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Federal Tax Alert - September 2015

Fri, 09/04/2015 - 12:00am
Section 199 Temporary and Proposed Regulations Issued
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On August 27, 2015, the Federal Register published IRS temporary regulations (T.D. 9731) related to how to calculate Section 199’s W-2 wage limitation for short taxable years, and proposed regulations (REG-136459-09) related to qualified oil related activities, qualified film rules, Puerto Rico gross receipts, the term “manufactured, produced, grown, or extracted,” contract manufacturing arrangements, construction activities, cost of goods sold allocations, and agricultural and horticultural cooperatives.

The most significant sections of the proposed regulations eliminate the benefits-and-burdens test for activities performed under contract manufacturing arrangements and provide further guidance on what activities the IRS deems non-qualifying by clarifying the definition of “minor assembly.”
Background The Section 199 domestic production activities deduction was enacted in 2004 to incentivize a broad range of domestic production activities and to maintain and enhance job opportunities in the United States.

Under Section 199, an eligible taxpayer can compute a deduction for taxable years equal to the lesser of:
 
  • 9% of the taxpayer’s qualified production activities income (“QPAI”);
  • 9% of the taxpayer’s taxable income for the tax year; and
  • 50% of the taxpayer’s W-2 wages for such year that are properly allocable to domestic production gross receipts (“DPGR”).

Temporary Regulations: Allocation of W-2 Wages in Short Taxable Years and for Acquisitions and Dispositions Historically, determining W-2 wages for taxpayers with either a short taxable year or an acquisition or disposition has been challenging.

Prior to the temporary regulations, W-2 wages were deemed to be the amount paid by the taxpayer for employment of employees by that taxpayer during the calendar year ending within that taxable year.

In the case of a taxpayer’s short taxable year that does not include a calendar year that ends within that short taxable year—e.g., a taxable year starting June 1 and ending September 30—it was unclear before the new regulations what wages were to be allocated to that taxpayer. Moreover, if the answer were none, then that taxpayer’s deduction would be zero, because its W-2 wage limitation would have been zero.

The newly issued temporary regulations clarify that wages paid by a taxpayer during such a short taxable year to employees for employment by such taxpayer are treated as W-2 wages for that short taxable year.

In addition, and following the same logic, the regulations provide that W-2 wages paid during the calendar year to employees of an acquired or disposed-of trade or business are to be allocated between each taxpayer based on the period during which the employees of the acquired or disposed of trade or business were employed by the respective taxpayers.

The temporary regulations are effective for tax years beginning on or after August 27, 2015, expire on August 24, 2018, and may be relied on for earlier tax years still open under the statute of limitations.

BDO Observation: Fiscal year taxpayers who did not take a Section 199 deduction for a short taxable year which did not include a calendar year end may now consider amending prior year tax returns for any open years to claim the Section 199 deduction.
Proposed Regulations - Highlights The proposed regulations have potential implications specifically for the oil-and-gas, film, and construction industries. Two of the more general provisions, however—regarding the benefits-and-burdens test under contract manufacturing arrangements and the definition of “minor assembly”—are likely to have a broader impact.

Elimination of Benefits-and-Burdens Test
 
The proposed regulations would replace the benefits-and-burdens-of-ownership test under Treas. Reg. Sec. 1.199-3(f)(1). This test allows only one taxpayer that is a party to a contract manufacturing arrangement to claim the deduction, namely, the taxpayer that has the benefits and burdens of ownership of the qualified production property during the production period.

The IRS Large Business and International Division (“LB&I”) has attempted several times to provide guidance on the treatment of contract manufacturing arrangements. For example, LB&I’s most recent directive on this matter (LB&I-04-1013-008) allows parties to a contract manufacturing arrangement to designate, by signing a certification statement, which party may claim the deduction.

This guidance, however, has not eliminated the uncertainty as to which party has the benefits and burdens under a contract manufacturing arrangement. Taxpayers, therefore, have resorted to finding a reliable basis for their position based on recent court cases addressing issues such as whether legal title passes, which party bears the risk of loss during production, how the parties treat the transaction, and whether an equity interest was acquired.

In part to reduce the administrative burden involved in analyzing these and other factors, the proposed regulations provide that, if a qualified activity is performed under a contract, then the party that performs the activity is the taxpayer eligible to claim the deduction for that activity. By drastically simplifying the benefits-and-burdens test, reducing it to simply the “benefit” or “burden” of performing the activity involved, this provision essentially eliminates the benefits-and-burdens test altogether.

BDO Observation: The proposed regulations may impact some taxpayers’ decisions about where and how to do their manufacturing. Currently, companies that do not have internal manufacturing capabilities, but are still in the business of manufacturing or selling products have been able to outsource production domestically and still claim the deduction using contracts drafted in a manner so as to meet the benefits-and-burdens test. This not only provided a benefit to the taxpayer; it also fostered the spirit of the original intent of Section 199 by keeping manufacturing jobs in the United States.

Under the proposed regulations, taxpayers would not be able to do this. Some taxpayers, therefore, may be inclined to contract less with more expensive domestic manufacturers and more with less expensive non-U.S. manufacturers. On the positive side, the proposed regulations increase the opportunity many U.S. contract manufacturers have to claim the deduction.

“Minor Assembly”
 
The proposed regulations supplement the IRS position on what activities constitute “minor assembly.” Treas. Reg. Sec. 1.199-3(e)(1) provides that the term “MPGE” includes manufacturing, producing, growing, extracting, installing, developing, improving and creating qualified production property; making qualified production property out of scrap, salvage, or junk material as well as from new or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles. MPGE does not include packaging, repackaging, labeling, or minor assembly alone, without engaging in other MPGE activities. The LB&I issued a directive in March 2015 delineating six activities that fall outside the definition of “MPGE” in Treas. Reg. Sec. 1.199-3(e), and the proposed regulations add an example that provides some clarity on the definition of “minor assembly.”
 
In United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal 2013), the U.S. Tax Court decided in favor of the taxpayer, concluding that the taxpayer’s activity of preparing gift baskets by assembling third party-produced products was substantial assembly, akin to a manufacturing activity, and not solely packaging or repackaging. The proposed regulations would reverse this, providing an example of a taxpayer specifically engaged in assembling third party products into gift baskets and concluding that such activities do not amount to MPGE.
 
BDO Observation: The definition of “minor assembly” has historically been a topic of much debate and disagreement between taxpayers, the IRS, and the courts. The Treasury Department and the IRS candidly admit that they have found it difficult to identify an objective test that would be widely acceptable. Therefore, the government has requested comments on, among other things, how the term “minor assembly” should be defined.

The proposed regulations would be effective for tax years beginning on or after the date that they are published as final regulations in the Federal Register.
 
Questions and Contact:
 
BDO is here to help our clients and prospects navigate through the complexities of the newly issued temporary and proposed regulations. Please contact a member of our Section 199 national team with any questions or to discuss whether and how the new regulations may affect your business.
  Yuan Chou
Tax Senior Director   David Wong
R&D Principal   Chris Bard
R&D Practice Leader   David Kalman
R&D Manager   Travis Butler
Tax Senior Director   Jonathan Forman
R&D Principal   Sara Chun
R&D Manager    

International Tax Newsletter - August 2015

Wed, 08/26/2015 - 12:00am
The August edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, such as the adjustment or certain pre-tax deductions, further standardization of levying, and more. Articles include:
 
  • Clarification of Pre-tax Deduction of Education Expenses for Employees of High-tech Enterprises
  • Commence of Joint Reporting of Annual Investment Operation Information by Foreign Investment Enterprises in 2015
  • Adjustment of Certain Pre-tax Deductions and Exemption Standards of Individual Income Tax in Shenzhen
  • Release of Provision on Levying and Collection of Individual Income Tax on Electronic Red Envelopes
  • Further Standardization of Levying and Collection of Individual Income Tax of the Personnel Who Perform Cross-Province Construction Work in the Building and Installation Industry

 

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BDO Transfer Pricing Alert - August 2015

Wed, 08/26/2015 - 12:00am
The Tax Court Strikes Down Cost-Sharing Regulations’ Requirement to Share Stock-Based Compensation Costs
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  Summary In a partial summary judgment decision rendered on July 27, 2015, the United States Tax Court (“Tax Court”) struck down the 2003 amendment to the Internal Revenue Code (“IRC”) § 482 cost sharing regulations that require controlled entities entering into qualified cost-sharing agreements (“QCSAs”) to share stock-based compensation costs.  The decision, which was reviewed by the Tax Court, validates Altera Corporation’s (“Altera-US”) position in Altera Corp. v. Commissioner that the final regulations (“T.D. 9088”) violate the arm’s-length standard due to a lack of evidence that unrelated parties ever share such costs.1
  Background On October 20, 2003, the Internal Revenue Service (“Service”) published final regulations, T.D. 9088, which provided guidance on the treatment of stock-based compensation for the purpose of updating, clarifying, and improving regulatory guidance in the area of transfer pricing and the rules governing QCSA’s.  On the topic of cost-sharing, these regulations prescribed rules for measuring the costs associated with stock-based compensation.  T.D. 9088 was intended to align the rules of Treasury Regulation (“Treas. Reg.”) § 1.482-7, regarding QCSAs, with the commensurate-with-income standard and the arm's-length standard to the extent that the participants’ shares of income reasonably reflected the actual economic activity undertaken by each.

In 2005, the Tax Court rejected the Service’s treatment of employee stock options under the taxpayer’s cost-sharing arrangement with its subsidiaries in Xilinx Inc. et al. v. Commissioner.2 The Tax Court determined that the regulations applicable at the time did not allow the Service to require taxpayers to share the spread or grant date value relating to employee stock options under the cost-sharing agreement.  The Ninth Circuit supported the Tax Court’s decision that controlled entities entering into QCSAs were not required to share stock-based compensation costs because parties operating at arm’s-length would not do so.3
  Case Details Altera-US, a Delaware corporation, develops, manufactures, markets, and sells programmable logic devices (“PLDs”) and related hardware and software.  Altera-US is the parent company of Altera International, Inc. (“Altera-Cayman”), a subsidiary located in the Cayman Islands.  As part of a QCSA, Altera-US and Altera-Cayman entered into two agreements:  (i) a master technology license agreement (“Technology License Agreement”) and (ii) a technology research and development cost-sharing agreement (“R&D-CSA”).  The Technology License Agreement granted Altera-Cayman the right to license pre-existing intellectual property (“IP”) from Altera-US and allowed for the use and exploitation of this IP associated with the sale of PLDs outside of the U.S. and Canada.  Altera-Cayman paid royalties to Altera-US for the right to use this IP every year from 1997 to 2003.  After 2003, Altera-Cayman made the requisite payment to obtain a fully paid-up license to use the pre-existing IP in its territory. 

Under the R&D-CSA, Altera-US and Altera-Cayman agreed to combine their respective research and development (“R&D”) resources to further enhance the pre-existing IP and share in the costs and risks of the R&D activities conducted after May 23, 1997.  During the tax years 2004 through 2007, Altera-US granted stock-based compensation to its employees and did not share these costs with Altera-Cayman.  On audit, the  Service determined deficiencies in the calculation of the cost base to be shared by Altera-US and Altera-Cayman and made allocations pursuant to Treas. Reg. § 1.482-7(d)(2).  The taxpayer and the Service filed cross-motions for partial summary judgment. 

The case consolidates two separate deficiency notices and involves $80 million in adjustments to income for years 2004-2007 related to the grant of stock-based compensation by Altera-US.  The Service, at an oral argument, contended that IRC § 482 doesn’t require income to be allocated based solely on evidence of uncontrolled-party transactions, but rather on whether a transaction is priced at arm’s-length, and that such an evaluation could be made in any number of ways.  The Service maintained that T.D. 9088 regulations are governed by the commensurate-with-income standard of IRC § 482 and by requiring that stock-based compensation be shared among related parties, an “arm’s-length result” may be reached.  The Service asserted that unrelated parties entering into QCSAs to develop high-profit intangibles would share the costs of stock-based compensation if stock-based compensation was a significant element of compensation.  Altera-US contended that many QCSAs do not pertain to high-profit intangibles and that stock-based compensation is not a significant element of the compensation of taxpayers that enter into QCSAs. 

The Tax Court found that the final rule lacked factual basis because the Service failed to provide adequate evidence.  The Tax Court first noted that in its ruling of Xilinx the court, “…concluded that Congress never intended for the commensurate-with-income standard to supplant the arm’s length standard.” [4]  The Service failed to support its claims with any administrative record that showed unrelated parties would share stock-based compensation costs. The Service’s files associated with the final ruling did not contain any expert opinions, empirical data, published or unpublished articles, papers, surveys, or reports supporting the determination that stock-based compensation must be included in QCSAs to achieve an arm’s-length result.  The Service also failed to produce any agreements between unrelated parties in which one party reimbursed the other parties for amounts attributable to stock-based compensation. 

The Service did not dispute either of Altera-US’s claims that many QCSAs are not associated with high-profit intangibles and that stock-based compensation is an insignificant element of the compensation of taxpayers that enter into QCSAs.  Furthermore, the Service never claimed that it found any of the evidence submitted by commentators as invalid, implicitly accepting the commentators’ economic analyses, which argued against the sharing of stock-based compensation by unrelated parties.  
  BDO Insights Taxpayers should monitor the developments of this case and consider whether there is a position to file amended tax returns, especially for periods that may be closing due to the expiration of the statute of limitations. This decision may have significant implications with respect to the treatment of these, and other similar, costs going into the current and future tax years.

The Service’s unsuccessful attempt to argue that the commensurate-with-income approach will, essentially, result in an arm’s-length arrangement indicates that empirical evidence will be essential for any regulatory implementation of the arm’s-length standard.  The decision may also result in implications that go beyond the United States cost-sharing regulations, such as the Organization for Economic Cooperation and Development’s (“OECD”) proposals to combat base erosion and profit shifting (“BEPS”). 
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

Jerry Seade
Principal

 

Bob Brown
Partner

 

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Scott Hendon
Partner  

Veena Parrikar
Principal, Transfer Pricing

  Monika Loving
Partner  

Kirk Hesser
Sr. Director, Transfer Pricing

 

Brad Rode
Partner

  Michiko Hamada
Sr. Director, Transfer Pricing  

William F. Roth III
Partner

   
1 Altera Corporation v. Commissioner, 145 T.C. No. 3 (July 27, 2015).
2 Xilinx Inc. et al. v. Commissioner, 125 T.C. 37 (2005).
3 Xilinx v. Commissioner, 567 F.3d 482 (9th Cir. 2009); rev’g and remanding 125 T.C. 37, withdrawn, 592 .3d 1017 (9th Cir. 2010)
4 Xilinx Inc. et al. v. Commissioner, 125 T.C. 37 (2005).
 

State and Local Tax Alert - August 2015

Tue, 08/25/2015 - 12:00am
Louisiana Enacts Several Laws That Limit the Use of Net Operating Losses and Reduce Tax Deductions, Subtractions, and Credits
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Summary  
In June 2015, Louisiana Governor Bobby Jindal (R) signed into law several bills that, together, modify the state’s corporation income tax net operating loss (“NOL”) provisions, and reduce certain deductions/subtractions from gross income, expense deductions and credits that a taxpayer subject to corporation income tax may claim.  It also imposes stricter limitations on the availability of the individual income resident credit for taxes paid to other states.  Lastly, the new law significantly changes certain aspects of the penalty provisions.
  Details Changes to Corporation Income Tax NOL Carryovers (Act 103/H.B. 218, June 19, 2015)
 
The new law modifies the use of NOL carryovers in the following ways:
 
  •  Extends the carryforward period for net operating losses to twenty (20) years from fifteen (15) years;
  • Eliminates the three (3) year carryback period; and
  • Reduces the NOL utilization by 28% of the total NOL carryover amount available for use in the current year.1
 
These changes to the NOL carry forward and carry back provisions apply to an NOL deduction claimed on an original return filed after June 30, 2015.  The change does not apply to an amended return filed on or after July 1, 2015, relating to a NOL deduction properly claimed on an original return filed prior to July 1, 2015. 
 
Reductions to Other Corporation Income Tax Deductions and Subtractions (Act 123/H.B. 624, June 19, 2015)
 
The new law also reduces the following deductions/subtractions from gross income by 28%:
 
  • Refunds of Louisiana corporation income taxes paid;
  • Amounts received as dividend income from a banking corporation organized under the laws of Louisiana, a national banking corporation doing business in Louisiana, and a capital stock association whose stock is subject to ad valorem taxation;
  • Hurricane recovery benefits;
  • Dividends received; and
  • A deduction for expenses disallowed under Section 280(C) of the Internal Revenue Code.
 
In addition, the new law reduces the allowance for depletion on oil and gas wells to 15.8% (previously 22%) of the gross income from the property during the taxable year, excluding from gross income 72% (previously 100%) of rents and royalties paid/incurred with respect to the property.  The depletion deduction may not exceed 36% (previously 50%) of the net income from the property of the taxpayer.
 
These changes to the law generally apply to an original return filed after June 30, 2015 but before July 1, 2018.  If the taxpayer filed a valid extension prior to July 1, 2015, one-third of any portion of a deduction/subtraction disallowed as a result of these law changes may be deducted on the taxpayer’s return for each of the taxable years beginning in 2017, 2018, and 2019.
 
Penalties and Waivers (Act 128/H.B. 721, June 19, 2015)
 
Effective July 1, 2015, the new law makes the late payment penalty discretionary and removes the estimated tax safe harbor, thus, allowing assessment of late payment penalties even if 90% of the total tax due on the return is paid by the non-extended due date for the return. 
 
Also effective July 1, 2015, the new law modifies the negligence penalty as follows:
 
  • Makes it discretionary;
  • Increases it to 10% (previously 5%) of the tax deficiency; and
  • Imposes a new 15% substantial underpayment penalty (20% in the case of willful attempt to disregard the tax).
 
Lastly, effective January 1, 2016, the new law removes the requirement that waiver of all penalties for individuals, and late payment and filing penalties for other taxpayers, in excess of $25,000 be approved by the Board of Tax Appeals, but subjects such waivers to oversight by the House Committee on Ways and Means and the Senate Committee on Revenue and Fiscal Affairs.
 
Tax Credits, Exemptions, and Rebates (Multiple Acts/Bills)
 
Act 125/H.B. 629, June 19, 2015, reduces many corporation income and franchise tax credits and exemptions by 28%.  With respect to these reductions, similar to other changes in the law: (i) most apply to an original return filed after June 30, 2015, and before June 30, 2018; and (ii) if the taxpayer filed a valid extension prior to July 1, 2015, one-third of any portion of a credit, exemption or rebate disallowed as a result of these law changes may be claimed on the taxpayer’s return for each of the taxable years beginning in 2017, 2018, and 2019.  (See the chart at the end of this alert.)
 
In addition, Act 357/H.B. 749, June 29, 2015 requires the House Committee on Ways and Means and the Senate Committee on Revenue and Fiscal Affairs to review the economic benefit of several credits and make recommendations by March 1, 2017, regarding whether to continue each credit.  (See the chart at the end of this alert.)

In addition to the credit reductions and economic benefit review, the new law modifies certain credits, including the following:
 
  • Tax Credits for Local Inventory Taxes Paid, R.S. § 47:6006 (Act 133/H.B. 805, June 19, 2015).  Effective for a credit claimed on an original return filed after June 30, 2015, a credit in excess of the tax liability for the year is refundable if the amount paid to all political subdivisions in the taxable year was less than $10,000.  If the amount paid was $10,000 or more, 75% of the excess credit is refundable and the remainder may be carried forward five (5) years.
  • Research and Development Tax Credit, R.S. § 47:6015 (Act 133/H.B. 805, June 19, 2015).  Effective for credits claimed on an original return filed after June 30, 2015, a credit in excess of the tax liability for the year is now non-refundable with allowance for a five (5) year carryover.
  • Angel Investor Credit, R.S. § 47:6020 (Act 104/H.B. 244, June 19, 2015).  The new law allows use of the Angel Investor Credit against the personal and corporate income tax and franchise tax through June 30, 2017 (previously July 1, 2017).
  • Enterprise Zone Credits and Rebates, R.S. § 51:1787 (Act 114/H.B. 466, June 19, 2015).  A retail business assigned a North American Industry Classification Code (or NAICS) of 44, 45 or 72 (which generally pertain to retailers, restaurants, and hotels), and whose contract was not entered into before July 1, 2015, may not receive benefits under this program.  The law allows a limited exception for a taxpayer that filed an advance notification form for its project before June 10, 2015.
  • Credit Repeals (Act 357/H.B. 749, June 29, 2015).  Effective July 1, 2015, the employer tax credit for employee alcohol and substance abuse treatment programs (R.S. § 47:6010), the tax credit for certain overpayments (R.S. § 47:6028), the tax credit for conversion or acquisition of trailers which haul sugarcane (R.S. § 47:6029), and apprenticeship tax credits (R.S. § 47:6033) are repealed.
 
Personal Income Tax Credit for Taxes Paid to Other States (Act 109/H.B. 402, June 19, 2015)
 
The new law adds the following requirements in order to claim the credit for taxes paid to other states:
 
  • The other state must have a similar credit;
  • The credit is limited to the amount of Louisiana income tax that would have been imposed on the income that is taxed by the other state; and
  • The credit is not allowed for income taxes paid to a state that allows a nonresident a credit for income taxes imposed by the state of residency.
 
The effective date of this change to the law is the same as the effective date of the reductions to the corporation income tax deductions and subtractions (See above).
 
New Income Tax Deduction for Employing Disabled Individuals (Act 117/H.B. 508, June 19, 2015)
 
Effective June 19, 2015, the new law creates a corporation and personal income tax deduction for an employer that provides continuous employment for certain individuals with intellectual, developmental, or service related disabilities within Louisiana for no less than an average of twenty (20) hours per week at a rate comparable to other employees performing the same task.  The deduction is equal to 50% of the gross wages paid to the disabled employee for the first four (4) months of service and 30% for each subsequent month.  The number of employees for which this deduction may be taken is capped at one hundred (100) qualifying employees for the entire program.

Suspended Sales and Use Tax Exemption for Business Utilities (H.C.R. 8, June 19, 2015)

Beginning July 1, 2015, and ending 60 days after the final adjournment of the 2016 Regular Session of the Legislature of Louisiana, House Concurrent Resolution 8 suspends the exemption from the 1% sales and use tax imposed on the sale or use of steam, water, electric power or energy, and natural gas.
  BDO Insights
  • While the reductions in subtractions, deductions and credits will likely have the effect of increasing the corporation income tax liability of many taxpayers, these taxpayers may take solace in the fact that many of these changes will only impact original returns filed during the three (3) year period July 1, 2015 through July 30, 2018.Those taxpayers that filed extensions before July 1, 2015, will at least be able to take a deduction, subtraction, and/or credit for one-third of an amount that was disallowed on the extended return when preparing a return to be filed in 2017, 2018, and 2019.
  • All but one of these laws were enacted on June 19, 2015 (i.e., Act 357/H.B. 749 was enacted on June 29, 2015).Taxpayers should assess what, if any, impact these law changes would have on their existing deferred tax balances and adjust them accordingly as of the enactment date.These changes would be a Q2 event for calendar year end corporate taxpayers.
  • Removal of the requirement that certain penalty waivers in excess of $25,000 be reviewed by the Board of Tax Appeals may be one welcomed law change as this should streamline the process.However, removal of the 90% safe harbor related to estimated tax payments seems a bit harsh as this will put excessive pressure on taxpayers to accurately calculate estimated tax – and to even make overpayments – to avoid late penalties.
 

Credits Subject to 28% Reduction / June 30, 2015 to June 30, 2018 Effective Period
(*Denotes different reduction amount or effective date)

... New jobs tax credit (R.S. § 47:34 / (R.S. § 47:287.749) ... Purchase of qualified new recycling manufacturing or process equipment and/or service contracts (R.S. § 47:6005) ... Neighborhood assistance tax credit (R.S. § 47:35) ... Donations made to assist qualified playgrounds (R.S. § 47:6008) ... Contribution of tangible personal property of a sophisticated & technological nature to educational institutions (R.S. § 47:37 / R.S. § 47:287.755) ... Louisiana basic skills training tax credit (R.S. § 47:6009) ... Insurance company premium tax credit (R.S. § 47:227) * ... Donations of materials, equipment, or instructors made to certain training providers (R.S. § 47:6012) ... Credits arising from refunds by utilities (R.S. § 47:265 / R.S. § 47:287.664) ... Donations made to public schools (R.S. § 47:6013) ... Corporation tax credit; Re-entrant jobs credit (R.S. § 47:287.748) ... Credit for certain debt issuance costs (R.S. § 47:6017) ... Tax credit for employment of first-time nonviolent offenders (R.S.§  47:287.752) ... Tax credits for purchasers from “PIE contractors” (R.S. § 47:6018) ... Neighborhood assistance tax credit (R.S. § 47:287.753) ... Angel investor tax credit program (R.S. § 47:6020) ... Bone marrow donor expenses (R.S. § 47:287.758 / R.S. § 47:297) ... Digital interactive media and software tax credit (R.S. § 47:6022) * ... Employee and dependent health insurance coverage credit (R.S. § 47:287.759) ... Sound recording investor tax credit (R.S. § 47:6023) * ... Certain disabilities (R.S. § 47:297) ... Credit for the Louisiana citizens property insurance corporation (R.S. § 47:6025) ... Credit for certain federal tax credits (R.S. § 47:297) ... Cane River heritage tax credit (R.S. § 47:6026) ... Gasoline & special fuels taxes for commercial fisherman (R.S. § 47:297) ... Milk producers tax credit (R.S. § 47:6032) ... Donations to public elementary or secondary schools (R.S. § 47:297) ... Musical and theatrical production income tax credit (R.S. § 47:6034) * ... Family Responsibility (R.S. § 47:297) ... Conversion of vehicles to alternative fuel usage (R.S. § 47:6035) * ... Environmental equipment (R.S. § 47:297) ... Ports of Louisiana tax credits (R.S. § 47:6036) ... Small town doctor/dentist (R.S. § 47:297) ... Tax credit for “green job industries” (R.S. § 47:6037) ... Educational expenses incurred for degree related to law enforcement (R.S. § 47:297) ... Urban revitalization tax incentive program (R.S. § 51:1807) ... Employment of certain first-time drug offenders (R.S. § 47:297) ... Modernization tax credit (R.S. § 51:2399.3) * ... Purchase of bulletproof vest (R.S. § 47:297) ... Louisiana community development financial institution act credit (R.S. § 51:3085) ... Long-term care insurance premiums credit (R.S. § 47:297) * ... Tax exemptions and credits (R.S. § 25:1226.4) * ... Living organ donation credit (R.S. § 47:297) ... Technology commercialization credit (R.S. § 51:2354) * ... Accessible and barrier-free constructed home credit (R.S. § 47:297) ... Louisiana quality jobs program (R.S. § 51:2455) * ... Rehabilitation of an owner occupied residential or mixed-use property (R.S. § 47:297.6) * ... Competitive projects payroll incentive program (R.S. § 51:3121) * ... Amounts paid by certain military service members and dependents for certain hunting and fishing licenses (R.S. § 47:297.9) ... Headquarters relocation (R.S. § 51:3114) * ... Employment of the previously unemployed (R.S. § 47:6004) ... Mega-project energy assistance (R.S. § 51:2367) * Credits Subject to Economic Benefit Review ... Employer credit (R.S. § 47:6004) ... Digital interactive media and software tax credit (R.S. § 47:6022) ... Qualified new recycling manufacturing or process equipment and/or service contracts (R.S. § 47:6005) ... Sound recording investor tax credit (R.S. § 47:6023) ... Tax credits for local inventory taxes paid (R.S. § 47:6006) ... Tax credit for Louisiana Citizens Property Insurance Corporation assessment (R.S. § 47:6025) ... Tax credits for taxes paid with respect to vessels in Outer Continental Shelf Lands Act Waters (R.S. § 47:6006.1) ... Cane River heritage tax credit (R.S. § 47:6026) ... Motion picture investor tax credit (R.S. § 47:6007) ... Solar energy systems tax credit (R.S. § 47:6030) ... Tax credits for donations made to assist playgrounds in economically depressed areas (R.S. § 47:6008) ... Tax credit for certain milk producers (R.S. § 47:6032) ... Louisiana Basic Skills Training Tax Credit (R.S. § 47:6009) ... Musical and theatrical production income tax credit (R.S. § 47:6034) ... Employer tax credits for donations of materials, equipment, advisors, or instructors (R.S. § 47:6012) ... Tax credit for conversion of vehicles to alternative fuel usage (R.S. § 47:6035) ... Tax credits for donations made to public schools (R.S. § 47:6013) ... Ports of Louisiana tax credits (R.S. § 47:6036) ... Credit for property taxes paid by certain telephone companies (R.S. § 47:6014) ... Tax credit for "green job industries" (R.S. § 47:6037) ... Research and development tax credit (R.S. § 47:6015) ... Child care expense tax credit (R.S. § 47:6104) ... Louisiana New Markets Jobs Act; Premium tax credit (R.S. § 47:6016.1) ... Child care provider tax credit (R.S. § 47:6105) ... Tax credits for certain expenses paid by economic development corporations (R.S. § 47:6017)... Credit for child care directors and staff (R.S. § 47:6106) ... Credit for child care directors and staff (R.S. § 47:6106) ... Tax credits for purchasers from "PIE contractors" (R.S. § 47:6018) ... Business-supported child care (R.S. § 47:6107)  

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 The amount of NOL deduction that may be taken by other taxpayers (e.g., partnerships and nonresident individuals) was reduced by 28% as well.  However, it appears the reduction for these taxpayers applies to taxable years beginning after December 31, 2014.

 

International Tax Alert - August 2015

Tue, 08/25/2015 - 12:00am
Brazil Update
New Corporate Income Tax Return e-filing Requirements (ECF)  
Download the PDF Version
Date/Timing This new requirement is effective for 2014 calendar year tax returns and Brazilian taxpayers have until September 30, 2015, to comply with these new requirements under Normative Instruction 1,524/2014.
Affecting The ECF e-filing process is mandatory for companies that calculate their income tax under the actual, presumed, or arbitrated profit methods, as well as entities that are exempt from Brazilian income tax. The only exception is granted to companies under the SIMPLES method, public entities, or inactive legal entities under Normative Instruction 1,422/2013.
Background The new ECF e-filing requirement applies to the reporting of all tax information concerning the Brazilian corporate income tax (“IRPJ”) and the social contribution tax (“CSLL”) calculations. The ECF will replace the current income tax return (“DIPJ”) process.
Details The ECF filing consists of 14 forms which include submission of the following information:
  • A detailed calculation of the IRPJ and CSLL including tax adjustments.
  • Chart of accounts and accounting records used by the company to support the tax calculation and the company’s financial statements.
  • Tax and administrative proceedings related to the IRPJ and CSLL.
  • Tax exemptions, benefits, or credits.
  • Transfer Pricing information.
  • Information on all payments made to shareholders and directors and entities abroad for services provided.
  • Related parties and subsidiaries (in Brazil and abroad).
  • Withholding taxes.
  • General and economic information.

Penalties can be imposed for late filing or errors. These include 0.25% of the company’s net income for each month (up to 10%) in the case of late filings and 3% of the amount omitted or reported in error. These penalties may be reduced or eliminated in some circumstances.
How BDO Can Help All Brazilian taxpayers should consider the complexities and challenges of this new e-filing requirement because of the new technical layout, analytics, and accounting records required to be reported. Tax returns are filed electronically in Brazil and Tax Authorities are able to crosscheck the information among the several different returns, issuing notifications and penalties.

BDO can review internal processes and controls to ensure sound governance, and crosscheck the information among the tax returns to ensure that fillings are made correctly to avoid potential penalties.  
 
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  

Fabrizia Hadlow
Senior Manager

  Brad Rode
Partner    

International Tax Alert - August 2015

Mon, 08/24/2015 - 12:00am
New Notice 2015-54 Addresses Certain Contributions Made to Partnerships
Download the PDF Version
Summary Notice 2015-54 (the “Notice”) provides that the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) plan to issue Treasury Regulations that will require, in certain situations, partners to recognize gain either immediately or periodically, when a partner contributes appreciated property to a partnership.
Background When a partner contributes appreciated property to a partnership, the general rule under Internal Revenue Code (“IRC”) Section 721(a) is that no gain is recognized by the partner. Prior to the issuance of the Notice, United States taxpayers treated a contribution of appreciated property to a partnership as a   nonrecognition event under the general principles of IRC Section 721(a) even in situations where a portion of the income or gain attributable to the contributed property was allocated, through the partnership, to a foreign partner not subject to United States income tax. Often times, the foreign partner would be a wholly-owned subsidiary or other related party of the United States partner. The position taken by United States taxpayers, prior to the issuance of the  Notice, created an opportunity to shift income from the United States partner to the related foreign partner, who is not subject to United States income tax, through partnership allocations without triggering an “exit tax” on the outbound transfer.
Details A. General Rules
The Notice provides that when a United States transferor (as defined in the Notice) contributes most types of appreciated property to a partnership, the United States transferor is required to recognize gain immediately if: (1) a related foreign person is a direct or indirect partner in the partnership, and (2) the United States transferor and related persons own more than 50% of the partnership interests in capital, profits, deductions or losses. This type of partnership structure is referred to as a “Section 721(c) partnership” in the Notice. Certain types of property (e.g., cash equivalents, any asset that is a security within the meaning of IRC Section 475(c)(2), without regard to IRC Section 475(c)(4) and any item of tangible property with built-in gain that does not exceed $20,000) will not be subject to these new rules.

The Notice further provides an exception where the United States transferor is not required to immediately recognize gain on the contribution of appreciated property to a Section 721(c) partnership, provided the partnership adopts the “Gain Deferral Method.” The Gain Deferral Method has several requirements (e.g., use of the remedial allocation method described in §1.704-3(d)) that essentially requires the partnership to allocate income or gain attributable to the contributed appreciated property to the United States transferor-partner over time so that income and gain attributable to the appreciated property cannot be shifted through the partnership structure to the foreign partner not subject to United States income tax. The regulations to be issued will also apply to transactions involving tiered partnerships in a manner consistent with the rules provided in the Notice.

B. Cost-Sharing Arrangements
In the Notice, the Service and Treasury stated their intention to issue guidance under IRC Section 482 applying Cost-Sharing Arrangement principles to contributions of appreciated property to Section 721(c) partnerships (as defined in the Notice) adjusted as needed to take into account the differences between a Section 721(c) partnership and Cost-Sharing Arrangements. In particular, the Notice states that the Service and the Treasury will issue guidance on the application of the “periodic adjustment provisions” in the Cost-Sharing Arrangement Regulations to Section 721(c) partnerships.

C. Reporting Requirements
The Notice also provides that the Service plans to modify Schedule O of Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) to require supplemental information for contributions of appreciated property to Section 721(c) partnerships. The Treasury Regulations to be issued will also describe additional reporting requirements for United States transferors for each taxable year in which the Gain Deferral Method applies.

D. Statute of Limitations
The Treasury Regulations to be issued will require the United States transferor to extend the statute of limitations period for all items related to the appreciated property contributed to the Section 721(c) partnership for eight full taxable years following the taxable year of the contribution.

E. Effective Date
The new rules requiring immediate gain recognition or the adoption of the Gain Deferral Method on transfers of appreciated property to a Section 721(c) partnership will apply to transfers occurring on or after August 6, 2015, and to transfers occurring before August 6, 2015, resulting from a check-the-box election to recognize an entity as a partnership filed on or after August 6, 2015, with an effective date on or before August 6, 2015.
The new reporting requirements, statute of limitations, and periodic adjustment provisions will be effective for transfers occurring on or after the date of publication of the Treasury Regulations.
How BDO Can Help BDO can assist you with determining the Federal tax implications on contributions to a Section 721(c) partnership, analyzing the tax implications under the Gain Deferral Method, and complying with the new reporting requirements that will be issued.
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

Brad Rode
Partner

 

Bob Brown
Partner

 

William F. Roth III
Partner

  Scott Hendon
Partner  

Jerry Seade
Principal

  Monika Loving
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

Compensation & Benefits Alert - August 2015

Fri, 08/21/2015 - 12:00am
Penalties On Information Returns Increased by the Trade Preferences Extension Act Of 2015 (The "Act") Effective for information returns filed after December 31, 2015
Download the PDF Version
  Background Internal Revenue Code section 6721 provides for penalties for failing to file information returns with the IRS. IRC section 6722 provides for penalties for failing to furnish a copy to a payee. These penalties apply to Forms W-2, 1098, 1099, 3921, 3922, 8937, 1042-S, etc., and beginning in 2015, will also apply to Forms 1094 and 1095, for reporting of health plan coverage.

The current penalty is $200 per violation, or $100 for each IRS and payee
copy that is not filed or furnished to the recipient, with a maximum penalty charge of $1.5 million per calendar year for failure to file and another $1.5 million for failure to furnish. The penalties also apply to timely filings with incorrect information.
  Summary of Changes Effective for information returns filed after December 31, 2015, the Act increases the penalty from $200 to $500 per violation, or $250 for each IRS and payee copy not filed or furnished to the recipient, respectively. The penalty exposure will typically be $500 per form because the same error usually occurs on both the IRS and payee copies. The maximum penalties per calendar year are doubled from the current maximum of $3 million to $6 million ($3 million for IRS copies and $3 million for participant copies). The penalty for intentionally failing to file, increases from $500 to $1,000 per violation, or $500 for each IRS and payee copy not filed or furnished to the recipient.
  Summary of Changes The applicable information return penalties can be significantly reduced by acting quickly to correct errors and/or delinquent filings. However, the Act also significantly increases the amount of these reduced penalties. For failures that are corrected within 30 days after the filing due date, the $250 penalty is reduced to $50 per return (currently $30) and the maximum penalty of $3 million is reduced to $500,000 per calendar year (currently $250,000). For failures corrected after 30 days but before Aug. 1, the $250 penalty is reduced to $100 per return (currently $60) and the maximum penalty of $3 million is reduced to $1.5 million per calendar year (currently $500,000).

Filers with gross receipts under $5 million are subject to the same per return penalty as outlined above but continue to get a break on the maximum annual penalty. Still the new law doubles the current maximum from $500,000 to $1 million per calendar year with reductions to $175,000 (currenlty $75,000) if  corrected within 30 days, and $500,000 (currently $200,000) if corrected after 30 days but before Aug. 1.

It is the enforcement position of the IRS National Office that the statute of limitations for penalties under sections 6721 and 6722 runs for three years from the filing of individual information return(s) (e.g., Forms W-2, 1099, etc.). (See, for example, IRS CCM number 111814-13 (4/4/2013). Accordingly, the statute of limitations will not begin to run in connection with delinquent filings. In addition, a 2008 Chief Counsel Memorandum advised there was not a statute of limitations on information returns furnished to taxpayers. (CCM number 138637-08 (10/17/2008). These unsettling positions at the IRS underscore the importance of accurate and timely information reporting, not only from the penalty assessment viewpoint, but also with regard to a potential need to reserve for known errors on financial statements. Unlike most tax penalty reserves, reserves for civil penalties related to delinquent information returns may become a permanent part of a taxpayer's reserve. 

While the IRS has discretion to waive/abate these penalties upon a showing of reasonable cause for the errors, it is better to avoid these potentially excessive penalties by ensuring compliance. Payers should begin now to review their practices and procedures related to tax information reporting, including the classification of workers as employees or independent contractors. In particular, employers should have a plan in place for how to fulfill their Form 1095 filing requirements under the Affordable Care Act, because these penalties apply to the 2015 information returns that are due in  2016.

Please contact us if you require further guidance or assistance in complying with any of your tax information reporting obligations, including compliance with the new requirements under the Affordable Care Act.
 
For questions related to matters discussed above, please contact one of the following practice leaders:
  Ira B. Mirsky
Sr. Director, National Tax
Compensation & Benefits Carl Toppin
Sr. Manager, Global Employer Services
Compensation & Benefits

Joan Vines
Sr. Director, National Tax
Compensation & Benefits

Kristin Peters
Sr. Manager, Global Employer Services
Compensation & Benefits

Federal Tax Alert - August 2015

Tue, 08/18/2015 - 12:00am
ACA Small Business Tax and Compliance
Perhaps the best feature of the Affordable Care Act (ACA) for small businesses is what it does not do: require them to choose between offering their fulltime employees ACA-compliant coverage or making Employer Shared Responsibility payments. Only Applicable Large Employers that average over 50 full-time employees a year have to make that choice.
  Download

Federal Tax Alert - August 2015

Tue, 08/18/2015 - 12:00am
Employer Shared Responsibility Payments and Reporting under the Affordable Care Act
The Employer Shared Responsibility payment and reporting rules under the Affordable Care Act (ACA) apply to Applicable Large Employers beginning in 2015. Reporting begins in early 2016 for the 2015 calendar year. Employers subject to these rules must decide whether it is better to pay for health coverage, or pay the penalty.
  Download

International Tax Alert - August 2015

Mon, 08/17/2015 - 12:00am
Surface Transportation and Veterans Health Care Choice Improvement Act of 2015

FinCen Form 114 (FBAR) Due Date Changes  
Download the PDF Version
Date/Timing As a result of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, significant changes will be made to the due date and extension time of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), for tax returns for tax years beginning after Dec. 31, 2015.
Affecting Any United States persons with a financial interest in or signature authority over foreign bank and financial accounts with a total balance exceeding $10,000 at any time during the calendar year.
Background Taxpayers are currently responsible for filing FinCEN Form 114 (FBAR), on or before June 30th of the year immediately following the calendar year being reported and there is no provision for extensions. As a result of the Act, the due date for FBARs will be changed From June 30th to April 15th. Additionally, a maximum extension will be available for a 6-month period ending on October 15 under rules similar to the rules in Reg. § 1.6081-5. The Act also provides that for any taxpayer required to file Form 114 for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Treasury Secretary.
Details FinCEN requires that FBARs be filed electronically. United States persons are required to file an FBAR if they have a financial interest in foreign bank accounts with an aggregate value exceeding $10,000 at any time during the calendar year. FBAR filing is also required by certain individual United States persons even if they do not have a financial interest in a reportable account if they have signature authority over one or more reportable accounts. This may include an officer or employee of a United States entity who has the requisite control over the transfer or withdrawal of funds from foreign financial accounts.

Failure to file an FBAR report may subject the non-filer to civil and criminal penalties. Penalties for a willful failure to file can be as much as the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Since the statute of limitations for civil or criminal violations is generally six years for FBARs, total penalties from failure to file for multiple years could be more than the value in the account.

Relief exists for delinquent FBAR filers who properly reported all income related to their foreign financial accounts on their United States income tax return but who inadvertently failed to file an FBAR. Provided that these taxpayers have not yet been contacted by the IRS regarding their delinquent FBARs and are not currently under IRS review, delinquent FBARs may be submitted penalty-free.
How BDO Can Help Our Clients Due to increased scrutiny and severe penalty regime with respect to failure to file FBARs, it is important for all individuals and entities to review whether there is any financial interest in or signature authority over accounts subject to FBAR reporting. BDO can help you review these requirements and submit any FBARs electronically.
 
For more information, please contact one of the following practice leaders:
 

Michelle Murphy
Senior Manager

 

Brad Rode
Partner

 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

  Bob Brown
Partner  

Jerry Seade
Principal

  Holly Carmichael
Partner  

Todd Simmens
Partner

 

Scott Hendon
Partner

 

Joe Calianno
Practice Leader

 

Monika Loving
Partner

 

 

State and Local Tax Alert - August 2015

Mon, 08/17/2015 - 12:00am
Chicago Rules Personal Property Lease Transaction Tax Applies to Cloud Computing and the Amusement Tax Applies to Electronically Delivered Amusements  Download the PDF Version
Summary The City of Chicago (the “City”), Department of Finance (the “Department”) recently issued two rulings in which it applies the Amusement Tax to electronically delivered amusements (e.g., streamed movies) and the Personal Property Lease Transaction Tax (“Lease Tax”) to cloud computing.  See Amusement Tax Ruling #5 (“Ruling #5”) and Lease Tax Ruling #12 (“Ruling #12”), respectively.  Each ruling is effective July 1, 2015.  However, the Department will limit the application of Ruling #5 to taxable periods beginning on or after September 1, 2015, and Ruling #12 to taxable periods beginning on or after January 1, 2016.1
  Details Applicability of the Amusement Tax to Electronically Delivered Amusements

The 9% Amusement Tax applies to an admission fee or other charge for the privilege to enter, view, or participate in an amusement.

In Ruling #5, the Department clarifies that the tax applies to a charge for the privilege to enter, view or participate in an amusement that is delivered electronically.  Examples of a taxable charge include a charge for the privilege to: (i) watch electronically delivered television shows, movies or videos; (ii) listen to electronically delivered music; and (iii) participate in online games.  The Amusement Tax does not apply to a sale of a show, movie, video, music, or a game (normally accomplished by permanent download), but rather applies to a rental of a show, movie, video, music, or a game (normally accomplished by streaming or temporary download).

Applicability of the Lease Tax to Cloud Computing

Taxability of Cloud Computing

The 9% Lease Transaction Tax applies to a charge for the use of personal property, including a charge paid pursuant to a non-possessory computer lease, unless the charge is exempt under Exemption 11.

In Ruling #12, the Department clarifies that the tax applies to a charge for the following: (i) to perform a function such as cloud computing, cloud service, hosted environment, software as a service (or SaaS), platform as a service (or PaaS), and infrastructure as a service (or IaaS); and (ii) to obtain real estate listings and prices, car prices, stock prices, marketing data, and similar information that has been compiled, entered and stored on a provider’s computer.  The tax does not apply to a charge for a service where the customer accesses the deliverable electronically (e.g., a charge to write a report, article or similar document that consists primarily of the provider’s own observations, opinions, ideas or analysis).

Exemption 11

In Ruling #12, the Department explains that an exempt use under Exemption 11 may be access to information or data which is entirely passive without interactive use, or access to materials that are primarily proprietary.  An example of the former is a one-way dissemination of current stock prices where there is no search function and the charge is predominately for information transferred to the customer.  An example of the latter is a subscription fee for an application that allows a subscriber to download or access materials such as copyrighted newspapers, newsletters or magazines that the subscriber would otherwise have to purchase at a bricks-and-motor store.

Nexus, Sourcing and Bundled Charges under Ruling #5 and Ruling #12

Nexus 

The Department noted that, while the discussion of nexus is generally outside the scope of a ruling, the Amusement Tax applies only to an amusement that takes place in the City, and the Lease Tax applies only where the customer’s use takes place in the City.

Sourcing

The Department also noted that it will utilize the rules in the Mobile Telecommunications Sourcing Conformity Act, 35 ILCS § 638, to determine sourcing for purposes of the Amusement Tax and the Lease Tax.  This means that the Amusement Tax and the Lease Tax will generally apply to a customer whose residential address or primary business address is located in the City as reflected by a credit card billing address or other reliable information. 

With respect to the Lease Tax, where some employees use a provider’s computer from terminals within the City and other employees without the City, and the provider has information regarding the customer’s use, Ruling #12 provides rules for apportioning use within the City.  However, no Lease Tax is due from a provider where it has no information to indicate that any of its customer’s use takes place in the City, or if the customer has 10 or more employees and the customer gives the provider written confirmation from the Department that the customer is registered to pay the Lease Tax.  The customer may, however, still be liable for the Lease Tax.

Bundled Charges

The Department reminded taxpayers that if a charge has a taxable and a non-taxable component, the entire charge is subject to the Amusement Tax or the Lease Tax where the charge is primarily for the privilege to enter, view or participate in an amusement, or for the use of a non-possessory computer lease, respectively.
  BDO Insights
  • Taxpayers that have not previously set-up their systems to collect, report, and remit the Lease Tax on charges for cloud computer or the Amusement Tax on charges for electronically delivered amusements will need to update their systems for collecting Amusement Tax on charges for electronically delivered amusements before their first taxable period beginning on or after September 1, 2015 and for Lease Tax on charges for cloud computing before their first taxable period beginning on or after January 1, 2016.
  • The City is presently contemplating relief from the “cloud tax” for small businesses and start-ups that may be placed at a competitive disadvantage as a result of the imposition of Lease Tax on cloud computing.  The City has not been clear as to what the relief will look like, but it anticipates issuing guidance in the near term.2
 

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 City of Chicago, Department of Finance, at www.cityofchicago.org/city/en/depts/fin/provdrs/tax_division/news/2015/june/PersonalPropertyLeaseTransactionTax12Effective7-1-2015.html (last visited August 14, 2015).
2 Adrienne Hurst, Chicago Will Protect Startups from the New ‘Cloud Tax,’ Chicago Magazine (July 14, 2015), at www.chicagomag.com/city-life/July-2015/Chicago-Will-Protect-Tech-Startups-from-the-New-Cloud-Tax (last visited August 14, 2015).
 

State and Local Tax Alert - August 2015

Fri, 08/14/2015 - 12:00am
Wisconsin Enacts a Sales/Use Tax Exclusion for Distribution Facility Operators, Codifies Additional Sales/Use Tax Nexus Creating Activities, and Creates a Business Development Credit for Income Tax Purposes Download the PDF Version
Summary On July 12, 2015, Wisconsin Governor Scott Walker (R) signed into law Senate Bill 21 (2015 Act 55), the Governor’s 2015-2017 Budget Bill.  This law enacts several changes to the state’s sales and use tax law, including the adoption of an exclusion from the tax for certain distribution facility operators, codifies  additional nexus creating activities, delays the private label credit card bad debt deduction, and clarification of the refund offset.  In addition, the law creates a Business Development Credit for corporate and individual income tax purposes and revises the Research Credit and the Manufacturing and Agriculture Credit.  The effective dates for these law changes are noted in the discussion that follows.
  Details Sales and Use Taxes
 
Certain Distribution Facility Operators Excluded from Tax
 
Effective July 14, 2015, the law excludes from the definition of “retailer” a person or business entity (or its affiliate) making sales of tangible personal property if all of the following apply:
 
  • The person or business entity (or its affiliate) operates a distribution facility;
  • The person or business entity (or its affiliate) sells tangible personal property on behalf of a third-party seller;
  • A third-party seller owns the tangible personal property and is disclosed to the customer as the seller; and
  • The person or business entity (or its affiliate) does not make sales for which the customer takes possession of the tangible personal property at a location operated by the person or business entity (or its affiliate).
 
Prior to the enactment of this provision, a person or business entity may have been liable for the payment of sales tax if the person or business entity was acting for a known or disclosed principal, had possession of tangible personal property owned by the principal, and made sales of such property.
 
The foregoing distribution facility operator exclusion does not apply to auction sales, sales of tangible personal property owned or previously owned by the person or business entity (or its affiliate), and sales of motor vehicles, aircraft, trailers, semitrailers, boats, snowmobiles, all-terrain vehicles or recreational vehicles.
 
Addition of Nexus Creating Activities
 
Effective July 14, 2015, the law specifies that the following activities are included in the definition of “retailer engaged in business in this state” and, thus, includes them among the activities that may subject a business to Wisconsin sales and use tax:
 
  • Any person or business entity servicing, repairing, or installing equipment or other tangible personal property in Wisconsin;
  • Any person or business entity delivering tangible personal property into Wisconsin in a vehicle operated by the person or business entity that sells the property or items that are delivered;
  • Any person or business entity performing construction activities in this state; and
  • Any retailer having a representative in the state for the purpose of performing any of the foregoing activities (among certain others).
 
Private Label Credit Card Bad Debt Deduction Delayed
 
The law extends the effective date for the bad debt return adjustments for private label credit card bad debt to apply to bad debts arising from sales completed after June 30, 2017 (previously June 30, 2015).
 
Refund Offset Clarification
 
Effective for taxable years beginning on or after January 1, 2015, the law clarifies that a taxpayer has no right to a refund until the offset procedure for delinquent debts owed to the Department of Revenue (the “Department”), other Wisconsin state agencies, and local governmental units has been completed.
 
Income Tax Credits
 
Business Development Credit Created
 
Effective for taxable years beginning after December 31, 2015, the law creates a refundable income tax credit to promote job creation and retention in Wisconsin.  The credit is available to a taxpayer certified to receive tax benefits by the Economic Development Corporation (“EDC”) and which increases its net employment in Wisconsin above its net employment during the year before the taxpayer was certified to receive the credit.
 
The credit may be taken against the corporation income tax and the personal income tax, including by an owner of a limited liability company, a partnership or a tax option corporation.
 
Generally, the amount of credit, as determined by the EDC, is equal to the following:
 
  • Up to 10% of the amount of wages paid to a full-time employee;
  • Up to an additional 5% of wages paid to a full-time employee if the employee is employed in an economically distressed area, as determined by the EDC;
  • Up to 50% of the amount of training costs incurred to enhance a full-time employee’s knowledge, employability, and skills;
  • Up to 3% of a taxpayer’s personal property investment and 5% of its real property investment in certain capital investment projects; and
  • A percentage of wages paid to a full-time employee if the employee’s position was created or retained in connection with the location or retention of the taxpayer’s corporate headquarters in Wisconsin and the employee’s position involves the performance of headquarters functions.
 
Research Credit Revisions
 
For taxable years beginning after December 31, 2014, the Research Credit under section 71.28(4)(ad) of the Wisconsin Statutes is equal to 5.75% of the excess of qualified research expenses in Wisconsin for the current taxable year over 50% of the average qualified research expenses for the prior three taxable years.  If the taxpayer doesn’t have any qualified research expenses in any of the prior three taxable years, the credit is equal to 2.875% of the qualified research expenses for the current year.  The percentage is 11.5% (5.75% if no qualified research expenses in three prior taxable years) for activities related to designing internal combustion engines for vehicles, and design and manufacturing of energy efficient lighting systems, building automation and control systems, and automotive batteries for use in hybrid-electric vehicles.
 
For taxable years beginning after December 31, 2014, the following Research Credits under 71.28(4)(ad) of the Wisconsin Statutes are no longer allowed: (i) the 5% credit for increasing research expenses; (ii) the 10% credit for research related to designing internal combustion engines for vehicles; and (iii) the 10% credit for research related to design and manufacturing of energy efficient lighting systems, building automation and control systems, or automotive batteries for use in hybrid-electric vehicles.  However, for the tax years while in effect, the calculation of each of these research credits is expanded to include compensation used for purposes of calculating the Development Zones Jobs Credit under section 71(1dj) of the Wisconsin Statutes.
 
Manufacturing and Agriculture Credit Revisions
 
For taxable years that begin in 2015 only, the rate used to compute the Manufacturing and Agricultural Credit Tax under section 71(5n) of the Wisconsin Statutes is reduced from 5.526% to 5.025%.  The tax credit rate remains at 7.5% for taxable years beginning after December 31, 2015.  The amount of any underpayment of estimated tax that arises from the reduction in the credit percentage for 2015 will not be subject to underpayment interest and penalties.
 
Also, retroactive to taxable years beginning after December 31, 2012, a taxpayer that has been approved to be classified as a manufacturer by the Department may claim the credit in the year or approval even if not eligible to be listed on the Department’s manufacturing roll until January 1 of the subsequent year.
  BDO Insights
  • A distribution facility operator should consider whether it qualifies for the new exclusion from sales tax.
  • All Wisconsin income taxpayers should consider whether they qualify for the new Business Development Credit.
  • The provision in the law that adds additional activities that create sales and use tax nexus appears to be a codification of the agency nexus positions that the Department has recently been asserting.
  • A taxpayer that had updated its sales and use tax systems to take the private label credit card bad debt deduction effective July 1, 2015, will now have to update its systems again for the delayed July 1, 2017 effective date.
  • A taxpayer that takes the Research Credit or the Manufacturing and Agriculture Credit should be mindful of the changes to these credits, which may impact the amount of credit that the taxpayer may take on returns to be filed.
  • A taxpayer that has taken the Research Credit but excluded compensation used for purposes of calculating the Development Zones Jobs Credit under section 71(1dj) of the Wisconsin Statute should consider whether additional credit may be claimed on previously filed returns.In addition, a taxpayer that did not take the Manufacturing and Agriculture Credit on a return for a taxable year beginning after December 31, 2012 because it was not listed on the Department’s manufacturing roll, should consider whether it may now be eligible to claim the credit under the provision that allows a taxpayer to claim it if it was approved to be classified as a manufacturer by the Department.
 

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

Federal Tax Alert - August 2015

Thu, 08/13/2015 - 12:00am
Proposed Regulations Addressing Disguised Payments for Services Likely to Impact Management Fee Waiver Arrangements Download the PDF Version
  Summary Proposed Regulations under Internal Revenue Code (“IRC”) Section 707(a)(2) issued on July 22, 2015 (Prop. Reg. Section 1.707-2) prescribe rules for characterizing an arrangement between a partnership and its partners as a disguised payment for services.  If finalized, the regulations are likely to affect the tax consequences of many “management fee waiver” and “cashless contribution” arrangements common to the private equity, hedge fund and venture capital industries.

The proposed regulations contain two examples specifically focused on management fee waiver arrangements.  In each example, the IRS concludes that the arrangements do not constitute a disguised payment for services under Section 707(a). However, the determinations rely on the existence of “significant entrepreneurial risk” within the arrangements. Many management fee waiver arrangements, as currently structured, may not satisfy this requirement.

Treasury also indicated that it intends to issue a revenue procedure providing an additional exception to the existing profits interest safe harbor under Revenue Procedure 93-27. The proposed modification would limit applicability of the safe harbor contained in Rev. Proc. 93-27 such that the safe harbor would not apply to situations where a profits interest is issued in conjunction with a partner forgoing payment of an amount that is substantially fixed for the performance of services. Additionally, the IRS has indicated that the existing the safe harbor would not apply to issuance of a profits interest to a party related to a service provider in exchange for the service provider waiving its fees.

The proposed regulations would be effective on the date the final regulations are published in the Federal Register. However, in the case of any arrangement entered into or modified before the final regulations are published, the IRS indicated it will determine whether an arrangement is a disguised payment for services on the basis of the statute and legislative history.  The IRS’s position is that the proposed regulations generally reflect Congressional intent as to which arrangements are appropriately treated as disguised payments for services.
  BDO Observations & Next Steps The proposed regulations and modifications to Rev. Proc. 93-27 are in large part a response to management fee waiver arrangements common in the private equity, hedge fund, and venture capital industries.  In a typical fee waiver, a partner (or an affiliate of the partner) of an investment fund will waive its right to receive a fixed fee for investment management services and instead receive an interest in fund profits and corresponding distributions.  If such a waiver is effective for income tax purposes, the partner may be able to defer recognition of income and convert its ordinary fee income into capital gains.  The proposals provide guidance on the economic risk needed in order to achieve this tradeoff.

Taxpayers subject to these rules, e.g., fund managers and investment managers, should review existing management fee waiver arrangements and evaluate the potential impact of these proposed rules. To the extent existing arrangements lack significant entrepreneurial risk under the proposed rules, taxpayer’s may want to consider modifying such agreements. Further, as taxpayers enter into new management fee waiver arrangements it is advisable to structure such arrangements in conformity with the proposed rules. 
  Application and Timing of the Proposed Regulations Under the proposed regulations, an arrangement otherwise characterized as an allocation and distribution will be treated as a disguised payment for services under IRC Section 707(a) if:
 
  1. A person (the “Service Provider”), either in a partner capacity or in anticipation of becoming a partner, performs services to or for the benefit of a partnership;
  2. There is a related direct or indirect allocation and distribution to such Service Provider; and
  3. The performance of such services and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a person acting other than in that person's capacity as a partner.

The determination is made at the time the arrangement is entered into or modified and without regard to whether the terms of the arrangement require the allocation and distribution to occur in the same taxable year. An arrangement that is treated as a payment for services under these rules is treated as a payment for services for all purposes of the Internal Revenue Code. The amount paid to a person in consideration for services under these rules is treated as a payment for services provided to the partnership, and, when appropriate, the partnership must capitalize these amounts (or otherwise treat such amounts in a manner consistent with their recharacterization). The partnership must also treat the arrangement as a payment to a non-partner in determining the remaining partners' shares of taxable income or loss.

The inclusion of income by the service provider and deduction (if applicable) by the partnership of amounts paid pursuant to an arrangement that is characterized as a payment for services under IRC Section 707(a) is taken into account in the taxable year as required under applicable law by applying all relevant sections of the Internal Revenue Code, including for example, sections 409A and 457A (as applicable), to the allocation and distribution when they occur (or are deemed to occur under all other provisions of the Internal Revenue Code).
  Factors Considered Under the Proposed Regulations Whether an arrangement constitutes a payment for services (in whole or in part) depends on all of the facts and circumstances. The proposed regulations provide a non-exclusive list of factors that may indicate that an arrangement constitutes a payment for services. The presence or absence of a factor is based on all of the facts and circumstances at the time the parties enter into the arrangement (or if the parties modify the arrangement, at the time of the modification).

An arrangement that lacks significant entrepreneurial risk constitutes a payment for services. An arrangement that has significant entrepreneurial risk will generally not constitute a payment for services unless other factors establish otherwise. For purposes of applying the proposed regulations, the weight to be given to any particular factor, other than entrepreneurial risk, depends on the particular case and the absence of a factor is not necessarily indicative of whether or not an arrangement is treated as a payment for services.

(1) The arrangement lacks significant entrepreneurial risk. Whether an arrangement lacks significant entrepreneurial risk is based on the service provider's entrepreneurial risk relative to the overall entrepreneurial risk of the partnership. Facts and circumstances described below create a presumption that an arrangement lacks significant entrepreneurial risk and will be treated as a disguised payment for services unless other facts and circumstances establish the presence of significant entrepreneurial risk by clear and convincing evidence:
 
  1. Capped allocations of partnership income if the cap is reasonably expected to apply in most years;
  2. An allocation for one or more years under which the service provider's share of income is reasonably certain;
  3. An allocation of gross income;
  4. An allocation (under a formula or otherwise) that is predominantly fixed in amount, is reasonably determinable under all the facts and circumstances, or is designed to assure that sufficient net profits are highly likely to be available to make the allocation to the service provider, e.g., if the partnership agreement provides for an allocation of net profits from specific transactions or accounting periods and this allocation does not depend on the long-term future success of the enterprise; or
  5. An arrangement in which a service provider waives its right to receive payment for the future performance of services in a manner that is non-binding or fails to timely notify the partnership and its partners of the waiver and its terms.

(2) The service provider holds, or is expected to hold, a transitory partnership interest or a partnership interest for only a short duration.

(3) The service provider receives an allocation and distribution in a time frame comparable to the time frame that a non-partner service provider would typically receive payment.

(4) The service provider became a partner primarily to obtain tax benefits that would not have been available if the services were rendered to the partnership in a third party capacity.

(5) The value of the service provider's interest in general and continuing partnership profits is small in relation to the allocation and distribution.

(6) The arrangement provides for different allocations or distributions with respect to different services received, the services are provided either by one person or by persons that are related under sections 707(b) or 267(b), and the terms of the differing allocations or distributions are subject to levels of entrepreneurial risk that vary significantly. 
  Management Fee Waiver Examples Several of the examples consider arrangements in which a partner agrees to forgo fees for services and also receives a share of future partnership income and gains. The examples consider the application of section 707(a)(2)(A) based on the manner in which the service provider (i) forgoes its right to receive fees, and (ii) is entitled to share in future partnership income and gains.

In Examples 5 and 6, the service provider forgoes the right to receive fees in a manner that supports the existence of significant entrepreneurial risk by forgoing its right to receive fees before the period begins and by executing a waiver that is binding, irrevocable, and clearly communicated to the other partners. Similarly, the service provider's arrangement in these examples includes the following facts and circumstances that taken together support the existence of significant entrepreneurial risk:

(1) The allocation to the service provider is determined out of net profits;
(2) The allocation is neither highly likely to be available nor reasonably determinable based on all facts and circumstances available at the time of the arrangement;
(3) The service provider undertakes a clawback obligation and is reasonably expected to be able to comply with that obligation; and
(4) The facts and circumstances do not otherwise suggest that the arrangement is properly characterized as a payment for services.

The presence of each fact described in these examples is not necessarily required to determine that section 707(a)(2)(A) does not apply to an arrangement. However, the absence of certain facts, such as a failure to measure future profits over at least a 12-month period, may suggest that an arrangement constitutes a fee for services.
  Modifications to Revenue Procedure 93-27 In addition to the proposed regulations, Treasury announced plans to issue a revenue procedure providing for an additional exception to the safe harbor in Rev. Proc. 93-27.  Rev. Proc. 93-27 provides that in certain circumstances if a person receives a profits interest for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of becoming a partner, the IRS will not treat the receipt of such interest as a taxable event for the partner or the partnership.  The additional exception will apply to a profits interest issued in conjunction with a partner forgoing payment of an amount that is substantially fixed (including a substantially fixed amount determined by formula, such as a fee based on a percentage of partner capital commitments) for the performance of services, including a guaranteed payment under IRC Section 707(c) or a payment in a non-partner capacity under IRC Section 707(a).

The preamble also states Treasury’s conclusion that transactions in which one party provides services, and another party receives a seemingly associated allocation and distribution of partnership income or gain does not meet the requirements of Rev. Proc. 93-27. For example, a management company that provides services to a fund in exchange for a fee may waive that fee, while a party related to the management company receives an interest in future partnership profits, the value of which, approximates the amount of the waived fee. The receipt of an interest in partnership profits in this case would not be for the provision of services to or for the benefit of the partnership in a partner capacity or in anticipation of being a partner as required under Rev. Proc. 93-27. The service provider would also be considered to have effectively disposed of the partnership interest (through a constructive transfer to the related party) within two years of receipt which is prohibited by the revenue procedure.
 


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

Private Equity & Transaction Advisory Services

Scott Hendon
Regional Managing Partner   Stephen Sonenshine
Partner   Francois Hechinger
Partner
    Jay Burleson
Senior Director
 
National Tax Office
  Jeffrey N. Bilsky
Senior Director   
    Julie Robins
Senior Director
    David Patch
Senior Director    

Federal Tax Alert - August 2015

Thu, 08/13/2015 - 12:00am
Year End Tax Planning Considerations Download the PDF Version

As the summer months wind down, year-end tax planning will become a hot topic for many client service professionals.  Whether it’s the closely held business owner or a high net worth individual, income taxes represent a significant outflow for our clients.  With top rates of 39.6% on ordinary income, 20% for long term capital gains plus a 3.8% Net Investment Income Tax (NIIT), our tax environment requires us to find favorable opportunities that generate tax savings for clients.  If not already addressed on a regular basis, year-end planning is the last chance to evaluate opportunities before the year comes to a close.  As conversations begin to shift towards year-end planning, below are a few strategies to consider. 
  What About Next Year Planning? Year end planning requires the planner to gather information on the current and at least the next upcoming tax year.   Savings can be generated for our clients by leveling out taxable income – accelerating income and deferring deductions from the lower anticipated income years or deferring income and accelerating deductions in high income tax years.  Similarly, investment account activity needs to be reviewed to determine if capital gains can be offset by available unrecognized losses in the account.
  Tax Payment Planning Individuals with adjusted gross income in excess of $150,000 have two methods available for managing estimated tax payment obligations: the safe-harbor method and the current year method.   Under the safe-harbor method a taxpayer will avoid underpayment penalties if 110% of the prior year liability is remitted on a quarterly basis.   The current year method requires quarterly payments based upon 90% of the current year tax.  Taxpayers can use either method for any tax quarter. Educating clients on their payment options will strengthen the client relationship, and set an expectation for income tax obligations coming due.  Clear reminders from the consulting professional regarding exposure to underpayment penalties allows clients to evaluate the cost of forgoing estimate planning.    
 
Quarterly estimates for individuals are due on the 15th of April, June, September and January of the subsequent year.   On April 15th taxpayer’s are required to satisfy 100% of the liability due for the prior year, as well as Q1 of the current year.  The combined total tax bill frequently surprises our clients.  Often times a shortfall can be mitigated by implementing simple year-end planning techniques.  For example, a W-2 employee can address a withholding shortfall by increasing Federal withholdings on the last few pay periods of the year or on a year-end bonus.  Federal Form 2210 calculates the penalty for underpayment of estimated taxes for individuals.   Annual withholding payments are deemed ratably paid throughout the year, whereas quarterly estimates are credited on the actual date paid.   Therefore, increased year end withholding can reduce or eliminate a penalty from missed estimated payments or under withholdings earlier in the year.     
  Retirement Distribution Planning Required Minimum Distributions (RMDs) represent the minimum amount an individual must withdraw each year from qualified retirement plans and IRAs, beginning in the year when the individual reaches 70 ½.   (Amounts from qualified plans, but not IRAs, can be deferred until the year of retirement, if later, rather than age 70 1/2 for non–owners of the employer sponsor.)  The amount required to be distributed is based on IRS generated distribution tables.  The date an individual turns 70 ½ is 6 months after their 70th birthday.  In the first minimum distribution year, taxpayers have an option to defer the payment on account of that tax year until the first quarter of the subsequent tax year.  For example, if a taxpayer has a birthday on or before June 30, 2015, 2015 will be the first RMD year and the RMD on account of the 2015 tax year must be paid no later than April 1, 2016.  If a taxpayer elects this one time deferral, 2015 taxable income will not include the minimum distribution amount and 2016 taxable income will include the required minimum distribution amounts for both 2015 and 2016.  Depending on the individual’s tax situation over the two years, this flexibility can result in lower overall taxes. Note that the IRS has strict guidelines with regard to RMD payments and if not followed, penalties apply.  Generally administrators of the retirement plan calculate the RMD annually, however the taxpayer is ultimately responsible for compliance with IRS requirements.  As professional advisors, we should confirm that required distributions have been received.
 
As many clients defer receipt of their RMDs until late in the year, this is also a good vehicle to use to adjust needed withholdings to reduce estimated tax payment requirements.
  Retirement Plan Creation Planning While retirement plan contributions can generally be made to a qualified plan up to the due date of the taxpayer’s return, the qualified plan itself must have been adopted prior to the end of the tax year to permit contributions to be made for that year.  Year end planning is the perfect time to review the types of plans available for your client and consider if any changes should be made to the structures currently in place.
  Charitable Planning In December 2014 the Tax Extenders Package gave individuals age 70 ½ and older the option of making tax-free distributions of up to $100,000 from IRA’s for charitable purposes. This is known as a Qualified Charitable Distribution (QCD).  Generally the QCD is a nontaxable distribution made directly by the IRA trustee to a specific eligible charitable organization.  For QCD purposes, eligible charitable organizations do not include private foundations and donor advised funds.   The QCD will also satisfy the taxpayers Required Minimum Distribution in the amount transferred to charity.  From an income tax perspective QCD’s are excluded from gross income and are not deductible on Schedule A, so that there would appear to be little benefit to the QCD.  However, certain deductions are limited based on a taxpayer’s Adjusted Gross Income (AGI)  and utilizing the QCD reduces AGI. 
 
This provision has not yet been extended for the 2015 tax year, so advisors may want to advise clients to postpone their RMD from IRAs and some of their charitable gifting commitments until Congress determines whether to extend the QCD rules for 2015.
  Annual Gifting For Federal gift tax purposes each individual can transfer each year (either cash or property) up to an allowable exclusion amount to as many individuals as they choose without incurring gift tax or using any of his or her lifetime exclusion amount.  For 2015 the annual gift exclusion is $14,000 per person, or $28,000 for married taxpayers.  Most planners consider annual exclusion gifts the “low-hanging fruit” of estate planning.  Since the annual exclusion expires each December 31 if not used, we should encourage our clients not to waste this tax free opportunity to reduce their taxable estates.   Implementing an annual gifting program permits taxpayers with large estates to regularly transfer wealth gift tax free.  Annual exclusion gifts can be part of sophisticated gifting programs reflected on gift tax returns each year and reducing the taxable gifts made in certain types of trusts.  But in other cases the administration of an annual gifting program can be very minimal.  The IRS does not require a gift tax return when total gifts made to individuals are under the annual exclusion amount. Therefore, gift tax returns will not be required in many situations. 
 
Annual exclusion gifts can be useful in creating Section 529 Education accounts for children and/or grandchildren or to help working children establish tax favored Roth IRA accounts.  Each year’s gifts are manageable and over time, a significant estate can be established for our clients’ family members. 
  Appreciated Stock The sale of appreciated stock will often lead to increased personal income taxes.  For high-income taxpayers the federal long-term capital gains rate tops out at 23.8% for 2015 (20% Income tax plus 3.8% Net Investment Income Tax).  If appropriate year-end planning takes place, your client may find a more efficient use of long-term appreciated stock.  For example, using the annual exclusion to gift appreciated stock to a family member may result in the capital gain being taxed at a lower rate and perhaps excluded from the Net Investment Income Tax altogether.    Another option is to use appreciated stock rather than cash to satisfy a charitable gift.  The taxpayer deducts the fair market value of the stock as a charitable donation, without triggering capital gains tax on the appreciation. 
  Trust Planning From an income tax perspective trusts become subject to the highest rates very quickly, which certainly leads to opportunities for year-end tax planning.  Trust taxable income, excluding long term capital gains, in excess of $12,300 will be subject to tax at 39.6%.  The tax on long term capital gains also rises from 15% to 20% when income exceeds $12,300. Similarly, the additional NIIT at the rate of 3.8% applies to undistributed trust investment income in excess of $12,300. 
 
The key to complex trust distribution planning is identifying opportunities to carry out beneficial tax opportunities to beneficiaries.  Trust distributions are governed by the terms of the trust document, but the benefits of distribution planning should be communicated to trustees if a favorable tax opportunity exists. 
 
The marginal rate brackets and NIIT thresholds are more favorable for individual taxpayers. Therefore in cases where a beneficiary is below the top bracket a tax savings may be generated by distributing income from a complex trust.   However, this may thwart the non-tax purpose of the trust so the trustee will want to consider both the tax and non-tax considerations before making this decision.  Distributions of capital gain  is a more complex matter requiring review of the trust document and consultation with tax counsel in some cases.
 
Trustees are given an opportunity to make a distribution post year end and treat it as if made in the prior tax year.  If paid within 65 days of year end and properly reflected on a timely filed fiduciary return, distributions made within the first 65 days of the year will be treated as made in the prior year.  Because of the potential significant difference in taxes to be paid at the trust level versus the beneficiary level, it is important to take advantage of this rule and review the estimated taxable income of the trust during this period.
Finally, if a trust has made estimated tax payments that are not needed for the year by the trust, an election may be made by filing Form 1041-T within 65 days of year end to allocate the estimated payments to trust beneficiaries. 
 

BDO Knows: ASC 740 - August 2015

Thu, 08/13/2015 - 12:00am
Income Tax Accounting Question & Answer Series - UK Diverted Profits Tax - US GAAP Accounting Implications Download the PDF Version
Preamble: The UK has recently enacted a new anti-avoidance tax related to “diverted profits” attributable to UK operations.  The Diverted Profits Tax or (“DPT”) may impact many multinationals with transactions in the UK.  The enactment date of this new tax regime is March 26, 2015, and the effective date is April 1, 2015.  Companies that do not have a March year end will be required to apportion their taxable profits between the periods arising pre and post April 1, 2015.  The DPT rate is 25% for all industries other than the oil and gas industry which will be subject to a DPT rate of 55%. This new tax regime is separate from, and in addition to, the existing regular UK corporation tax (“CT”) and DPT payable cannot be credited against the regular CT. The CT rate is currently 20%. The DPT regime is modeled on the anti-avoidance principles that have been proposed by the Organization for Economic Co-operation and Development (“OECD”) in its ongoing project to study and propose rules to combat base erosion and profit shift (“BEPS”) by multinational entities. It is generally intended to apply to multinational enterprises with business activities in the UK and certain structures, discussed below, which purportedly divert profits from the UK.
Q&A 1: What is the scope of DPT? The DPT applies to two broad scenarios: 1) those that seek to avoid creating a UK permanent establishment (“PE”) status, and 2) those involving transactions with an entity with insufficient economic substance.
 
Structures that Avoid UK Permanent Establishment
 
Foreign companies that carry on business activities within the UK without a UK PE should examine their structure.  Specifically, the DPT applies to a foreign company (i.e., non-UK resident) when another entity (e.g., a UK subsidiary) or person is carrying on an activity in the UK in connection with the supply of goods, services or other property of the foreign company to customers, whether in the UK or elsewhere.  The entity or person carrying on activities in the UK on behalf of the foreign company may or may not be a UK resident for tax purposes.
 
DPT will apply in this scenario where it is reasonable to assume that any of the activity of either party is designed to ensure that the foreign company does not carry on the trade in the UK as a result of the other party’s activities and either the “tax mismatch condition” or the “tax avoidance condition” is met. 
 
a)  Broadly, the “tax mismatch condition” has two requirements 

i) The “effective tax mismatch outcome” (“ETMO”). This will be met where, in connection with the supply of goods, services or other property:
  •  One or more transactions (for these purposes, “transaction” is very broadly defined to include any arrangement, agreement or understanding) is entered into between the foreign company and a related person (“A”)
  • As a result of the transaction(s), expenses of the foreign company are increased (or the income of the foreign company is reduced)
  • The resulting reduction in taxes payable by the foreign company exceed the increase in the taxes paid by A
  • The increase in taxes payable by A are not at least 80% of the reduction in the tax payable by the foreign company.
ii) The “insufficient economic substance” condition

This is satisfied where one or more of the following is met in relation to the transaction(s) giving rise to the ETMO:
  • It is reasonable to assume that the transaction(s) was designed to secure a tax reduction, except where the non-tax benefits are expected to exceed the financial benefit of the tax reduction
  • A person is party to any of the transactions comprising the material provision and it is reasonable to assume that the person’s involvement was designed to secure the tax reduction, unless one or both of the following is met:
    • It was reasonable to assume that for the foreign company and A, the non-tax benefits related to the contribution made by A’s staff would exceed the financial benefit of the tax reduction
    • The ongoing income attributable to the ongoing functions or activities of A’s staff, measured by reference to their contribution to the transaction(s), exceeds the other income attributable to the transaction.
 
b)  The “tax avoidance condition” will be met where in connection with the supply of services, goods or other property, arrangements were in place where the main or one of the main purposes of which is to avoid or reduce the UK CT. 
 
Many structures and arrangements might fall within this scenario including internet based retailers where goods are delivered from UK warehouses, but the sales are considered to be made by a foreign company with no UK PE; groups which sign global contracts with customers with sales/marketing support; implementation/after sales support from the UK (IT business); and groups which use principal/commissionaire structures.  The tax mismatch condition seeks to extend that to cases where the profits of the foreign company are artificially reduced by, for example, paying a royalty to a tax haven entity without substance.
 
Example Facts:
 
A foreign company (“FC”) sells products to customers located throughout the world.  The group operates in the UK through a subsidiary which employs a team of UK based individuals assisting with sales and marketing activity throughout Europe.  The activity is remunerated on a cost plus basis.  All sales contracts, however, are concluded by customers directly with the foreign parent.  All of the group’s IP is held in a subsidiary (“IPco”) and is not subject to tax on the income.  Sales activity by FC generates a royalty payment from FC to IPco.
 
Examining the conditions:
 
When the details of the arrangement between the UK operations and the FC are examined, it is determined that there is good reason to assume that they are designed to ensure that FC is not trading in the UK through a permanent establishment.  Accordingly, it is necessary to consider the ETMO and insufficient economic substance tests. 
 
a)  ETMO:
 
i)   The relevant transaction is the royalty payment from FC to IPCo
ii)  The expenses of FC are increased as a result of the provision
iii)  FC achieves a tax saving at 35% whereas IPco is not subject to tax on the income
iv)  The 80% requirement is not, therefore, met.
 
b)  Insufficient Economic Substance:

IPco has only one employee and management have confirmed that the value added by this individual is not significant in relation to either the tax benefits or the income received by IPco.

Conclusion: Based on the above, it would appear that the ETMO and the insufficient economic substance tests are met.  Consequently, DPT may therefore apply and FC would be subject to tax in the UK on an appropriate proportion of the profits from all sales arising from the UK-related activity. 
 
Transactions with Insufficient Economic Substance
 
The second scenario is where a UK company, or non-UK company with a UK PE, is party to a transaction or series of transactions with an affiliate (whether non-UK or UK tax resident).
 
The DPT would apply to these arrangements if the following two conditions are present:
 
a) The transaction results in an effective tax mismatch outcome, as explained above
b) The insufficient economic substance condition (as explained above) is met.
 
Typically, this scenario is relevant to structures where a foreign company uses a non-UK affiliate to provide services or property (e.g., marketing and brand rights) to a UK subsidiary (or UK PE of a non UK company) in exchange for a payment. 
 
However, the rules are not limited simply to “payment” cases.  Another important class of transactions will be where income-producing assets are transferred outside of the UK, for example under asset leasing or royalty arrangements and, as a result, UK taxable income has been reduced.  
 
Example Facts:
 
A UK company (“UKco”) and a Dubai company (“DUco”) are owned by a foreign company.  DUco buys plant and machinery and leases it to UKco.  The lease payments leave UKco with relatively little UK profits.  Moreover, the DUco has neither full-time staff nor business activities besides its leasing contract with UKco.  The UKco’s lease payments are deductible for UK CT, however, the payments received by DUco are not taxable in Dubai. 

Examining the conditions:
 
a) ETMO:
 
i)   The material provision is the lease arrangement entered into by UKco and DUco
ii)  The expenses of UKco are increased as a result of the leasing arrangement
iii)  UKco achieves a tax saving at 20% whereas DUco is not subject to tax on the income
iv)  The 80% requirement is not, therefore, met
 
b)  Insufficient Economic Substance:

The company undertook the structuring with the understanding that it would reduce taxes payable and management has confirmed that the non-tax benefits are not expected to exceed the tax benefits arising.

Conclusion: Absent further analysis, it might be reasonable to conclude that the ETMO and the insufficient economic substance tests are met.  DPT may therefore apply. 
  Q&A 2: Are there any exemptions from DPT? The new tax regime will not apply in the following two fact patterns:
 
  1. SME Exemption - Smallormedium sized enterpris or groups(“SME”) willbe exemt from the DPT. This exemptionapplis to reporting entties or groups with less than250 employees, and at least one of the following: revenue not exeeding 50 million ER, or total assets not exceeding 43 millionEUR on a consolidated basis. As all “linked enterprises” need to be included within the calculations, most private equity backed businesses will likely be within the DPT regime regardless of that group’s actual size.
  2. Avoided PE Exemption –Thisexemption applies to a foreign multinationl with totalUK-related sales not exeeding 10 million GBP orUK-related epenses ofless than 1 millin GP. For these purposes UK-related sales and expenses include all sales and expenses arising from activities carried on in the UK in connection with the supplies of services, goods or other property made by the foreign company in the course of its trade.Specifically, therefore, the threshold needs to include all sales to UK and non-UK customers arising from the UK activities.It should be noted that the test is effectively considered on a group-wide basis.
 
For both the avoided PE and transactions with insufficient economic substance scenarios, generally, where the ETMO arises wholly from a loan relationship (money debts between companies which are to be repaid in cash), the arrangement is not within the scope of DPT.
  Q&A 3: What are the compliance obligations and how will DPT be assessed?
  1. Companies have a requirement to notify te UK Tax Authority(HM Revenue & Customs, “HMRC”) that they fall under the DPT regime ecept whee itis reasonable for them to conlude that they will ot fallunder this regime in the period.
  2. Companies have three months from the end of the accounting period to notify HMRC that they are within the regime.This period is extended to six months for the first accounting periods affected by the introduction of the DPT, i.e., to accounting periods ending on or before March 31, 2016.
  3. The HMRC may issue a preliminary assessment notice within two years after the end of the accounting period.Companies have 30 days from the issue of this preliminary assessment notice to make limited representations (or four years if the company has not notified HMRC of a potential liability).
  4. Having considered the representations, HMRC must issue a charging notice, or confirm that no notice will be issued, within 30 days from the end of the representation period.
  5. DPT must be paid within 30 days of the issue of the charging notice and there is no right to postpone payment of the tax.
  6. HMRC is able to review and amend the charging notice within a review period of up to 12 months from the issue date. Changes will be based on the information and documents provided:
    1. By the company
    2. Taxpayers have no right of appeal during the review period. Once the review period is over taxpayers have the right to file an appeal within 30 days before the charging notice will become final.
  Q&A 4: How will DPT be calculated?
 

a) Avoided Permanent Establishment
 
Calculation of the DPT arising depends on whether the tax mismatch condition or the tax avoidance condition is met and also differs for the purposes of the preliminary assessment notice or the charging notice.
 
For cases falling within tax avoidance condition, DPT for the charging notice will be calculated by reference to the “notional PE profits”– i.e., the profits which would have been assessed to UK CT if an actual PE had been created, using the authorized OECD approach to branch profits allocation.
 
For cases falling within the tax mismatch condition, the calculation of the DPT for the charging notice will depend upon whether the parties would have undertaken the same type of transaction(s) as they actually did, if tax had not been a relevant consideration.   
 
If it is concluded that in the absence of tax considerations:

  • The foreign company would have made the same type of payments (that gave rise to the mismatch), and for the same purpose; and
  • None of those payments would have been made to a UK entity

the DPT is to be calculated by reference to the notional PE profits of the foreign company. 
 
In all other cases, the DPT is calculated by reference to the alternative transaction(s) that it is reasonable to assume would have been undertaken in the absence of tax considerations. In these cases, the DPT charge will consist of both the notional PE profits that would have arisen on the basis of those alternative transactions plus any additional profit that would have arisen to UK companies as a result of such transactions. . 
 
For the purposes of the preliminary assessment, the basic rule is that HMRC are to make a “best of judgment” estimate of the amount of profits subject to the DPT.  Specific rules apply, however, where HMRC considers that the actual provision might exceed an arm’s length amount.  In these circumstances, HMRC will automatically disallow 30% of the payment made by the foreign company to the connected party.
 
b) Transactions With Insufficient Economic Substance
 
As with the avoided PE scenario, the calculation of taxable diverted profits is different for the charging notice and the preliminary assessment. 
 
For the charging notice, the calculation of the DPT will, depend upon whether the parties would have undertaken the same type of transaction(s) as they actually did, if tax had not been a relevant consideration
 
The DPT charge will be based on the actual transaction(s), if it is concluded that in the absence of tax considerations:

  • The UK company would have made the same type of payments (that gave rise to the mismatch), and for the same purpose; and
  • None of those payments would have been made to a UK entity

 
Where the actual transaction(s) is to be used and the company has applied arm’s length principles, or has made a transfer pricing adjustment in its corporation tax return, no taxable diverted profits will arise.  Where pricing is not at arm’s length and no transfer pricing adjustment has been made, taxable diverted profits will be calculated by reference to the transfer pricing adjustment needed. 
 
In all other cases, the DPT is calculated by reference to the alternative transaction(s) that it is reasonable to assume would have been undertaken in the absence of tax considerations. In these cases, the DPT charge will consist of the additional UK profits that would have arisen to the UK company or PE, as well as any UK affiliates, as a result of such transactions.
 
For purposes of issuing a preliminary assessment, HMRC are to make a “best of judgment” assessment.  As with the avoided PE scenario, where the material provision results in expenses of the UK company for which a UK corporation tax deduction has been taken and HMRC believe that those expenses, or part of the them, exceed an arm’s length amount, HMRC has the power to automatically disallow 30% of the expenses incurred. 
 

Q&A 5: Are there any penalties for noncompliance?

 
The DPT regime carries two types of penalties for noncompliance:
 

1) Late notification penalty:
  • Delay up to 6 months                      100 GPB penalty
  • Delay between 6 and 12 months     5% of the DPT
  • Delay of more than 12 months        Up to 200% of the DPT

 
2) Penalty for late payment:
 

  • 5%, 10%, or15% of the T, dependng on the number of months overdue.

 
Accounting Implications:
 
The effects of new tax legislation cannot be recognized prior to enactment.  The DPT tax regime was enacted on March 26, 2015, which is the first quarter for calendar year reporting entities (the evaluation of the tax law’s application should have begun Q1-2015).  Reporting entities with UK operations and/or sales have to consider the new tax and determine whether it is applicable to their UK activities.  This analysis is quite challenging due to the tax law’s uniqueness and limited interpretive guidance. DPT is not self-assessed but rather determined by the tax authority.  It will be necessary to identify and examine the assets, liabilities, revenues and costs which are attributable to the UK activities (sales, services, etc.).  There might be significant uncertainty about the application of this new tax to a particular fact pattern and to business and tax restructuring that has been done by some reporting entities since the enactment of this unique law.  Reporting entities would need to consider appropriate disclosure and the provisions governing the accounting for uncertain tax benefits (FIN 48 liabilities).
 
The following subsections discuss the rules pertaining to current and deferred taxes when there is a change in the tax law and the provisions related to uncertain tax benefits.
 

Q&A 6: What is the impact on current taxes?

 
The tax effect of a change in tax laws or rates on taxes currently payable or refundable for the current year shall be recorded after the effective date prescribed in the statute and be reflected in the computation of the annual effective tax rate beginning no earlier than the first interim period that includes the enactment date of the new tax legislation (ASC 740-270-25-5).  As illustrated in ASC 740-270-55-45, the effect on current tax from a tax law change with a prospective effective date is not recognized in the effective tax rate for the current year before the interim period which includes the effective date.
 
The DPT regime was enacted on March 26, 2015 (Q1-2015 for calendar year entities), but with a prospective effective date of April 1, 2015.  Therefore, based on the example in ASC Subtopic 740-270, the effect of the DPT on current tax would be reflected in the calculation of the annual estimated effective rate beginning in the interim period which includes April 1, 2015 (i.e., Q2-2015 for calendar year entities).
 

Q&A 7: What is the impact on deferred taxes?


The effect of a new tax on deferred tax balances must be recognized in the period that the legislation is enacted (ASC 740-10-25-47).[1]  As it relates to the DPT law, this would be the interim period which includes March 26, 2015 (Q1-2015 for calendar year entities), assuming the entity concludes that this new tax applies to its current structure. The adjustment is recognized as a discrete period tax expense from continuing operations, even if the assets and liabilities relate to discontinued operations, a prior business combination, or items of accumulated other comprehensive income. Reporting entities which conclude that the DPT applies to their current structures or arrangements and therefore might incur the tax would need to identify relevant temporary differences which would impact the computation of the DPT.  This might require examination assets, liabilities, revenues and costs which are attributable to the UK activities.
 

Q&A 8: How does the DPT effect uncertain tax positions (ASC 740-10-25)?

 
Initially, it might be challenging to identify all assets, liabilities, revenues and expenses attributable to UK activities.  The service offering of BDO UK (or other external service providers) might have to be utilized to determine applicability and to estimate the anticipated effect.  Additionally, the penalties for noncompliance, as summarized in Q&A 5, are quite onerous.
 
Therefore, companies will have to consider the recognition and measurement principles related to uncertain tax positions for interim and annual financial reporting.  These requirements apply to current and deferred income tax (ASC 740-10-25-17).  The assessment must be made under the presumption that the UK tax authority has full knowledge of the UK activities and business structures.
 
Two Step Approach – Technical Aspects
 
Recognition (first step): A tax benefit can be recognized if the likelihood that the tax position will be sustained upon examination is greater than 50%.  Recognition must be based on relevant law, legal practice or advance rulings presuming that the tax position will be examined by the tax authorities.  If recognition is not considered met, no tax benefit is recognized.  If recognition is considered met, the position’s benefit must be evaluated for measurement under the second step.
 
Measurement (second step): The largest benefit amount that has a greater than 50% probability of being sustained is recognized.  The concept of accumulated probability has to be considered in the measurement step (ASC 740-10-30-6 to 7).  This generally means two or more possible outcomes and their individual probability would be considered. Several illustrating examples are available in ASC 740 (ASC 740-10-55-99 through 55-116).
 
Interest and Penalty Charges
 
As mentioned in Q&A 5, the DPT regime contains two types of penalty charges for delayed payments.  Under Topic 740, interest and penalties must be accrued in the first period in which the law requires it (ASC 740-10-25-56 and 57).
 
Interest expenses and penalties may be classified in the financial statements as either income taxes or interest expenses (“other expenses” in the case of penalties) based on the accounting policy election of the reporting group (ASC 740-10-45-25).
 
Disclosure Related to Uncertain Tax Positions
 
ASC 740 includes several disclosure requirements with respect to uncertain tax positions.  The major disclosure requirements are as follows:
 
‘Early warning disclosure’
 
Disclosure is required when it is reasonably possible that significant changes in unrecognized tax benefits may occur within the next 12 months (ASC 740-10-50-15 d).  The type of “early warning” disclosures that are required at the end of each annual reporting period include:
 

  • Nature of the uncertainty
  • Nature of the event that could occur within the next 12 month to cause the change
  • Estimate of the range of the reasonably possible change or statement that an estimate of the range cannot be made.

 
Reasonably possible is generally considered a likelihood of approximately 30%, although not specifically defined.
 
Public companies must disclose on an annual basis a tabular reconciliation of the total amounts of unrecognized tax benefits by period, and the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate (ASC 740-10-50-15A).

1 Deferred tax adjustments would be determined based on the temporary differences that exist as of enactment.
 


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

National Tax Services -  Topic 740 Group

Yosef Barbut
Tax Partner   William Connolly
Tax Senior Director   William F. Roth
Tax Partner
    Ingo Harre
Tax Manager
 
International Tax Group
  Ingrid Gardner
Tax Managing Director    
    Michelle Murphy
International Senior Tax Manager
 
BDO UK
  Tim Ferris
Tax Partner
    Howard Veares
Tax Director
 

State and Local Tax Alert - August 2015

Mon, 08/10/2015 - 12:00am
Missouri Allows Single Sales Factor Apportionment and Market Sourcing for Service and Intangible Providers and Requires the Department to Notify Taxpayers of a Change in Sales/Use Tax Law
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  Summary Missouri Governor Jay Nixon (D) recently signed into law Senate Bill 18 (“S.B. 18”) and Senate Bill 19 (“S.B. 19”).  S.B. 19 provides market sourcing rules for all sales that are not sales of tangible personal property (e.g., services and intangibles) under the single sales factor apportionment election and, thus, now definitively allows corporations that have such sales the option of electing this apportionment method for purposes of the corporate income tax.  S.B. 18, which relates to sales and use tax, requires the Department of Revenue (the “Department”) to notify affected sellers if there has been a change in an interpretation of the law that modifies the taxability of an item of tangible personal property or a service.
  Details Corporation Income Tax – Single Sales Factor Apportionment
A corporation may make an annual, irrevocable election to apportion business income using a fraction comprised of in-state sales in the numerator and everywhere sales in the denominator.  The Department had previously denied taxpayers that sell services or license intangibles the use of this method on the basis that the statute did not provide for a method of sourcing such sales.  S.B. 19 provides rules for sourcing sales of services and intangibles and, thus, at least with respect to an original return filed after August 27, 2015, definitively allows taxpayers that sell services and/or license intangibles the option of electing to use this apportionment method.

S.B. 19 assigns sales of services, intangibles and other certain items to Missouri using a “market” approach.  See the following chart.  If the state of assignment of a sale cannot be determined or reasonably approximated under these rules, it is excluded from the numerator and denominator of the apportionment factor.
  Receipt From... Source to Missouri If... … Sale, rental, lease or license of real property … Missouri property … Rental, lease or license of real or tangible personal property … Missouri property … Service …The ultimate beneficiary is in the state … Rented, leased or licensed non-marketing intangible …The intangible property is used in the state
by the rentee, lessee or licensee … Rented, leased or licensed marketing intangible …The good or service is purchased by a consumer
in the state … Franchise fees or related royalties or right to conduct business …The franchise location is in the state … 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 the state … Sale of intangible property - sales contingent on productivity,
use or disposition of the intangible property …Treated as a receipt from the rental, lease or license of the intangible property
Sales and Use Tax – Department Notification
Effective August 28, 2015, S.B. 18 requires the Department to notify affected sellers if an item of tangible personal property or a service determined to be taxable is modified by a decision of the Department, the administrative hearing commission, or a court decision, and a reasonable person would not have expected the decision or order based on prior law or regulation.  Failure by the Department to provide notification relieves a seller that has not previously remitted tax on the tangible personal property or service of liability for taxes that would otherwise be due.

Formal notification in this case may be delivered via U.S. mail or email. The Department is also required to update its website with information regarding modifications to sales tax law.
BDO Insights
  • As compared to the three factor apportionment formula option under which sales of other than tangible personal property are sourced using the original multistate compact income-producing activity/costs of performance rules, the single sales factor option using market sourcing rules may be more beneficial to a Missouri-based corporation (i.e., including an S corporation and an LLC that elects to be taxed as a corporation for federal income tax purposes) that provides services or intangibles to non-Missouri customers.  This may be particularly beneficial since the elective single sales factor apportionment method does not contain a “throwback” or “throw out” rule for sales to states in which the corporation is not subject to tax.
  • The changes to the single sales factor apportionment appear to be limited to original returns filed after August 27, 2015.  This means that a taxpayer that sells services or licenses intangibles that files a validly extended or past due original return after this date may make the election to use the single sales factor apportionment method and source sales accordingly.
  • While the Missouri General Assembly characterized this change in the law as a “clarification” of the intent of the existing statute in  committee reports related to bills that had similar language, this was not directly reflected in the legislative history to S.B. 19.  In addition, the Department has informally announced that it will not apply S.B. 19 as a clarification to existing law.
  • It should be noted that the market sourcing provisions under the single sales factor option do not address how to assign a sale of goodwill.  Thus, it appears that a sale of goodwill should be excluded from the numerator and denominator of the fraction if the single sales factor option has been elected.
  • S.B. 18 seeks to resolve an ongoing problem caused by the Department assessing sales and use tax, plus interest and penalties, on transactions after informing a taxpayer that the transactions were not subject to tax.

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

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

BDO Transfer Pricing Alert - July 2015

Fri, 07/31/2015 - 12:00am
World Customs Organization Guide to Customs Valuation and Transfer Pricing
Download the PDF Version
Summary On June 24, 2015, the World Customs Organization (“WCO”) published its Guide to Customs Valuation and Transfer Pricing.  The guide attempts to bridge gaps between customs valuation and transfer pricing for customs officials conducting audit and control on multi-national enterprises (“MNEs”), private sector participants and tax administrators.  In its guide, the WCO discusses the challenges preventing synergy between transfer pricing compliance efforts and customs valuation, and sets forth best practices to achieve desirable and efficient outcomes in both customs valuation and transfer pricing.  Through the issuance of this guide, the WCO intends to further the discussion on developing a consistent approach for customs valuation and transfer pricing, as well as reduce the burdens on private sector business to facilitate international trade.
Details The WCO was established in 1952 as the Customs Co-operation Council (“CCC”).  It currently represents 180 customs authorities, which account for approximately 98 percent of world trade.  The WCO recognizes that while the outcomes from customs valuations and transfer pricing analyses appear similar, they often differ and produce regulatory issues for both customs and tax administrations.  The WCO’s guide is comprised of five main elements: (i) Customs Valuation and Related Party Transactions; (ii) An Introduction to Transfer Pricing; (iii) Linkages Between Transfer Pricing and Customs Valuation; (iv) Using Transfer Pricing Information to Examine Related Party Transactions; and (v) Raising Awareness and Closer Working.

The guide begins with an overview of customs valuation that describes the methodology set out in the World Trade Organization (“WTO”) Valuation Agreement.  The Agreement lists a hierarchy of customs valuation methods, of which the transaction value method is primary.  Customs valuation methods assess duties on individual transactions at the time the goods are imported into the country.  When determining customs valuations for transactions between related parties, the MNE must be able to demonstrate that the price determined in the transaction was not influenced by the relationship between the related parties.  To determine whether the price was influenced by the relationship, customs officials should consider the following circumstances: (i) whether the price was settled in a manner consistent with the normal pricing practices of the industry; (ii) whether the price was settled in a manner consistent with the way the seller settles prices for sales to unrelated buyers; and (iii) whether the price is adequate to ensure recovery of all costs plus a profit representative of the firm’s overall profit realized over a representative period of time in sales of goods of the same class or kind.

The WCO provides an introduction to transfer pricing that focuses on the transfer pricing regulations set out in the Organization for Economic Co-operation and Development (“OECD”) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”).  The OECD Guidelines use the arm’s-length principle to determine whether the conditions (prices, profit margins, etc.) surrounding transactions between related parties are the same as those that would have prevailed between two independent parties in a similar transaction under similar conditions.  The OECD Guidelines set forth a hierarchy of methods for determining if intercompany transactions are consistent with the arm’s–length principle.  Due to the difficulties in obtaining transactional level data and comparable information, many transfer pricing analyses are conducted using profit-based methods.  Profit-based methods often look at aggregated transactions or the overall profitability of an entity to determine if the prices charged in its intercompany transactions are arm’s-length.  When aggregated transaction data is examined, it often includes transactions involving various products.  It is also common for MNEs to make year-end adjustments to their transfer pricing to ensure that an arm’s-length level of profitability is earned by each entity.  

Although customs valuations and transfer pricing methodologies both seek to ensure that the price is set as if the parties were not related and had been negotiated under normal business conditions, the objectives of parties involved in customs valuations and transfer pricing differ.  Customs authorities seek to ensure that all appropriate elements are included in the customs value and that the price is not understated, while the tax authority in the importing country seeks to ensure the transfer price does not include inappropriate elements and that it is not overstated.  Similarly, for MNEs, lower custom values lead to reduced duty liability, while a higher transfer price leads to a reduced taxable profit in the importing country.  Since there are conflicting objectives between customs valuation and transfer pricing methodologies, the WCO, United Nations (“UN”), OECD, Technical Committee on Customs Valuation (“TCCV”), World Bank Group (“WBG”), and the private sector are discussing ways to bridge gaps and streamline the customs and transfer pricing processes.  One proposal is to utilize transfer pricing documentation, and the information presented therein, for customs valuation purposes.  This suggestion is supported by the private sector but is only supported on a case by case basis by the TCCV.

Use of transfer pricing information to examine related party transactions is encouraged in the WCO guidelines.  While using transfer pricing documentation for customs purposes would reduce the compliance burden for MNEs, this practice gives rise to a number of practical issues.  Transfer pricing analyses often look at aggregated transaction data that span a range of products, while customs valuations examine single product transactions.  In this case, transfer pricing documentation must give additional assurance to customs authorities that the products sold are of the same class or kind, and can therefore be considered as a group.  It is also important that the dates of transfer pricing documentation and customs valuations align to ensure that all information presented in the transfer pricing documentation is relevant to the customs valuation.  Furthermore, many MNEs make transfer pricing adjustments to ensure that each entity earns an arm’s-length level of profitability.  One method of adjustment is to adjust the actual price of the goods sold between related parties.  This type of adjustment presents an issue for customs valuation, for which duty is assessed at the time of import.  MNEs also conduct transfer pricing adjustments that affect only the tax liability (i.e., no actual change to the amount paid for the goods).  For adjustments of this type, customs authorities must consider whether the change in tax liability indicates that the original price was not arm’s-length.

The guide closes with suggested best practices for customs valuation policy managers, MNEs, and tax administrations.  The WCO suggests that customs valuation policy managers assess the extent to which MNEs are importing from related parties, ensure that employees have proper training, leverage information represented in transfer pricing documentation when sufficient, participate in industry discussions, and strengthen relationships with tax administrations.  MNEs should ensure that customs and tax advisors communicate, be mindful of customs valuation when preparing transfer pricing documentation, and give advance notice to customs authorities when an adjustment is expected.  Finally, tax administrators should strengthen their relationships with customs authorities and take into account how a customs valuation was determined when assessing transfer pricing.
BDO Insights The WCO’s guide provides a comprehensive summary of customs valuation and transfer pricing issues, making it worthwhile reading for parties interested in both issues.  It is important for firms to employ complementary transfer pricing and customs policies to reduce compliance burdens, but differences between customs valuation and transfer pricing practices pose significant barriers to accomplishing this goal.  This guide should serve as a platform to stimulate discussion between interested parties about ways to standardize customs valuations and transfer pricing policies.  

BDO supports its clients in all aspects of transfer pricing and customs valuations.  The agility of BDO as a firm ensures that maximum communication occurs between the transfer pricing and customs valuations teams.  This synergy between the transfer pricing and customs valuation teams allows BDO to prepare transfer pricing documentation that considers customs valuation issues and ultimately saves money and time for clients.
 


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

International Tax

Robert Pedersen
Practice Lead and Partner William F. Roth III
Partner
 

Transfer Pricing

Veena Parrikar 
Tax Principal Michiko Hamada
Senior Director Kirk Hesser
Senior Director

Federal Tax Alert - July 2015

Fri, 07/31/2015 - 12:00am
Stopgap Highway Bill Includes New Tax Compliance Measures
An eleventh-hour temporary extension of federal highway and transportation spending is partially paid for by new tax compliance requirements. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (H.R. 3236) was approved by the House, 385 to 34, on July 29, and the Senate on July 30, by a 91-4 margin. This stop-gap bill changes the filing deadlines of certain returns, modifies mortgage reporting, clarifies the six-year statute of limitations in the case of overstatement of basis, and requires consistency between estate tax value and income tax basis of assets acquired from a decedent. The bill also provides that employees with TRICARE or VA coverage may be exempted from the Affordable Care Act’s employer shared responsibility requirements and clarifies veterans’ eligibility for a health savings account (HSA).     
  Download

Federal Tax Alert - July 2015

Wed, 07/29/2015 - 12:00am
Section 2704 Proposed Regulation Coming Possibly in Fall of 2015

Download PDF Version

Summary

Catherine Hughes, Office of Tax Policy of the US Treasury Department, recently spoke at the American Bar Association Conference.  Part of her discussion indicated that proposed regulations under IRC section 2704 will likely be introduced in the fall of 2015.  Those regulations may limit the availability of lack of control and lack of marketability discounts for transfers of closely held interests among family members.  Accordingly, clients contemplating the transfer of closely held business interests should consider making those gifts as soon as possible, prior to the issuance of the proposed regulations.

Details 

IRC Section 2704 & Applicable Restrictions
IRC Section 2704 was enacted in 1990 to eliminate perceived valuation abuses concerning certain lapsing voting and liquidation rights as well as certain restrictions on liquidation.  Specifically, the statute addresses transfers of interests in controlled corporations or partnerships among family members.  In valuing those transfers “applicable restrictions” are to be disregarded.  An “applicable restriction” is any restriction that effectively limits the ability of a corporation or partnership to liquidate and, (i) where either the restriction lapses, in whole or in part, after the transfer, or (ii) the transferor or family members can remove the restriction, in whole or in part. 

An applicable restriction, however, does not include any restriction imposed by federal or state law, nor any reasonable restriction which arises as part of financing to the corporation/partnership with a person who is not related to the transferor or transferee, or a member of the family of either.  Many states enacted statutes that caused a restriction to be imposed by state law such that discounts for those restrictions were still permitted.
Section 2704(b)(4) provides that the IRS can issue regulations that would disregard other restrictions if the restriction has the effect of reducing the value of the transferred interest, but does not ultimately reduce the value of such interest to the transferee. Under this provision, the IRS intends to issue proposed regulations.
 
When Will the Regulation Take Effect?
It is not known if this Regulation will be effective as of the date of the Proposed Regulation, or as of the date of issuance of the Final Regulation.  If gifts, as described above, are contemplated, the safest approach is to make them prior to issuance of the Proposed Regulation in late summer or early fall of 2015.

Federal Tax Alert - July 2015

Wed, 07/29/2015 - 12:00am
Section 2704 Proposed Regulation Coming Possibly in Fall of 2015

Download PDF Version

Summary

Catherine Hughes, Office of Tax Policy of the US Treasury Department, recently spoke at the American Bar Association Conference.  Part of her discussion indicated that proposed regulations under IRC section 2704 will likely be introduced in the fall of 2015.  Those regulations may limit the availability of lack of control and lack of marketability discounts for transfers of closely held interests among family members.  Accordingly, clients contemplating the transfer of closely held business interests should consider making those gifts as soon as possible, prior to the issuance of the proposed regulations.

Details 

IRC Section 2704 & Applicable Restrictions
IRC Section 2704 was enacted in 1990 to eliminate perceived valuation abuses concerning certain lapsing voting and liquidation rights as well as certain restrictions on liquidation.  Specifically, the statute addresses transfers of interests in controlled corporations or partnerships among family members.  In valuing those transfers “applicable restrictions” are to be disregarded.  An “applicable restriction” is any restriction that effectively limits the ability of a corporation or partnership to liquidate and, (i) where either the restriction lapses, in whole or in part, after the transfer, or (ii) the transferor or family members can remove the restriction, in whole or in part. 

An applicable restriction, however, does not include any restriction imposed by federal or state law, nor any reasonable restriction which arises as part of financing to the corporation/partnership with a person who is not related to the transferor or transferee, or a member of the family of either.  Many states enacted statutes that caused a restriction to be imposed by state law such that discounts for those restrictions were still permitted.
Section 2704(b)(4) provides that the IRS can issue regulations that would disregard other restrictions if the restriction has the effect of reducing the value of the transferred interest, but does not ultimately reduce the value of such interest to the transferee. Under this provision, the IRS intends to issue proposed regulations.
 
When Will the Regulation Take Effect?
It is not known if this Regulation will be effective as of the date of the Proposed Regulation, or as of the date of issuance of the Final Regulation.  If gifts, as described above, are contemplated, the safest approach is to make them prior to issuance of the Proposed Regulation in late summer or early fall of 2015.

 

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