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State and Local Tax Alert

Wed, 06/10/2015 - 12:00am
Oklahoma Introduced a New Two-Month Amnesty Program in 2015 Click here to download the PDF version
  Summary On May 20, 2015, Oklahoma Governor Mary Fallin (R) approved House Bill 2236, which, subject to availability of funds, directs the Oklahoma Tax Commission to establish a new tax amnesty period running from September 14, 2015 through November 13, 2015 (the “Compliance Period”).  The bill entitles a taxpayer to waiver of penalties, interest and other collection fees or costs due on eligible taxes if the taxpayer files delinquent tax returns and pays the related taxes.
  Details Eligible taxes under the new tax amnesty include the following due and payable before a taxable period ending prior to January 1, 2015: (1) income taxes, (2) sales and use taxes, (3) the privilege tax imposed on state and national banks and credit unions, (4) employer withholding taxes, (5) gross production and petroleum excise tax, (6) gasoline and diesel tax, and (7) mixed beverage tax.
Upon filing and payment of eligible delinquent taxes within the Compliance Period, the Tax Commission is required to abate interest, penalties, collection fees, and costs that would otherwise be applicable and release any liens imposed.  However, if delinquent taxes are remitted to a debt collection agency, the debt collection agency contract fee will not be waived.
The Tax Commission is authorized to promulgate rules detailing the terms and other conditions of the program.
  BDO Insights
  • This amnesty program presents a great opportunity for a taxpayer to come into compliance with their Oklahoma taxes, and reduce related accounting reserves, if any, without having to pay penalties or interest.
  • The Tax Commission publishes a list on its website of its top 100 delinquent taxpayers, including the name, address, tax type, and delinquency amount of each such taxpayer.  Thus, this tax amnesty may also present a taxpayer with a large delinquency with the opportunity to come into compliance with their Oklahoma taxes at a much lower cost and avoid tarnishing their reputation by appearing on this list or even remove their name from the list.
  • The amnesty program is expected to increase revenue by $35 million in fiscal year 2016.  Thus, it is hard to imagine the funds to run the program will not be available.


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

State and Local Tax Alert - June 2015

Mon, 06/08/2015 - 12:00am
Indiana Eliminates Its Sales Factor Throwback Rule, Modifies Its Related Party Expense Addback Provision, Expands Business Income Definition, Defines Computer Software as Tangible Personal Property, and Establishes a Tax Amnesty Click here to download the PDF version
  Summary In early May, Indiana Governor Michael Pence (R) signed into law Senate Bill 441 (“S.B. 441”) and House Bill 1001 (“H.B. 1001”), which together eliminate sales factor throwback, expand the related party expense add back to require adjustment for all interest expense, broadens the definition of  business income to include all income apportionable under the U.S. Constitution, treat the sale of computer software as a sale of tangible personal property for receipts factor purposes, and require the establishment of tax amnesty for income, sales/use and certain other taxes due for a taxable period ending before January 1, 2013.  The foregoing substantive changes to the law take effect January 1, 2016, and apply to taxable years beginning after December 31, 2015.  The provisions related to tax amnesty take effect July 1, 2015, and require the establishment of a maximum eight-week tax amnesty period that ends before January 1, 2017.
Details Definition of Business Income
Indiana income tax law currently defines business income as “all income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer’s regular trade or business operations.”  Applicable to taxable years beginning after December 31, 2015, S.B. 441 replaces this definition of business income with the following more expansive definition: “all income that is apportionable to the state under the Constitution of the United States.”
 
Addback
Subject to certain exceptions, Indiana income tax law currently requires a corporate taxpayer to increase (i.e., “addback”) the federal income tax base, which is used as the starting point for calculating taxable income for intangible expenses and related intangible interest expenses paid to a member of the same affiliated group or a foreign corporation.  For taxable years beginning after December 31, 2015, S.B. 441 expands the amount required to be added back to include all interest expenses paid to a member of the same affiliated group or a foreign corporation.  However, in addition to currently existing exceptions to addback, S.B. 441 also excepts such interest expense from addback if the income recipient: (1) is subject to the financial institutions tax; (2) files a financial institutions tax return; and (3) apportions the interest income.
 
Sales Factor
For sales factor purposes, Indiana income tax law currently sources receipts from sales of tangible personal property to Indiana if the tangible personal property is shipped from a location in Indiana and the taxpayer is not subject to tax in the state of the purchaser (i.e., “throwback”).  For taxable years beginning after December 31, 2015, S.B. 441 eliminates throwback, as well as statutorily treats receipts from the sale of computer software as receipts from sales of tangible personal property.
 
Amnesty
Effective July 1, 2015, S.B. 1001 requires the Indiana Department of Revenue to establish a maximum eight-week tax amnesty ending before January 1, 2017 for the following taxes, among others, “due and payable” for a taxable period ending prior to January 1, 2013: adjusted gross income tax, sales and use taxes, financial institutions tax, utility receipts and services use taxes, and various excise and fuel taxes (collectively, “listed taxes”).  Upon payment of all listed taxes due and payable by a taxpayer under amnesty, the Department must abate interest, penalties, and collection fees and costs.  For these purposes a listed tax “due and payable” includes one that the Department has assessed, one for which the Department has issued a demand for payment or a demand notice for payment, one that the taxpayer has reported on a return, and one for which the taxpayer has filed an acceptable written statement of liability.
 
Taxpayers eligible for amnesty include those that have not participated in a previous amnesty.  An eligible taxpayer that does not participate in the amnesty to be established under S.B. 1001 may be subject to a penalty for failure to participate.
BDO Insights
  • The change in the business income definition to “all income apportionable to the state under the Constitution of the United States” could have the effect of including more income in a taxpayer’s apportionable base because, as a result of S.B. 441, Indiana will no longer look to whether the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer’s regular trade or business operations.  Instead, Indiana will look to whether the income is unitary with the taxpayer’s business carried on in the state – a more inclusive definition.
  • The elimination of Indiana’s throwback rule will benefit those taxpayers that ship tangible property from a location in the state, but are not subject to tax in one or more states where they have customers, by reducing the amount of sales required to be sourced to Indiana and the corresponding sales only apportionment factor applied to apportionable income.
  • The specification that a sale of computer software constitutes a sale of tangible personal property will likely have little impact as the Department appears to currently take the position that a sale of computer software, regardless of delivery method, constitutes a sale of tangible personal property for income tax purposes.  However, specifying this treatment in the statute removes any doubt as to the treatment of such receipts for purposes of sourcing receipts from sales of computer software.
  • The expansion of Indiana’s related party expense addback to include all interest income paid to an affiliated group member or a foreign corporation may have the effect of increasing the amount of overall income apportionable to Indiana for taxpayers that have intercompany loan arrangements (or loan arrangements with a foreign corporation) unrelated to an intangible licensing agreement.
  • The amnesty program required to be established under H.B. 1001 will provide eligible Indiana taxpayers with the opportunity to report and/or pay taxes, including those that are presently assessed or otherwise due, without the cost of interest and penalties.  The risk of the Department imposing an additional penalty on an eligible taxpayer for not participating in the amnesty adds to the incentive to participate.


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

State and Local Tax Alert - June 2015

Mon, 06/01/2015 - 12:00am
United States Supreme Court Holds Maryland Disallowance of Resident Credit against County Income Tax Unconstitutional Click here to download a PDF version
Summary On May 18, 2015, the United States Supreme Court issued its decision in Comptroller of the Treasury of Maryland v. Wynne, No. 13-485, 575 U.S. ___ (2015), in which the Court held that Maryland’s limitation on the use of a resident credit for taxes paid to other states as an offset against the state portion of the personal income tax only, and not the county portion of the tax, violates the Commerce Clause of the United States Constitution.  The Court’s decision opens the door to a tidal wave of refund claims for those taxpayers that were denied the credit or overlooked taking the credit against the county tax for taxes paid to other states on returns filed with the state, as well as for those taxpayers who have protective refund claims pending with the Comptroller.
Details     Background

Maryland imposes a tax on the income of a resident individual earned within and without the state, and the income of a nonresident earned from sources within the state.  The Maryland income tax is composed of a state tax on residents and nonresidents, a county tax imposed only on residents at rates that vary by county, and a special nonresident tax imposed at the lowest county rate.  Maryland allows a resident taxpayer a credit for taxes paid to another state, but has statutorily limited the use of the credit as an offset against only the state portion of the tax.

The taxpayers in Wynne, Brian and Karen Wynne, were residents of Howard County, Maryland, who had income from sources outside the state via an ownership interest in an S corporation doing business throughout the United States.  They used taxes paid to other states as an offset against the state and county taxes reported on their 2006 Maryland income tax return.  The Maryland State Comptroller denied the taxpayers’ use of the resident credit as an offset against the county tax and assessed tax accordingly.  The taxpayers appealed the assessment, which was upheld at the administrative level and by the Maryland Tax Court.  The Circuit Court for Howard County, Maryland, reversed the decision of the Tax Court and the Maryland Court of Appeals affirmed the Circuit Court’s decision.  The Comptroller then petitioned the United States Supreme Court for a writ of certiorari, which the Court granted.

Majority’s Holding and Reasoning

The Court’s 5-4 majority affirmed the decision of the Maryland Court of Appeals and held that Maryland’s limitation on the use of the resident credit violates the “dormant” Commerce Clause of the United States Constitution.1 The Court reasoned that Maryland’s tax scheme inherently discriminates against interstate commerce because it fails the internal consistency test – a judicially developed doctrine which asks whether the hypothetical adoption of a tax scheme by all states would result in multiple taxation of interstate commerce.  In this case, the Court’s majority found that if every state adopted a tax scheme similar to Maryland’s (i.e., a 1.25% tax on the income of a resident earned in the state, a 1.25% tax on the income of a resident earned outside the state, and a 1.25% tax on the income of a nonresident earned in the state), then income earned by a taxpayer outside its state of residency would be subject to a 1.25% tax twice, whereas, the income earned by a taxpayer inside its state of residency would be subject to a 1.25% tax once.  Thus, the Maryland tax scheme subjects the income earned by residents to double taxation and impermissibly discriminates against interstate commerce in favor of intrastate commerce.

In so holding, the majority rejected the argument that dictum in Goldberg v. Sweet, 488 U.S. 252 (1989) dictates that the “dormant” Commerce Clause does not protect state residents from their own tax because residents unhappy with a tax scheme may change the tax through the state’s political process.  Therefore, according to the majority, while the Due Process Clause of the Fourteenth Amendment may allow a state to favor intrastate activity, the Commerce Clause may act as a restraint on that authority.  The majority also rejected any argument that the “dormant” Commerce Clause is a “judicial fraud” or does not otherwise exist, that the Commerce Clause distinguishes between taxes on net and gross income, or that the Commerce Clause could treat individuals less favorably than corporations.  Thus, the internal consistency test – a test that looks solely to the economic impact of the tax – appears to be alive and well and to apply to income and gross receipts taxes, taxes that favor residents and nonresidents, and taxes on corporations and individuals alike.
BDO Insights
  • Maryland resident taxpayers who believe they may be entitled to a refund claim as a result of the decision in Wynne, should consult with their tax advisors regarding refund claims, which would presumably be limited under Maryland’s three-year statute of limitations on tax refunds.  Affected taxpayers who followed the development of this issue through the courts will likely have filed protective claims for refund before the period of limitations expired for a particular taxable year.  Such claims should now be processed in due course by the Comptroller.  While a state may usually cure a constitutional violation by either “leveling up” those that are subject to less tax under the unconstitutional tax or “leveling down” those that are subject to more tax under the unconstitutional tax, it appears that Maryland is in a position where it must “level down” and allow the resident credit as an offset against the county tax.  This is because if Maryland were to disallow the resident credit in its entirety, and assuming the hypothetical adoption of such a tax scheme by all states, the taxpayers in Wynne (and other similarly situated taxpayers) would still be subject to double tax on income earned in interstate commerce, whereas resident taxpayers with no income earned outside the state would still only be subject to one level of tax.
  • The Court’s decision in Wynne leaves Maryland liable for at least $202 million in tax refunds with Montgomery County expecting to bear a large portion of this burden – i.e., an estimated $8 to $10 million in fiscal year 2016 and $50 million in fiscal year 2017.2  It is unclear whether these estimates take into account revenue shortfalls that will likely result from allowing the full resident credit on future returns.  It will be interesting to see what actions Maryland and its localities will take to cover any budget shortfalls as a result of the decision in Wynne – i.e., reduce expenditures or increase taxes.  Perhaps the amnesty program Governor Larry Hogan (R) approved in April 2015, which requires the Comptroller to declare a tax amnesty period that runs from September 1, 2015, through October 30, 2015, and which is anticipated to increase revenue by $11.4 million in fiscal year 2016 and $3.6 million in fiscal year 2017, was intended to recoup some of the losses as a result of the anticipated decision in Wynne.3  See State and Local Tax Alert - April 2015, “Maryland Introduced a New Two-Month Tax Amnesty Program in 2015.
  • Maryland may not be the only state affected by the decision in Wynne.  For example, as was noted in Brief for the International Municipal Lawyers Association and Other State and Local Government Groups as Amici Curiae in Support of Petitioner, “Wisconsin and North Carolina provide credits for state-level foreign income taxes but disallow credits for city, county and local foreign income taxes.”  In addition, “in New York State, two cities (New York City and Yonkers) impose an income tax . . . [, a]nd although a foreign tax credit is provided against the state-level income tax, no credit is provided against the municipal tax.”  Thus, similar to Maryland, there may be an opportunity for a refund claim in these and other states.
  • In anticipation of the decision in Wynne, the Maryland legislature recently passed legislation that would, if approved by Governor Hogan, effective for taxable years beginning after December 31, 2014, allow a resident credit as an offset against the county tax in the event of a United States Supreme Court decision affirming the Maryland Court of Appeals.4 Thus, for taxable years beginning after December 31, 2014, Maryland residents should be able to take the resident credit as an offset against the county tax without risk that the state would disallow it.
  • Also in anticipation of the decision in Wynne, in 2014, Maryland passed a law that would retroactively reduce the interest rate on refunds issued as a result of the decision in Wynne from 13% (a rate that ordinarily applies to assessments of tax as well as refunds) to “a percentage, rounded to the nearest whole number, that is the percent that equals the average prime rate of interest quoted by commercial banks to large businesses during fiscal year 2015.”5 Thus, taxpayers that seek a refund of tax as a result of the decision in Wynne will be ineligible to receive interest on refunds at Maryland’s very favorable 13% interest rate.  In a letter to then Maryland Governor Martin O’Malley (D) dated May 14, 2014, then Maryland Attorney General Douglas F. Gansler (D) stated his position that the limited application of the reduced interest rate is constitutional and legally sufficient because the Maryland Court of Appeals has stated on numerous occasions that entitlement to interest on a tax refund is a matter of grace which can only be authorized by legislative enactment and, thus, “determining the interest rate is a perfectly acceptable exercise of legislative power.”  Nevertheless, legal challenges to these interest-rate provisions could also arise when refunds based on the Wynne decision are processed.


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 Justice Alito delivered the opinion of the Court, in which Chief Justice Roberts, and Justices Kennedy, Breyer, and Sotomayor joined.  Justice Scalia filed a dissenting opinion in which Justice Thomas joined in part, Justice Thomas filed a dissenting opinion in which Justice Scalia joined in part, and Justice Ginsburg filed a dissenting opinion in which Justices Scalia and Kagan joined.
2 Jennifer De Paul, “Maryland Counties Owe Millions in Tax Refunds Under Wynne Decision,” State Tax Today (May 19, 2015).
3 See S.B. 763, Reg. Sess., Fiscal and Policy Note (rev.) (Md. 2015).
4 See H.B. 72, Reg. Sess., §§ 4 and 26 (Md. 2015).
5 See S.B. 172, Reg. Sess., § 16 (Md. 2014) (enacted).
 

International Tax Alert - May 2015

Fri, 05/29/2015 - 12:00am
BEA Survey Forms – Automatic Extension to June 30, 2015, for “New Filers”
Date/Timing

The due date of Form BE-10, Benchmark Survey of the U.S. Direct Investment Abroad (“BE-10”), to be filed with the Bureau of Economic Analysis (“BEA”) if certain requirements are met, has been automatically extended to June 30, 2015, for “New Filers.”
 

Affecting

The affected filers are United States Businesses or persons with Outbound Investments who were initially required to file Form BE-10 by May 29, 2015, and are “New Filers” for purposes of the BEA survey. A “New Filer” includes a business or person which has not filed a BEA survey to report its foreign investments in any previous year.
 

Details

The extended June 30, 2015, due date is automatic for “New Filers,” and does not require the filing of an application for extension on or before May 29, 2015. BE-10 surveys may then be submitted on or before June 30, 2015, by “New Filers” with fewer than fifty foreign affiliates. “New Filers” who were not directly contacted by the BEA may need to contact BEA to obtain a U.S. Reporter ID Number (note that this is different from a Federal Taxpayer Identification Number).  Information required to obtain a U.S. Reporter ID Number generally includes name, address, contact details, and the fiscal year end month of the “New Filer.”
 
“New Filers” of Form BE-10 with five or more foreign affiliates may also contact BEA to set up an electronic filing account for the electronic submission of Form BE-10. 
 
The BEA posted the extended automatic June 30, 2015 deadline on their website.
 


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

Robert Pedersen
International Tax Practice Leader

 

Chip Morgan
Senior Managing Director

  Bob Brown
Partner   William F. Roth III
Partner   Holly Carmichael 
Partner  

Brad Rode
Partner

 

Scott Hendon
Partner

 

Monika Loving
Partner

 

Jerry Seade
Principal

 

 

State and Local Tax Alert - May 2015

Wed, 05/27/2015 - 12:00am
Tennessee Enacts the Revenue Modernization Act, Which Adopts New Cloud Computing Use Tax, Overhauls the Franchise and Excise Tax, and Eliminates or Modifies Tennessee Tax Credits
Summary On May 20, 2015, Tennessee Governor Bill Haslam (R) signed House Bill 644, the Revenue Modernization Act (“RMA”), as well as House Bill 291 (“H.B. 291”), into law.  Together, these bills make changes to the Jobs Tax Credit and other credits which may require action by July 1, 2015, and beginning July 1, 2015, the RMA subjects “cloud” software to use tax to the extent used in Tennessee.  In addition, the RMA adopts “click-through” nexus for Sales and Use Tax purposes and overhauls Tennessee’s Franchise and Excise Tax by adopting economic nexus, a triple-weighted sales factor, and market-based sourcing for sales of other than tangible personal property, and making more changes to Tennessee’s affiliated intangible expense add-back statute.
  Details New Use Tax on Cloud Computing

Effective July 1, 2015, the RMA imposes sales and use tax on a Tennessee business or individual accessing software “in the cloud” or software as a service (“SaaS”).  Accordingly, a taxable use of computer software in Tennessee will include the right to access and use software that remains on a server hosted in another state by the cloud vendor or third-party host.  If the purchaser has users inside and outside Tennessee that have a right to access the software, the sales price or purchase price may be allocated based on the number of Tennessee users to determine use tax.
 
Modifications to Tax Credits
 
Franchise and Excise Tax Jobs Tax Credit
H.B. 291 expands the Jobs Tax Credit to apply to “back office operations.”  However, the bill also eliminates the Jobs Tax Credit for certain projects unless action is taken prior to July 1, 2015.  For example, except as to a taxpayer that files a business plan with the Department of Economic and Community Development by July 1, 2015, the bill eliminates a regional headquarters facility as a qualifying business for purposes of the credit.  As a result, only if a taxpayer’s “sole” international or “sole” national headquarters is located in Tennessee will “headquarters-related functions and services” qualify as headquarters jobs for purposes of the Jobs Tax Credit on or after July 1, 2015.  Further, except for business plans filed prior to July 1, 2015, the additional headquarters relocation Jobs Tax Credit will be eliminated.  Despite these eliminations that may require time-sensitive action, the bill removes a sunset date problem by removing the requirement that a job position must be filled prior to January 1, 2016, for it to be “qualifying.”
 
Sales and Use Tax Qualified Headquarters Facility Credit
Similar to the Franchise and Excise Jobs Tax Credit, effective July 1, 2015, H.B. 291 excludes a regional headquarters facility from the application of the credit.
 
Other Tax Credits
H.B. 291 also repeals a number of lesser known and used Sales and Use and Franchise and Excise tax credits, except for business plans filed with the Department of Economic and Community Development before July, 1 2015.  In addition, the legislation requires the Department of Economic and Community Development and the Department of Revenue to review and evaluate the economic impact of Excise, Franchise, and Sales and Use Tax credit programs and draft a report which includes recommendations for modification, discontinuance, or no action.
 
Overhaul of the Franchise and Excise Tax
 
Subject to differing effective dates, the RMA makes the following significant changes to Tennessee’s Franchise and Excise Tax:
 
Economic Nexus
Effective for taxable years beginning on or after January 1, 2016, Tennessee will impose Franchise and Excise Tax on a taxpayer that has more than $500,000 in Tennessee sales (regardless of physical presence) or more than $50,000 in Tennessee property or payroll, or whose Tennessee property, payroll, or receipts comprise more than 25% of its total property, payroll, or sales.  Tennessee’s new “factor presence” economic nexus provisions will apply as well to the Business Tax, Tennessee’s state administered local gross receipts tax.
 
Affiliated Intangible Expense Add-back
Applicable to taxable years beginning on or after July 1, 2016, Tennessee eliminates the application requirement, returns to a disclosure requirement, and relaxes the exceptions to add-back.  Tennessee will allow the deduction of an intangible expense paid to an affiliate if the payment is disclosed and the affiliate is registered for or paying the Excise Tax, is not required to be registered for the Excise Tax (i.e., does not have “factor presence”), or is in a foreign nation that is a signatory to a United States income tax treaty.  The RMA eliminates the “subject to tax in another state” exception and the “conduit” exception.
 
Apportionment/Receipts Factor
Applicable to taxable years beginning on or after July 1, 2016, Tennessee triple-weights the receipts factor of the three-factor apportionment formula and adopts a market-based approach to sourcing receipts from sales of other than tangible personal property.  See the chart below.  Reasonable approximation is allowed where receipts assignment cannot be determined under the primary sourcing rules, but a receipt is required to be excluded from the numerator and denominator of the apportionment factor (i.e., “thrown out”) where receipts assignment cannot be reasonably approximated.  Under current law, the receipts factor is double-weighted and receipts from sales of other than tangible personal property are sourced to Tennessee using a costs-of-performance approach.  As a result, for taxable years beginning on or after July 1, 2016, Tennessee’s receipts factor of the apportionment formula will be determined as follows:
  Receipts From... Source to Tennessee If... … Sales of real property … Tennessee property … Sales of tangible personal property … Destination is Tennessee … Services … To the extent the service is delivered to Tennessee … Rent, lease, or license of non-marketing intangible … To the extent the intangible property is used in Tennessee … Rent, lease, or license of marketing intangible … The underlying good or service is purchased by a consumer in the stat … 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 Tennessee … Sale of intangible property - sales contingent on productivity, use, or disposition of the intangible property … Treated as a rent, lease, or license of a marketing or non-marketing intangible … Sale of intangible property - other … Exclude from numerator and denominator of the receipts factor
Tennessee also adopts: (1) applicable to taxable years beginning on or after July 1, 2016, apportionment changes for securities dealers (net gains from sales of securities will be sourced to Tennessee if the customer is located in Tennessee); (2) applicable to taxable years beginning on or after July 1, 2016, a hybrid market-sourcing costs-of-performance approach to sourcing receipts for taxpayers engaged in the sale of telecommunications service, mobile telecommunications service, Internet access service, video programming service, or direct-to-home satellite television programming service; and (3) applicable to taxable years beginning on or after January 1, 2016, a “Certified Distribution Sales” election that allows a taxpayer to elect to exclude from the numerator of its receipts factor, and instead pay a separate Excise Tax at a dramatically reduced rate on, sales made to a distributor (for ultimate resale outside Tennessee) if the taxpayer has a Tennessee receipts factor that exceeds 10% and sales of tangible personal property to Tennessee distributors that exceed $1 billion.  If elected, the separate Excise Tax ranges from 0.5% to 0.125%, depending on the amount of certified distribution sales.
 
Other Sales and Use Tax Changes
   
“Click-Through” Nexus
Effective July 1, 2015, the RMA adds a “click-through” nexus provision that imposes a sales tax collection and remittance responsibility on a remote dealer that enters into an agreement with a person located in Tennessee under which the person refers potential customers to the dealer for consideration by a Web site link (or any other means) and, during the preceding 12 months, the dealer’s cumulative gross receipts from retail sales to customers in the state under all such agreements exceeds $10,000.
 
Industrial Machinery Exemption
Also effective July 1, 2015, H.B. 291 expands the sales and use tax exemption for industrial machinery to include machinery and equipment used for the purpose of research and development.  
BDO Insights
  • Especially for business users of software, cloud computing has become the norm due to its cost savings and efficiencies.  The RMA’s new use tax on access to SaaS is a departure from Tennessee’s administrative position on cloud computing established in a series of letter rulings.  Given a July 1, 2015, effective date, Tennessee businesses accessing the cloud for their information technology needs and requirements must quickly determine the impact of Tennessee’s new cloud computing use tax.
  • Businesses with planned or contemplated headquarters relocations within Tennessee or into Tennessee should take immediate action to prepare and file business plans with the Department of Economic and Community Development prior to July 1, 2015, to be able to secure the full amount of tax credits that will be modified or eliminated after that date.
  • Tennessee joins the ranks of many states that have transitioned to market-based sourcing for sales of other than tangible personal property.  While this change will most heavily affect service providers, and the change (and a triple-weighted Tennessee sales factor) will not affect Tennessee taxpayers until their taxable years beginning on or after July 1, 2016, Tennessee taxpayers should begin planning for the transition as soon as possible.  The Department of Revenue and Tennessee Attorney General are on record stating that regulations will likely be required to implement market sourcing for Tennessee.  BDO will be monitoring this regulation project.
  • Perhaps as a precursor to an eventual single sales factor apportionment formula, the RMA jumps on yet another trend among states -– the adoption of a more heavily weighted sales factor and the eventual adoption of a single sales factor.
  • Tennessee has traditionally been assumed to be a physical presence state for Franchise and Excise Tax purposes, at least for non-financial institutions, based on J.C. Penney National Bank v. Johnson, 19 S.W.3d 831 (Tenn. Ct. App. 1999).  However, for some time, states have been asserting economic presence nexus over taxpayers engaged in financial services or managing and licensing intangible property.  A recent trend in the area is the adoption of so-called “factor presence” or “bright-line” nexus statutes by states, and the RMA follows this trend as well.  While there will likely be challenges to Tennessee’s “factor presence” economic nexus provisions, as there are in other states, the Tennessee Attorney General recently opined that Tennessee’s new “factor presence” economic nexus statute “is rooted in a widely-accepted theory of ‘economic nexus’ that has attained significant currency through court decisions in many states.”  See Tennessee Attorney General Opinion No. 15-37 (April 22, 2015).  Taxpayers should evaluate the impact of, and their transition path to, Tennessee’s new economic nexus, apportionment, and tax bases with respect to their Tennessee and multistate operations.
  • The RMA continues Tennessee’s circuitous experience with affiliated intangible expense disallowance.  Beginning in 2004, Tennessee allowed intangible expenses paid to an affiliate to be deducted only if the payor disclosed the payment on its Franchise and Excise Tax return.  For taxable years beginning on or after July 1, 2012, Tennessee substantially changed its affiliated intangible expense add-back statute.  The 2012 legislation permitted affiliated intangible expense deductions only if (a) the taxpayer filed an application with the Department of Revenue and received “permission” for the deduction, or (b) one of three exceptions was satisfied.  For taxable years beginning on and after July 1, 2016, the RMA eliminates the cumbersome affiliated intangible expense add-back exception application process that was enacted in 2012 in favor of a new disclosure requirement.  Nonetheless, taxpayers are cautioned that (a) the application process remains in effect for taxable years beginning before July 1, 2016, and (b) the Department of Revenue used the former disclosure procedures to identify taxpayers for audit.
 


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 - May 2015

Thu, 05/21/2015 - 12:00am
U.S. Department of Commerce Bureau of Economic Analysis – Reporting Requirements for U.S. Outbound and Inbound Investments
  Date/Timing The Commerce Department requires United States businesses to file Form BE-10, Benchmark Survey of the U.S. Direct Investment Abroad (“BE-10”), with the Bureau of Economic Analysis (“BEA”) if certain prerequisites on outbound investments are met.   The BE-10 reports are due on or before May 29, 2015, for those United States reporters with fewer than fifty foreign affiliates, and June 30, 2015, for those with fifty or more foreign affiliates.

A domestic entity is also required to file Form BE-13, Survey of New Foreign Direct Investments in the United States (“BE-13”) to report certain inbound investment transactions of its foreign affiliates. Form BE-13 must be filed within 45 days after the investment transaction takes place.

Filing of both forms is mandatory whether or not the domestic business was contacted by the BEA.   These are surveys and not tax reports. 

The BEA has indicated that reasonable requests for extension of the filing deadline will normally be granted if requested before the due date. With respect to Form BE-10, an extension may be obtained by filing Form BE-11, Request for Extension for Filing and submitting through the BEA’s eFile system or faxing it to the BEA. There are three extension dates available: (1) June 30, 2015 for U.S. reporters with fewer than 50 forms; (2) July 31, 2015 for U.S. reporters with between 50-100 forms; and (3) August 31, 2015 for U.S. reporters with more than 100 forms.

With respect to Form BE-13, the U.S. reporter must contact the BEA directly at 202-606-5613, regarding such request.
  Affecting United States Businesses with Outbound Investments

United States Businesses with Foreign Owners
  Background The BEA prepares official United States economic statistics including direct investment abroad (USDIA, “outward” direct investment) and foreign direct investment in the United States (FDIUS, “inward” direct investment). BEA conducts various mandatory surveys to collect the relevant information, including annual, quarterly, and benchmark surveys.  Form BE-10 is a survey conducted every five years.
  Details Outbound Investments
Domestic entities are “U.S. Reporters” and required to file form BE-10 for the fiscal year 2014, if the reporting criteria, such as 10% ownership interest in the voting stock (or an equivalent interest in an unincorporated business) are met. The mandatory reporting applies whether or not they have been contacted by the BEA. Reports are required even though a foreign business enterprise was established, acquired, seized, liquidated, sold, expropriated, or inactivated during the U.S. Reporter’s 2014 fiscal year.

If the domestic person had no direct or indirect 10% or more interest in the voting stock of a foreign affiliate, or an equivalent interest in an unincorporated foreign business enterprise (including a branch or real estate held for other than personal use) during its 2014 fiscal year, it must file a “BE-10 Claim for Not Filing.” 

Notably, if two or more “U.S. Reporters” jointly own, directly or indirectly, a foreign affiliate, each “U.S. Reporter” must file a Form BE-10.

Form BE-10 must also be filed by a “U.S. Reporter” that is an individual, estate, trust, or religious, charitable, or other nonprofit organization that owns a foreign affiliate directly, rather than through a domestic business enterprise. If a United States individual, estate, trust, or nonprofit organization owns more than 50 percent of a domestic business enterprise that, in turn, owns a foreign affiliate, then the U.S. Reporter is deemed to be the domestic business enterprise.

Inbound Investments
In the context of United States inbound investments, all domestic business enterprises in which a foreign person (in the broad legal sense, including a company) owns, directly and/or indirectly, 10 percent or more of the voting securities of an incorporated domestic business enterprise, or an equivalent interest of an unincorporated domestic business enterprise, are subject to these reporting requirements. This includes foreign ownership of real estate, improved and unimproved, except residential real estate held exclusively for personal use and not for profit-making purposes. A domestic business enterprise or real estate holding subject to these reporting requirements is referred to as a domestic affiliate. A foreign person owning a 10 percent or more voting interest (or the equivalent) in a domestic affiliate is referred to as a foreign parent. The foreign parent is the first person outside the United States in a foreign chain of ownership. In addition, the transaction, investment or expansion costs must be greater than $3 million, subject to inflation adjustments.

Penalties 
Whoever fails to report shall be subject to a civil penalty of not less than $2,500, and not more than $25,000, and to injunctive relief commanding such person to comply, or both. Whoever willfully fails to report shall be fined not more than $10,000 and, if an individual, may be imprisoned for not more than one year, or both. Any officer, director, employee, or agent of any corporation who knowingly participates in such violations, upon conviction, may be punished by a like fine, imprisonment or both. These civil penalties are subject to inflationary adjustments
How BDO Can Help Our Clients Although these are surveys and not tax reporting, the disclosures are nonetheless required by multinational corporations.  We can assist with any questions in relation to these annual, quarterly and benchmark forms or surveys issued by the BEA.
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

Chip Morgan
Senior Managing Director

  Bob Brown
Partner   William F. Roth III
Partner   Holly Carmichael 
Partner  

Brad Rode
Partner

 

Scott Hendon
Partner

 

Monika Loving
Partner

 

Jerry Seade
Principal

 

 

State and Local Tax Alert - May 2015

Tue, 05/19/2015 - 12:00am
Governor Cuomo Signs the 2015-2016 Budget Bill, Which Reflects Amendments to the New York State Corporation Tax and Sales/Use Tax and, Most Notably, Significant Changes to the New York City Corporate Tax for 2015 to Create Substantial Conformity to the New York State Corporation Tax Changes Summary On April 13, 2015, New York Governor Andrew Cuomo (D) signed into law A6721-A/S4610-A and A3009-B/S2009-B (collectively, the “Budget Bill”) which, together, implement the “new” New York City Corporate Tax of 2015 as well as amendments to the New York State Franchise Tax on Business Corporations and the New York State Sales and Compensating Use Taxes.  The New York City Corporate Tax of 2015 is effective for taxable years beginning on or after January 1, 2015, and in large part now conforms to the New York State Corporation Tax adopted previously.  However, there are some significant differences.  The amendments to the New York State Franchise Tax on Business Corporations (generally effective for taxable years beginning on or after January 1, 2015), of which there are many, are largely “corrective” in nature and the amendments to the New York State Sales and Compensating Use Taxes are not nearly as significant as those contained in earlier versions of the bill.
  Details Our BDO Insights provide a broad overview of some concepts and issues for taxpayers to consider as a result of the Budget Bill.  The charts on the following pages highlight many specific provisions of the Budget Bill, including provisions regarding the New York City Corporate Tax of 2015 and some of the more notable amendments to the New York State Franchise Tax on Business Corporations and the New York State Sales and Compensating Use Taxes.
  BDO Insights
  • There are many similarities between the New York State and New York City corporate income tax regimes as a result of certain amendments to the Budget Bill.  For example, both jurisdictions will now require unitary-combined reporting and market-based sourcing for sales factor purposes, and net operating loss deductions are to be applied on a post-apportionment basis.  Due to the unitary-combined reporting requirement, if a corporation within a unitary group has nexus with the State or the City, the corporation’s entire unitary group may be included in a State or City corporate tax return.
  • While there are many similarities between the New York State and New York City tax regimes, there are some significant differences.  For example: (1) the City’s  economic nexus standard is limited to corporations that issue credit cards while the State’s economic nexus standard applies generally, including to corporations that issue credit cards; (2) the City’s tax on business capital is not subject to phase-out while the State’s tax on business capital is scheduled to be phased out for taxable years beginning on or after January 1, 2021; and (3) the City continues to subject S corporations to a corporate level tax (albeit under the “old” corporate tax using the “old” apportionment rules) while the State conforms to federal flow-through treatment.  The City’s Unincorporated Business Tax is unaffected by the Budget Bill.
  • Under the City’s newly enacted law, investment income, which is not subject to income tax, cannot comprise more than 8% of a taxpayer’s entire net income.  Any investment income in excess of the 8% cap may be recharacterized as business income, the apportionment of which may run afoul of the Due Process and Commerce Clauses of the United States Constitution to the extent not unitary with the in-state business.
  • While the Budget Bill contains many “corrective” changes to the State’s corporate tax reform of last year, some of the more impactful changes relate to investment income and investment capital.  For example, the newly enacted law narrows the definition of investment capital and investment income and, thus, reduces the amount that may be subtracted from the business income tax base and the business capital base, respectively.  In addition, the Budget Bill imposes a compliance burden with respect to investment capital, which requires taxpayers to “clearly” identify in records stock as held for investment at the time of purchase in the same manner as under section 1236(a)(1) of the Internal Revenue Code, but allows stock acquired prior to October 1, 2015, to be so identified subsequent to the purchase but prior to October 1, 2015.
  • The City has issued transitional rules for current Banking Corporation Tax and General Corporation Tax filers in Finance Memorandum 15-2, New York City Department of Finance (April 17, 2015), and the State posts answers to frequently asked questions (FAQs) relating to its corporate tax reform at www.tax.ny.gov/bus/ct/corp_tax_reform_faqs.htm.
  • The sales/use tax changes adopted by the State focus on relief to purchasers/users of aircraft and vessels.  New York State did not adopt some of the potentially significant sales/use tax changes that appeared in earlier versions of the bill including: (1) imposition of a sales tax collection responsibility on a marketplace provider; (2) a limitation on the nonresident use tax exemption; (3) disregarded treatment for limited liability companies, and (4) acceleration of tax on payments under a related party lease.

New York City Corporate Tax of 2015 Snapshot Highlights
(please see actual legislation for details and additional provisions)
  Subjectivity … The tax is imposed on corporations (including C corporations and banks).
… S corporations and qualified subchapter S subsidiaries continue to be subject to the pre-existing General Corporation Tax. Nexus … A corporation may have nexus with New York City ("NYC") where: (1) it conducts business, employs capital, owns/leases property, or maintains an office in NYC; (2) it issues credit cards to 1,000 or more customers who have a mailing address in NYC; (3) it has merchant customer contracts totaling 1,000 or more locations in NYC to whom the corporation remitted payments for credit card transactions; (3) the sum of its credit cards issued to NYC customers and NYC merchant customer contracts equals 1,000 or more; or (4) it is a partner in partnership that has nexus with NYC.

… A "foreign corporation" is not considered to be doing business if its NYC presence is limited to one or more of the following: (1) the maintenance of cash balances with banks or trust companies in NYC; (2) the ownership of shares of stock or securities kept in NYC; (3) the taking of any action by a bank, trust company or broker incidental to the rendering of safekeeping or custodian service to a corporation; (4) the maintenance of a NYC office by one or more officers or directors of the corporation who are not employees; or (5) keeping of books and records in NYC.

… An "alien corporation" is not considered to be doing business in NYC if: (1) it is not treated as a "domestic corporation" under IRC § 7701 and has no effectively connected income, or (2) its activities are limited to investing or trading in stocks and securities for its own account, investing or trading in commodities for its own account, or both, within the meaning of IRC § 864(b)(2). Tax Rates … The tax is Imposed on the greater of: (1) 9% of Business Income ("BI") for financial corporations and 8.85% of BI for all other corporations; or (2) 0.15% of Business Capital ("BC") minus $10,000 and subject to a $10 million cap, except cooperative housing corporations (0.04% of BC) or corporations subject to the utility tax or insurance corporations (0.075% of BC); or (3) a fixed dollar minimum tax ranging from $25 to $200,000, depending upon NYC receipts.

… Reduced BI tax rates apply to corporations with allocated BI less than $1 million (reduced rates starting at 6.5%, depending upon allocated BI) and "qualified New York manufacturing corporations" with allocated BI less than $40 million (reduced rates starting at 4.425%, depending upon allocated BI).

… A “qualified New York manufacturing corporation” is a corporation that: (1) principally engages in the manufacturing and sale thereof of tangible personal property; and (2) has property in New York the adjusted basis of which at the close of the taxable year is at least $1,000,000 or more than 50% of its real and personal property located in the State. Business Income ("BI") Tax Base … BI equals Entire Net Income ("ENI"), less Investment Income ("II"), less Other Exempt Income ("OEI").  The sum of II and OEI may not exceed ENI.

… ENI means income from all sources (generally, federal taxable income adjusted as required).

… OEI equals Exempt CFC Income, plus Exempt Unitary Corporation Dividends ("Exempt Dividends").  OEI does not include IRC § 78 gross-up.

… II equals income from investment capital ("IC"), including capital gains in excess of capital losses and excluding IRC § 78 gross-up, to the extent included in computing ENI, less allowable interest deductions.  II cannot exceed 8% of the taxpayer's ENI, determined without regard to interest deductions.

… Exempt CFC Income equals IRC § 951(a) income from a unitary corporation that is not included in a combined report, less allowable interest deductions.

… Exempt Dividends equals dividends from a unitary corporation that is not included in a combined report, less allowable interest deductions.

… IC equals investments in stocks, less directly or indirectly attributable liabilities, that: (1) are capital assets under IRC § 1221; (2) are held for investment more than one year; (3) disposition is or would be treated as a long-term capital gain or loss under the IRC; (4) for stocks acquired on or after January 1, 2015, have never been held for sale to customers in the ordinary course of business; and (5) are identified in taxpayer's records as stock held for investment.  IC does not include: stocks of unitary corporations and corporations included in a combined report, stocks used by the taxpayer, and investments the income from which is excluded from ENI.

… In lieu of interest expense deductions, a taxpayer may make a revocable election to reduce Exempt CFC Income, Exempt Dividends and Investment Income by 40%. Business Capital ("BC") Tax Base … BC equals total assets, less the following: IC; stock issued by the corporation; liabilities not deducted from IC; and assets and liabilities the income or loss from which is not reflected in ENI. Apportionment … The general apportionment factor is weighted as follows: in 2015, 80% sales, 10% property, 10% payroll; in 2016, 87% sales, 6.5% property, 6.5% payroll; in 2017, 93% sales, 3.5% property, 3.5% payroll; and in 2018 and after the apportionment factor is 100% sales.

… For its first taxable year beginning on or after January 1, 2018, a taxpayer that has $50 million or less in NYC receipts may make a one-time, revocable election on an original or amended return to determine its allocation based upon a three factor formula weighted as follows: 93% sales, 3.5% property, and 3.5% payroll.

… Receipts are sourced using market-based rules (see details on the next pages). Combined Reporting … "Water's edge" combined reporting is required for unitary corporations directly or indirectly owned/controlled greater than 50%, including captive REITs, captive RICs, combinable captive insurance companies, and alien corporations that satisfy the control/ownership and unitary requirements and meet the definition of “domestic corporation” under IRC § 7701 or have effectively connected income for the taxable year.

… Taxpayers may make an irrevocable seven-year election on a timely filed original return to include all non-unitary entities that meet the common control or ownership requirement and otherwise could be included in a combined return.  The election is subject to automatic renewal unless revoked and applies to any corporation entering a commonly owned group subsequent to the year of election.

… In  determining  the  business  allocation  percentage  for a combined report: (1) receipts, net income, net gains and other items  of each  member of the combined group, whether or not they are a taxpayer, are included; and (2) intercorporate receipts, income and  gains are eliminated (i.e., a Finnigan approach). Net Operating Losses … A corporation is allowed a post-apportioned “net operating loss deduction” ("NOLD") and “prior operating loss conversion subtraction” ("PNOLS").  NOLD may be carried back three years (but not to a pre-2015 taxable year) and carried forward 20 years.  PNOLS may be carried forward 20 years but no longer than a taxable year beginning on or after January 1, 2035).

… The "net operating loss deduction" is the sum of a taxpayer's net operating losses arising in a taxable year beginning on or after January 1, 2015.

… The PNOLS which is applied before the NOLD, is generally made up of a taxpayer's unused net operating losses arising under the "old" General Corporation Tax (i.e., "unabsorbed net operating losses" or "UNOL") and, for any given year equals 1/10th of its "prior year net operating loss subtraction pool" ("PYNOLSP"), plus the unused PYNOLS from prior taxable years, but may not reduce business income below the greater of the tax on BC or the fixed dollar minimum tax.

… PYNOLSP equals the product of UNOL, Base Year BAP , Base Year Tax Rate, all divided by 8.85% (or 9% if a financial corporation), where Base Year BAP and Base Year Tax Rate are the business allocation percentage and tax rate, respectively, used by the taxpayer in its last year subject to the pre-existing General Corporation Tax.

… A taxpayer may make a revocable election on its first return filed in 2015 to use up to 50% of its PYNOLSP in each of its taxable years beginning on or after January 1, 2015, and before January 1,2017.  Any unused PYNOLSP as of a taxable year beginning on or after January 1, 2017, is forfeited.

… The law provides specific provisions for PYNOLS related to combined groups.
Apportionment Highlights Receipt From ... Source to NYC If ... General Sourcing Provisions   … Tangible personal property … Shipped to NYC … Sales of electricity … Delivered to NYC … Net gain from sale of real property … NYC property … Rent from real or tangible personal property … NYC property … Use of patents, copyrights, trademarks, and similar intangibles … Used in NYC … Sale of rights for closed-circuit or cable television transmission of an NYC event … To the extent attributable to transmissions received or exhibited in NYC … Sale, license or remote access to digital products … Use customer-focused hierarchy (i.e., benefit received, delivery, etc.) … Other services or business receipts … Use customer-focused hierarchy (i.e., benefit received, delivery, etc.) Financial Transactions / Broker-Dealer Activities   … Interest on loan secured by real property … NYC property … Interest on loan not secured by real property … NYC borrower … Net gain from sale of loan secured by real property … Multiply by proceeds from sales of loans secured by NYC real property divided by proceeds from all loans secured by real property … Net gain from sale of loan not secured by real property … Multiply by proceeds from sales of loans not secured by real property to NYC purchasers divided by proceeds from all loans not secured by real property … Interest/net gain from federal, state or municipal debt instruments … (1) Exclude from the numerator interest/net gain from a debt instrument issued by the US or any state or municipality; and (2) include in the denominator 100% of receipts/net gain from a debt instrument issued by the US or New York or any of its political subdivisions, and only 50% of receipts/net gain from debt instruments issued by other states or their political subdivisions. … Interest from asset-backed security or other government agency debt … 8% of receipts … Net gain from asset-backed security or other government agency debt … 8% of net gain if government issued or sold through broker-dealer; otherwise, multiply net gain times proceeds from sales to NYC purchasers divided by proceeds from all such purchasers … Interest from corporate bonds … Issuing corporation’s commercial domicile is NYC … Net gain from sale of corporate bond … 8% of net gain if sold through broker-dealer or through licensed exchange; otherwise, multiply net gains by proceeds from sales to NYC purchasers divided by proceeds from all such purchasers … Net interest from reverse repurchase agreement … 8% of net interest income … Net interest from federal funds … 8% of net interest … Dividend/net gain from stock or partnership interest … Exclude from numerator and denominator unless the Commissioner determines inclusion is necessary … Receipt/net gain from a qualified financial instrument … 8% of net gain/receipt if fixed percentage method is elected; otherwise, source according to rules related to non-qualified financial instruments. … Interest from other financial instruments … Payor located in NYC … Net gain from sale of other financial instrument … 8% of receipt if sold through broker-dealer or on licensed exchange; otherwise, NYC payor … Net income from sale of physical commodities … Multiply by receipts from commodities delivered to NYC (if no physical delivery, commodities sold to NYC purchaser) divided by all such receipts … Brokerage commission on sales of securities/commodities, margin interest on brokerage accounts, certain underwriting fees, account maintenance fees, certain advisory/management fees, … Customer responsible for paying has NYC address, but if can’t determine mailing address, then 8 percent of receipts … Interest on loans/advances made to an affiliated corporation not included in a combined report … Principal place of business of affiliated corporation is in NYC … Management, administration or distribution services to an investment company … Multiply by the average of the monthly percentages of NYC shares of the investment company owned by NYC shareholders Credit Card Activities   … Interest, fee, penalty, or service charge … Cardholder mailing address is in NYC … Merchant discount … Merchant is in NYC, but if merchant is within and without NYC attributable to sales made from NYC … Credit card authorization, processing and clearing … Credit card processor’s customer accesses the processor’s network in NYC … Other receipts from credit card activities … Multiply by average of 8% and percentage of NYC access points Other Industries   … Advertising (newspapers and periodicals) … Multiply by number of newspapers or periodicals delivered to NYC divided by number of all newspapers or periodicals … Advertising (television, radio, other) … Multiply by number of NYC viewers/listeners divided by number of all viewers/listeners … Railroad/trucking business … NYC miles divided by everywhere miles … Aviation service (air freight forwarding) …100% NYC if both NYC pick-up and delivery, but 50 percent NYC if either NYC pick-up or delivery … Other aviation service … Multiply by average of percentage of NYC aircraft arrivals and departures, percentage of NYC revenue tons, and percentage of NYC originating revenue … Transportation/transmission of gas … Multiply by NYC transportation units divided by all transportation units … Operation of vessels … Multiply by percentage of working days vessel is within NYC territorial waters
 
New York State Corporation Tax and Sales/Use Tax Amendments Snapshot Highlights
(please see actual legislation for details and additional provisions)
  Nexus … Clarifies that, for purposes of determining whether a combined group meets the economic nexus threshold, use unitary members that meet the 50% ownership test and have at least $10,000 in New York receipts or, in the case of a credit card corporation, at least ten New York customers and/or merchant locations

… Clarifies that an alien corporation is not “deriving receipts from activity in this state” if its New York activity is limited to investing or trading for its own account (within the meaning of I.R.C. § 864) stocks, securities and/or commodities Net Operating Losses … Requires taxpayers to first carry back a net operating loss arising in a taxable year beginning after January 1, 2015, but allows taxpayers to make an irrevocable election on a timely filed original return (determined with regard to extensions) to waive the three-year carryback period

… Clarifies that: (1) if a taxpayer makes the revocable election to accelerate the use of a prior year net operating loss subtraction pool and the pool is not exhausted by its last taxable year beginning before January 1, 2017, then the remainder of the prior year net operating loss subtraction pool is forfeited; and (2) where a taxpayer does not make the revocable election to accelerate the use of a prior year net operating loss subtraction pool, it may carry forward a prior year net operating loss subtraction 20 taxable years or to its last taxable year beginning before January 1, 2036, whichever comes first Investment Income … Removes the deduction from investment income for a loss, deduction, and/or expense attributable to a hedging transaction related to an item of investment capital

… Limits investment income determined without regard to attributed interest deductions to 8% of entire net income where investment income determined without regard to attributed interest deductions exceeds entire net income

… Makes the election to reduce investment income by 40% (in lieu of the interest deduction) revocable Exempt CFC Income/Exempt Unitary Dividends … Allows a taxpayer to revoke an election to reduce exempt controlled foreign corporation (CFC) income and exempt unitary dividends by 40% (in lieu of the interest deduction), but it also incorporates provisions that require the taxpayer to revoke the election made with respect to exempt CFC income, exempt unitary dividends and interest income if the taxpayer revokes the election for any one of the foregoing types of income Investment Capital … Redefines “investment capital” (which is used for purposes of determining investment income) to mean an investment in stock: (1) that meets the definition of “capital asset” under I.R.C. § 1221 during the period the taxpayer owned it during the taxable year; (2) that is held by the taxpayer as an investment for more than one year; (3) the disposition of which would be treated as generating long-term capital gains; (4) that has never been held for sale to customers in the regular course of business (applies only if acquired on or after January 1, 2015); and (5) is identified in the taxpayer’s records as being held for investment

… Clarifies that if the taxpayer does not own a stock on the last day of the taxable year, the presumption that the stock was held for more than one year does not apply and the actual period of time during which the taxpayer owned the stock must be used to determine whether the stock should be classified as investment capital (and adds that if the presumption is relied upon for a taxable year and the stock is not held for more than one year, business capital in the succeeding taxable year must be increased by the amount included in investment income) Apportionment … Provides a clarifying definition of “qualified financial instrument,” including a clarification that, with respect to a corporation included in a combined report, the determination is made on a combined basis

… Excludes from the definition of “qualified financial instrument:” (1) loans  secured by real property and defines a loan secured by real property to mean a secured loan where 50% or more of the value of the collateral consists of real property; and (2) stock that meets the definition of investment capital

… Clarifies that the election to use the fixed percentage method to source receipts/net gains from qualified financial instruments must be made on a timely filed original return determined with regard to extensions and that, if the election is made, marked-to-market net gains are among the items of income that must be treated as business income

… Removed “the location of the treasury function of the business entity” as a criterion for determining commercial domicile for purposes of sourcing receipts (making “the seat of management and control of the business entity” the first criterion)

… Adds sourcing provisions for marked-to-market net gains (including a definition of marked-to-market net gains) and receipts from the operation of a vessel

… Extends the apportionment provisions related to “other aviation services” to a “qualified air freight forwarder” and provides a definition for “qualified air freight forwarder”

… Clarifies that receipts from physical commodities that are not actually delivered are included in the denominator of the fraction used to determine the receipts from physical commodities that are sourced to the State Combined Returns … Eliminates the requirement that the designated agent on a combined return must be the parent corporation

… Clarifies that the election to file a combined return for a commonly owned group must be made on a timely filed original return determined with regard to extensions

… Adds that the election to waive an NOL carryback and an election to deduct a prior year net operating loss subtraction pool over a two-year period applies to all members of a combined group Qualified New York Manufacturers … Establishes a .0132% capital tax rate for qualified New York manufacturers for taxable years beginning in 2015

… Adds fixed dollar minimum tax tables for S corporations that are qualified New York manufacturers and provides that a combined group must meet the qualified New York manufacturer definition to use the related fixed dollar minimum tax tables

… Limits the type of property that may be used to satisfy the definition of a qualified New York manufacturer to New York investment tax credit (ITC) property that is “principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing”

… Clarifies that, with respect to a combined return, the qualified New York manufacturer test is applied at the combined group level

… Limits the property a broker-dealer, a business providing investment advisory services to a regulated investment company, and an exchange registered as a national securities exchange may use for purposes of the investment tax credit to that which was placed in service before October 1, 2015 New York State Sales and Compensating Use Tax Amendments … Effective June 1, 2015, provides relief to purchasers of vessels (i.e., an exemption for receipts from the sale of a vessel in excess of $230,000 and exempts the use of a vessel from tax until the earlier of use in the state in excess of 90 consecutive days, the date the vessel is first required to be registered, or the date upon which the vessel is registered)

… Adds an exemption for: (1) certain receipts from the sale of electricity by a person primarily engaged in the sale of solar energy equipment and/or electricity generated by such equipment (effective December 1, 2015); (2) the use of certain items at a tasting held by a licensed brewery, cider producer, or distillery (effective June 1, 2015); (3) "general aviation aircraft" and machinery and equipment installed on such aircraft (effective September 1, 2015); and (4) certain transfers between related persons pursuant to a divestiture authorized under the Dodd-Frank Wall Street Reform and Consumer Protection Act (effective on the first day of a sales tax quarterly period commencing at least ninety days after April 1, 2015)

… Effective September 1, 2015, removes: (1) "aircraft" from the exception to the exclusion from sales tax that applies to certain mergers, consolidations, contributions, and distributions; and (2) certain small aircraft from the requirement to accelerate payments under a lease with a term of one year or more

… Effective April 1, 2015, expanded the definition (and taxability) of a "prepaid telephone calling service" to include a "prepaid mobile calling service"  


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 Newsletter - May 2015

Fri, 05/01/2015 - 12:00am
The May edition of BDO's China Tax Newsletter features recent tax-related developments in China, including adjustments to business tax policies for transfer of housing by individuals. Articles include:
 
  • Promulgation of the Catalogue of Encouraged Industries in Western China
  • Administrative Approval Replaced by Registration When Applying for the General VAT Taxpayer Qualification
  • Further Regulated and Strengthened Administration of Transfer Pricing in Respect of Expenses Paid By an Enterprise to Its Overseas Related Party
  • Expanded Scope of Small Low-profit Enterprises Eligible to Reduce Taxable Income by Half When Computing Enterprise Income Tax
  • Adjustments to Business Tax Policies for Transfer of Housing by Individuals
  • Nationwide Implementation of the Installment Tax Policy for Individual Investments with Non-monetary Assets
  Download

State and Local Tax Alert - April 2015

Wed, 04/29/2015 - 12:00am
Maryland Introduced a New Two-Month Tax Amnesty Program in 2015 Summary On April 14, 2015, Maryland Governor Larry Hogan (R) approved Senate Bill 763, which requires the Comptroller of Maryland to declare a new tax amnesty period that runs from September 1, 2015, through October 30, 2015 (the “Amnesty Period”).  Under this tax amnesty, the Comptroller must waive all civil penalties and one-half of the interest imposed against a qualifying taxpayer for nonpayment, non-reporting and underreporting of individual income tax, corporate income tax, withholding tax, sales and use tax, and admissions and amusement tax delinquent as of December 31, 2014.  In addition, under certain circumstances, a qualifying taxpayer may not be charged with a criminal tax offense arising from a return filed and tax paid during the Amnesty Period.
  Details To qualify for interest and penalty relief and relief from criminal charges under this amnesty program, a taxpayer must, during the Amnesty Period, file delinquent returns and pay the entire tax liability and one-half of any interest due.  If a taxpayer is unable to pay the tax and interest in full during the Amnesty Period, the Comptroller is authorized to enter into a payment agreement with the taxpayer to make payment in full by December 31, 2016.

Interest relief does not apply to interest accruing for taxable periods following the Amnesty Period as a result of a payment agreement and amnesty from criminal charges does not apply to charges under investigation or pending in a Maryland court.  In addition, amnesty (i.e., interest and penalty relief and relief from criminal charges) under this program does not apply to a taxpayer that was granted amnesty under a Maryland tax amnesty program held between calendar years 1999 and 2014 or to any taxpayer eligible for the July 1, 2004, through November 1, 2004, settlement period for Maryland corporation income tax assessed by the Comptroller on issues related to the decisions in Comptroller of the Treasury v. SYL, Inc. and Comptroller of the Treasury v. Crown Cork & Seal Company (Delaware), Inc., 375 Md. 78 (2003) for pre-2003 taxable periods.
  BDO Insights
  • This amnesty program allows filing and non-filing and registered and unregistered businesses to come into compliance with their Maryland taxes.  As such, this program is a great opportunity for a taxpayer to reduce financial accounting reserves, if any, to the extent related to Maryland taxes.
  • Relief from interest and penalties under the amnesty program can be significant given Maryland’s onerous 13% annual interest rate and penalties that may amount to as much as 25% of unpaid taxes.
  • Relief from criminal charges may be meaningful to those taxpayers (and their officers) that have unremitted trust fund type taxes such as sales and use tax or withholding tax.


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

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

State and Local Tax Alert - April 2015

Wed, 04/29/2015 - 12:00am
Missouri Introduced a New Three-Month Tax Amnesty Program in 2015 Summary On April 27, 2015, Missouri Governor Jay Nixon (D) approved House Bill 384, which requires the Department of Revenue to implement an amnesty program under which it is required to waive all penalties, additions to tax, and interest of a qualifying taxpayer related to income tax (including, corporate, individual, and withholding tax), sales and use tax, and corporation franchise tax due as of December 31, 2014.
  Details A qualifying taxpayer, for purposes of the amnesty program, is one that is not a party to a criminal investigation or criminal or civil litigation at the time of payment, submits a written application on forms prescribed by the Director of Revenue during the period September 1, 2015, through November 30, 2015, pays its entire tax liability by November 30, 2015, and complies in “good faith” with the state’s tax laws for the eight-year period following the date of the amnesty agreement.  A grant of amnesty for a particular tax type under this program makes a taxpayer ineligible to participate in a future amnesty program for the same tax type.
  BDO Insights
  • This amnesty program is significant in that it is the first such program in Missouri since 2002 and, thus, offers an opportunity to settle up to 12 years of Missouri income, franchise, and sales and use taxes free from penalties, additions to tax, and interest.
  • This amnesty program offers broader relief than the relief offered under Missouri’s traditional voluntary disclosure program, inasmuch as this amnesty program offers relief from penalties, additions to tax, and interest, whereas Missouri’s voluntary disclosure program limits relief to penalties.
  • This amnesty program is also wider in scope than Missouri’s voluntary disclosure program.  For example, Missouri’s voluntary disclosure program is limited to a taxpayer that has not been contacted by the Department of Revenue for the tax in question, is not under audit for any tax, or has not previously filed a tax return with underreported tax, whereas this amnesty program applies to all applicable taxes of a qualifying taxpayer due as of December 31, 2014.


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

International Tax Newsletter - April 2015

Thu, 04/09/2015 - 12:00am
The April edition of BDO China's China Tax Newsletter  features recent tax-related news and developments in China, such as the Public Rental Tax Housing Policy, further regulations on the taxable turnover of bond transactions,  as well as helpful tips on how to better understand and leverage these new developments.
  Download

BDO Indirect Tax News - April 2014

Tue, 04/07/2015 - 12:00am
The latest edition of BDO's Indirect Tax News features recent indirect tax developments in countries around the globe, including France, Spain, India and Israel.
  Download

International Tax Alert - April 2015

Fri, 04/03/2015 - 12:00am
BEPS Action Item 5 – Modified Nexus Approach for Preferential Intellectual Property Regimes
Affecting Multinational companies that own intellectual property (“IP”) and are utilizing a preferential IP regime.
  Background Many countries have introduced favorable tax regimes for income that is derived from ownership of intellectual property.  These regimes are more commonly referred to as “preferential IP regimes” or “patent box regimes.”  The preferential IP regimes were enacted with the aim of attracting foreign investment, specifically in the technology sector, into the respective countries.  While the definition of IP differs for each jurisdiction, it generally includes patents, designs, copyrights, models, and similar related products.  Some countries also allow trade names, trademarks, and other marketing-related IP assets to be included in the definition of IP.

Currently, most countries do not require that work related to the IP be carried out within the country or by the legal entity that owns the IP in order for a company to avail itself of the benefits.  In other words, the tax benefit is available as long as the IP is owned by a company that is a resident of that country even if no expenditure related to that IP has been incurred directly by that legal entity or within the jurisdiction.  For example, under the United Kingdom patent box regime effective April 2013, any profits derived from a product that is protected by a patent are taxed at a preferential rate of 10% as opposed to the corporate tax rate of 21%, regardless of whether the expenses related to the product have been incurred in the United Kingdom or by the same legal entity.

The Organization for Economic Cooperation and Development (“OECD”) Forum on Harmful Tax Practices (“FHTP”) realizes that many companies are artificially shifting profits to these jurisdictions in order to take advantage of the preferential IP tax regimes similar to that of the United Kingdom.  The FHTP has, therefore, laid out a proposal that limits the preferential treatment unless there is some nexus, in the form of activities performed or expenditure incurred on research within the tax jurisdiction, which ties the legal ownership of the IP to the income that is derived from it.
  Details Action 5 of the Base Erosion and Profit Shifting (“BEPS”) Action Plan is focused on countering “harmful tax practices more effectively, taking into account transparency and substance.”  It specifically requires substantial activity within a country for availability of any preferential regime, thus ensuring that the taxable profits are not artificially shifted away from the country or countries where the value is created.  In line with this objective, the FHTP has proposed that the regimes that are determined to be harmful should be modified to adopt a nexus approach for taxing IP income and any new preferential regimes that are introduced in the future should similarly follow the principles outlined by the FHTP (“Modified Nexus Approach”).

This Modified Nexus Approach requires that there should be nexus between the income receiving the benefits and the expenses contributing to that income.  Under this approach, the countries should allow only that part of IP income to qualify for the preferential rates that is connected with the research and development (“R&D”) expenditure incurred to generate this income.  More importantly, the FHTP proposed that the qualifying expenditure should be incurred directly by the legal entity claiming the preferential treatment.  Outsourcing of R&D activity to a subsidiary company should generally not be allowed and such outsourced expenditure should not qualify as being incurred by the same legal entity and within that country.  This focus on expenditures aligns with the underlying purpose of preferential IP regimes by ensuring that the regimes that are intended to encourage R&D activity only provide benefits to taxpayers that in fact engaged in such activity.

Moreover, the Action 5 Deliverable released under the 2014 BEPS Package also states that it is the proportion of total expenditures directly related to R&D activities, rather than the amount of the expenditures, that demonstrates real value added by the taxpayer.  According to the FHTP, it is this proportionate expenditure that should be taken into account under the nexus approach.  Therefore, only the proportion of income that is the same as the proportion of qualifying expenditures to the overall expenditures should qualify for preferential IP treatment.

Furthermore, while countries can formulate their own definitions of “qualifying expenditure,” “overall expenditure,” and “qualifying assets,” the definitions should follow the principles laid down under the Modified Nexus Approach.

The Modified Nexus Approach would, therefore, severely restrict the amount of income that is currently being taxed under the existing preferential IP regimes.  The FHTP recognizes that, in order to continue to take advantage of the beneficial tax treatment, businesses would incur significant restructuring expenses to migrate the R&D activity to such tax-friendly jurisdictions.  While discussions are in progress to develop the transitional and grandfathering rules for such situations, the new IP regimes and the taxpayers that will be receiving these benefits for the first time would be required to meet the framework laid down by the Modified Nexus Approach.
  How BDO Can Help Our Clients Taxpayers that are currently receiving beneficial treatment under preferential IP regimes should analyze their current corporate and operational structures to determine whether the income related to their IP would continue to qualify for lower tax rates under these new rules.  Contractual arrangements with related and unrelated parties may also need to be analyzed to determine whether and how the Modified Nexus Approach will affect their tax positions.  While it will take time for legislation to be formulated under BEPS, the Modified Nexus Approach or a similar concept is likely to be implemented.  Therefore, any IP-related tax planning that is undertaken by the taxpayers going forward should take this approach into consideration.

BDO’s international tax practice has the knowledge and expertise to assist in reviewing your structure, to model various options and outline their potential impact on your organization, and to provide planning solutions to optimize their effect on your company’s income tax expense.
 

BDO Knows: ASC 740 - March 2015

Tue, 03/24/2015 - 12:00am
FASB Makes Tentative Decisions with Respect to Disclosure of Income Taxes Related to Foreign Earnings   Executive Summary The FASB (“Board”) made tentative decisions at its February 11, 2015 meeting on income tax disclosure requirements in ASC 740 related to foreign earnings. These decisions are made pursuant to the FASB’s on-going Disclosure Framework Project (“disclosure project”). The tax and accounting treatments of foreign earnings continue to be a topic of interest and controversy to tax policy makers in Washington, investors and other stakeholders, the SEC, and the PCAOB.  The Board is considering the topic from a footnote disclosure perspective and discussed at its February 11 meeting potential income tax disclosure changes specific to foreign earnings. These tentative decisions aim to improve transparency and provide relevant information regarding the income tax effects from foreign earnings in the tax footnote. 

The Board’s tentative disclosure decisions with respect to foreign earnings include:
 
  • Income before taxes separated between domestic and foreign earnings - foreign earnings would be further disaggregated for any country that is significant to total earnings.
  • Domestic tax expense recognized in the current period on foreign earnings.
  • Undistributed foreign earnings for which the indefinite reinvestment assertion is no longer made and an explanation of why the assertion has changed.  Separate disclosure is necessary for any country that is significant to the disclosed amount.
  • A disaggregation of the current requirement to disclosure the cumulative amount of the temporary difference related to indefinitely reinvested foreign earnings for any country which represents at least 10 percent of the total cumulative temporary difference required to be disclosed.
The Board decided not to require the disclosure of:
  • Disaggregation of deferred tax liabilities for undistributed foreign earnings by country.
  • An estimate of the unrecognized deferred tax liability based on simplified assumptions.
  • Any change in management’s plans for undistributed foreign earnings based on past or current conditions.
The FASB and its staff continue to review the current disclosures requirements, the tentative decisions, and input from stakeholders. The FASB could decide to change or revise these tentative decisions. An exposure draft is not expected until the FASB has considered disclosure changes for two additional income tax topics: uncertain tax benefits and miscellaneous income tax items.  
  Disclosure Framework Project: This FASB project seeks to improve the effectiveness of disclosures in notes to financial statements by requiring disclosure of information that is most important or relevant to an entity’s financial statement users. The FASB’s disclosure framework is intended to promote consistent decisions by the FASB about disclosure requirements and to serve as a “guide” to disclosure decisions undertaken by reporting entities. The FASB also wants to provide flexibility and discretion in applying disclosures requirements.

The FASB is currently evaluating disclosure requirements on four accounting topics:
 
  • Fair Value Measurement (ASC 820-10-50)
  • Defined Benefit Plans (ASC 715-20-50)
  • Income Taxes (ASC 740-10-50)
  • Inventory (ASC 330-10-50)

The tentative decisions made on February 11 reflect certain concepts from the proposed FASB Concepts Statements, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements.  For example, one proposed concept focuses on entity-specific factors that impact cash flows for a particular financial statement line item, such as income taxes. The FASB staff concluded that the jurisdictions in which the reporting entity operates provide relevant information about expected cash flows for income taxes. To give the preparer flexibility in applying this proposed disclosure without incurring significant cost, the tentative decisions focus on “significant” jurisdictions. However, “significant” is not defined for disclosing pretax income by jurisdiction because of perceived application issues when there is consolidated income (or loss) but country-specific loss or income.

The tentative decisions also reflect users’ input that the disclosure of accumulated foreign earnings by “significant” jurisdictions would be more relevant than providing a single amount for all jurisdictions. Users presumably would be able to determine the foreign tax credits that would be applied, analyze the advantages or disadvantages of remitting from a particular country, and understand certain exposures related to earnings accumulated in a “significant” country.
  Undistributed Foreign Earnings – Current GAAP and Recent Issues The growing globalization of businesses has meant that a greater share of income is generated outside a reporting entity’s home country and in jurisdictions with no tax or low-tax rates. For US reporting entities alone it is estimated by various studies that as much as $2 trillion of accumulated foreign income is held outside the US, mostly in jurisdictions with low tax rates. The high technology and pharmaceutical industries in particular have very significant accumulated foreign earnings which have not been subject to US tax.

Current US GAAP (ASC 740) generally requires the recognition of a deferred income tax liability at the parent entity’s home country tax rate for the excess of financial reporting basis over tax basis in the stock of a foreign subsidiary (i.e., outside basis difference).The outside-basis difference generally consists of unremitted earnings (including translation effects) and could also include purchase accounting book-tax differences. 

An exception to recognition of a deferred tax liability exists if the parent entity has the intent and ability to assert that undistributed foreign earnings are indefinitely or “permanently” reinvested outside the parent’s jurisdiction (for US reporting entities, the foreign earnings would have to be invested outside the US).[1]  The parent entity’s ability to avoid incurring the home-country tax on accumulated foreign earnings is implicit in the indefinite reinvestment assertion.  ASC 740 currently requires the reporting entity to disclose in the footnotes of the financial statements the amount of the undistributed foreign earnings and an estimate of the tax liability that would be incurred upon repatriation of the foreign earnings (i.e., an estimate of the deferred tax liability that is currently not recognized because of the indefinite reinvestment assertion), or a statement that such estimation is not practicable to determine.

SEC reviews of this accounting has also been on a rise as evident by the increasing amount of comment letters related to indefinite reinvestment assertions and related disclosures. The SEC has been concerned with the level of transparency around the unrecorded tax liability, management’s intention and ability to defer the US tax on accumulated foreign earnings, and the potential implications to a reporting entity’s liquidity resources.

More recently, the PCAOB has also indicated that it will closely inspect audit work related to the assertion given the growing amount of accumulated foreign earnings outside the US. The FASB has also considered revising the accounting for accumulated foreign earnings, but ultimately decided to keep the current exception to comprehensive recognition of income tax on foreign earnings.

On the tax legislation front, policy makers in Washington are trying to develop a solution that would be supported by all branches of the US government as well as US-based multinational businesses. These efforts have generated various proposals, yet without a resolution on a final proposal.   
  BDO Comments BDO supports the FASB’s efforts to improve the effectiveness of financial statement disclosures through development of a disclosure framework to ensure consistency and provide flexibility.

These tentative decisions focus less on future-looking events and repatriation scenarios that might not occur, and more on the disclosure of relevant information that is already available in the reporting entity’s accounting system without adding undo cost to disclose. Therefore, we see these as improvements to the current requirements. This would also “codify” a disclosure of domestic vs. foreign pretax income which is already required by the SEC.    

However, there are questions that should be answered: (1) What information is gained by requiring quantification and disclosure of the US tax expense recognized for current period foreign earnings? (2) Would it make sense to clarify the term “significant” to prevent potential confusion and inconsistent application? (3) Would stakeholders also benefit from knowing the foreign income tax rate(s) in “significant” jurisdictions?     

BDO will continue to monitor this project and provide input to the FASB.

[1] ASC 740-10-25-17 (formerly APB 23).
 

Federal Tax Alert

Tue, 03/17/2015 - 12:00am
Congress Extends the Work Opportunity Credit for Another Year and the IRS Extends the Related Employee Application Due Date Summary Congress recently extended the application of the work opportunity tax credit (the “WOTC”) to an employee who began working after December 31, 2013, and before January 1, 2015.  Because the extension was not enacted until December 19, 2014, and the application for pre-screening an employee must be filed within 28 days after an employee begins work, the Service granted transitional relief extending the application due date for an employee hired in 2014 to April 30, 2015.
  Details Background
The WOTC is a credit available to a taxpayer that employs an individual from a targeted group, such as, very generally, a qualified IV-A recipient, a qualified veteran, a qualified ex-felon, a designated community resident, a vocational rehabilitation referral, a qualified summer youth employee, a qualified food stamp recipient, a qualified SSI recipient, or a long-term family assistance recipient.[1]  The amount of the WOTC is 40% (25% in the case of an employee who does not meet certain minimum employment requirements) of the first-year wages paid or incurred by an employer during the taxable year to employees who are members of a targeted group.[2]

While the number of employees who may qualify for the WOTC is not limited, the amount of qualified first-year wages that may be taken into account with respect to any individual during a taxable year is generally limited to $6,000 (a $2,400 maximum credit).  However, the wage limitation is $12,000 (a $4,800 maximum credit) in the case of a qualified veteran with a service-connected disability who has a hiring date not more than one year after having been discharged from active duty in the armed forces,[3] $14,000 (a $5,600 maximum credit) in the case of a qualified veteran without a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date which equal or exceed six months,[4] and $24,000 (a $9,600 maximum credit) in the case of a qualified veteran with a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date which equal or exceed six months.[5]

Prior to the enactment of the Tax Increase Prevention Act of 2014 on December 19, 2014, the WOTC applied only to wages paid or incurred by an employer with respect to an employee who began work before January 1, 2014.  Now, the WOTC retroactively extends to wages paid or incurred with respect to an employee who began working after December 31, 2013, and before January 1, 2015.[6]
  Pre-Screening Process An employee may not be treated as a member of a targeted group unless the employee goes through a pre-screening process.  That is, the employer must either: (1) on or before the day the individual begins work, obtain certification from a designated local agency (“DLA”) that the individual is a member of a targeted group; or (2) complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, on or before the day the individual is offered employment and submit the form to the appropriate DLA within 28 days after the individual began work.[7]
  Transitional Relief In light of the fact that the extension of the WOTC to wages paid or incurred by an employer with respect to an employee who began work after December 31, 2013, and before January 1, 2015, was not enacted until December 19, 2014, the Service granted transitional relief with respect to the pre-screening process.  Specifically, the Service has given taxpayers until April 30, 2015, to submit a completed Form 8850 to the appropriate DLA for employees hired in 2014.[8]
  BDO Insights The Service’s transitional relief makes good sense.  Without it, a qualifying employee who began work as late as mid-November 2014 could be excluded from the WOTC before the credit extension was even granted and, thus, render Congress’s extension of the WOTC for another year virtually worthless. 

The WOTC can be a valuable credit that ranges between $2,400 and $9,600 per qualifying employee who began work during the taxable year.  However, as noted above, each employee is subject to a pre-screening application process and the application deadline for 2014 hires is fast approaching.  BDO can assist with determining which employees are from a targeted group as well as the pre-screening application process.
 
[1] Section 51(a), (b)(1), and (d)(1).  Each of the specified categories within this targeted group is further defined in section 51(d).
[2] Section 51(a), (b)(1), and (i)(3).
[3] Section 51(b)(3) and (d)(3)(A)(ii)(I).
[4] Section 51(b)(3) and (d)(3)(A)(iv).
[5] Section 51(b)(3) and (d)(3)(A)(ii)(II).
[6] Tax Increase Prevention Act of 2014, Pub. L. No. 113-295, § 119.
[7] Section 51(d)(13)(A).
[8] Notice 2015-13.
 

State and Local Tax Alert

Thu, 03/12/2015 - 12:00am
2014 Michigan State and Local Tax in Review:  Recent Significant Michigan Developments, Most of Which are Taxpayer-Friendly   Summary  
During 2014, many significant, taxpayer-friendly developments occurred in Michigan, including the decisions in Thomson-Reuters Inc. v. Department of Treasury, Auto-Owners Insurance Co. v. Department of Treasury, and Fradco, Inc. v. Department of Treasury, as well as several legislative developments.  Together, these developments begin to provide guidance regarding the treatment of software as a service (“SaaS”) for sales and use tax purposes, and improve the fairness and administration of Michigan taxes.  While the decision in International Business Machines Corp. v. Department of Treasury was also considered a taxpayer win, the flurry of activity in the second half of the year has only made the availability of the Multistate Tax Compact (the “Compact”) three-factor apportionment formula election (the “MTC Election”) more uncertain for Michigan taxpayers.
  Details  
Legislative developments[1]
 
S.B. 658 and S.B. 659, 97th Legis., Reg. Sess. (Mich. Public Act 553 of 2014)  – Michigan Enacts Affiliate and Click-Through Nexus Provisions for Sales/Use Tax
On December 15, 2014, the Michigan legislature enacted, and Michigan Governor Rick Snyder subsequently signed into law, changes to the provisions identifying the activities that constitute doing business in Michigan for purposes of Michigan sales and use tax collection requirements.  The changes address when an affiliate can create a collection requirement for a related party and when an unrelated party can create nexus for a remote seller if business is referred to the remote seller.
 
Affiliate Nexus Provision
A seller will be presumed to be doing business in Michigan for purposes of sales and use tax collection if any one or more of the following activities  are conducted by the seller or an affiliate:
 
  • The affiliate sells a similar line of products as the seller and does so under the same business name as the seller or a similar business name as the seller.
  • The seller uses its employees, agents, representatives, or independent contractors in Michigan to promote or facilitate sales by the seller to purchasers in Michigan.
  • The seller or an affiliate maintains, occupies, or uses an office, distribution facility, warehouse, storage place, or similar place of business in Michigan to facilitate the delivery or sale of tangible personal property sold by the seller to the seller’s purchasers in Michigan.
  • An affiliate uses, with the seller’s consent or knowledge, trademarks, service marks, or trade names in Michigan that are the same or substantially similar to those used by the seller.
  • An affiliate delivers, installs, assembles, or performs maintenance or repair services for the seller’s customers in Michigan.
  • An affiliate facilitates the sale of tangible personal property to customers in Michigan by allowing the seller’s customers to pick up or return tangible personal property sold by the seller to an office, distribution facility, warehouse, storage place, or similar place of business maintained by the affiliate in Michigan.
  • An affiliate shares management, business systems, business practices, or employees with the seller, or the affiliate and the seller have intercompany transactions related to the activities with the seller that assist the seller with establishing or maintaining the seller’s market in Michigan.
  • An affiliate conducts any other activity within Michigan that is significantly associated with the seller’s ability to establish and maintain a market in Michigan for the seller’s sales of tangible personal property to purchasers within Michigan.
 
The statute also states that, in addition to an affiliate, an independent third party can trigger a collection requirement if the third party is performing any of the activities described above.  The existence of any of the above activities creates a presumption of doing business.  The statute states that the presumption can be rebutted by the seller if the seller can demonstrate that the existence of the above activities is not “significantly associated with the seller’s ability to establish or maintain a market in the state”.  In addition to the above activities the statute also contains a “click-through” nexus provision.
 
Click-Through Nexus Provision
A seller will be presumed to have nexus in Michigan for sales and use tax collection purposes if the seller enters into an agreement with a “resident” of Michigan whereby the resident refers purchasers to the remote seller for a commission or other consideration.  In order for the provision to apply, both of the following must be present:
 
  • The cumulative gross receipts of the seller during the immediately preceding 12 months that are the result of referrals from all residents within Michigan must exceed $10,000; and
  •  The remote seller’s total gross receipts to customers within Michigan must exceed $50,000 during the same twelve- month period.
 
As with the affiliate activities outlined above, the statute also states that if the above two factors are present relating to a referral agreement, then the remote seller is presumed to have nexus in Michigan and thus a collection requirement.  The statute outlines how the presumption can be rebutted by the remote seller.

S.B. 156, 97th Legis., Reg. Sess. (Mich. Public Act 282 of 2014) (“S.B. 156”) – Adds several Michigan Business Tax (“MBT”) technical corrections, and purportedly retroactively repeals the MTC Election.  On September 11, 2014, Gov. Snyder signed into law S.B. 156, the provisions of which are effective, in the case of the technical corrections, for years other than 2008 and 2009.  The MTC Election repeal is effective January 1, 2008.  Any amended returns resulting from S.B. 156 must be filed during 2015.  Taxpayers will receive refunds over a six-year payout period.  In addition, the statute of limitations is extended beyond the normal time frame for the items that relate to the S.B. 156 issues.
 
MTC Election Repeal
At the last minute, a provision was added in the enacting section of this bill (originally intended to include only MBT technical corrections), which served to retroactively repeal the MTC Election effective January 1, 2008.  The provision’s intended effect was to undo the result in International Business Machines Corp. v. Department of Treasury.  More discussion on this issue is set forth below.
 
Cancellation of Indebtedness Income
With the enactment of S.B. 156, cancellation of indebtedness (“COD”) income and discharge of nonrecourse debt is excluded from the modified gross receipts tax base under the MBT to avoid a deemed receipt where no actual receipt existed.  This taxpayer-favorable provision only applies to taxable years 2010 and 2011 (and potentially later years for MBT opt-in taxpayers).  COD income is still considered a gross receipt for the 2008 and 2009 taxable years.  Therefore, if a taxpayer has its 2008 and/or 2009 MBT taxable years still open under the statute of limitations and has COD income, then the issue of whether or not COD income is in fact a “gross receipt” must still be considered by the taxpayer for income tax examination and financial reporting (ASC 740) purposes.
 
Investment Tax Credit Recapture
With the enactment of S.B. 156, a “tax benefit” rule was enacted into the statute which prevents a taxpayer from being required to recapture an investment tax credit (“ITC”) when certain assets are sold if the credit never provided a benefit to the taxpayer when those assets were originally purchased.  This taxpayer-favorable provision limits ITC recapture to the extent the original credit actually produced a reduction in the taxpayer’s tax liability (i.e., “used”) and applies to years other than 2008 and 2009.  However, the term “used” is not defined in the statute.  Accordingly, the tax benefit rule for MBT-era assets sold does not exist for 2008 and 2009 MBT returns.  Note also that, earlier in 2014, H.B. 5011 (Public Act 16) created a tax benefit rule for MBT ITC-era assets required to be recaptured on corporate income tax (“CIT”) returns that was retroactive to the start of the CIT regime.
 
Renaissance Zone Credit
With the enactment of S.B. 156, the credit calculation is revised to eliminate the arbitrary limit based on a taxpayer’s prior single business tax (“SBT”) credit amount and to give effect to the intended elimination of all MBT liability on activity within the Renaissance Zone for those taxpayers in a zone before December 1, 2002.  This taxpayer-favorable provision is for years other than 2008 and 2009.  The credit limitation is still in place on 2008 and 2009 returns.
 
Sales Apportionment of Dock Sales
Finally, the enactment of S.B. 156 corrected a grammatical error (the word “not” was in duplicate) in the prior statute that gave the opposite of the intended effect for sourcing sales of tangible personal property involving the ultimate destination determination of dock sales.  This taxpayer-favorable provision is only for the 2010 and 2011 taxable years (and potentially later years for MBT opt-in taxpayers).  Unfortunately, this grammatical error correction does not apply to 2008 and 2009 MBT returns and gives a result that is not intuitive.  Note also that earlier in 2014, H.B. 5008 (Public Act 13) amended the apportionment statute to provide guidance relating to the determination of the ultimate destination, especially as it relates to dock sales and goods in transit, for CIT purposes.  This provision was retroactive to the start of the CIT regime.  In  2012, S.B. 1037 (Public Act 605) made similar changes to the MBT as described above for the CIT, except that the drafters left the duplicative word “not” in the guidance of dock sales, an action which prompted the S.B. 156 correction.
 
 
S.B. 337, 97th Legis., Reg. Sess. (Mich. Public Act 3 of 2014) (“S.B. 337”) – Adds audit timing and refund deemed denied provisions, and makes changes to statute of limitations, successor liability and responsible person provisions.  On January 30, 2014, Gov. Snyder signed into law S.B. 337, the provisions of which are effective as of February 6, 2014.
 
Audit Timing and Process Changes
With the enactment of S.B. 337, for an audit commenced after September 30, 2014, the Department of Treasury (the “Department”) must complete audit fieldwork and provide a written preliminary audit determination no later than one year after the four-year statute of limitations for the period at issue expires (unless the taxpayer otherwise agrees to extend the one-year period).  The Department must also issue a final assessment within nine months of the date the Department provided the taxpayer with the preliminary audit determination (unless the taxpayer requests a reconsideration of the preliminary audit determination or an informal conference).
 
Statute of Limitations Changes
In addition, S.B. 337 changes the situations under which the four-year statute of limitations is “suspended” as to an issue that was the subject of a federal income tax or a Michigan tax audit, conference, hearing, or litigation.  First, under S.B. 337, the statute of limitations is extended under the circumstances set forth below, but only if a period referred to exceeds the statutory four-year statute of limitations.  Next, the four-year statute of limitations extension is limited to the following situations and extension periods:
 
  • The period pending a final determination of federal income tax through audit, conference, hearing, and litigation, and for one year after that period, but no longer as it relates to a Michigan tax.
  • With respect to Michigan tax audits:
    • For a period of 90 days after a decision and order from an informal conference or a court order that finally resolves an appeal of a decision of the Department in a case in which a final assessment was not issued before appeal;
    • The periods established by S.B. 337 relating to preliminary audit determinations and final assessments for audits commencing after September 30, 2014, or pending the completion of an appeal of a final assessment; and
    • The period for which the taxpayer and the Department have consented to an extension.
 
The changes did not alter the limitation that the extension of the statute of limitations applies only to the “items that were subject of the audit,” but S.B. 337 did provide a definition of such items.  These items are defined to be “items that share a common characteristic that were examined by an auditor even if there was no adjustment to the tax as a result of the examination.  Items that share a common characteristic include items that are reported on the same line on a tax return or items that are grouped by ledger, account, or record or by class or type of asset, liability, income, or expense.”
 
Deemed Denial Provisions on Certain Refunds
S.B. 337 also allows taxpayers, excluding individuals, to elect to treat a claim for refund as “denied” where the Department has not approved, denied, or adjusted the claim within one year of the Department’s receipt of the claim.  Upon such a deemed denial, a taxpayer may then seek an appeal with the Michigan Tax Tribunal or the Michigan Court of Claims as it pertains to the issue(s) raised in the claim or refund.
 
Successor Liability and Responsible Persons
Lastly, S.B. 337 amends the successor liability and responsible person provisions.  Most notably, for purposes of meeting the escrow requirement as it relates to sales and use tax, income tax withholding, and certain other taxes, S.B. 337 now requires that within 60 days of receiving a request, the Department must provide to a purchaser of a business the amount of any known or estimated tax liability of the business.  Additionally, S.B. 337 limits a purchaser’s liability to the amount escrowed pursuant to the Department’s tax disclosure, and extinguishes a purchaser’s liability in the event the Department fails to comply with the known or estimated tax liability disclosure requirement.  The purchaser, on the other hand, may be held liable for the business’s tax debts up to the fair market value of the business in the event it does not comply with the escrow requirement but the Department complies with the disclosure requirement.
 
S.B.  337 adds the term “responsible person” to the statute, and limits a responsible person’s liability to sales and use tax, income tax withholding, and certain other taxes for which he/she was responsible during the period of default.  The new provisions require willful failure of a responsible person regarding the filing of a return or the payment of a tax in order to impose a liability on the responsible person.  In addition, the statute applies more favorable provisions to assessments issued after December 31, 2013, regarding the types of taxes involved in connection with the liability of responsible persons.  S.B. 337 also imposes a four-year statute of limitations on the Department to assess a responsible person, shifts the initial burden of establishing that a person is a “responsible person” to the Department, allows a responsible person to challenge an assessment to the same extent the business could have, and creates a right of recovery from another responsible person.  In addition, S.B. 337 requires the Department to notify a responsible person of amounts collected from another responsible person or a business purchaser that is attributable to the assessment, assess a purchaser of the business before assessing a responsible person under certain circumstances, and disclose documents that the Department considered in its audit or investigation in determining that a person is a “responsible person” and is personally liable.
 
H.B. 4291, 97th Legis., Reg. Sess. (Mich. Public Act 35 of 2014) (“H.B. 4291”) – Requires the Department to provide copies of audit work papers and promulgate administrative rules related to audit standards.  On March 20, 2014, Gov. Snyder signed into law H.B. 4291 which, effective March 20, 2014, requires the Department to provide a taxpayer under audit with a complete copy of audit work papers and the audit report of findings upon request.  In addition, H.B. 4291 requires the Department to perform an audit in accordance with administrative rules, which it must promulgate within one year of the enactment of H.B. 4291 (i.e., March 20, 2014).  Such rules are required to address, but are not limited to, confidentiality, technical training, due professional care, planning, supervision, understanding of the entity under audit, audit evidence documentation, sampling, and elements of the audit in the report.  On October 1, 2014, the Department issued Proposed Administrative Rules Regarding Audit Standards for Field Audits.  A public hearing was held on December 1, 2014, regarding the proposed rules.
 
H.B. 4288, 97th Legis., Reg. Sess. (Mich. Public Act 108 of 2014) (“H.B. 4288”) and H.B. 4292, 97th Legis., Reg. Sess. (Mich. Public Act 109 of 2014) (“H.B. 4292”) – Limits the ability of the Department to use indirect audit procedures for sales and use tax purposes.  On April 7, 2014, Gov. Snyder signed into law H.B. 4288 and H.B. 4292, effective April 10, 2014.  Taken together, the legislation limits the ability of the Department to conduct indirect audit procedures for sales and use tax purposes to those situations where a taxpayer does not file a return or maintain “sufficient” (previously “proper”) records, or if the Department considers the taxpayer’s records or returns to be inaccurate.  Further, H.B. 4288 and H.B. 4292 require the Department to conduct an indirect audit in accordance with the administrative rules to be promulgated as required by H.B. 4291 and establish the required elements of an indirect audit, including: (1) a review of the taxpayer’s books and records; (2) evaluation of the credibility of evidence and the reasonableness of the conclusion; (3) use of reasonable methods to construct income, deductions, or expenses; and (4) an investigation of reasonable evidence by the taxpayer refuting the computation.
 
H.B. 4003, 97th Legis., Reg. Sess. (Mich. Public Act 240 of 2014) (“H.B. 4003”) – Creates an offer-in-compromise program.  On June 21, 2014, Gov. Snyder signed into law H.B. 4003, which, effective June 27, 2014, creates an offer-in-compromise program beginning January 1, 2015.  Under the program, the State Treasurer (or an authorized representative) may compromise a liability if:
 
  • Doubt as to liability exists (i.e., evidence shows that the taxpayer would have prevailed in a contested case if the taxpayer’s appeal rights had not expired),
  • Doubt as to collectability exists (i.e., the amount offered is the most that the Department could collect from the taxpayer’s assets and income), or
  • A federal offer-in-compromise has been granted for the same taxable years.
 
To be eligible under the program, there must be an assessment and all opportunities to contest the assessment must have expired.  There must also be no open bankruptcy proceedings and all applicable tax returns must be filed.  Under the program, rejections are not subject to review or appeal (except through an independent administrative review process if requested within 30 days).  In addition, the taxpayer must submit the greater of $100 or 20% of the offer in contemplation of the compromise which is applied to the outstanding liability (which will not be refunded if the offer is rejected or reduced).  The State Treasurer is to publish on the Department’s Web site a written report of a compromised tax liability which contains, at a minimum, a statement regarding each of the following: the basis for the compromise, the amount of tax assessed, the terms of the compromise, the amount actually paid, and the grounds for compromise.  Finally, within 180 days after the effective date of H.B. 4003, the State Treasurer must establish administrative guidelines for the program.
 
Case Developments
 
Thomson-Reuters Inc. v. Department of Treasury, Michigan Court of Appeals No. 313825 (May 13, 2014).  In Thomson-Reuters Inc., the Michigan Court of Appeals held that the taxpayer’s sale of Checkpoint online subscriptions did not constitute the sale of taxable pre-written software.  The court reasoned that the JavaScript computer code that was sent from the taxpayer’s server to a customer’s computer (which constituted less than one percent of the transaction) was incidental to the true object of the transaction – the expert knowledge of Checkpoint’s content creators in synthesizing, compiling, and organizing materials to make researching more efficient, which is a service.  As an unpublished case, this Court of Appeals decision is not precedential.  The Department has appealed the matter to the Michigan Supreme Court.
 
Auto-Owners Insurance Co. v. Department of Treasury, Michigan Court of Claims, No. 12-000082 (March 20, 2014).  In Auto-Owners Insurance Co., the Michigan Court of Claims held that accessing a third party’s computer systems for the purpose of Web conferencing, Web hosting, processing payments, and conducting online research, risk analyses, and property valuations involved a non-taxable service, rather than a taxable transfer of tangible personal property, for use tax purposes.  In so holding, the court reasoned that the seller transferred information and data that were processed using the third-party provider’s software, hardware and infrastructure, but the software itself was not transferred.  The court further reasoned that, even if tangible personal property was transferred: (1) the taxpayer only had a right of control constituting a taxable use over the outcomes arising from the inputting of certain data to be analyzed – not the software itself; and (2) any tangible personal property transferred was merely incidental to the services provided.  The Department has appealed the matter to the Michigan Court of Appeals.
 
Rehmann Robson & Co., P.C. v. Department of Treasury, Case No. 12-000098-MT (November 26, 2014).  Rehmann Robson & Co., P.C., a large accounting firm headquartered in Michigan, subscribed to Checkpoint, an online information database offered by Thomson Reuters.  Access was obtained through Checkpoint’s main Web site on the Internet.  However, no software was downloaded by Rehmann employees.  Upon audit, the Michigan Department of Treasury assessed Michigan use tax on the transactions asserting the use of Checkpoint constituted the sales of tangible personal property in the form of “prewritten computer software”.
 
The Michigan Court of Claims held that the transactions are not subject to Michigan use tax as they were non-taxable services rendered through an online information service.  In its opinion the court held that: (1) the transactions did not involve “tangible personal property” as there was no delivery of prewritten computer software effectuated by giving up possession or control of the software; (2) even if prewritten computer software was delivered, there was no “use” as evidenced by exercising a right or power incident to ownership in the software, noting that “access” does not equate to “use”, and (3) even if prewritten computer software was delivered and used, any such use was merely “incidental” to the services pursuant to the “incidental to services” test adopted by the Michigan Supreme Court in Catalina Marketing Sales Corp. v. Department of Treasury, 470 Mich. 13, 678 N.W.2d 619 (2004).
It is worth noting that the opinion was written by the same judge who ruled on another Court of Claims case earlier this year on the same issue and which contained a very similar analysis (see Auto-Owners Insurance Co. v. Department of Treasury, discussed above).
 
Fradco, Inc. v. Department of Treasury, 495 Mich. 104, 845 N.W.2d 81 (2014).  In Fradco, Inc., the Michigan Supreme Court held that where a taxpayer has appointed a representative, the Department must issue a notice to both the taxpayer and its representative to trigger the running of the appeal period.  The court reasoned that both MCL §§ 205.28 and 205.8 require that the Department send notice – the former to the taxpayer and the latter to the taxpayer’s appointed representative.  In addition, the two notice requirements are of equal weight in relation to the appeal procedures under MCL § 205.22 because the statute does not refer to either MCL § 205.28 or MCL § 205.8 and neither MCL § 205.28 nor MCL § 205.8 refers to MCL § 205.22.  The court found that, because the two notice requirements have equal weight and “statutes that relate to the same subject matter or share a common purpose must be read together as constituting one law[,]” it follows that the both notices are required to trigger the running of the appeal period where the taxpayer has appointed a representative.
 
International Business Machines Corp. v. Department of Treasury, 496 Mich. 642, 852 N.W.2d 865 (2014).  In International Business Machines Corp., the Michigan Supreme Court reversed the Michigan Court of Appeals judgment in favor of the Department and held that, for purposes of computing its business income tax and modified gross receipts tax (“MGRT”) under the MBT, the taxpayer could elect to use the MTC apportionment provisions in lieu of the single sales-factor apportionment required under the MBT Act on its 2008 MBT return.  In its decision, the court addressed whether: (1) the MBT Act repealed the availability of the MTC Election; and (2) the taxpayer could make the MTC Election to apportion the MGRT base of its MBT.  The court determined that it did not need to address contractual or constitutional issues raised by IBM because it determined that IBM should prevail on statutory construction grounds.
 
On the first issue, the court reversed the Michigan Court of Appeals in holding that the enactment of the MBT did not repeal the availability of the MTC Election.  The court reasoned that, although there was a way to repeal the MTC Election, it could not be repealed by implication by the enactment of the MBT.  Even though the MBT Act contained its own apportionment provisions, the MTC Election statute has been in place through periods of application of several different taxes that also provided apportionment provisions different from the Compact.  Inasmuch as the court found that the MTC Election’s availability was a matter of statutory construction, it did not address the issue of whether Michigan’s membership in the Compact required that taxpayers be allowed the option of making the MTC Election with respect to income taxes.
 
On the second issue, the court held that the MGRT portion of the MBT met the MTC definition of an “income tax” – a prerequisite to making the MTC Election.  Thus, the taxpayer could apportion that tax base using the Compact apportionment provisions.  The court reasoned that the MTC defines “income tax” as a tax that “measures net income by subtracting expenses from gross income, with at least one of the expense deductions not being specifically and directly related to a particular transaction.”  For purposes of calculating the MGRT base, a taxpayer determines its gross receipts, which the court found met the Internal Revenue Code and Black’s Law Dictionary definitions of “gross income,” and then deducts therefrom several expenses, including deductions for purchases of materials and supplies.  The court found that the enumerated deductions available under the MGRT are not specifically and directly related to particular transactions and thus the MGRT met the MTC definition of an "income tax".
 
On August 4, 2014, as anticipated, the Michigan Office of Attorney General filed a Motion for Rehearing, as well as a Motion to Stay the decision, with the Michigan Supreme Court.  The motions focused on the fact that if left unaltered, the impact of the IBM decision would cost the state over $1 billion in refunds, plus interest, mostly to out-of-state businesses.  On August 11, 2014, IBM filed its response.
 
Shortly after these motions were filed, legislators moved quickly to pass legislation, S.B. 156 (discussed above), repealing  MCL §§205.581-205.589 (the Compact provisions) retroactively to January 1, 2008.  Although the language of the bill states that the intent of the repeal was to express the intent of the legislature in drafting the original MBT Act, that a single sales factor be required, it is unclear whether this law change will withstand constitutional challenges, given a six-year retroactive application.
 
On the heels of the new legislation, the Department filed a Statement of Supplemental Authority with the Michigan Supreme Court on September 18, 2014, requesting that the retroactive statute be applied in the case and that the court reverse its judgment, disallowing IBM from utilizing the MTC Election.  IBM filed a response on October 7, 2014, indicating that the decision should hold, and that the lower courts can subsequently address the applicability of the retroactive legislation.
 
On November 14, 2014, the Michigan Supreme Court denied both motions, remanding the case back to the Court of Claims for immediate consideration.
 
On December 19, 2014, the Michigan Court of Claims upheld the retroactive legislation enacted by the Michigan Legislature.[2] The court ruled that the retroactive appeal of the MTC Election did not violate the United States or Michigan constitutions and that the MTC was not a binding interstate compact under federal law.  The decision has been appealed to the Michigan Court of Appeals.
 
Andrie Inc. v. Department of Treasury, 496 Mich. 161, 853 N.W.2d 310 (2014).  In the one case highlighted in this alert that was not decided in favor of the taxpayer, Andrie Inc., the Michigan Supreme Court reversed the Michigan Court of Appeals and held that the exemption from the use tax for sales tax paid requires that the taxpayer actually pay the sales tax because the statute “unambiguously” provides that the exemption applies “if the tax was due and paid[.]”  The court also held that a taxpayer must prove that it paid the sales tax and was not entitled to a presumption that it paid the tax because the burden of proving entitlement to an exemption rests on the party asserting the right to the exemption.
  BDO Insights
 
  • The enactment of S.B. 658/659 represents a series of changes to the doing business statute within Michigan which are very similar to changes that have been made by other states related to click-through nexus.  In addition, the affiliate nexus provision simply codifies specific activities that will create nexus.  The codification of these affiliate-nexus-creating activities may have been unnecessary because courts in other states have often held that these types of activities conducted by an affiliate within a state on behalf of a remote seller can trigger collection requirements.
 
  • The legislative developments in H.B. 4003, H.B. 4288, H.B. 4291, H.B. 4292, and S.B. 337 help to create a more taxpayer-friendly environment in Michigan.   For example, S.B. 337 imposes a much needed one-year limit on the period of time during which the Department can delay the processing of a refund claim before a taxpayer has the right to litigate the issue by considering the claim to be deemed denied.  However, it appears that the refund denial election under S.B. 337 limits a taxpayer’s remedy to an appeal to the Michigan courts and does not provide the option of an informal conference.  In addition, the refund denial election does not apply to individual income tax refund claims.  The new offer-in-compromise program eliminates Michigan’s absolute prohibition against any compromise of a final tax for any reason.  The enacted legislation was modified substantially from its original version, but it is a major improvement.  It gives the Department an opportunity to really make a difference, using the offer in compromise, in both poverty cases and in cases in which the taxpayers likely do not owe the tax.  Caution should be used when considering making an offer in compromise to the Department due to the requirement to pay the greater of $100 or 20% of the offer, inasmuch as this amount is not refunded if the offer is rejected.
 
 
  • The decision in International Business Machines Corp. brought the MTC Election one step closer to being available to Michigan taxpayers.  However, given the retroactive legislation, taxpayers are once again in uncertain territory as to the availability of the MTC Election in Michigan.  It is important to note that, even if the retroactive legislation is found to be unconstitutional, this case only directly applies to MBT taxable years 2008 through 2011, and separate litigation will likely be necessary for the following years.  Additionally, litigation on this issue in California, Minnesota, Oregon, and Texas is ongoing.  While the decision in International Business Machines Corp. technically has no precedential value in the other states, it could help to persuade the courts in the other states to decide in favor of the taxpayers.
 
 
  • The decisions in Thomson-Reuters Inc., Auto-Owners Insurance Company, and Rehmann Robson should provide guidance to taxpayers regarding the treatment of certain online services for Michigan sales and use tax purposes.  For taxpayers that are hoping that these cases will provide guidance related to the application of Michigan sales and use tax to SaaS transactions, there are two unfortunate aspects to these cases.  First, none of these cases seem to deal with “true” SaaS transactions (i.e., a software license granted to a remote user in Michigan whereby the user remotely uses the software code on the vendor’s server).  All of the services subject to litigation in these three cases either were information services or services sold by the vendor, whereby the service was provided by way of the operation of software code used by the vendor.  Because none of the items under consideration were true SaaS transactions, it may require more litigation beyond these three cases to fully resolve the taxability of SaaS in Michigan.  Second, even if the three cases could be used analogously to determine the taxability of SaaS transactions, none of the three cases are precedential because the Court of Claims cases are not precedential and the Court of Appeals case is unpublished.  Inasmuch as none of the cases are precedential, taxpayers must be cautious with changing their approach on similar transactions.  The Department has indicated that it believes the decisions in the three cases are wrong and thus the Department will not change its position on the taxability of these types of transactions.  Given that these decisions are contrary to the Department’s longstanding position that SaaS and SaaS “like” services are taxable, here, too, taxpayers should evaluate whether they have improperly paid use tax on purchases of these services and contemplate filing refund claims where it is beneficial.  Sellers, on the other hand, should be cautious with changing their taxability approach related to these types of transactions given that these decisions are not precedential.  A non-collecting vendor could be assessed by the Department for failure to collect tax because the vendor cannot look to these cases as precedents.  Recognizing that these decisions are not precedential, coupled with the fact that the Department intends to “ignore” the decisions, vendors of these types of services are put in a very difficult position with respect to the decision to impose tax or not to impose tax on these types of services.
 
 
  • The holding in Fradco, Inc. to require notice to the taxpayer as well as its appointed representative should provide those taxpayers that heavily rely on their tax representatives for assistance with an added level of protection.  In that sense, Fradco, Inc., together with the other recent legislative developments related to Michigan tax administration, is a big win for Michigan taxpayers.
 
 
  • Michigan does not require a seller to separately state the sales tax paid on an invoice and a consumer might not have access to the seller’s records necessary to prove that the seller paid sales tax on a purchase.  Thus, the decision in Andrie Inc. is an unfortunate result because, as the dissent pointed out, it creates a risk of double taxation.
  [1] Note that this document identifies the most recent Michigan legislative developments.  Please see prior BDO State and Local Tax Alerts for details on earlier legislative developments: Michigan Corporate Income Tax: New Law Allows a Taxpayer to Elect to Include Non-Unitary, Controlled Entities in a Combined Group, dated January 2014, and Michigan Corporate Income Tax: Passage of Bills Result in Exemption of DISCs, Modification of Sales Factor Eliminations, and Various Other “Clean-Up” Items, dated March 2014.  These documents may be accessed at www.bdo.com/insights/tax/state-and-local-tax/michigan-corporate-income-tax-new-law-allows-a-tax and www.bdo.com/insights/tax/state-and-local-tax/mi-passage-of-bills-result-in-exemption-of-discs. [2] Yaskawa America, Inc. v. Department of Treasury, Mich. Court of Claims, No. 11-77-MT, (Dec. 19, 2014).

Expatriate Tax Newsletter - March 2015

Sun, 03/01/2015 - 12:00am
BDO’s Expatriate Newsletter covers timely tax-related updates and regulations from countries around the globe. The March 2015 issue highlights developments in Sweden, Italy, Germany, and more – with a special feature on employee secondments in India.
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BDO Knows: ASC 740 - February 2015

Wed, 02/25/2015 - 12:00am
Accounting Alert: FASB Issues Exposure Draft on Tax Recognition for Intra-entity Asset Transfers and Balance Sheet Classification for Deferred Tax Items

 

Summary The FASB (or “Board”) issued on January 22, 2015 an Exposure Draft (ED) to solicit public comments on two proposed changes to ASC 740, Income Taxes to (1) remove the intra-entity asset transfer exception, and (2) remove the “current” classification of deferred taxes. The Board also decided on a transition method, transition disclosure, and an effective date. The Board is seeking comments on the ED by May 29, 2015.
  Elimination of the intra-entity asset transfer exception (par. 740-10-25-3(e)) (F/K/A “par. 9(e)” in FAS 109) Currently, this exception prohibits immediate recognition of the income tax effects from intra-entity transfers of assets. That is, the tax expense of the entity transferring or selling an asset is deferred on the balance sheet and amortized to income tax expense over the remaining recovery period of the asset and the tax basis step-up to the entity receiving or buying the asset is not recognized (i.e., the tax basis step-up would be tracked off-balance sheet). The Board is proposing to eliminate this exception.
  Elimination of “current” classification of deferred taxes (pars. 740-10-45-4 through 45-1 This proposal would only affect entities which present a classified statement of financial position. Deferred income taxes are currently presented in a classified balance sheet as “current” and “noncurrent” based on the classification of the underlying asset or liability for which a deferred tax is recognized. Deferred tax assets (“DTAs”) for income tax attribute carryforwards (for example, net operating losses (“NOLs”), income tax credits and the Alternative Minimum Tax credit) are classified based on their expected reversal pattern (i.e., their expected tax return utilization period). The Board is proposing to eliminate “current” classification and require “noncurrent” classification for all balance sheet deferred tax items. If this proposed change is finalized, the requirement to allocate a valuation allowance between current and noncurrent assets would no longer be necessary, since all deferred tax assets and liabilities would be classified as “noncurrent.”
  Transition Method The Board is proposing a modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings for the first proposal (the elimination of the intra-entity asset transfer exception), and a prospective transition period for the second proposal (the elimination of “current” classification).  
  Transition disclosure With respect to the first proposal, all entities will be required to disclose (1) the nature and reason for the change in accounting principle, (2) the cumulative effect to be recognized in the adoption year through an adjustment to opening retained earnings (for deferred tax charges existing as of the adoption date), (3) the effect on the year of adoption’s results (i.e., tax expense with the intra-entity transfer exception vs. tax expense without the intra-entity transfer exception) and any affected per-share amounts for the current year. Public entities must provide the disclosures in the annual period in which they adopt the proposal and in the interim periods within that annual period. Private entities must provide the disclosures in the annual period in which they adopt the proposal.    

With respect to the second proposal, all entities would be required to disclose (1) the nature of and reason for the change in accounting principle, and (2) that prospective adoption of “noncurrent” classification results in a lack of comparability with prior periods. This requirement is met by including a statement that prior periods were not restated to remove “current” classification of deferred taxes.  Public entities must provide the disclosures in the annual period of adoption and in the first interim period within that year. Private entities must provide the disclosures in the annual period of adoption.    
  Effective Date Public entities’ effective date is the annual and interim periods, beginning after December 15, 2016. Private entities will have an additional year to adopt the proposals with respect to annual reports (i.e., annual periods beginning after December 15, 2017) and another year after adoption to take the proposals into account for interim reports (i.e., interim periods beginning after December 15, 2018). Private entities will be allowed to early-adopt the proposals (same period applicable to public entities). However, public entities are not allowed early adoption.
  Additional Background The key argument for proposing to remove the exception for intra-entity transfer of assets is the purported complexity when intangible assets are transferred or sold in intra-entity transactions. For example, intra-entity transfer of indefinite-lived intangible assets and goodwill may trigger a net tax effect to be deferred on the balance sheet and amortized into income tax expense over the remaining amortization period (if any) or economic useful life. When the intangible asset or goodwill is not amortized for book or tax, the deferred tax charge is either suspended indefinitely or until the asset is impaired or disposed of. Another question in practice is whether the release of a valuation allowance occurring in conjunction with intra-entity transfers should also be suspended. Further, there is an argument that the recognition of the income tax effects from intra-entity asset transfers in the period in which the transfer occurs is a better reflection of the economic consequences compared to current accounting.         
 
The Board believes that recognition of current income tax paid or payable would better enable users to compare current tax expense and the effective tax rate to cash paid for income taxes. However, the ED acknowledges that the elimination of the recognition exception for intra-entity transfers of assets might (a) necessitate making changes in processes and systems to track additional temporary differences and (b) introduce greater volatility in earnings. The Board nevertheless believes that removing the exception is more beneficial than providing incremental clarifying guidance.   
 
The reason for proposing “noncurrent” classification of all deferred taxes is to simplify the presentation of deferred taxes and thus reduce complexity. The Board noted the classification requirement does not provide useful information because it “generally does not reflect when a temporary difference will reverse and become a taxable or deductible item.”  Therefore, “current” classification of deferred taxes is not always an accurate estimate of deferred tax balances expected to reverse within the next accounting period. Additionally, some preparers question the usefulness of the “pro rata” allocation of valuation allowance between current and noncurrent gross DTAs when only some (but not all) deferred tax balances require a valuation allowance (e.g., a capital loss carryforward or a particular state or foreign country net operating loss carryforward).
BDO Comments BDO supports initiatives to reduce or eliminate unnecessary complexity from current U.S. GAAP. However, we question whether other areas in Topic 740 might warrant relief for a wider population of entities - for example, addressing common practice issues associated with valuation allowances and uncertain tax positions (“FIN 48 liabilities”).
 
Stakeholders are encouraged to submit comment letters by the May 29, 2015 deadline.      
 

BDO World Wide Tax News - February 2015

Wed, 02/25/2015 - 12:00am
The latest issue of BDO World Wide Tax News highlights recent international tax issue, such as OECD guidance on the implementation aspects of Country-by-Country (CbC) Reporting for tax, tax developments in the UK, and more.
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Compensation & Benefits Alert - February 2015

Wed, 02/25/2015 - 12:00am
Transition Relief Allows Small Employers to Continue Premium Reimbursement Arrangements through June 2015 Summary IRS Notice 2015-17 allows certain “small” employers* that fail to comply with Affordable Care Act (“ACA”) market reforms because of reimbursement of individual health insurance premiums or Medicare Part B or Part D premiums to avoid the $100 per-day, per-employee penalty under section 4980D.  The protection under the transition rules applies to calendar year 2014 and the first six months of 2015.

The Notice also makes it clear that S corporation 2-percent shareholder-employee healthcare arrangements will not cause the $100 per-day, per-employee penalty to be imposed for failing to comply with ACA market reforms for 2014 or 2015 pending additional guidance.  Taxpayers may continue to rely on IRS Notice 2008-1 with regard to the tax treatment of 2-percent shareholder-employee healthcare arrangements.

Form 8928, Return of Certain Excise Taxes under Chapter 43 of the Internal Revenue Code, is not required for employers eligible for this transitional relief.
  Discussion Notice 2015-17 provides substantial relief to employers that are not applicable large employers (“ALEs”) and that are providing a premium reimbursement arrangement or stand-alone health reimbursement arrangement (“HRA”) as described in Notice 2013-54.

Four previous issuances on the topic addressed by Notice 2015-17 warned that stand- alone HRAs and other employer premium reimbursement arrangements would be considered an employer-provided healthcare arrangement that failed the ACA market reforms regarding annual plan benefit limitations.  Such a failure would expose the employer to an excise tax under section 4978D of $100 per day per employee.

IRS Notice 2015-17 confirms that the excise tax applies to employer payment plans as described in the earlier guidance, but waives the penalty for 2014 and for January 1 through June 30, 2015, for employers that are not ALEs.  The waiver applies to the reimbursement of individual health policy premiums and Medicare Part B or Part D premiums.  Some small employers that want to take advantage of this relief may need to amend their employee Forms W-2 and related employment tax filings for 2014.

The relief does not extend to stand-alone HRAs or other arrangements to reimburse employees for medical expenses other than insurance premiums.

The Notice also provides transitional relief for S corporation 2-percent shareholder-employee healthcare arrangements that fail the market reforms and thus are subject to the excise tax under section 4980D.  Such arrangements are provided relief from the excise tax through December 31, 2015.  Taxpayers may continue to rely on Notice 2008-1 with regard to the tax treatment of 2-percent shareholder-employee healthcare arrangements until the Service issues further guidance, and will not be assessed the excise tax on payments for healthcare coverage for 2-percent shareholder-employees.

Finally, Notice 2015-17 makes it clear that a reimbursement of healthcare premiums on an after-tax basis does not cure any violation of the ACA market reforms.  However, there will be no penalty for employers that provide taxable compensation to employees to assist with payments for health insurance as long as the arrangement does not stipulate that the employee must purchase health insurance.

* A “small” employer is one that is not an applicable large employer under the ACA provisions and therefore averages less than 50 full-time equivalent employees during the required measurement period`
 

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