30 days following a refund denial, whichever is later.  This appeals process is not available to a holder that has failed to keep and preserve records as required under Washington’s record retention policy.
                                                     BDO Insights
  • The risks associated with an unclaimed property audit exist until a holder is in compliance with unclaimed property laws.Amnesty and voluntary disclosure offers a holder the opportunity to come into compliance with the significant benefit of penalty and interest waiver.
  • Washington has indicated that it will continue to conduct unclaimed property audits during the amnesty period and has hired additional third party auditors to assist in this process.It is unclear at this time whether Washington will continue to offer its current voluntary disclosure program once the amnesty program expires, which potentially limits the window of time for achieving compliance under favorable terms.This underscores the significance of amnesty or voluntary disclosure.
  • Under the new penalty provisions, Washington may impose penalties for failure to report or pay; whereas, currently Washington may not.Thus, the potential benefits of amnesty or a voluntary disclosure become even greater upon the effective date of Washington’s new penalty provisions.
 


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
1 In the event that Department of Revenue is unable to “efficiently and effectively” implement these penalty provisions, they take effect July 1, 2017 instead. 

International Tax Newsletter - September 2015

Tue, 09/29/2015 - 12:00am
The September edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, including the following topics:
 
  • New Mode of Declaration Upon Tax Payment Obligation Put into Force by Shenzhen Local Tax Bureau
  • Continuous Implementation of Preferential Tax Policies for Small and Micro Enterprises
  • Clarification on Offset of Input VAT Before a Taxpayer Is Accredited or Registered as a General VAT Taxpayer
  Download

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