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International Tax Newsletter - July 2015

Tue, 07/28/2015 - 12:00am
The July edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, such as adjustment to VAT declaration, adjustments to cigarette consumption tax and more. Articles include:
  • Promulgation of Administrative Measures on Tax Refund for Overseas Visitors Purchasing Goods and Departing from China (Trial Implementation)
  • Deferred Declaration Allowed for Overdue Export VAT Refund (Exemption)
  • Reinforced Follow- up Administration of Cost Apportionment Agreement
  • Clarification on Several Issues Relating to Administration of Levying and Collection of Enterprise Income Tax on Restructuring of Enterprises
  • Simplification of Application Procedure of Business Tax Exemption on Individual Donating Immovable Property and Land Use Right
  • Adjustment of Value-Added Tax Incentives of Integrated Utilization of Resources Products and Labor Services
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Compensation & Benefits Alert - July 2015

Mon, 07/27/2015 - 12:00am
Reminder to Self-Insured Plan Sponsors Form 720 to Pay PCORI Fees due July 31st
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  Background In addition to the much publicized provisions of The Patient Protection and Affordable Care Act (“PPACA”) enacted in 2010, it also  created a private, non-profit corporation called the Patient-Centered Outcomes Research Institute (“PCORI”) to conduct research and to evaluate health outcomes, clinical effectiveness, risks and benefits of medical treatments, etc. The PPACA requires that the Institute will be funded in part by a fee collected from health plan providers. For insured health plans the fee is paid by the health insurance issuer.  However, for self-insured health plans1, including health reimbursement accounts, the fee is paid by the plan sponsor on a Form 720 for the second quarter that is due by July 31st each year.
Determining the PCORI Fee The amount of the PCORI fee applicable for plan years ending after October 1, 2014 and before October 1, 2015 is $2.08 for each “covered person." Covered person for this purpose includes the employee, spouses and dependents that are covered under the plan.

The number of covered lives is determined after the end of the plan year, under one of three methods provided in the regulations to determine the average number of covered lives. 
 
  1. Actual count methods – sum the actual number of covered lives on each day of the year and divide by 365 days.
  2. Snapshot method – pick a day or days from each calendar quarter and sum the actual number of covered lives on each of those days, then divide by the number of days selection as the snapshot.
  3. The Form 5500 method – use the number of participants (this number does not include spouses and dependents) reported on the Form 5500. If the plan offers coverage only for the employee (i.e. self only coverage) the number is the beginning of the year participant count plus the end of the year participant count divided by two. If the plan offers dependent coverage the number is the beginning of the year participant count plus the end of the year participant count (do not divide by two.)

Employers may use the Form 5500 method only if the Form 5500 was filed no later than July 31 of the year following the last day of the plan year. Therefore, plan sponsors who are subject to this fee and extend the Form 5500 will need to determine the number of covered persons under the actual count method or the snapshot method. 

1 The PCORI fee generally will apply to major medical benefits, while many other benefits such as dental plans, vision plans and health flexible spending arrangements are usually accepted. 
 
For questions related to matters discussed above, please contact one of the following practice leaders:
 

Joan Vines
Sr. Director, National Tax
Compensation & Benefits

Ira B. Mirsky
Sr. Director, National Tax
Compensation & Benefits Kimberly Flett 
Sr. Director, Global Employer Services
Compensation & Benefits

Linda Baker
Sr. Manager, Global Employer Services
Compensation & Benefits

First Annual BDO Tax Outlook

Tue, 07/21/2015 - 12:00am


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  Tax Directors Foresee Domestic and Cross-Border Growth over the Next Three Years 2015 could mark a period of international and domestic expansion opportunities for businesses.

According to the first ever BDO USA, LLP Tax Outlook Survey, which surveyed 100 tax directors at $1 billion-plus public companies, 50 percent of respondents say their organizations are planning to enter new geographic areas in the U.S. during the next three years, and 63 percent of respondents say their organizations are planning to enter or expand to international markets during the same period.

The survey also finds that only 10 percent of tax directors say that business decisions are being made without robust tax planning as their primary concern, strongly indicating that many organizations are focused on their tax posture. If a company is executing against a growth strategy, giving attention to how taxes could impact the opportunity should continue to play a significant role.

Despite the strong indication that organizations understand the importance of tax planning, uncertainty about foreign, federal and state tax legislation – and its impact on tax rates, credits and other incentives – continues to be the primary tax concern identified by tax directors (45 percent). This sentiment is likely impacted largely by the cyclical nature of many non-permanent credits and incentives, which could sunset at year-end, as well as by newly proposed or enacted tax regulations.


  For Many Companies, Expansion Begins Domestically According to the Duke/CFO Global Business Outlook Survey, “Economic optimism of U.S. finance executives took another tick upwards in the first quarter of 2015. On a scale from 0 to 100, confidence in the economy came in at 64.7, rising one percentage point from the rating at the end of last year.” The increasingly positive economic outlook could lead some organizations to act upon their domestic growth strategies.

Additionally, despite rumblings about a U.S. corporate tax code overhaul, tax directors seem undeterred by potential tax changes when it comes to domestic growth, with 50 percent of respondents saying their organization is likely to enter a new geographic market in the U.S. during the next three years. Of those planning to expand, 45 percent say income or franchise credits and exemptions will have the greatest impact on their decision to enter a market.



“Tax incentives will only increase in importance, especially as companies look toward domestic growth opportunities,” says Matthew Becker, tax partner and National Tax Office leader at BDO. “Credits and incentives not only have a positive impact on an organization’s bottom line, but they can also help drive economic advantages in local economies.”

“For many companies, state and local taxes can make up a significant portion of their tax liability. Yet, there are many incentives organizations can take advantage of domestically to reduce their tax exposure, which may further motivate companies to capitalize on growth opportunities within the U.S.,” says Rocky Cummings, Tax Partner at BDO.
  International Tax Policies Play a Role in Business Expansion Strategies Tax directors’ attitudes on international expansion seem generally positive, with the majority of tax directors (63 percent) saying that their organization is planning to enter or expand into international markets during the next three years.

Forty-two percent of tax directors at organizations with operations outside of the U.S. report moderate concern around the proposed rules from the Organization for Economic Cooperation and Development (OECD) on base erosion, profit shifting, increased disclosures and transfer pricing, while 36 percent feel a high level of concern. More than one in five, however, express low to no concern at all. While the proposed OECD rules may appear to undermine current corporate tax positions, they could create an opportunity for better transparency and guidance for organizations implementing complex tax strategies.



“With a number of OECD proposals on the table, multi-national companies should understand the potential implications and be proactive in making any necessary adjustments to mitigate undue risk,” says Robert Pedersen, Tax Partner at BDO.


  Tax Directors Refine Transfer Pricing Strategies Of the 90 percent of tax directors familiar with transfer pricing mechanisms, 82 percent say their organization’s current tax strategy includes transfer pricing mechanisms.



While the IRS may home in on transfer pricing mechanisms during a review, if implemented properly and in accordance with the arm’s length rule, an organization may be able to leverage the practice and be in full compliance. Of the 44 percent of tax directors who say that transfer pricing was a significant issue for their firm during an IRS examination over the past five years, 90 percent say that the financial effects were minimal in terms of adjusted taxes owed (including penalties and fees).
R&D Credits’ Advantages Remain Popular Among Tax Directors About two-thirds of respondents say their company takes advantage of the federal research and development (R&D) tax credits, and 56 percent note that they claim state and local R&D credits as well. Despite the majority of surveyed tax directors leveraging both federal and state R&D credits, 59 percent of those not claiming the federal R&D credit say their decision is based on an assumption that their activities did not qualify.



“As innovation continues to be a pillar of organizations’ business goals, it will become increasingly important for tax directors and financial executives to understand the widespread benefits of claiming incentives like the R&D Credit and Domestic Production Activities Deduction (DPAD) as well as their breadth and scope in terms of what qualifies,” says Chris Bard, practice leader for Specialized Tax Services, Research and Development at BDO. “For example, companies often think only costs associated with developing a new and groundbreaking product can qualify. Instead, the credit and DPAD are intended also for investments to attempt to improve products, manufacturing processes and software, among other activities, whether the activities succeed or not.”

“Financial reporting of income tax continues to be ‘flagged’ as high-risk accounting by the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board. Maintaining high-quality financial reporting of income tax is an ongoing challenge, which requires robust internal controls, a well-developed income tax provision process, and solid tax accounting technical know-how. Whether an organization is expanding internationally or domestically, or undergoing a merger or acquisition, tax directors and financial executives should focus on how they can mitigate their ASC 740 risk when reporting their tax position on their SEC filings or privately issued filings,” says Yosef Barbut, tax partner at BDO.
  ASC 740 Complexities Require a Proactive Approach to Reporting When it comes to financial reporting for income taxes, 35 percent of tax directors cite avoiding material misstatements of income taxes as most challenging to their organizations, followed by meeting deadlines for interim and annual income tax reporting (29 percent), staying up-to-date on accounting standards, changes and proposals (22 percent) and recruiting and retaining professionals responsible for financial reporting of income taxes (14 percent).


  Cost of Compliance Necessitates a Need for Efficiency According to three-quarters of respondents, the cost of compliance within the tax and financial regulatory environment has increased over the past three years. While the cost of compliance may seem unfavorable, the larger opportunity that this trend presents to tax directors is in determining how best to generate efficiencies through more streamlined programs and practices.

“While compliance and its associated costs, as well as ongoing uncertainty in the tax environment, may seem like a moving target, early-stage tax planning can help organizations proactively manage resources and lay a foundation for a more effective and responsive tax infrastructure,” says Paul Heiselmann, National Managing Partner of Specialized Tax Services at BDO.
For more information on BDO USA's service offerings, please contact one of the following practice leaders:
 

Matthew Becker
Grand Rapids

 

Chris Bard
Los Angeles

  Paul Heiselmann
Chicago   Robert Pedersen
New York   Todd Simmens 
Woodbridge   Yosef Barbut
New York  

Andrew Gibson 
Atlanta

 

Bob Haran
Boston

 

Rocky Cummings
San Jose

 

 


About the Survey The BDO Tax Outlook Study of Tax Directors is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 100 tax directors, or those with tax director responsibilities, using a survey conducted within a scientifically developed, pure random sample.

State and Local Tax Alert - July 2015

Mon, 07/20/2015 - 12:00am
Connecticut Enacts Mandatory Unitary Combined Reporting, Imposes New Limitations on Net Operating Losses and Tax Credits, and Makes Sales and Use and Personal Income Tax Changes
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  Summary On June 30, 2015, Connecticut Governor Dan Malloy (D) signed into law House Bill 7061 and Senate Bill 1502, which together enact significant changes to the corporate income tax law, including the adoption of mandatory unitary combined reporting for tax years beginning after December 31, 2015, more restrictive limitations on the use of net operating loss carryforwards and tax credits for tax years beginning after December 31, 2015, the extension of the 20% corporate income tax surcharge through 2017, and the adoption of a 10% surcharge beginning in 2018.  The enactment of these bills also causes several changes to: (i) the sales and use tax law (e.g., a change to the payment and return due date for monthly filers, and the expansion of taxable services to include creation, development, hosting, and maintenance of a website);  and (ii) the personal income tax law (e.g., increases in tax rates, and delays to the increase in the personal exemption and the income thresholds used for purposes of reducing personal income tax credits).
  Details  
Corporate Tax Changes
 
Mandatory Unitary Combined Reporting
 
Effective tax years beginning after December 31, 2015, a corporation with Connecticut nexus is required to report income on a unitary combined basis with its “combined group.”  A “combined group” for these purposes, unless elected otherwise, is determined on a water’s-edge basis and is generally comprised of the following types of corporations that have “common ownership” and are engaged in a “unitary business”: (i) U.S. corporations with 80% or more of their property and payroll located in the U.S.; (ii) non-U.S. corporations with 20% or more of their property and payroll in the U.S. or that are incorporated in tax haven jurisdictions; and (iii) corporations that derive more than 20% of their income from payments for intangible property or service-related activities deductible from the income of other members of the combined group (but only to the extent of the related income and the apportionment factors).
 
Common Ownership and Unitary Reporting
 
Two or more corporations are under “common ownership” where, when applying Section 318 of the Internal Revenue Code, more than 50% of the voting control of each corporation is directly or indirectly owned by the same owner or owners – whether corporate or non-corporate, and regardless of whether the owner or owners are members of the combined group.  “Unitary business” for these purposes means a single economic enterprise, whether separate parts of a single business entity or a group of business entities, that is sufficiently independent, integrated or interrelated through activities so as to provide mutual benefit and produce a significant sharing or exchange of value among such entities, or a significant flow of value among the separate parts.
 
World-Wide and Affiliated Group Reporting Elections
 
As an alternative to reporting on a water’s-edge basis, a combined group may make an election on a timely filed, original return to report on a world-wide basis (generally disregarding the entity restrictions imposed on a water’s-edge group) or as an “affiliated group.”  Once made, the election is binding for the current and subsequent ten (10) taxable years.  An “affiliated group” for Connecticut purposes is generally the same as a federal income tax affiliated group with certain modifications, including a requirement to include a corporation in the Connecticut affiliated group even if it is included in the federal consolidated return of a different group.  A Connecticut affiliated group may even include a corporation formed in a tax haven jurisdiction.
 
Income Tax Liability
 
The Connecticut corporate income tax applies only to a corporation that is subject to the corporate income tax (a “Taxable Member”).  A taxable member’s tax liability is a product of the combined group’s net income, the taxable member’s Connecticut apportionment factor, and the applicable tax rate (currently 7.5%).
 
Combined Net Income
 
A combined group’s net income is determined by adding the net income of every taxable and nontaxable member and deferring/eliminating intercompany transactions in a manner similar to the federal consolidated return rules.  For this purpose, each member’s net income is its separate company federal taxable income, which is then subject to certain adjustments (in addition to the standard additions and subtractions).  These adjustments include the elimination of intercompany dividends, removal of gain or loss from the sale or exchange of capital assets, property used in a trade or business (i.e., property described in Section 1231(a)(3) of the Internal Revenue Code), and property subject to an involuntary conversion.  The net income (and apportionment) of a non-U.S. corporation that is not required to file a federal income tax return is determined on the basis of a profit and loss statement prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). This amount is then adjusted to take into account any book-tax differences required by federal or Connecticut law.
 
Apportionment Formula
 
A taxable member calculates its own apportionment percentage.  The property, payroll, and sales factors of a taxable member are determined by dividing its Connecticut property, payroll, and sales by the combined group’s everywhere property, payroll, and sales.  The Connecticut sales of a taxable member includes its proportionate share of each nontaxable member’s Connecticut sales factor as if the nontaxable member were subject to tax, which, in turn, is determined by the ratio of the taxable member’s Connecticut sales to the Connecticut sales of the combined group.  Transactions among combined group members are eliminated for purposes of determining the numerator and denominator of the apportionment factors.
 
Net Deferred Tax Liability Deduction
 
Publicly traded companies participating in the filing of a publicly traded company’s GAAP financial statements as of January 1, 2016, are eligible for a “net deferred tax liability” deduction if the new unitary combined reporting requirements result in an aggregate increase or decrease in the members’ “net deferred tax liability” or “net deferred tax asset,” respectively.  The deduction may be claimed in equal amounts for a seven-year period beginning in the combined group’s first income year that begins in 2018.  Any unused amount may be carried forward until fully utilized.  To claim the deduction, a combined group must file a statement with the Department of Revenue Services by July 1, 2017, that specifies the total amount of the deduction to be claimed.
 
NOLs and Credits
 
Each taxable member of a combined group separately calculates its NOLs and credits, which it may carryforward to the extent allowed or share with another member of the combined group if the other member was a member of the combined group during the taxable year the NOL or credit was generated.  A NOL or credit arising from a taxable year during which a corporation was not a member of the combined group may generally only be used by the corporation that generated it.
 
Capital Gains and Losses
 
Capital gains and losses removed from the income of a member are aggregated, apportioned to each member, and added to each taxable member’s income.  A loss apportioned to a member that is limited by Section 1211 of the Internal Revenue Code must be carried forward and treated as a short-term capital loss apportioned and incurred by that member for the year for which the carryover applies.
 
Capital Base Tax
 
Similar to the income tax, a combined group’s capital base is the aggregate of the capital base of each taxable and nontaxable member.  Intercorporate stockholdings are eliminated to avoid double counting.  A taxable member’s apportionment percentage is then applied to determine its apportioned capital base for purposes of computing its capital base tax.  Also similar to the income tax, the numerator of a taxable member’s capital base tax apportionment factor is comprised of its Connecticut property, and the denominator is comprised of the aggregated everywhere property of nontaxable and taxable members.
 
If the aggregate amount of tax calculated on each taxable member’s capital base exceeds the $1 million cap, each taxable member prorates its tax in proportion to the group's tax calculated without regard to the cap so that the group's aggregate additional tax equals $1 million.
 
Designated Taxable Member
 
The “designated taxable member” of the combined group makes all elections, files returns, and makes tax payments, including estimated tax payments, on behalf of the combined group.  The “designated taxable member” is the common parent if it is a taxable member.  If no such common parent exists, the “designated taxable member” is a taxable member selected by the combined group, notification of which must be made to the Department of Revenue Services by the due date (as extended) of the combined group’s combined return for the initial taxable year that the return is required.
 
NOL and Tax Credit Limitations
 
Effective for taxable years beginning after December 31, 2014, an NOL carryforward is subject to a new 50% of apportioned net income limitation, and the amount of tax credits that may be used may not exceed 50.01% of the amount of tax due.  Under “old” law, the credit limitation was 70%.
 
A combined group with over $6 billion in unutilized NOLs arising from taxable years beginning prior to January 1, 2013, may make a special election on its return for its taxable year beginning in 2015 regarding the utilization of NOLs.
 
Surcharge and Preference Tax
 
The new law extends the 20% surcharge, which was previously set to expire for taxable years beginning before January 1, 2016, to taxable years beginning prior to January 1, 2018.  For taxable years beginning after December 31, 2017, corporations will be subject to a 10% surcharge.  A corporation with less than $100 million in annual gross income during the taxable year will not be subject to the 10% surcharge, unless it files as part of a combined return.
 
Effective for taxable years beginning after December 31, 2015, the new law repeals the preference tax that is intended to recapture some or all of the tax benefit derived from the filing of a combined return under the elective combined return regime.
 
Sales and Use Tax Changes
 
Following are some of the more notable sales and use tax changes in the new law:
 
  • Effective July 1, 2015, the tax rate on luxury goods, which applies to motor vehicles with a sales price exceeding $50,000, jewelry with a sales price exceeding $5,000, and clothing, footwear and certain accessories with a sales price exceeding $1,000, increased from 7% to 7.75%.
  • Effective July 1, 2015, car wash services, including coin-operated car washes, are subject to tax.
  • Effective October 1, 2015, taxable computer and data processing services are defined to include services related to the creation, development, hosting and maintenance of a website, and are, therefore, taxable.
  • Effective October 1, 2015, the deadline for remitting and filing monthly sales and use tax returns will change from the 20th day of the month to the last day of the month following the month covered by the return.
Personal Income Tax Changes
 
Following are some of the more notable personal income tax changes in the new law:
 
  • Effective January 1, 2015, a 6.99% marginal tax bracket has been added for single filers with more than $500,000 in Connecticut taxable income, head of household filers with more than $800,000 in Connecticut taxable income, and joint filers with more than $1 million in Connecticut taxable income.
  • Effective January 1, 2015, the 6.7% marginal rate increased to 6.9% and the flat income tax rate for trusts and estates increased from 6.7% to 6.99%.
  • The scheduled $500 increase for the personal exemption from $14,500 to $15,000 has been delayed until January 1, 2017.
  • The scheduled increase for the income thresholds used for purposes of reducing personal income tax credits has been delayed until January 1, 2016.
  • The increase to the earned income tax credit percentage from 27.5% to 30% has been delayed until January 1, 2017.
  • Effective January 1, 2015, federally taxable military pay is fully exempt from Connecticut income tax.

BDO Insights
  • Connecticut’s change to mandatory combined reporting will likely present a significant departure from current law for many taxpayers since, Connecticut has historically required separate reporting, unless a taxpayer elected to file on a federal consolidated or unitary combined basis.  Regardless, taxpayers should consider modeling the tax impact of filing combined returns on a water’s-edge, worldwide or an affiliated group basis to ascertain which reporting method may be most advantageous.  But do note that an election to file on a worldwide or affiliated group basis is binding for the current and subsequent 10 tax years.
  • Connecticut has provided taxpayers that are publicly traded companies with a unique net deferred tax liability deduction to mitigate the financial statement impact of the law changes.  However, the benefit of the deduction applies only to a combined group that has a taxable member in 2018.
  • Since the new law was enacted on June 30, 2015, taxpayers should assess what, if any, impact these law changes would have on their existing deferred tax balances and adjust accordingly as of the enactment date.
  • Due to the sales and use tax changes, taxpayers that have not historically charged sales tax on car wash services or services related to creation, development, hosting, and maintenance of a website should implement procedures to ensure the collection and remittance of sales and use tax on such services.
  • The increases to the personal income tax rates, which were made retroactively effective to January 1, 2015, may impact employers and individuals who have likely been withholding taxes and making estimated tax payments based on “old” tax rates.  These taxpayers will likely be required to make adjustments to their withholdings and estimated taxes to compensate for the differences resulting from the rate increases.  Connecticut has exempted individuals from interest assessments due to an underpayment in estimated taxes created by the rate changes.

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 News - July 2015

Wed, 07/15/2015 - 12:00am
Transfer pricing is increasingly influencing significant changes in tax legislation around the world. The 17th issue of BDO International's Transfer Pricing News focuses on recent developments in the field of transfer pricing in Canada, Morocco, Africa, Spain, and Indonesia. As you will read, various countries are showing initiatives following the ongoing work on OECD's BEPS project.
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State and Local Tax Alert - July 2015

Tue, 07/14/2015 - 12:00am
Nevada Imposes a New Commerce Tax on Businesses with Nevada Gross Revenue Exceeding $4 Million and Creates Nexus Rebuttable Presumptions for Sales and Use Tax Purposes
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  Summary On May 27, 2015 and June 9, 2015, Nevada Governor Brian Sandoval (R) signed into law Assembly Bill 380 (“A.B. 380”) and Senate Bill 483 (“S.B. 483”), respectively.  S.B. 483 imposes a gross receipts tax (the “Commerce Tax”) on a business entity with Nevada gross revenue exceeding $4 million.  In addition, S.B. 483 increases the business license fee to $500 for corporations and reverses the previously legislated fee decrease for all other businesses, makes the 2.6% Local School Support Tax permanent, extends the Net Proceeds of Minerals Tax prepayment requirement until June 30, 2016, and with respect to the Modified Business Tax, increases the tax rate and decreases the exemption amount for certain taxpayers.  A.B. 380 subjects an out-of-state retailer to a rebuttable sales and use tax collection and remittance responsibility presumption where the retailer has a referral agreement with an in-state resident, or is a member of a controlled group and a component member of the group engages in an activity significantly associated with the retailer’s ability to establish and maintain a market in Nevada.
  Details The “New” Commerce Tax
Imposition.  Effective July 1, 2015, S.B. 483 imposes the Commerce Tax on the Nevada gross revenue of a business entity engaging in a business in the state that has Nevada gross revenue that exceeds $4 million during a taxable year.  A taxable year for all purposes is a twelve (12) month period beginning on July 1 and ending on June 30.

Taxable Entities.  A “business entity” for Commerce Tax purposes includes, among others, a corporation, partnership, sole proprietorship, limited liability company, and generally any other business entity engaged in business in the state.  However, the following types of business entities are excluded from the tax: (i) governmental entities; (ii) organizations that qualify for exemption from federal income tax under Internal Revenue Code section 501(c); (iii) estates of natural persons and grantor trusts all of the grantors and beneficiaries of which are natural persons; (iv) certain real estate investment trusts (or REITs); (v) a limited liability company, partnership, or non-business trust that derives at least 90% of its federal gross income from certain investment activities and no more than 10% of its federal gross income from conducting an active trade or business; and (vi) a business entity that confines its in-state activities to the owning, maintenance and management of intangible investments, including stocks, bonds, patents, trademarks, and trade names. 

Gross Revenue.  “Gross revenue” for these purposes generally means the total amount realized by a business entity (without deduction for the cost of goods sold or other expenses incurred), including: (i) the fair market value of property or services received; (ii) the fair market value of debt forgiven or transferred; (iii) amounts realized from the performance of services; (iv) amounts realized from the sale, exchange, or other disposition of the business entity’s property; and (v) amounts realized from another person’s possession of the property or capital of a business entity. 

Exclusions from Gross Revenue.  The following, among others, may be excluded from “gross revenue:” (i) the value of cash discounts allowed by the business entity and taken by a customer; (ii) the value of goods or services provided to a customer on a complimentary basis; (iii) regardless of the federal income tax classification of the business entity, amounts realized from certain reorganization-type transactions; (iv) amounts realized from the sale, exchange, disposition or grant of the right to use a trademark, trade name, patent, copyright, or other similar intellectual property; (v) amounts indirectly realized from a reduction of an expense or deduction; and (vi) amounts that are not considered revenue under generally accepted accounting principles.

Deductions from Gross Revenue.  The following, among others,  may be deducted from “gross revenue”: (i) interest and dividends attributable to federal and Nevada state and local bonds or securities; (ii) certain taxes and fees paid to the state and the amount of income/receipts used to determine certain other taxes; (iii) payments received by an employee leasing company from a client company for wages, payroll taxes on those wages, employee benefits and workers’ compensation benefits for employees leased to the client company; (iv) pass-through revenue; (v) the federal income tax basis of securities and loans sold by the business entity; (vi) interest income other than interest on credit sales; (vii) dividends and distributions from corporations and pass-through entities; (viii) receipts from the sale, exchange or other disposition of an asset described in Internal Revenue Code sections 1221 and 1231; (ix) receipts from certain hedging transactions; (x) proceeds attributable to the repayment, maturity or redemption of the principal of a loan, bond, mutual fund, certificate of deposit, or marketable instrument; (xi) proceeds from the issuance of stock, options and warrants; (xii) customer returns and refunds; and (xiii) bad debts expensed for federal income tax purposes.

Nevada Gross Revenue.  “Nevada gross revenue” is gross revenue (after exclusions and deductions) from Nevada sources that exceeds $4 million.  (See the chart below.)
  Receipt From... Source to Nevada If... … Rents and royalties from real property … The property is located in the state … Sale of real property … The property is located in the state … Rents and royalties from tangible personal property … The property is located or used in the state … Sale of tangible personal property … The property is delivered or shipped to a buyer in the state … Sale of transportation services … The origin and the destination point of the transportation are in the state … Other service revenue … Based upon the ratio of the purchaser's benefit derived from the service in the state to the purchaser's benefit derived from the service everywhere … Revenue not otherwise described in this section … The receipt is from business conducted in the state

Tax Rates.  Commerce Tax rates, which vary depending upon a business entity’s 2012 industry category, and are generally based on the North American Industry Classification System (or NAICS), range from 0.051% to 0.331%.  (See the chart below.)  If a business entity is engaged in business in more than one industry category, its industry category for Commerce Tax filing purposes is the industry category in which the highest percentage of its Nevada gross revenue is generated.  After designating an industry on its initial report, a business entity may only change its industry category, and hence its rate, with approval from the Department of Taxation.
  Industry Sector NAICS Code Tax Rate Agriculture, Forestry, Fishing, and Hunting (e.g.,  farms, ranches, dairies, greenhouses, nurseries, orchards, and hatcheries) NAICS 11 0.083% Mining, Quarrying, and Oil and Gas Extraction (e.g., well operations and beneficiating, mining exploration services, mine site preparation, and the construction of oil and gas pipelines) NAICS 12 0.051% Utilities and Telecommunication (e.g., providing electric power, natural gas, steam supply, water supply, sewage  removal, Telephone services, cable and satellite, and internet access) NAICS 22 & 517 0.136% Construction (e.g., general contractors, design-builders, construction managers, turnkey contractors, for sale builders, specialty trade contractors, speculative builders, construction of buildings, engineering of highways and utility systems, and subdividing land) NAICS 23   Manufacturing (e.g., milk bottling and pasteurizing, water bottling and processing, apparel jobbing, printing, leather converting, wood preserving, electroplating, fabricating signs and advertising displays, ship repairs, etc.) NAICS 31, 32, & 33 0.091% Wholesale Trade NAICS 42 0.101% Retail Trade NAICS 44 0.111% Air Transportation (includes transportation by airplane and helicopter of passengers and/or cargo) NAICS 481 0.058% Truck Transportation (over-the-road transportation of cargo using motor vehicles) NAICS 484 0.202% Rail Transportation (includes transportation of passengers and cargo) NAICS 482 0.331% Other Transportation (e.g., water transportation, charter buses, school buses, taxis, limousine services, commuter rail, street railroads, pipelines, scenic and sightseeing transportation, air traffic control services, marine cargo handling, postal services, courier and messenger services) NAICS 483, 485, 487, 488, 491, & 492 0.129% Warehousing and Storage (includes warehousing and storage of merchandise and refrigerated goods) NAICS 493 0.128% Publishing, Software, and Data Processing (e.g., publishing of magazines, newspapers, periodicals and books, motion picture and sound recording, production and distribution of motion pictures and sound recordings, broadcasting, except on the internet, data processing, providing infrastructure for hosing and data processing services) NAICS 511, 512, 515, & 518 0.128% Finance and Insurance (includes businesses engaged in facilitating financial transactions) NAICS 52 0.111% Real Estate, Rental, and Leasing (e.g., renting, leasing, managing real estate for others, selling real estate for others, and appraising real estate) NAICS 53 0.250% Professional, Scientific, and Technical Services NAICS 54 0.181% Management of Companies and Enterprises (e.g., holding securities for the purpose of owning a controlling interest or influencing management decisions, administering, overseeing and managing establishments of a company or enterprise) NAICS 55 0.137% Administrative and Support Services (e.g., day-to-day operations support of other organizations) NAICS 561 0.154% Waste Management and Remediation Services NAICS 562 0.261% Educational Services NAICS 61 0.281% Health Care and Social Assistance NAICS 62 0.190% Arts, Entertainment, and Recreation NAICS 71 0.240% Accommodations (e.g., providing lodging or short-term accommodations for travelers, vacationers, and others) NAICS 721 0.200% Food Services and Drinking Places (includes businesses providing meals, snacks, and beverages for on-premises and off-premises consumption) NAICS 722 0.194% Other Services (e.g., repairing equipment and machinery, promoting or administering religious activities, grant making, advocacy, dry cleaning, laundry, personal care, death care, pet care, photofinishing, temporary parking services, and dating services) NAICS 81 0.142% Unclassified Not Applicable 0.128%
Reporting Requirements.  Within forty-five (45) days following the end of a taxable year, a taxpayer must report and pay the Commerce Tax due.  A taxpayer may apply for one thirty (30) day extension to pay the tax, but must still pay interest on the amount due as of the original filing/payment date at the rate of 0.75% per month until the tax is paid.
 
Sales and Use Tax Rebuttable Presumptions 
Under A.B. 380, effective July 1, 2015, a retailer that is part of a “controlled group” is presumed to be subject to a sales and use tax collection and remittance responsibility if a “component member” of the “controlled group” has a physical presence in Nevada and engages in any of the following activities in the state: (i) sells a similar line of products or services as the retailer under a same or a similar business name; (ii) maintains an office, distribution facility, warehouse or storage place, or similar place of business in Nevada to facilitate delivery of tangible personal property sold by the retailer; (iii) uses the same or substantially similar trademarks, service marks or trade names as the retailer; (iv) delivers, installs, assembles or performs maintenance services for the retailer’s Nevada customers; (v) facilitates the retailer’s delivery of tangible personal property to customers in Nevada through pickups at an office, distribution facility, warehouse, storage place or similar place of business maintained by the component member; or (vi) conducts any other activity in Nevada significantly associated with the retailer’s ability to establish and maintain a market in Nevada.  For these purposes, “controlled group” and “component member” have the same meanings as provided under Internal Revenue Code Section 1563, but may include business entities that are not corporations.

Also under A.B. 380, effective October 1, 2015, a retailer is presumed to be subject to a sales and use tax collection and remittance responsibility if, during any four-quarter period ending on the last day of March, June, September and December, it grosses more than $10,000 in sales to Nevada customers referred to the retailer by Nevada residents, whether by an Internet website or otherwise, that have a referral agreement with the retailer pursuant to which the retailer receives consideration for such referrals.

Both of the foregoing presumptions may be rebutted via proof that the activities of the component member or resident are not significantly associated with the retailer’s ability to establish or maintain a market in Nevada.

Modified Business Tax Rate Increases and Exemption Decrease
Previous legislation scheduled the Modified Business Tax rate imposed on non-financial institutions to decrease on July 1, 2015 from 1.17% to 0.63% on quarterly wages that exceed $85,000.  Effective July 1, 2015, S.B. 483 increases the rate imposed on non-financial institutions (other than mining companies) to 1.475% and increases the rate paid by mining companies to 2%.  In addition, S.B. 483 reduces the quarterly exemption amount to $50,000 with respect to all non-financial institutions (other than mining companies).  However, if revenue from all business taxes exceeds projections by more than 4%, the Modified Business Tax rates may eventually be reduced to as low as 1.17%.

After the first year of the implementation of the Commerce Tax, S.B. 483 allows a taxpayer to use 50% of its Commerce Tax liability as a credit against, and to the extent of, its Modified Business Tax liability.  Unused credit may be carried forward, but not beyond the fourth calendar quarter immediately following the end of the taxable year in which the Commerce Tax was paid.

Other Changes
Business License Fee.  Previous legislation scheduled the current $200 Secretary of State annual business license fee to drop to $100 in 2016.  Effective July 1, 2015, S.B. 483 increases the fee to $500 for corporations.  With respect to all other businesses, S.B. 483 reverses the previously legislated fee drop.

Local School Support Tax.  In 2009, Nevada temporarily raised its Local School Support Tax (which combined with the Basic City-County Relief Tax, Supplemental City-County Relief Tax, and state rate comprise the state’s current 6.85% sales tax) to 2.6%.  The temporary 2.6% Local School Support Tax was set to return to the pre-2009 rate of 2.25% (a 0.35% decrease) at the end of the 2015 fiscal year.  Effective July 1, 2015, S.B. 483 permanently adopts the 2.6% Local School Support Tax rate.

Net Proceeds of Minerals Tax.  Also in 2009, Nevada required taxpayers to begin prepaying the Net Proceeds of Minerals Tax – a requirement that was set to expire on June 30, 2015.  S.B. 483 extends the prepayment requirement until
June 30, 2016.
  BDO Insights
  • Business entities with more than $4 million of Nevada gross revenue may now be subject to an entirely new tax.  A taxpayer that chose to do business in Nevada, particularly because of the absence of an income tax, may need to reevaluate its tax structure.
  • Business entities that are subject to the Commerce Tax should note that the first payment and return due date (excluding an extension) under the tax is not until August 2016 (or 45 days after June 30, 2016).
  • A retailer that is unable to overcome one of the new sales and use tax rebuttable presumptions due to a referral agreement with one or more Nevada residents, or because an in-state “component member” helps to establish and maintain a market for the retailer in Nevada, may find itself subject to a significantly higher Nevada tax burden or an exposure.
  • Non-financial institutions, including mining and non-mining companies, currently subject to the Modified Business Tax may find themselves subject to more tax than before due to the rate increases.  Non-financial institutions (other than mining companies) that were not subject to the Modified Business Tax due to the previous $85,000 quarterly exemption amount may now find themselves subject to the tax because of the now lower $50,000 quarterly exemption amount.  For example, the Nevada legislature is anticipating the lower exemption amount will increase the number of taxpayers subject to the Modified Business Tax from 13,492 to 18,607.
  • Although the now permanent changes to the Local School Support Tax and the Net Proceeds of Minerals Tax have been in place for several years, a taxpayer that anticipated the previously legislated sunset to take place with respect to one or more of those provisions may need to adjust for permanent change.

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

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

State and Local Tax Alert - July 2015

Tue, 07/14/2015 - 12:00am
The South Carolina Department of Revenue Issued a Final Revenue Procedure and Ruling for the Use of Alternative Apportionment
Download the PDF Version
  Summary On June 12, 2015, the South Carolina Department of Revenue (the “Department”) issued Revenue Procedure #15-2 and Revenue Ruling #15-5, which together provide detailed information regarding determining when to use an alternative apportionment method, selecting an alternative apportionment method, combined reporting as an alternative apportionment method, and the procedural/administrative aspects related to alternative apportionment methods.  The provisions of Revenue Procedure #15-2 are effective June 1, 2015, whereas, Revenue Ruling #15-5 is effective for all taxable periods open under the statute of limitations.
  Details Background
Under its standard apportionment formula, South Carolina requires most businesses to apportion unallocated income using a single sales factor.  However, South Carolina allows for the use of an alternative apportionment method, which may include separate accounting, the exclusion or inclusion of one or more factors, or the use of any other method to effectuate allocation and apportionment of a taxpayer’s income, including combined reporting, where the standard apportionment formula does not fairly represent the extent of the taxpayer’s business in the state.1

Determining When to Use an Alternative Apportionment Method
Under Revenue Ruling #15-5, use of an alternative apportionment method is based on the facts and circumstances of the taxpayer and the use of an alternative apportionment method is not limited to those cases where application of the standard apportionment formula would be unconstitutional.  Whatever the facts or circumstances, Revenue Ruling #15-5 provides that the party seeking the use of an alternative apportionment method, whether the Department or the taxpayer, must factually identify why, by a preponderance of the evidence, the use of the standard apportionment method does not fairly represent the taxpayer’s in-state business activity, and propose a reasonable alternative method that will result in equitable allocation and apportionment of the taxpayer’s income.2 Thus, the party seeking the application of an alternative apportionment method has the burden to justify its use.

Selecting an Alternative Method
No particular alternative apportionment method is provided for in Revenue Ruling #15-5.  In fact, the Department states in Revenue Ruling #15-5 that there is no single alternative apportionment method that fits every scenario, but that whatever the selected method, it should be determined in relation to the reasons the standard apportionment formula does not fairly represent the taxpayer’s in-state business, be reasonable, and fairly reflect the taxpayer’s in-state business activity.  By way of quoting the Oregon Supreme Court’s decision in Twentieth Century-Fox Film Corp. v. Department of Revenue, 299 Or. 220, 700 P.2d 1035 (1985), the Department indicates in Revenue Ruling # 15-5 that an alternative apportionment method will be considered reasonable where: (1) the division of income fairly represents business activity and if applied uniformly would result in no more or no less than 100% of the taxpayer’s income; (2) the division of income does not create or foster a lack of uniformity among states; and (3) the division of income reflects the economic reality of the taxpayer’s in-state business activity.

Combined Reporting as an Alternative Method
When to Use Combined Reporting.  Under Revenue Ruling #15-5, the Department may use combined reporting as an alternative apportionment method when the taxpayer is a member of a unitary group.  Some of the facts the Department will examine when assessing whether the standard apportionment formula fairly reflects the taxpayer’s in-state activity for purposes of using combined reporting include: (1) amounts paid to related parties for goods and services or goods and services are provided without payment; (2) profit margins associated with business activities; (3) capital investments associated with business activities; (4) whether goods or services are provided to both related and unrelated parties on similar terms; (5) whether taxpayers in similar industries provide similar goods and services to unrelated parties under similar terms; and (6) whether the taxpayer would be willing to enter into a similar arrangement with an unrelated party considering, among other things, the relinquishment of control over the business activity.  The Department states in Revenue Ruling #15-5 its position that a transfer pricing study to support pricing between related entities is not determinative of whether South Carolina’s statutory apportionment formula fairly represents the taxpayer’s in-state business activities, and notes that it has required or approved unitary combined reporting in situations involving the use of purchasing companies, management fee companies and “east/west” companies.

Combined Reporting Group.  In instances when combined reporting is the chosen alternative apportionment method, Revenue Ruling #15-5 provides that the combined reporting group comprises those members of the business group that are unitary under the U.S. Constitution.  The composition of the combined group is further limited to a “water’s edge” group – i.e., U.S. corporations, DISCs, controlled foreign corporations, and any member that earns, directly or indirectly, more than 20% of its income from intangible property or service related activities that are deductible against the income of other members of the group.

Calculation of Combined Income.  Revenue Ruling #15-5 contemplates calculation of the combined reporting group’s income (or loss) using the Finnigan approach – the same method used by California.3  Under Finnigan, first, the pre-apportioned income of the entire combined reporting group is apportioned to South Carolina based on a single sales factor, the numerator of which is South Carolina sales of every member of the combined reporting group and the denominator of which is everywhere sales of every member of the combined reporting group.  Then, the apportioned income is divided among the members of the combined reporting group that have a taxable nexus with the state.  Intercompany income and sales are eliminated in this process.  While each member of the combined reporting group are able to use the net operating losses and credits of the other members of the combined reporting group, net operating losses and credits are tracked at the member level and follow each member when it ceases to be a member of the group.

Alternative Apportionment Procedure
Under Revenue Procedure #15-2, the Department must approve an application for the use of an alternative apportionment method before a taxpayer may use it.  A taxpayer must submit the application for approval, which is filed separate from the return, prior to the extended due date of the return for which the alternative method will be used.  A taxpayer would be required to file an amended return if it receives approval from the Department after its original return is filed.  The taxpayer must use an approved alternative apportionment method until it receives permission from the Department to use the statutory method or another alternative method.  A taxpayer may appeal the denial of an application. Revenue Procedure #15-2 provides many more details regarding the application process.

If an assessment results in a substantial understatement of tax because the Department requires the use of an alternative apportionment method, the Department will limit the statute of limitations to 36 months rather than use the 72 months statute of limitations that ordinarily applies in the case of a substantial understatement of tax.  In addition, the Department will not apply the 25% substantial understatement of tax penalty.  However, if a taxpayer fails to use an alternative apportionment method it was required to use and an assessment results in a substantial understatement of tax, the Department will apply the 72 months statute of limitations as well as the 25% substantial understatement of tax penalty.
  BDO Insights
  • For the past several years, the procedural details related to requesting an alternative apportionment method were found in Revenue Procedure #09-1.  Effective June 1, 2015, taxpayers should instead refer to Revenue Procedure #15-2 with respect to a request to use an alternative apportionment method.
  • While Revenue Procedure #15-2 may be effective as of a date certain, Revenue Ruling  #15-5 applies to all taxable years open under the statute of limitations.  Thus, unlike Revenue Procedure #15-2, it appears the Department will apply the principles under Revenue Ruling #15-5 prospectively as well as retroactively, which means that the Department should apply Revenue Ruling #15-5 to an application for an alternative apportionment method currently under review as well as to a prior taxable year of a taxpayer currently under audit.
  • Revenue Procedure #15-2 and Revenue Ruling #15-5 relate to the alternative apportionment provisions under South Carolina Code § 12-6-2320(A) only.  Revenue Procedure #15-2 and Revenue Ruling #15-5 do not at all relate to the economic development based alternative apportionment provisions under South Carolina Code § 12-6-2320(B), wherein the Department has the authority to enter into an agreement with a multistate taxpayer that is planning a new facility or expansion in South Carolina.  Thus, with respect to economic development based alternative apportionment, taxpayers should continue to follow Department guidance that relates to those provisions.
  • The Department may have appropriately incorporated the holdings in Carmax Auto Superstores and Media General in Revenue Ruling #15-5.[4]  However, it does not seem appropriate for the Department to, on the one hand, state that there is no single alternative apportionment method that fits every scenario, but, on the other hand, administratively “legislate” a particular method of combined reporting.  But, on the bright-side, taxpayers will have set rules regarding combined reporting which they may plan for.

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 S.C. Code § 12-6-2320(A); Media General Communications, Inc. v. South Carolina Dep’t of Revenue, 388 S.C. 138, 694 S.E.2d 525 (2010).
2 See also Carmax Auto Superstores West Coast, Inc. v. South Carolina Dep’t of Revenue, 411 S.C. 79, 767 S.E.2d 195 (2014).
3 See Appeal of Finnigan, No. 88-SBE-022, California Board of Equalization (opinion filed Aug 28, 1988).
4 Carmax Auto Superstores West Coast, Inc. v. South Carolina Dep’t of Revenue, 411 S.C. 79, 767 S.E.2d 195 (2014) (the party that seeks to deviate from the statutory apportionment formula bears the burden of showing that it does not fairly represent the taxpayer’s in-state business activity, and its alternative apportionment method is reasonable); Media General Communications, Inc. v. South Carolina Dep’t of Revenue, 388 S.C. 138, 694 S.E.2d 525 (2010) (the alternative apportionment provisions authorize the Department to use combined reporting).

International Tax Alert - July 2015

Tue, 07/14/2015 - 12:00am
U.K. Supreme Court Rules that Profits of a Limited Liability Company Accrue to Members as They Arise Download the PDF Version
  Summary On July 1, 2015, the Supreme Court of the United Kingdom issued its long awaited judgment in the case of Anson (Appellant) v. Commissioners for Her Majesty’s Revenue & Customs (Respondent), [2015] UKSC 44, overturning the Court of Appeal’s decision, to find for the taxpayer.
Details The issue at stake was whether an individual, Mr. Anson, a non-domiciled U.K. tax resident, was entitled to double tax relief under the United States – United Kingdom Double Income Tax Treaty (the “Treaty”) for income he received from his United States interest in a Delaware LLC. That is, whether the income taxed in the U.K. could be said to be the same income on which United States tax had been paid. If the income was the same, then double tax relief would be available. However, if it was determined to be different income, (e.g., some type of dividend from the LLC), no credit relief for the United States tax would be allowed.

Specifically, Mr. Anson was subject to taxation in the United States on his share of the LLC’s profits as they arose. He had a U.K. tax liability on any after-tax LLC profits that were distributed from the LLC and remitted to the U.K. The issue presented to the Supreme Court was whether he was entitled to double tax relief in the U.K. for the United States taxes suffered on the profits of the LLC. The Treaty generally provides credit relief for United States federal tax if the U.K. tax could be said to be computed by reference to “the same profits or income” by reference to which the United States federal tax was computed.

U.K. domestic law also provides for unilateral double taxation relief by reference to the same test, and Mr. Anson claimed double tax relief for the Massachusetts state taxes he suffered on the LLC profits on this basis.

The Supreme Court confirmed that what income arises to an LLC member is governed by United States law and is therefore a question of fact. U.K. tax law is then applied to those facts, as found. In this case, the United States legal analysis, with respect to both the relevant Delaware statute governing the LLC, and the rights created by the LLC agreement itself, concluded that Mr. Anson was entitled to the profits of the LLC as they arose, rather than on distribution, even though he did not have a proprietary interest in the assets of the LLC. As such, the profits taxed in the U.K. were the same profits being taxed in the United States, and double tax relief under the Treaty and domestic law was available.

The court made it clear that the U.K. tax treatment of the LLC would depend on the application of both the local governing statute and the rights created under local law by the relevant LLC agreement. Not all LLCs will, therefore, necessarily be regarded in the same way as the one in this case; indeed many may continue to be regarded as opaque (as is HMRC’s long-standing view), depending on their constitutions and the law under which they are formed.
  Insights
  • Although the case is directly on point for United Kingdom resident individuals claiming double tax relief for United States taxes on their limited liability company (“LLC”) interests treated as a partnership for United States tax purposes, the case may impact how certain LLCs are regarded for all U.K. tax purposes.

How BDO Can Help Individuals with interests in LLCs should review their particular circumstances to determine whether they could be entitled to double tax relief that was previously denied.

Corporate groups with LLCs in their structure should also consider the impact of the case, in particular, whether any LLCs in the group that were previously considered to be wholly opaque could now be regarded as being transparent from an income ownership perspective. Areas where this may have an impact include: groupings for U.K. tax purposes,( i.e., whether an LLC breaks the tax group; the application of the dividend exemption to distributions received from an LLC; and any other U.K. tax analysis that relies on income being received by the LLC itself rather than the members).

BDO can help you review your LLC agreements in the light of this tax case to determine whether there is any potential change to the current U.K. tax treatment that might present an opportunity or risk to you.
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

Monika Loving
Partner

  Matthew Barton
Senior Director   Ira Mirsky
Senior Director   Bob Brown
Partner  

Chip Morgan
Senior Managing Director

  Holly Carmichael 
Partner  

Michelle Murphy
Senior Manager

 

Scott Hendon
Partner

 

Brad Rode
Partner

  Martin Karges
Senior Director   William F. Roth III
Partner   Paul Kozulis
Senior Director  

Jerry Seade
Principal

 

Annie Lee
Senior Director

 

Todd Simmens
Partner

International Tax Alert - July 2015

Tue, 07/14/2015 - 12:00am
United Kingdom Summer Budget 2015 - Highlights for United States Businesses Investing in the United Kingdom
Download the PDF Version
  Summary On July 8, 2015, United Kingdom (“UK”) Chancellor of the Exchequer, The Rt. Hon. George Osborne MP delivered his Summer Budget (“Budget”) to Parliament, setting out the Government’s plans in relation to taxation.
  Details The annual budget in the U.K., where the Government sets out information on the economy and plans in relation to tax measures for the coming year takes place in March.  However, following the General Election in May this year, the new U.K. Conservative Government has an opportunity to present its “emergency” budget, setting out its own policies based on its electoral mandate.  Many of the measures introduced in the Budget will be enacted as part of the Summer Finance Bill 2015, a draft of which should be published on July 15, 2015, for enactment (“Royal Assent”) later in July or early August 2015.

The Chancellor described the Budget as setting out a plan for Britain for the next 5 years “to keep moving from a low wage, high tax, high welfare economy, to the higher wage, lower tax, lower welfare country we intend to create.”  Some key specific measures are described below.

Further Reduction in Rate of Corporation Tax
At a current rate of 20 percent, the U.K. corporate tax rate is tied for the lowest rate in the G20.1  In a surprising move, the Chancellor announced that the rate would further fall to 19 percent on April 1, 2017, and then to 18 percent on April 1, 2020.

Annual investment allowance
U.K. companies and unincorporated businesses are allowed a 100 percent deduction for plant and machinery up to a maximum amount per annum.  This annual investment allowance, temporarily set at GBP 500,000 p.a., had been due to revert to its original GBP 25,000 p.a. at the end of 2015.  However, from January 1, 2016, the annual investment allowance is to be fixed at GBP 200,000 p.a., providing incentive for businesses to invest in plant and machinery.

Corporation Tax Payment Dates
Currently, although paid in installments, large companies in the UK do not start paying tax until the seventh month of their accounting period. The Budget proposes to accelerate the timing of these payments and for accounting periods beginning on or after April 1, 2017, companies with annual taxable profits of GBP 20m or more (reduced ratably where there is more than one group company) will be required to pay their corporation tax in quarterly installments in the third, sixth, ninth and twelfth month of their accounting period.  This brings forward the payment dates of corporation tax for those affected companies by four months, and makes U.K. payments more aligned with United States estimated payment dates. 

Restriction of Relief for Goodwill Amortization
Companies purchasing goodwill or other customer related intangibles will no longer be able to amortize that expenditure for corporation tax purposes.  This base broadening measure seeks to remove the tax relief available when structuring an acquisition as an asset deal, leveling the playing field with share acquisitions, where no relief for goodwill or other customer related intangibles is available.  The restriction applies to purchases of goodwill and other customer related intangibles on or after July, 8 2015, but will not impact amortization where the relevant intangible was acquired before this date.

Loan Relationships and Derivatives
Consultation on the modernization of the rules dealing with corporate debt and derivative contracts has been ongoing since 2013.  It was announced in the Budget that a series of changes to update the computation of profits and losses on loan relationships and derivative contracts will be made for accounting periods commencing on or after January 1, 2016.  Such measures include amending the calculation of taxable amounts (income or deductions) to include only items recognized in the profit or loss account, rather than those recognized elsewhere in the accounts (e.g., items taken through reserves).

Companies in financial distress that enter into restructuring arrangements to ensure continued solvency can now exclude any credits arising as a result of such restructuring from their taxable income.  This measure takes effect from the date on which the Summer Finance Bill receives Royal Assent.

New anti-avoidance legislation will also be introduced to cover both loan relationships and derivatives. The new rule, which will apply to arrangements entered into on or after Royal Assent, will seek to counter those arrangements entered into with a main purpose of obtaining a tax advantage by way of the loan relationship or derivative contract rules.  Certain specific anti-avoidance rules will be repealed as a result.

National Living Wage
Following the Government’s stated aim of being a “higher wage” country, a compulsory “National Living Wage” was introduced in the Summer Budget.  Working people over the age of 25 years will have to be paid a minimum of GBP 7.20 per hour from April 1, 2016, reaching GBP 9 per hour by 2020.  This cost will be borne by business, but the reduction in the corporation tax rate is intended to at least partially ameliorate this, but, of course, will depend on the specific company’s facts.

Abolition of Non-domicile Status for Long Domicile Residents
In an anticipated move, the Chancellor announced that from April 2017 otherwise non-domiciled individuals who have lived in the UK for 15 out of the last 20 years will be deemed to be U.K. domiciled for tax purposes.  Individuals impacted will thus lose the ability to be taxed on a remittance basis in respect of their non-U.K. source income.  It remains to be seen whether globally mobile individuals impacted will choose to leave the U.K. as a result.
  Insights
  • The Budget covers all areas of U.K. taxation and impacts all U.K. resident individuals and companies doing business in the U.K.  The effect of the proposed Budget extends overseas to non-UK residents conducting business in the U.K. as well. This alert highlights some of the main proposals likely to impact United States businesses investing in the U.K.

How BDO Can Help United States businesses investing in the U.K. will need to assess the impact of the Budget proposals.  While there is good news in terms of a reduced rate of corporation tax in the near future, other proposals, for example, the changes to the loan relationship anti-avoidance legislation and loss of amortization on future acquisitions of goodwill may have an adverse impact going forward.

BDO can work with you to help you understand what the U.K. Budget proposals mean for your business. 
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

Monika Loving
Partner

  Matthew Barton
Senior Director   Ira Mirsky
Senior Director   Bob Brown
Partner  

Chip Morgan
Senior Managing Director

  Holly Carmichael 
Partner  

Michelle Murphy
Senior Manager

 

Scott Hendon
Partner

 

Brad Rode
Partner

  Martin Karges
Senior Director   William F. Roth III
Partner   Paul Kozulis
Senior Director  

Jerry Seade
Principal

 

Annie Lee
Senior Director

 

Todd Simmens
Partner

 
1 Russia, Saudi Arabia and Turkey also provide for a 20% corporate income tax rate in 2015.
 

BDO Knows: SALT and Transfer Pricing

Thu, 07/09/2015 - 12:00am
The Multistate Tax Commission Approves Draft Design for State Transfer Pricing Audit Program

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Summary On May 7, 2015, the Multistate Tax Commission’s (the “MTC”) Executive Committee approved a draft design for the Arm’s Length Adjustment Service (“ALAS”), which will help states audit transfer pricing arrangements used by multi-jurisdictional enterprises – a capability states have typically lacked the monetary resources and expertise to provide.  Under the approved draft design, which the MTC anticipates implementing over a four-year “charter period,” the ALAS will provide states with training and support pertaining to audits of transfer pricing arrangements.  Through this initiative, the MTC intends to help states recover a portion of an estimated $20 billion they lose annually due to improper income shifting.
  Details The MTC, which was created in 1967, is an organization of state governments.  The MTC works on behalf of states to assist with administration and uniformity of tax laws, which it has historically done through such initiatives as its multistate Nexus and Audit Programs.  The ALAS, which is the MTC’s most recent initiative, was developed with the help of representatives from Alabama, the District of Columbia, Florida, Georgia, Hawaii, Iowa, Kentucky, New Jersey and North Carolina.
 
Goals, Objectives, and Strategies of the ALAS
 
The ALAS has four main goals and objectives: (i) improve the ability of states to identify and “correct” cases of taxpayer “underreporting” associated with related party transactions; (ii)  increase audit coverage of related party transactions; (iii) foster dispute resolution by offering an initial voluntary disclosure opportunity, encouraging use of the MTC Dispute Resolution process, and providing litigation support to states; and (iv) inform and advise states on emerging developments regarding related party transactions.
 
Integral to achieving these goals and objectives are the ALAS’s overall strategies, which include: (i) building transfer pricing audit capacity through knowledge/experience sharing and training of MTC and state staff; (ii) collaboration among state staff, MTC staff and expert consultants across compliance, auditing, economics and law disciplines (i.e., the disciplines usually associated with a transfer pricing audit); (iii) hiring and developing core staff at the MTC, as well as contracting with outside consultants; and (iv) developing procedures and steps to improve tax compliance as it pertains to related party transactions.
 
Elements of the ALAS
 
The ALAS is comprised of five main elements, (i) training; (ii) transfer pricing analysis; (iii) information exchange, process improvement, and case assistance; (iv) case resolution and litigation support services; and (v) optional joint audits, which are aligned with its goals, objectives, and strategies.
 
(i) Training.  Initial ALAS training courses will be provided for state staff on identifying audit issues, securing documents, and conducting non-economic technical reviews of taxpayer transfer pricing analyses (e.g., calculation errors, inappropriate selection of comparables, absence of business purpose, etc.).  Thereafter, general training courses that cover federal and state related party tax laws and related party compliance methods (e.g., information gathering methods, audit selection procedures, identifying related party/transfer pricing issues, developing defensible transfer pricing adjustments, etc.) will be offered.  Beyond formal training, periodic conference-style training sessions will be organized to discuss emerging related party/transfer pricing issues.
 
(ii) Transfer Pricing Analysis.  The ALAS is focused on minimizing the cost of evaluating taxpayer transfer pricing studies by securing information from taxpayers to assist with preparation of economic analyses, conducting initial technical audits of transfer pricing studies, and performing economic analyses in transfer pricing studies.  The ALAS will help states through training initiatives, process improvement and case assistance, developing and working with state staff devoted to technical audits, and providing economic expertise for transfer pricing studies and alternative pricing solutions, if needed.  During the early stages, the MTC will rely upon contractors to conduct economic analyses and provide alternative pricing recommendations, but it intends to hire three MTC economists to perform approximately 70 percent of the economic analyses in subsequent years.  The MTC also anticipates hiring an auditor to work with designated state staff for document gathering and technical reviews.
 
(iii) Information Exchange, Process Improvement, and Case Assistance.  The ALAS will develop a taxpayer information exchange process to help states notify each other when they encounter cases wherein a joint economic analysis of a taxpayer’s transfer pricing study is warranted.  An information exchange process will also serve as a vehicle for sharing information, documentation, and results of any joint analysis.  The ALAS will also improve processes and procedures to secure taxpayer information through questions concerning related party transactions on returns and other forms, and by developing audit protocols and standard information requests.  Lastly, ALAS staff will provide information and advice to individual states concerning procedures and issues in particular taxpayer cases.
 
(iv) Case Resolution and Litigation Support Services.  The MTC will offer its Alternative Dispute Resolution program to help taxpayers and states resolve disputes over related party arrangements.  To help facilitate this program, ALAS staff will provide legal advice and support to participating states.  MTC staff may explore the feasibility and desirability of developing and using an advance pricing agreement process with taxpayers.  The ALAS may also support a six-month voluntary disclosure program early in its operation (e.g., July 1, 2016 through December 31, 2016).
 
(v) Optional Joint Audits.  States seeking to expand audit coverage of related party transactions and transfer pricing arrangements will be invited to join the corporate income tax portion of the MTC Joint Audit Program.
 
Development, Operation, and Funding of the ALAS
 
The estimated annual budget for the ALAS is approximately $2.0 million. The MTC must receive an annual financial commitment of at least $200,000 from at least nine states to participate in the program. Full development and implementation of the ALAS will span the charter period and will be completed in three stages, which include: (i) pre-launch stage; (ii) developmental stage; and (iii) operational stage. 
 
(i) Pre-Launch Stage.  The pre-launch stage, which began in January 2015, will likely conclude by July 2015, with the goal of launching the ALAS shortly thereafter.  During the pre-launch stage, the MTC has been tasked with recruiting participating states, recruiting staff positions, and finalizing formal program designs and implementation plans.  Recruiting states to participate in the program is arguably the most critical activity during the pre-launch stage since the ALAS will not launch until the necessary nine or ten states have committed funding.  To date, only six states (Alabama, Iowa, Kentucky, New Jersey, North Carolina and Pennsylvania) have agreed to fund the program.  If a sufficient number of states do not commit funding by July 2015, the timeline may be adjusted.
 
(ii) Developmental Stage.  The developmental stage is expected to begin in July 2015 and conclude by June 2017.  During the developmental stage, the MTC will sequentially implement, refine, and expand elements of the service (e.g., training, a voluntary disclosure opportunity, technical reviews, economic analyses, process improvement, and audits) to lay the foundation for the operational stage.  During this stage, the MTC will contract with consulting economists, develop in-house staff, and hire multiple personnel to facilitate day-to-day activities.  Anticipated hires include a tax manager to coordinate communication among state staff and the ALAS, two economists to conduct economic analysis, a staff attorney to provide legal support for the administration of the ALAS, and a transfer pricing auditor to assist with technical reviews.
 
(iii) Operational Stage.  The ALAS will be fully operational by June 2017.  Audits, which address the full range of related party and transfer pricing issues, will be regularly conducted and trainings will be held on a regular schedule.  During the operational stage, which is expected to run through June 2018, additional staff economists will be hired to bolster in-house capacity for economic analyses and compliance efforts.  Process improvement, case assistance, case resolution and litigation support activities will be monitored and reviewed during this stage as well.
  BDO Insights
  • By designing a draft version of the ALAS, states are moving from reliance on existing laws that address related party transaction issues (e.g., related party add-backs and factor presence nexus) to enforcement of underreported related party transactions. In light of this initiative, taxpayers should review their existing transfer pricing arrangements to determine whether updates are warranted.
  • The MTC is discussing several mechanisms that could minimize administrative tasks associated with compliance efforts (e.g., state-level advance pricing agreements, safe harbor rules, and a state-level competent authority).  If implemented, taxpayers could formalize positions with several states at once.


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

Transfer Pricing

Robert Pedersen
International Tax
Practice Leader   Kirk Hesser
Senior Director   Veena Parrikar 
Tax Partner
    Jon Jenni
Senior Director
    Michiko Hamada Haney
Senior Director
    Sean Kim
Senior Manager
 
SALT
  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 Partner
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
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 - July 2015

Thu, 07/09/2015 - 12:00am
IRS Announces Two Capital Gains Transactions Deemed Potential Avoidance Deals Download PDF Version
  Summary On July 8, 2015, the Internal Revenue Service released two notices announcing its planned treatment of two types of structured financial transactions the Service believes are tax avoidance transactions.
  Details On July 8, 2015, the Internal Revenue Service released two notices announcing its planned treatment of two types of structured financial transactions the Service believes are tax avoidance transactions.

The first, Notice 2015-47, addresses transactions IRS refers to as “basket option contracts,” in which a taxpayer attempts to defer income recognition and convert short-term capital gain and ordinary income to long-term capital gain using a contract denominated as an option contract.  The IRS now considers these transactions a “listed transaction.”

The second, Notice 2015-48, concerns a transaction where a taxpayer attempts to defer income recognition and may attempt to convert short-term capital gain and ordinary income to long-term capital gain through a contract denominated as an option, notional principal contract, forward contract, or other derivative contract.  IRS refers to this transaction as “basket contracts.”  The IRS has now designated such transactions as a “transaction of interest.”

A listed transaction is a transaction that is the same as, or substantially similar to, one that the IRS has determined to be a tax avoidance transaction and identified by the IRS notice or other form of published guidance. Taxpayers who participate in listed transactions are required to disclose the transaction as required by the regulations.  Tax practitioners who advise taxpayers regarding listed transactions are required to register the transaction with the IRS and maintain lists of investors in the transactions and provide the list to the IRS on request.

A transaction of interest is defined as a transaction that the IRS and the Treasury Department believe is a transaction that has the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be identified specifically as a listed transaction.
BDO Insights
  • Taxpayers should be aware of the severe penalties associated with the nondisclosure of listed transactions and transactions of interest, as well as heightened accuracy-related penalties for understatements attributable to such transactions
  • The new IRS notices are expected to be available online in the near future.  in the interim, more information on the transactions that the IRS has determined are tax avoidance transactions can be found at: www.irs.gov/Businesses/Corporations/Listed-Transactions

For questions related to matters discussed above, please contact Todd Simmens, Les Williford, Michael Andreola or Jonathan Schmeltz.
 

BDO Indirect Tax News - June 2015

Wed, 07/08/2015 - 12:00am
The latest edition of BDO International's Indirect Tax News covers current global developments in relation to indirect tax, including GST implementation in Malaysia, VAT costs at publicity events in Belgium, and more.
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Expatriate Tax Newsletter - July 2015

Wed, 07/01/2015 - 12:00am
BDO’s Expatriate Newsletter covers timely tax-related updates and regulations from countries around the globe. The July 2015 issue highlights developments in Sweden, Italy, Germany, and more – with a special feature on employee secondments in India.
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Federal Tax Alert - June 2015

Wed, 07/01/2015 - 12:00am
Supreme Court Upholds Premium Assistance Tax Credit; Extends Same-Sex Marriage Nationwide
The U.S. Supreme Court has handed down two much-anticipated decisions: one on the Affordable Care Act’s key provision, the Code Sec. 36B premium assistance tax credit; and another on same-sex marriage nationwide. In King v Burwell, SCt, June 25, 2015 (2015-1 ustc ¶50,356), the Court ruled 6 to 3 that the Code Sec. 36B credit is available to enrollees in both federally-facilitated and state-run Exchanges (currently commonly referred to as Marketplaces). In Obergefell v. Hodges, SCt, June 26, 2015 (2015-1 ustc ¶50,357), the Court ruled 5 to 4 that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when a marriage was lawfully licensed and performed out of state. Both decisions have far-reaching tax consequences.
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Federal Tax Alert - June 2015

Wed, 07/01/2015 - 12:00am
Trade Package Includes Individual and Business Tax Provisions
Just before recessing for the Independence Day holiday, Congress passed two trade bills with important tax changes affecting individuals and businesses. The Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (HR 2146) and the Trade Preferences Extension Act of 2015 (HR 1295) are expected to be signed into law by President Obama as soon as they reach the White House. A third trade bill, the Trade Facilitation and Enforcement Act of 2015 (HR 644) is going to a House-Senate conference to iron-out differences.
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BDO World Wide Tax News - June 2015

Fri, 06/19/2015 - 12:00am
Catch up on recent international tax news via BDO's latest edition of World Wide Tax News. This newsletter summarizes recent tax developments of international interest across the world, including China, India and Singapore.
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State and Local Tax Alert - June 2015

Fri, 06/19/2015 - 12:00am
The California Court of Appeals, 4th Appellate District Held That California’s Combined Reporting Scheme Violates the Commerce Clause
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  Summary On May 28, 2015, the California Court of Appeals, 4th Appellate District issued its decision in Harley-Davidson, Inc. v. California Franchise Tax Board, No. D064241 (Cal. Ct. App. May 28, 2015), in which it held that California’s combined reporting scheme, which allows an intrastate group of unitary corporations to elect to file on a separate company or combined basis but requires an interstate group of unitary corporations to file on a combined basis, violates the Commerce Clause of the United States Constitution.  The court also held that two of the taxpayer’s financial services subsidiaries had Due Process Clause and Commerce Clause nexus with the state even though each subsidiary did not purposefully target the California market or have a physical presence in California on its own.
  Details Background
Harley-Davidson, Inc. (“Harley-Davidson”) is a Wisconsin headquartered corporation that engages in two businesses through several subsidiaries: (1) a motorcycle business and (2) a financial services business.  Among the subsidiaries that comprise the financial services business are Harley-Davidson Customer Funding Corp. (“HDCF”) and Eaglemark Customer Funding Corp. IV (“Eaglemark”). Each purchased loans secured by motorcycles, some of which originated in California, from Harley-Davidson Credit Corporation (“HDCC”), which is also a Harley-Davidson financial services subsidiary.  HDCF and Eaglemark then “securitized” the loans they purchased through trusts they each owned.

HDCF and Eaglemark each had no employees and so they entered into contracts with HDCC to service the loans they owned through the trusts.  HDCC, which had offices in Nevada and other states but no property or employees in California, had its Nevada based employees perform collection activities with respect to delinquent loans.  In the event of an unsuccessful collection, HDCC hired a third-party to repossess the motorcycle.  An HDCC employee visited an auction house in California on 17 days total to assist with setting prices for repossessed motorcycles at auction or to observe some part of the auction process.  HDCF and Eaglemark had no control over how the loans it purchased were obtained and neither entity specifically targeted any state, including California, as it did not matter to either entity where the underlying borrower was located.

For the taxable years at issue, Harley-Davidson filed combined returns with California that included the motorcycle business only. Upon audit, the California Franchise Tax Board (the “FTB”) concluded that the financial services business should have been included in the combined report and assessed additional taxes.  Harley-Davidson paid provisional taxes in excess of $1.8 million and then filed suit against the FTB in the Superior Court of San Diego County for an income tax refund claiming: (1) California’s combined reporting scheme violates the Commerce Clause; and (2) HDCF and Eaglemark do not have nexus with California.  The Board filed a demurrer1 with respect to each claim, which the Superior Court sustained, and Harley-Davidson timely appealed to the California Court of Appeals.

California’s Combined Reporting Scheme Violates the Commerce Clause
The court in Harley-Davidson, Inc., had three questions before it with respect to California’s combined reporting scheme: (1) whether California’s combined reporting scheme treats interstate and intrastate businesses differently; (2) whether any differential treatment discriminates against interstate commerce; and (3) whether any differential treatment withstands strict scrutiny. 

The FTB conceded that California’s combined reporting scheme treats interstate and intrastate businesses differently and the court remanded the strict scrutiny question for the trial court to make a determination because the FTB had raised the issue for the first time on appeal.  With respect to the discrimination issue, the court held that Harley-Davidson had sufficiently alleged discriminatory treatment in violation of the Commerce Clause of the U.S. Constitution for purposes of surviving the demurrer challenge. The Court of Appeals directed the Superior Court to enter an order overruling the demurrer as to that claim and to conduct further proceedings consistent with its opinion. 

With respect to its discrimination holding, the Court of Appeals reasoned that the holdings in Fulton Corp. v. Faulkner, 516 U.S. 325 (1996), South Central Bell Telephone Co. v. Alabama, 526 U.S. 160 (1999), Farmer Bros. Co. v. Franchise Tax Board, 108 Cal. App. 4th 976 (2003), and other case precedent lead to the unavoidable conclusion that California’s combined reporting scheme facially discriminates against interstate commerce in violation of the Commerce Clause because whether a unitary business computes its California tax liability using the separate company or combined reporting method is determined solely by where the unitary business is engaged in business.  The court wholly rejected all of the FTB’s arguments, including an argument that the present combined reporting scheme is justified because it is an attempt to “level the field” between interstate and intrastate businesses.

HDCF and Eaglemark Have Nexus with California
Under the Due Process Clause of the U.S. Constitution, a state may not impose a tax unless the taxpayer has “minimum contacts” with the state such that the maintenance of a lawsuit does not offend traditional notions of fair play and substantial justice.  Under the Commerce Clause of the U.S. Constitution, a state may not tax a taxpayer unless it has a “substantial nexus” with the state, which may be satisfied by a physical presence in the taxing state, whether by the taxpayer itself or an independent contractor or an agent in the state acting on the taxpayer’s behalf. 

The court in Harley-Davidson, Inc., held that HDCF and Eaglemark had the requisite “minimum contacts” and “substantial nexus” with the state for California to impose an income tax and, thus, affirmed the Superior Court’s decision as to this issue.  The court reasoned that there was sufficient evidence, based on conduct and circumstances, to support an agency relationship between HDCC and HDCF and Eaglemark, and HDCC carried on collection and auction activities in California on their behalf.  The court rejected Harley-Davidson’s arguments, including the following: (1) the decision in Borders Online v. State Board of Equalization, 129 Cal. App. 4th 1179 (2005) demands a more stringent three or four-prong agency relationship test; (2) HDCF and Eaglemark did not purposefully target the California market as this was done through their agent, HDCC; (3) an agent’s in-state activity must be sales-related to create nexus; and (4) HDCC’s in-state activity was de minimis.
  Insights
  • Given that California’s combined reporting scheme is at stake, it is very likely that this matter is far from over.  But note that even if the court ultimately finds that the combined reporting scheme cannot survive a strict scrutiny challenge (i.e., the state has a legitimate interest in the differential treatment that could not be accomplished in a less discriminatory manner), California may choose to cure any constitutional infirmity by requiring all corporations – interstate and intrastate alike – to file on a combined basis.  Regardless, in order to preserve refund rights which may otherwise expire, pending litigation of this matter, taxpayers may want to consider filing protective refund claims in the event of a taxpayer favorable outcome.
  • The decision as it relates to nexus seems to follow long-standing Due Process and Commerce Clause jurisprudence – a taxpayer generally may not contract away nexus by entering into an agreement with another taxpayer to perform an in-state activity on its behalf.

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 Senior Director
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
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 A demurrer is a pleading stating that although the facts alleged in a complaint may be true, they are insufficient for the plaintiff to state a claim for relief.  Black’s Law Dictionary 444 (7th ed. 1999).
 

Unclaimed Property Notice - June 2015

Thu, 06/18/2015 - 12:00am
Delaware Proposed Law Change around Unclaimed Property Administration Seeks to Foster Business-Friendly Environment Click here to download the PDF version

Senate Bill No. 141 (“the bill”) was introduced in the Delaware State Senate on June 16, 2015.  The pending legislation intends to improve the fairness of and foster compliance with Delaware’s Unclaimed Property Program.  Specifically the bill proposes:  (a) extension of the Voluntary Disclosure Agreement program (“VDA”) and creates an audit notice process, (b) Modifications to the audit and VDA look-back periods, (c) Annual compliance return filing reminder requirement from the State Escheator of a company’s requirement to file unclaimed property report with Delaware, and (d) Reinstatement of interest with a reduced aggregate cap of 25%.   It is expected that this legislation will pass the Delaware General Assembly before it adjourns on June 30, 2015.

A. Extension of Delaware VDA program & Audit Notice Process
SB No. 141 extends the Delaware Secretary of State (“DE SOS” or “SOS”) unclaimed property VDA program.  The bill provides that for periods beginning July 1, 2015 the State Escheator shall not initiate any new unclaimed property audits of companies unless:
 
  • The company is notified in writing by the DE SOS that it may enter into a VDA program and the company does not enter the VDA program within 60 days from the mailing date of the invitation to participate in the VDA program; or
  • A company that has entered into the DE VDA program and has failed to comply with its terms and conditions.1
B. Modifications to the Audit and VDA Look-Back Periods
Under the new proposed legislation, the audit and VDA look-back periods are adjusted as follows:

Unclaimed Property Audits
The bill provides what could equate to significant “estimated liability” savings for those companies that are incorporated in Delaware.  This savings occur given the reduced look-back periods and the “rolling look-back period” method.  The latter of which eliminates what would otherwise be a perpetually inclining audit look-back scale.
  # Audit Notice Issue Period Audit Look-back Period Comments 1 Pending Examination
(audit began prior to 7/1/15) 1/1/86 – forward (transaction years) This is 5 year reduction off current 1981 audit look-back period 2 7/1/15 – 12/31/16 1/1/91 – forward
(transaction years) This is a 10 year reduction off current 1981 audit look-back period 3 1/1/17 and after 22 years prior to calendar year in which a company is provided written notice of the examination (transactions years) For audits that begin in 2017 this is a 14 year reduction off current audit look back periods to 19812
 
This is a forward “rolling” 22 year look-back period in contrast to current fixed 1981 look-back date
Unclaimed Property VDA
Similarly, the VDA modified look-back periods and certain other terms and conditions of the program are highlighted below.  Companies that were previously enrolled in the DE SOS VDA program and withdrew from that program or were removed for failure to work in “good faith” to complete the VDA filing are not permitted to re-enter the program prospectively.  This adds to the already existing categories preempted from participating in the VDA program, including companies that filed VDA agreements with Delaware prior to 6/30/12 or had received an audit notice prior to entering into the VDA program.
  # VDA Filing Date VDA
Look-back Period Payment Date3 Comments 1 7/1/13 - 9/30/14 1/1/96 – forward
(transaction years) 6/30/16 This is a 3 year reduction off current DE SOS VDA look-back periods to 1993 2 9/30/14 – 12/31/16 1/1/96 – forward
(transaction years) Within 2 years of DE SOS fully executed DE VDA - 1 Form DE SOS at sole discretion can extend due date of VDA completion and payment. 3 1/1/2017 - Forward 19 years prior to year DE VDA – 1 Form was accepted by DE SOS Within 2 years of DE SOS fully executed DE VDA - 1 Form DE SOS at sole discretion can extend due date of VDA completion and payment.
 
This appears to be a forward “rolling” 19 year look-back period in contrast to current fixed 1993 or 1996 look-back periods based on application filing date
C. Annual Compliance Return Filing Requirement Reminder
The legislation provides that the State Escheator sends an annual reminder of a company’s requirement to file unclaimed property report with Delaware.  Specifically, the State Escheator must send a notice 120 days prior to the State’s March 1st unclaimed property report deadline to all those who have filed unclaimed property returns in the past five years.  In addition, holders must identify in the report a designated employee of the company who will serve as a contact with the State for all correspondence with the state related to the reporting and remittance of unclaimed property.  This person must report any change in contact or contact information, if any, as well.

D. Reinstatement of Interest with a Reduced Aggregate Cap of 25%
The Bill seeks to reinstate the imposition of interest at .5% per month on outstanding unpaid amounts from date the amounts or property is due until paid unless such failure is due to reasonable cause.  Interest would be capped at 25% of the amount required to be paid.  Presumably interest would be imposed on audits and for property reported on annual compliance returns that was reported late.  This provision of the bill is effective for any late filed unclaimed property that is reported and remitted on or after March 1, 2016. 

Closing Considerations
Delaware’s unclaimed property laws continue to change, providing opportunities to holders that are incorporated in DE or conduct significant business in Delaware to address its unclaimed property matters with the state.  While this bill goes a long way to address many concerns regarding unclaimed property compliance in Delaware, it still leaves open many unanswered questions.  How will interest be applied on audits going forward, automatic application or consistent with historical practices on a more limited case by case basis?  How is “reasonable cause” defined and applied?  Is the audit testing methodology going to mirror those laid out in the DE SOS VDA Implementing Guidelines going forward, etc.?  These questions and others will have to be addressed and may have a significant impact on pending and new audits alike. 

Notwithstanding, most of these concerns can be alleviated via participation in the DE SOS VDA program.  Under the program, Delaware waives all penalties and interest.  The settlement agreement executed at the end of the VDA waives the states right for audit so long as certain conditions are satisfied.   Moreover, there is a 2-year “review period” with potential extension opportunities to review and settle escheat liabilities, far less of a period than average 3-7 years it takes to complete an unclaimed property audit.  In addition, the DE SOS VDA Implementing Guidelines only require voids after 90 days from issue date to be reviewed, while traditional audit void waiver requires review of all voids after 30 days of initial check issue date, etc.  Given the above, the benefits can be significant.  BDO has represented over 50 clients in DE VDA filings with the state for which our experience has shown that the program has proven to be a very fair and friendly venue over the course of last 3 years to resolve unclaimed property matters with the state.  

Should you have any questions or would like to discuss escheatment further, please contact Joseph Carr, Partner & National Unclaimed Property Practice Leader at jcarr@bdo.com or 312-616-3946. 
 
 For more information, please contact one of the following practice leaders:
 

Joseph Carr
Partner and National Unclaimed
Property Practice Leader

 

Nick Boegel
Midwest Practice Leader
 

  Elizabeth Foley
Mid-Atlantic Practice Leader   Michael Kenehan
Senior Manager   Ricardo Garcia 
West Coast Practice Leader  

 

 
1 See Delaware SOS VDA Implementing Guidelines (February 11, 2014 as amended) for further guidance with respect to filing process requirements, testing methodologies, etc.  See also, DE VDA -1 Form Disclosure and Notice of Intent to Voluntarily Comply with Abandoned Property Law Pursuant to 12 Del. C. Sec 1177.
2 Generally, audits commenced in 2017 would look back to 1995 capturing transactions from 1/1/95 – 12/31/11, given Delaware 5 year dormancy period for most property types.  It should be noted that the DE VDA -1 Form is the Disclosure and Notice of Intent to Voluntarily Comply with Abandoned Property Law Pursuant to 12 Del. C. Sec 1177.  The proposed legislation also requires payment or an agreed payment plan executed 30 days prior to the 2 year review period end date. 
3 Payment date requires either that (a) full payment is received by DE SOS by the stated date or a payment plan is entered into by the stated date.

State and Local Tax Alert - June 2015

Thu, 06/11/2015 - 12:00am
District of Columbia Adopts Single Sales Factor Apportionment, Market-Based Sourcing, and a Throwout Rule, Expands the List of Services Subject to Sales Tax, and Reduces the Corporation and Unincorporated Business Franchise Tax Rates
Click here to download the PDF version
  Summary On February 26, 2015, the District of Columbia (the “District”) enacted the Fiscal Year 2015 Budget Support Act of 2014 (the “Budget Support Act”) the result of which is, effective for taxable years beginning after 2014, the adoption of single sales factor apportionment, market-based sourcing, a “throwout” rule for receipts from sales of other than tangible personal property, and a reduced 9.4% tax rate for corporations and unincorporated entities.  The Budget Support Act also expands the scope of services subject to sales tax to include such services as car washing, bottled water delivery services, and health-club services.  Lastly, the Budget Support Act clarifies the definition of Qualified High Technology Company (“QHTC”) used for purposes of tax credits, the exemption from Unincorporated Business Tax, and the special 6% tax.  
Details Adoption of Single Sales Factor, Market-Based Sourcing and Throwout

Currently, the District requires Corporation and Unincorporated Business Franchise Tax taxpayers to apportion income using a three factor formula comprised of property, payroll and double-weighted sales, where, for sales factor purposes, receipts from sales of other than tangible property are sourced using an income-producing activity/costs of performance approach.  Effective for taxable years beginning after December 31, 2014, these taxpayers will be required to apportion income using a single sales factor and assign receipts from the sale of other than tangible personal property using a market-based approach.

  Receipt From... Source to District of Columbia If... … Sale, rental, lease or license of real property … To the extent the real property is located in District of Columbia … Rental, lease or license of tangible personal property … To the extent the tangible personal property is located in District of Columbia … Sale of a service … Service is delivered to a location in District of Columbia … Rented, leased, or licensed non-marketing intangible … To the extent the intangible property is used in District of Columbia … Rented, leased, or licensed marketing intangible … The underlying good or service is purchased by a consumer in District of Columbia … 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 District of Columbia … Sale of intangible property - sales contingent on productivity, use, or disposition of the intangible property … Treat as a receipt from the rental, lease or license of such intangible property  
Under these market-based sourcing rules, the District allows for reasonable approximation where the state of assignment cannot be determined.  In addition, the District requires “throwout” (i.e., exclusion from numerator and denominator of the sales factor) with respect to receipts from sales of other than tangible personal property where: (1) no assignment rule is provided; (2) the taxpayer is not subject to tax in the state of assignment; or (3) the state of assignment cannot be reasonably approximated.

Reduced Corporation and Unincorporated Business Franchise Tax Rates

Effective for taxable years beginning after December 31, 2014, the rate of tax imposed on corporations and unincorporated businesses will be reduced to 9.4% from the current rate of 9.975%.  Subject to available funding and inclusion in subsequent budgets, the tax rate may be further reduced incrementally to as low as 8.25%.

Additional Unincorporated Business Tax Exemption

Currently, the District exempts certain businesses from the Unincorporated Business Tax, including: (1) a trade or a business which by law, customs, or ethics cannot be incorporated; (2) a corporation that is required to incorporate under the Professional Corporation laws; (3) a trade or business in which 80% or more of the gross income is derived from personal services rendered by partners or members of the business; and (4) a QHTC.  For taxable years beginning after December 31, 2014, a business “that arises solely by reason of the purchase, holding, or sale of, or the entering, maintaining, or terminating positions in stocks, securities, or commodities for the taxpayer’s own account” will also be exempt from the tax provided that the business does not: (1) hold property, or maintain positions, as stock in trade, inventory, or for sale to customers in the ordinary course business; (2) acquire debt instruments in the ordinary course of business for funds loaned or services rendered; or (3) hold stock in a real estate investment trust or partnership interest that is not traded on an established securities market.

Qualified High Technology Company (“QHTC”) Definition Clarification

In addition to the Unincorporated Business Tax exemption for unincorporated businesses that meet the QHTC definition, the District applies a special 6% tax and offers certain tax credits to a corporation that meets the definition as well.  In BAE Systems Enterprise Systems Inc. v. District of Columbia Office of Tax and Revenue, 56 A.3d 477 (D.C. 2012), the District Court of Appeals affirmed the Office of Administrative Hearings and held that the historic QHTC definition did not require property ownership or the payment of rent or the exercise of predominant authority, dominion, or control over an office or base of operations in the District.  In an attempt to overturn that decision, the Budget Support Act clarifies that QHTC status applies only to a company that owns or leases an office in the District and meets the employment requirement.  In addition, the Budget Act excludes an online or brick and mortar retail store and a building or construction company from the QHTC definition.  These changes to the QHTC definition appear to be effective October 1, 2014, because no particular effective date is provided for these changes and the general applicability date of the Budget Support Act is October 1, 2014.

Sales Tax on Additional Services

Effective as of October 1, 2014, the District will impose sales tax on the sale or charge for the following: (1) bottled water by the gallon delivered via a bottled water delivery service; (2) household goods storage services; (3) carpet and upholstery cleaning and dyeing and rug repair; (4) health-club services or a tanning studio; (5) car washing, not including self-service carwashes; and (6) a bowling alley or a billiard parlor.
  BDO Insights
  • With the adoption of single sales factor apportionment and market-based sourcing, the District joins the ranks of many other states that have transitioned from three factor apportionment and the use of an income-producing activity/costs of performance approach for sourcing receipts from sales of other than tangible personal property.
  • Service based business, especially those that provide services to the federal government, should evaluate the potential impact of the new single sales factor and market-based sourcing rules.  The risk is that apportionment to the District could substantially increase under this new market-based sourcing regime, and, thus, subject more income of incorporated and unincorporated businesses to the still relatively high 9.4% District tax rate.  Special attention should be paid by S Corporations, since the District franchise tax applies at the entity-level, regardless of federal income tax treatment.  Regulations to clarify the applicability of the new adopted sourcing rules are currently being drafted. However, the expected issuance of the regulations late in the tax year could leave certain taxpayers with underpaid estimated taxes and a surprise District tax bill.
  • Many businesses will welcome the tax rate reductions under the Budget Support Act.  However, a business that does not own or lease an office in the District but relied on or anticipated relying on the decision in BAE Systems Enterprise Systems Inc. for a more inclusive QHTC definition may now be subject to the Unincorporated Business Tax, the higher Corporation Franchise Tax, or may no longer benefit from the tax credits it once enjoyed.
  • Businesses that provide a bottled water delivery service, household goods storage service, carpet and upholstery cleaning and dyeing or rug repair services, health-club services, or car washing services, or operate a tanning studio, bowling alley, or a billiard parlor, will effective October 1, 2014, have to concern themselves with collecting, reporting, and remitting sales tax on the sales of such services.


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 Senior Director
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director   Richard Spengler
Tax Senior Director         Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

International Tax Alert

Thu, 06/11/2015 - 12:00am
Foreign Financial Account Reporting (FinCEN Form 114) Should Be Submitted Electronically No Later Than June 30, 2015

Click here to download the PDF version


Affecting Any United States persons with a financial interest in or signature authority over foreign bank and financial accounts with a total balance exceeding $10,000 at any time during the calendar year.
Details FinCEN Regulations
On February 24, 2011, the Financial Crimes and Enforcement Network (“FinCEN”) issued regulations with respect to filing requirements and definitions for FBAR filings. The regulations issued by FinCEN addressed issues that had been the subject of earlier guidance. Specifically, the regulations finalized guidance relating to the persons required to file FBARs, and the types of accounts that were subject to FBAR reporting. These include:

1. Definition of United States Person. The term “United States person” is defined as a citizen of the United States; a resident of the United States; and, an entity, including but not limited to, a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States, or the Indian Tribes.

2. Reportable Accounts. Reportable accounts include bank accounts, securities accounts, and other financial accounts. The term “other financial account” includes the following assets or accounts:
 
  • An account with a person that is in the business of accepting deposits as a financial agency;
  • An account that is an insurance or annuity policy with a cash value;
  • An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
  • A foreign mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.The regulations reserved guidance with respect to other investment funds. No specific guidance was provided with respect to whether the ownership of a passive foreign investment company (“PFIC”) is subject to FBAR reporting. Previously, comments were requested regarding the issue of whether a PFIC is a foreign financial account for FBAR reporting purposes.
The regulations reserved guidance with respect to other investment funds. No specific guidance was provided with respect to whether the ownership of a passive foreign investment company (“PFIC”) is subject to FBAR reporting. Previously, comments were requested regarding the issue of whether a PFIC is a foreign financial account for FBAR reporting purposes.
  Exception for Certain Employees and Officers In 2012, FinCEN issued two Notices, Notice 2012-1 and Notice 2012-2, with reference to Notices 2011-1 and 2011-2, which provided for an extension of the filing deadline, for certain individuals with signature authority over, but no financial interest in, one or more foreign financial accounts. 

Notice 2012-1 specifically addressed individuals whose FBAR filing requirements may be affected by the signature authority filing exceptions in 31 CFR § 1010.350(f)(2)(i)-(v), as well as certain employees or officers of investment advisers registered with the Securities and Exchange Commission who have signature authority over, but no financial interest in, certain foreign financial accounts. Subsequently, Notice 2012-2 extended the FBAR filing due date for individuals whose filing due date for reporting signature authority was previously extended by Notice 2012-1 and again in December 2013. FinCEN Notice 2013-1 extended the due date to June 30, 2015, for the reporting of signature authority held during the 2013 calendar year, as well as all reporting deadlines extended by Notices 2011-1 and 2011-2.

Most recently, on November 24, 2014, FinCen Notice 2014-01 further extended the due date for the above to June 30, 2016. Specifically, FinCen Notice 2014-01 extends the reporting of signature authority held during the 2014 calendar year as well as all reporting deadlines extended by previous Notices 2013-1, 2012-1, 2012-2, 2011-1 and 2011-2 until June 30, 2016. Filing due dates remain unchanged for officers and employees who have a financial interest in a reportable account. For all other individuals with an FBAR filing obligation, the filing due date remains unchanged.
  Penalties and Relief The FinCEN regulations include an anti-avoidance rule that will require FBAR reporting if an entity is created for the purpose of evading FBAR reporting. Failure to file an FBAR report may subject the non-filer to civil and criminal penalties. Penalties for a willful failure to file can be as much as the greater of $100,000 or 50 percent of the amount in the account at the time of the violation.

However, 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 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 now be submitted penalty-free. 
  E-filing Requirement The FBAR filing must be received by the Treasury Department by June 30 following the close of the calendar year. This filing must be done electronically.  Paper filing using prior Form TD F 90-22.1 will no longer be permitted. (Note:  Unlike tax returns, the June 30th filing deadline for FBARs may not be extended.)  For more information regarding FBAR reporting, see the Services’ website.
 
In addition to Form 114, the taxpayer must complete Form 114a, Record of Authorization to Electronically File FBARs, in order to permit a third-party to sign and submit the FBARs on their behalf electronically. This may be used in the instance of an officer or employee with signature authority, but no financial interest in an account held by its employer, to authorize said employer to file the FBAR on his behalf.
  How BDO Can Help Due to increased scrutiny and severe penalty regime with respect failure to file FBARs, it is important for all individuals and entities to review whether there is any financial interest in or signature authority over accounts subject to FBAR reporting. BDO can help you review these requirements and submit any FBARs electronically.
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

Monika Loving
Partner

  Matthew Barton
Senior Director   Ira Mirsky
Senior Director   Bob Brown
Partner  

Chip Morgan
Senior Managing Director

  Holly Carmichael 
Partner  

Michelle Murphy
Senior Manager

 

Scott Hendon
Partner

 

Brad Rode
Partner

  Martin Karges
Senior Director   William F. Roth III
Partner   Paul Kozulis
Senior Director  

Jerry Seade
Principal

 

Annie Lee
Senior Director

 

Todd Simmens
Partner

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