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ESOP Alert - February 2015

Fri, 02/20/2015 - 12:00am
Pushdown Accounting in ESOP Transactions As more fully described in BDO’s Flash Report, the FASB recently issued a standard that permits, but does not require, an acquired entity to apply pushdown accounting in its separate financial statements when an acquirer obtains control of the acquired entity (the “acquiree”).

The new pushdown standard does not change the guidance in U.S. GAAP that determines when a change-in-control occurs. As such, an acquiree must first conclude whether the acquirer has in fact obtained a “controlling financial interest” under Topic 810.[1] For example, an operating company (“the Employer”) would have to evaluate whether an ESOP has obtained control of the Employer as a result of a leveraged ESOP transaction. The Employer would only have the option to apply pushdown accounting in situations in which an ESOP obtains control. The assessment of control is based on specific facts and circumstances, including whether the Employer is considered a variable interest entity (VIE) or voting interest entity (VOE) under Topic 810. Other relevant factors include how the Employer’s governing documents are designed (e.g., board composition) and the rights of its stakeholders (e.g., primary lenders).

As such, if a leveraged ESOP transaction did not result in a change of control prior to the new pushdown accounting standard, it would not represent a change of control afterward either.

However, if an Employer is permitted to apply pushdown accounting and does so, it must prepare its financial statements using the acquirer’s new basis of accounting under Topic 805.[2] Goodwill is recognized in pushdown accounting; however bargain purchase gains are not. Instead, a bargain purchase gain recognized by an acquirer would be recorded as an adjustment to additional paid-in-capital of the acquiree. Additionally, any acquisition-related liability incurred by the acquirer (e.g., debt incurred by the ESOP) would only be recognized if it represents an obligation of the acquiree.

The Employer is required to record acquisition-related debt under ASC 718-40 even if the debt is incurred by the ESOP because it is the ultimate source of the cash to repay the debt. Since the acquisition method generally reflects the net assets at fair value, the fair value of debt reported by the Employer may be substantially different than its carrying amount outside of pushdown accounting. For example, in the absence of pushdown accounting, a leveraged ESOP may result in a negative amount of equity (debit equity, credit debt). The fair value of the debt recorded under pushdown accounting may be significantly less.

As the new pushdown standard acknowledges, deciding whether to apply pushdown accounting requires judgment based on the specific circumstances.[3] Reporting entities should consider the needs of their financial statement users in making that decision. For questions or to discuss matters related to this article, please contact Kim Blaugher or Adam Brown.

  [1] Consolidation [2] Business Combinations. Using the acquirer’s new basis of accounting applies even if the acquirer was not required to apply Topic 805, for example if the acquirer reports all of its investments at fair value under U.S. GAAP. [3] See BC16 in ASU No. 2014-17.

International Tax Alert - February 2015

Thu, 02/19/2015 - 12:00am
Current U.S. Taxation of Foreign Earnings: Three Alternative Proposals Introduced   Affecting All United States multinational corporations with foreign operations that have unrepatriated and previously untaxed foreign earnings.
  Background The Administration and certain House and Senate members have recently introduced three different proposals with respect to United States taxation of unremitted foreign earnings of United States multinational companies.

This alert highlights the repatriation provisions with respect to each of the proposals.
  Administration Proposal: 14% back/19% forward President Obama’s proposed fiscal year 2016 budget includes a provision to impose a 14% one-time tax on untaxed, unremitted foreign income. This proposal is intended to work together with another provision in the proposed budget that would impose a 19% minimum tax on future foreign subsidiary earnings, thereby eliminating the deferral previously available with respect to foreign income.

The foreign income subject to this proposed tax on unremitted earnings would only include income that has not already been subject to tax in the United States, i.e., previously taxed income (“PTI”) would be excluded. A foreign tax credit with respect to foreign taxes associated with this income would be available to offset the tax imposed. The tax available for credit would be “haircut” using the following formula: foreign income taxes associated with the income would be multiplied by a ratio of the 14% one-time tax rate to the maximum United States corporate tax rate for 2015. After paying this one-time tax, the associated foreign earnings could be brought back to the United
States without additional United States tax. In addition, the 19% minimum tax would be imposed on current foreign earnings (whether or not repatriated) and future repatriation of such foreign earnings would not suffer additional United States taxation.

The proposed 14% one-time tax would be effective as of the date of enactment and would apply to earnings accumulated for taxable years beginning before January 1, 2016. This tax would be payable ratably over five years.

The proposal with respect to the 19% minimum tax would be effective for taxable years beginning after December 31, 2015.
  Boxer-Paul Proposal: 6.5% tax rate on repatriated income On January 29, 2015, Sens. Barbara Boxer (D-Calif.) and Rand Paul (R-Ky.) released details of their proposed legislation, Invest in Transportation Act of 2015, which they will introduce in the near future. Unlike the Administration’s Budget Proposal, this proposal would be voluntary and require an actual repatriation of the foreign earnings. The repatriated earnings would be taxed at a 6.5% rate and would apply to pre-2016 foreign earnings. The lower rate would only apply to repatriations that exceed a company’s average repatriation in recent years. Companies would have to complete their distributions over a five-year period in order to obtain this rate. A portion of the funds would need to be used for increasing wages and hiring, research and development, capital improvements, and acquisitions, but not for executive compensation. Using the repatriated funds for increased dividends and stock buybacks would be limited for three years. Also, any companies that have taken part in this program would need to repay the tax incentive, with interest, if they inverted within ten years after participating in the program.
  Delaney-Hanna Proposal On January 28, 2015, Rep. John Delaney (D-Md.) announced that he would introduce a bipartisan bill, The Infrastructure 2.0 Act, in order to help fund the Highway Trust Fund. Rep. Richard Hanna (R-N.Y.) is a co-sponsor of the bill. Similar to the Administration’s proposal, this is a mandatory, one-time deemed “repatriation” of a company’s foreign earnings. The unrepatriated earnings would be taxed at a rate of 8.75%, replacing the deferral option and the current rate of 35%. In addition, the bill will include an 18-month deadline for implementing international tax reform. If no reform is implemented, the bill will provide for a fallback international tax package which, among other things, will end deferral with respect to foreign earnings and decrease taxes for companies paying fair rates abroad but increase taxes for companies in tax havens. For example, as it relates to what is described as “active market foreign income,” a company would pay a minimum tax of 12.25% to the United States on income that is not currently subject to foreign tax and a 2% tax to the United States if the income is subject to a rate of 25%. A sliding tax-rate scale would be used for income subject to foreign taxes at rates between zero and 25%.
  Observation While there has been continued opposition in Washington to any sort of foreign earnings repatriation relief, the fact that three proposals have been recently put forth indicates that perhaps there may be now broader support for such relief than at any time in the recent past.
  How BDO Can Help BDO’s international tax practice has the knowledge and expertise to assist in reviewing your structure, modeling the various proposals and their potential impact to your organization, and provide planning solutions to optimize their effect on your company’s income tax expense as well as assessing the timing of the expense recognition pursuant to ASC 740-30-25-19 (APB 23), Exceptions to Comprehensive Recognition of Deferred Income Taxes. We will continue to track these proposals and keep you updated on any legislative changes and the impact to United States–based multinational companies.

International Tax Newsletter - February 2015

Wed, 02/18/2015 - 12:00am
China Tax Newsletter
Consumption Tax Levied on Batteries and Coatings Starting from 1 February 2015, batteries and coatings are subject to consumption tax at the rate of 4% on production, consigned processing, and importation of batteries and coatings.
  Extension of the Pre-tax Deduction Policy on Loan Loss Reserve for Financial Enterprises Pre-tax deduction is allowed for loss reserve accrued by financial enterprises for the three categories of loan assets at the rate of 1%. The validity of this policy will be extended to 31 January 2018.
  Export Enterprises Are to Be Managed by Classification Starting from 1 March 2015, export enterprises will be classified into four categories according to their tax payment credit ratings, compliance to the regulations on export refund (exemption), etc. The tax authorities will apply different export management measures on export enterprises of different classifications.
  New Double Taxation Agreement (DTA) Between China and Swiss Takes Effect The new DTA signed between China and Swiss on 25 September 2013 is effective as of 15 November 2014 and is applicable to income derived by residents of the two countries on and after 1 January 2015.

Tips from BDO China
Compared to the old DTA, the new DTA features the following changes:

(1) Permanent establishment (PE)
A building site, or construction, assembly, or installation project or supervisory activities in connection therewith, constitute a permanent establishment only if they last more than twelve months instead of six months; for furnishing of services (including consultancy services) by an enterprise through employees, it constitutes a PE if the activities last “for a period or periods aggregating more than 183 days within any twelve-month period” instead of “for a period or periods aggregating more than six months within any twelve-month period”.

(2) Dividends
The taxation limit is 10% of the gross amount of the dividends pursuant to the old DTA; in the new DTA, if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends, the taxation limit is 5%, and it is 10% in all other cases.

(3) Royalties
Pursuant to the old DTA, the taxation limit is 10% of the gross amount of the royalties, and it is changed to 9% in the new DTA.

(4) Capital gains
With regard to capital gains from alienation of shares, pursuant to the old DTA, they are taxable in the State of origin of the gains only when the value of the shares derives mostly from the immovable property in the State of origin; in the new DTA, the circumstance is refined: more than 50% of the value of the shares derives from the immovable property in the State of origin. Moreover, a new circumstance where gains are taxable in the State of origin is added to the new DTA: if the recipient of the gains, at any time during the twelve-month period preceding such alienation, had a participation, directly or indirectly, of at least 25% in the capital of that company.
  New DTA Between China and France Takes Effect The new DTA signed between China and France on 26 November 2013 is effective as of 28 December 2014 and is applicable to income derived by residents of the two countries on and after 1 January 2015.

Tips from BDO China
Compare to the old DTA, the new DTA features the following changes:

(1) PE
A building site, or construction, assembly, or installation project or supervisory activities in connection therewith, constitute a permanent establishment only if they last more than twelve months instead of six months; for furnishing of services (including consultancy services) by an enterprise through employees, it constitutes a PE if the activities last “for a period or periods aggregating more than 183 days within any twelve-month period” instead of “for a period or periods aggregating more than six months within any twelve-month period”.

(2) Dividends
The taxation limit is 10% of the gross amount of the dividends pursuant to the old DTA; in the new DTA, if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends, the taxation limit is 5%, and it is 10% in all other cases.

(3) Capital gains
The new DTA further specifies the circumstances where the capital gains are taxable in the State of origin, including: alienation of companies whose main properties are immovable properties within 36 months preceding the transfer; for alienation of a company other than the preceding, the transferor shall have a participation, directly or indirectly, of at least 25% in the capital of that company within 12 months preceding the transfer.

Gains from the alienation of any property, other than that referred to in this article, “shall be taxable in the State where the transferor is a resident” instead of “can be taxable in the State of origin”.
  Further Regulations on Enterprise Income Tax on Indirect Transfer of the Property of Chinese Resident Enterprises by Non-resident Enterprises Guo Shui Han [2009] No. 698 (hereinafter referred to as “Circular 698”) is a previously issued circular focusing on enterprise income tax on indirect equity transfer of Chinese resident enterprises by non-resident enterprises. Recently, the State Administration of Taxation (SAT) issued the Announcement of the State Administration of Taxation [2015] No. 7 (hereinafter referred to as “Announcement 7”), in which further regulations have been put forward regarding the indirect transfer of equity by non-resident enterprises. Compared to Circular 698, Announcement 7 features the following changes:

(1) More explicit criteria for determining transfers with “reasonable business purposes”;

(2) Explicit conditions for being regarded as transfers with reasonable business purposes;

(3) Explicit conditions for not being regarded as transfers with reasonable business purposes;

(4) Explicit circumstances under which recharacterization of an equity transfer is not required (i.e. there is no need to pay enterprise income tax according to this circular);

(5) Revised regulations on the collection and administration procedures;

(6) More explicit regulations on the legal liability of the transferor and the transferee.

Tips from BDO China
(1) Where both the transferor and the transferee engaged in an indirect equity transfer are non-resident enterprises and the capital gains are subject to the enterprise income tax pursuant to related regulations, the party directly paying the proceeds shall act as the withholding agent for declaring and paying the enterprise income tax.

(2) Parties involved in an indirect transfer of Chinese taxable property can choose to voluntarily report the transaction and submit related documents to their competent tax authorities. However, if the transaction is taxable in terms of Chinese enterprise income tax, the legal liabilities will be different subject to whether related documents have been submitted to the tax authorities:

For the equity transferor who has overdue tax payment, if the transaction has not been reported and related documents have not been submitted to the tax authorities, the late payment interest will be levied based on the RMB loan benchmark interest rate for the tax payment period plus five percentage points; if the transferor has reported the transaction and submitted related documents to the competent tax authority, the late payment interest will be levied based on the RMB loan benchmark interest rate.

If the withholding agent has not reported and submitted related documents to the tax authorities, a penalty ranging from 50% to three times of the tax amount not withheld will be levied on the withholding agent; if the transaction has been reported and related documents have been submitted, the liability of the withholding agent may be mitigated or exempted.
 

Accounting Methods Alert - February 2015

Wed, 02/18/2015 - 12:00am
IRS Provides Welcome Relief For Small Taxpayers To Comply With Tangible Property (Repair) Regulations The Treasury Department and Internal Revenue Service released much-requested guidance, simplifying the procedures for small taxpayers to comply with the final tangible property regulations (T.D. 9636) and disposition regulations (T.D. 9689). The new procedures allow small businesses to change a method of accounting under the final tangible property and disposition regulations on a prospective basis for the first taxable year beginning on or after January 1, 2014. However, no audit protection is provided for taxable years beginning before January 1, 2014.

The Service is also waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014. In addition, no formal election is required to be filed with the tax return to request a change in accounting method under this guidance.

Rev. Proc. 2015-20 is effective for taxable years beginning on or after January 1, 2014.

Simplification for Small Business Taxpayers
Rev. Proc. 2015-20 modifies Rev. Proc. 2015-14 to permit a “small business taxpayer” to make certain tangible property changes in its method of accounting and disposition changes in its method of accounting with an adjustment under section 481(a) that takes into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014. By choosing this simplified section 481(a) adjustment procedure, small business taxpayers are able to make these changes in their method of accounting for the 2014 taxable year with a zero section 481(a) adjustment, which effectively amounts to a cut-off basis.[1] The simplified section 481(a) adjustment option is available only to changes under the final tangible regulations (section 10.11(3)(a) of Rev. Proc. 2015-14), certain permissible methods of accounting for depreciation of MACRS property in mass accounts (section 6.37(3)(a)(iv), (a)(v), (a)(vii), and (a)(viii) of Rev. Proc. 2015-14), disposition of a building or structural component (section 6.38 of Rev. Proc. 2015-14), and disposition of tangible depreciable assets (section 6.39 of Rev. Proc. 2015-14).

The revenue procedure applies to a taxpayer with one or more separate and distinct trade(s) or business(es) that has:
 
  1. Total assets of less than $10 million as of the first day of the taxable year; or
  2. Average annual gross receipts of $10 million or less for the prior three taxable years, as determined under Treas. Reg. § 1.263(a)-3(h)(3) (substituting “separate and distinct trade or business” for “taxpayer”).
Rev. Proc. 2015-20 applies the “total asset” test to each taxpayer, which may include multiple trades or businesses.  In contrast, the “gross receipts” test is applied to each separate and distinct trade or business of the taxpayer. Therefore, Rev. Proc. 2015-20 applies to a taxpayer that meets the “total asset” test (even if the gross receipts test is not met) as well as to a separate and distinct trade or business if that trade or business meets the “gross receipts” test (even if the total assets test is not met).[2]  Rev. Proc. 2015-20 does not require aggregation of taxpayers or trades or businesses under the attribution rules under section 267(b) for purposes of either test.

Rev. Proc. 2015-20 does not define a separate and distinct trade or business.  Whether trades or businesses are separate and distinct requires a factual determination.  Treas. Reg. § 1.446-1(d) provides that a separate trade or business must keep a complete and separable set of books and records.  Courts have also considered the following additional factors regarding whether a taxpayer is engaged in separate trades or businesses: (1) whether common management exists; (2) whether the taxpayer holds out each line as a separate business; (3) whether separate bank accounts are used; (4) whether the businesses share employees; and (5) the nature of each business.  If, by reason of maintaining different methods of accounting, there is a creation or shifting of profits or losses between the trades or businesses of the taxpayer (for example, through inventory adjustments, sales, purchases, or expenses) so that income of the taxpayer is not clearly reflected, the trades or businesses of the taxpayer will not be considered to be separate and distinct.

Furthermore, Rev. Proc. 2015-20 provides that a small business taxpayer choosing the simplified option for a tangible property method change under section 10.11(3)(a) of Rev. Proc. 2015-14 must also calculate the section 481(a) adjustment that takes into account only dispositions in taxable years beginning on or after January 1, 2014, for any method change made under sections 6.37, 6.38, or 6.39 of Rev. Proc. 2015-14, and vice versa.  For example, a small business taxpayer that chooses to make a repair method change (automatic change #184) with a simplified section 481(a) adjustment may only make a disposition of a building method change (automatic change #205) using a simplified section 481(a) adjustment.

Waiver of Requirement to File Form 3115 for 2014 Taxable Year Only
In addition to the simplified section 481(a) adjustment procedure, Rev. Proc. 2015-20 provides further simplification with respect to the requirement to file a Form 3115, Application for Change in Accounting Method, for the method changes specifically enumerated above.  While some small business taxpayers may continue to choose to file a Form 3115 in order to retain a clear record of a change in method of accounting or to make permissible concurrent automatic changes on the same form, the Service recognizes that other small business taxpayers may prefer the administrative convenience of being able to comply with the final tangible property and disposition regulations in their first taxable year that begins on or after January 1, 2014, solely through the filing of a federal tax return.  Accordingly, small business taxpayers that choose to prospectively apply the tangible property regulations to amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014, have the option of making the tangible property and disposition changes in method of accounting on the federal tax return without including a separate Form 3115 or separate statement for the 2014 taxable year of change only.

Use of Relief Provisions Renders Audit Protection and Late Partial Disposition Election Unavailable
Under Rev. Proc. 2015-20, a small business taxpayer choosing to calculate a section 481(a) adjustment that takes into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014, does not receive audit protection for amounts paid or incurred in taxable years beginning prior to January 1, 2014.

Because taxable years beginning before January 1, 2014, are not taken into account by a small business taxpayer choosing the simplified option, audit protection applies only to amounts that are paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014.

Furthermore, a small taxpayer that chooses the simplified section 481(a) adjustment option of Rev. Proc. 2015-20 to take into account only dispositions in 2014 and succeeding taxable years is not permitted to make a late partial disposition election accounting method change under Rev. Proc. 2015-14, section 6.33.  The Service’s rationale is that the late partial disposition election would permit partial dispositions for taxable years beginning before January 1, 2014, and such an election would therefore be inconsistent with the prospective nature of the simplified section 481(a) adjustment option.

Transition Rule for Tax Returns Already Filed
A taxpayer that wants to use Rev. Proc. 2015-20 for its first taxable year beginning on or after January 1, 2014, but had previously filed its federal tax return for that taxable year with a Form 3115 to change to a method of accounting specified in Rev. Proc. 2015-20, may withdraw its Form 3115 by filing an amended federal tax return.  The amended federal tax return must be filed on or before the due date of the taxpayer’s federal tax return for its first taxable year beginning on or after January 1, 2014, including extensions.

Comments Sought on De Minimis Rule
The Service requested comments by April 21, 2015, on increasing the de minimis safe harbor limit provided in Treas. Reg. § 1.263(a)-1(f)(1)(ii)(D) to an amount greater than $500 for a taxpayer without an applicable financial statement.

Next Steps
In light of this new guidance, taxpayers should determine if they qualify for these simplified filing procedures and then determine the appropriate course of action.  Provided below are suggested actions for taxpayers qualifying and not qualifying for these simplified procedures, followed by suggested actions for all taxpayers:

Taxpayers Meeting the Small Taxpayer Filing Requirements of Rev. Proc. 2015-20
 
  • Determine whether to file accounting method changes prospectively (no inclusion of a Form 3115) with a simplified section 481(a) adjustment or retroactively (Form 3115 required); and
  • Consider amending 2014 federal tax returns already filed with accounting method changes described herein and file the amended return under these simplified procedures.

Taxpayers Not Meeting the Small Taxpayer Filing Requirements of Rev. Proc. 2015-20
 
  • The guidance provided in Rev. Proc. 2015-20 will not affect actions necessary for compliance with the tangible property and disposition regulations for taxpayers that do not meet the small-taxpayer thresholds of this guidance.
  • Such taxpayers should continue to assess which accounting method changes should be made and proceed to implement necessary business process changes and accounting method changes.
All taxpayers should continue to do the following:
 
  • Continue to evaluate which elections (e.g., de minimis safe harbor, safe harbor for small taxpayers, election to follow book to capitalize repair and maintenance) should be made as they have not changed; and
  • Continue to assess what current and prospective business and process changes must be made to implement and maintain any accounting method changes elected to conform with the tangible property and disposition regulations.
  [1] A section 481(a) adjustment is required to be calculated as of the beginning of the taxable year of change.  Therefore, a small business taxpayer making these changes in method of accounting in a taxable year of change subsequent to the 2014 taxable year may be required to calculate a section 481(a) adjustment for amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014.
  [2] Section 4.02 of Rev. Proc. 2015-20 contains an inapplicability provision that could possibly be interpreted to require a small business taxpayer to meet both the total assets test and the gross receipts test in order to be eligible for the relief provisions of this revenue procedure.  Such an interpretation would prevent a business from utilizing these relief procedures if it meets one test but not both.  However, BDO believes this unfavorable interpretation is incorrect because it would run counter to the purpose of this revenue procedure as stated in section 1 of Rev. Proc. 2015-20 (where a small business taxpayer is defined as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three taxable years).

BDO Transfer Pricing Alert - February 2015

Wed, 02/18/2015 - 12:00am
OECD Guidance on Implementation of Country-By-Country Reporting
Summary On February 6, 2015, the Organization for Economic Cooperation and Development (“OECD”) issued guidance on the implementation aspects of country-by-country (“CBC”) reporting for tax. This implementation guidance follows from its report in September 2014 describing a three-tiered (master file, local file, and CBC report) approach to transfer pricing documentation as part of the OECD’s Base Erosion and Profit Shifting (“BEPS”) initiative. The OECD sees the publication of this item as the single most important achievement of the international tax transparency agenda to date.
  Affecting Groups where the ultimate parent of the multinational enterprise (“MNE”) is located in a country that participates in the BEPS project will be affected. Although the reporting threshold of €750 million will exclude approximately 85% to 90% of all MNE groups from the filing the reports, the requirement would still cover groups that control approximately 90% of global corporate revenue.
  Background The BEPS Action Plan provides for 15 actions covering coherence of corporate income taxation, realignment of taxation and relevant substance, and ensuring transparency while promoting increased certainty and predictability. The CBC reporting requirements are covered under Action 13, which addresses changes to the transfer pricing rules in relation to documentation.
  Details The key highlights are as follows:
 
  • Timing - The ‎first CBC Reports are required for fiscal years beginning on or after January 1, 2016.
  • Exemption for smaller international groups - There is to be an exemption for groups with total revenues of less than €750 million (approximately $850 million at the time of publication of the guidance), but the appropriateness of this threshold will be reviewed in 2020.
  • Other exemptions – No exemptions are provided. All industries will be included, as will investment funds and all “non-corporate” entities.
  • Consistency of data disclosed - The OECD emphasized the importance of utilizing the standard CBC reporting template.
  • Confidentiality - Information provided in the CBC reports will not be available to the public and will only be exchanged between tax authorities through existing mechanisms under double tax conventions (or as enabled through the OECD’s proposed multinational instrument). Countries participating in the project have agreed to be prepared to enforce legal protections of the confidentiality of the information contained in the CbC reports as currently covered under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a tax treaty, or a tax information exchange agreement.
  • Appropriate use – Jurisdictions are directed to use the CBC report to assess high-level transfer pricing risk but may also use it to assess other BEPS-related risks.
  • Filing mechanisms – CBC reports will be filed with the jurisdiction of the ultimate parent entity of a group within one year from the close of the fiscal year concerned. A requirement to file locally or to the next-tier parent entity may be imposed if the ultimate parent jurisdiction does not require CBC reporting or there is no adequate mechanism for the timely exchange of CBC reports (or there is a failure to do so in practice).
  • Government-to-government‎ exchange of information – There is to be an “implementation package” to facilitate effective exchange of information.
‎The primary purpose of CBC reporting is as a risk assessment tool for tax administrations. The OECD specifically recognizes in its release that the need for countries “for more effective dispute resolution may increase as a result of the enhanced risk assessment capability following the adoption and implementation of a CbC reporting requirement.”
  How BDO Can Help Businesses should begin to prepare for the nature and level of scrutiny by tax authorities that will inevitably arise from the implementation of CBC reporting. As part of these preparations, each MNE group should determine if it will need to file a report and if preparation of a draft CBC report would be worthwhile. While this publication relates primarily to the implementation of CBC reporting, the OECD recommends that the master file and the local file elements of documentation also be implemented. Please contact your BDO advisor for help in determining the steps your group should take in anticipation of CBC reporting and related documentation requirements.
 

BDO International Tax Webinar Series

Tue, 02/17/2015 - 12:00am
Throughout 2015, BDO will be hosting a series of webinars on international tax.  The webinars will be presented by BDO tax specialists from around the world and will cover a range of topics of relevance to businesses operating internationally. 

A full list of the scheduled webinars is contained below.  The webinars are free to attend, but numbers are limited so please sign up early to ensure a place.  

Upcoming Webinars
To register for a webinar, please click on the relevant link and follow the instructions.
 
  • Tuesday, February 24 – Value Chain Tax Planning – how has it been affected by recent developments — in particular the OECD’s project on Base Erosion and Profit Shifting as well as the proposed changes to the Swiss and Irish tax regimes. The session will be presented by members of our Value Chain Centre of Excellence in the UK, the US, Switzerland and Ireland - Register here!
  • Tuesday, June 2 – Transfer Pricing update – looking at the OECD’s work on intangibles and documentation as well as other transfer pricing news from around the world - Save the Date
  • Tuesday, August 25 – Compliance Traps – common problems in tax compliance encountered by groups expanding into new territories - Save the Date
  • Tuesday, November 24 – Base Erosion and Profit Shifting – an overview of the most recent releases from the OECD on their 15 point action plan - Save the Date

All webinars will last one hour and will start at 11:00 AM ET.
  From time to time we will run additional webinars on new developments in the world of international tax. Please keep a look out for these on our website. We look forward to welcoming you to our international tax webinar series.

Past Webinars
For those unable to attend, recordings of past webinars can be accessed here.
 

State and Local Tax Alert - February 2015

Mon, 02/09/2015 - 12:00am
Massachusetts Final Regulations Accompany Its Market-Based Sourcing Apportionment Law
Summary On January 2, 2015, the Massachusetts Department of Revenue (the “Department”) repealed and replaced section 63.38.1 of title 830 of the Code of Massachusetts Regulations (the “Market-Based Sourcing Regulation”) to supplement the market-based sales sourcing apportionment law applied to receipts from sales of other than tangible personal property under section 38(f) of chapter 63 of the General Laws of the Commonwealth of Massachusetts (the “Market-Based Sourcing Law”), which was enacted July 24, 2013.[1] The Market-Based Sourcing Regulation is very lengthy and provides detailed rules pertaining to assigning a receipt from the sale of other than tangible personal property, including a sale of an in-person service, a transportation/delivery service, and a professional service, as well as licensing, leasing, and selling of intangible property, among others. The receipts-assignment rules under the Market-Based Sourcing Regulation are effective for taxable years beginning on or after January 1, 2014, which is the same as effective date of the Market-Based Sourcing Law.[2]
  Details Background
The Market-Based Sourcing Law set the following framework for assigning receipts from sales of other than tangible personal property receipts to Massachusetts and adopted the concept of reasonable approximation where the state or states to which sales should be assigned cannot be determined:
  • Sale, rental, lease, or license of real property, to the extent the property is located in the state;
  • Rental, lease, or license of tangible personal property, to the extent the property is located in the state;
  • Sale of a service, if and to the extent the service is “delivered” to a location in the state;
  • Lease or license of intangible property, to the extent the intangible property is used in the state; and
  • Sale of intangible property, excluded from the numerator and the denominator of the sales factor.[3]
For taxable years beginning before January 1, 2014, the foregoing receipts are assigned to Massachusetts if the greater proportion of the income-producing activity was performed in Massachusetts, based upon costs of performance.[4] Before and after the enactment of the Market-Based Sourcing Law, receipts from sales of tangible personal property are sourced based upon destination.[5]

Assignment Rules Under the Regulation
The charts on the following pages summarize many rules for assigning receipts to Massachusetts under the Market-Based Sourcing Regulation. The assignment provisions related to the sale, lease, rental, lease, or license of real and tangible personal property, corporate partners, and section 38 manufacturers[6] remain largely unchanged and have thus been omitted.[7]

In applying the rules under the Market-Based Sourcing Regulation, a taxpayer is required to use objective criteria, consider all available information, use the methodology that most accurately assigns sales, and make a reasonable effort to apply the rule before it may approximate the amount of sales assigned to a state.[8] Lastly, the Market-Based Sourcing Regulation makes extensive use of examples for purposes of demonstrating the application of the following rules and generally prohibits modifying an assignment methodology once it has been applied on an originally filed return.[9]

Other Noteworthy Aspects of the Regulation
Throwout Rule. Under the Market-Based Sourcing Regulation (as well as under the Market-Based Sourcing Law), where a taxpayer cannot ascertain the state to which a sale of other than tangible personal property should be assigned, including under the reasonable approximation rules, the taxpayer must exclude the sale from the numerator and denominator of the sales factor – a throwout rule.[10] Also under the Market-Based Sourcing Regulation (as well as under the Market-Based Sourcing Law), a throwout rule applies to sales of other than tangible personal property where the taxpayer is not taxable in a state to which the sale is assigned.[11] For purposes of determining whether a taxpayer that is a member of a combined reporting group is taxable in a state, under the Market-Based Sourcing Regulation (as well as under the Market-Based Sourcing Law), if any member of the combined group is taxable in a state to which the sale is assigned, then every member of the combined group is deemed to be taxable in that state (i.e., a Finnigan approach).[12]

Reasonable Approximation and Unassigned Sales. Many of the assignment provisions in the Market-Based Sourcing Regulation permit a taxpayer to reasonably approximate to which state a receipt should be assigned where the state of assignment cannot be determined under the rules provided. Where permitted, and if provided, the taxpayer is required to follow the reasonable approximation rule(s) applicable to the receipt at issue.[13]However, in the case of an unassigned receipt from a sale of a service, the taxpayer is required to assign the sale in the same proportion as assigned sales where the taxpayer is able to ascertain the state of assignment of a substantial portion of its sales of substantially similar services and the taxpayer reasonably believes the geographic distribution of the unassigned sale tracks the geographic distribution of the assigned sales.[14] The same rule applies to a license or sale of intangible property where the substance of the transaction resembles a sale of goods or services.[15]

Changes in Methodology. Under the Market-Based Sourcing Regulation, once a taxpayer files an original return for a taxable year in which it properly assigns the receipts from a sale, neither the taxpayer nor the Department may modify the assignment methodology for that taxable year, except to correct for factual or calculation errors.[16] With respect to prospectively filed returns, a taxpayer may only change an assignment methodology to improve the accuracy of reporting.[17] In the event a taxpayer opts to change an assignment methodology on a prospectively filed return, the taxpayer must disclose the change and retain documents that explain the nature and extent of the change and provide them to the Department upon request.[18] If the taxpayer fails to disclose the change or retain or provide the appropriate records, the Department may substitute an assignment methodology it determines is appropriate.[19] Similar to taxpayers, the Department may also modify an assignment methodology on a prospectively filed return where it determines the change is appropriate to reflect a more accurate assignment of the taxpayer’s sales and the methodology can be reasonably adopted by the taxpayer.[20]

Department Review and Adjustment. The Market-Based Sourcing Regulation provides the Department with the authority to: (1) adjust a sale assignment in accordance with the rules under the Market-Based Sourcing Regulation where the taxpayer failed to assign a sale as required or retain or provide the appropriate records, or where the Department concludes that the taxpayer’s customer’s billing address was selected for tax avoidance purposes;[21] (2) substitute a method of approximation or exclude sales from the numerator or denominator of the sales factor where the Department determines that the method of approximation employed by the taxpayer is unreasonable;[22] (3) require a taxpayer to use a reasonable method of approximation in a consistent manner where it has not been applied in a consistent manner with respect to similar transactions or on a year-to-year basis;[23] and (4) apply a method of approximation to sales a taxpayer excluded from the numerator and denominator of the sales factor on the basis that such sales cannot be reasonably approximated.[24]

Industry Specific Provisions. With respect to motor carriers, airlines, and courier and package delivery services, the sales factor is now determined pursuant to the Market-Based Sourcing Regulation as applied to transportation and delivery services.[25] Other industry-specific apportionment guidance continues to be addressed through the applicable regulatory provisions, such as section 63.38.8 of title 830 of the Code of Massachusetts Regulations (“CMR”) (Apportionment of Income of Pipeline Companies), section 63.38.10 of title 830 of the CMR (Apportionment of Income of Electric Industry), and section 63.38.11 of title 830 of the CMR (Apportionment of Income of Telecommunications Industry – except to the extent the provisions under section 63.38.1 of title 830 of the CMR pertaining to the sale or license of digital goods and services apply).[26]

Other Regulations Amended. While not specifically addressed herein, the Department also amended section 63.38.2 of title 830 of the CMR (Apportionment of Income of Airline Corporations), section 63.38.3 of title 830 of the CMR (Apportionment of Income of Motor Carriers), section 63.38.4 of title 830 of the CMR (Apportionment of Income of Courier and Package Delivery Services), and section 63.39.1 of title 830 of the CMR (Corporate Nexus), which reflect updates to be consistent with the Market-Based Sourcing Regulation.
BDO Insights
  • With the enactment of the Market-Based Sourcing Law in 2013, Massachusetts switched from a costs of performance/income-producing activity sales assignment methodology to a market-based sourcing methodology as it pertains to receipts from sales of other than tangible personal property and became one of approximately 15 other states that presently assign receipts from the sale of other than tangible personal property using a market-based approach. The general motivation behind such a switch is to shift at least a portion of the tax burden to out-of-state corporations that do not perform the service in-state. Adoption of a market-based approach to sourcing sales of other than tangible personal property has the added benefit of making in-state investment and hiring decisions more income tax neutral because the sales factor is no longer affected by costs incurred as it is under a costs of performance/income-producing activity methodology. More states are likely to switch to market-based sourcing (and single sales factor apportionment) in order to improve their position in the race for in-state investment and hiring.
  • The sourcing and assignment rules under the Market-Based Sourcing Regulation are extremely detailed and complex. On the one hand, this complexity facilitates a comprehensive sales sourcing regime with rules that address a myriad of business types and industries. In addition, the reasonable approximation rules and safe harbor rules should give taxpayers some sense of comfort with respect to those situations where recordkeeping may be less than perfect or does not otherwise facilitate conformity with the general assignment rules. On the other hand, the devil is in the details, and, as such, the efficacy of these detailed and complex rules in practice will be tested in the upcoming filing season and beyond.
  • As noted above, once a taxpayer adopts a proper assignment methodology on an originally filed return, the taxpayer may not modify the assignment methodology on an amended or future taxable year’s return except to correct for factual or calculation errors or to improve accuracy.[27] Even then, if the taxpayer opts to modify an assignment methodology, it must disclose the change.[28] Taken together, these provisions place a heavy burden on the taxpayer to get the assignment methodology “right” the first time (i.e., on the first return filed after the 2013 taxable year) or risk having to rationalize a change to the Department on grounds that justify modifying an assignment methodology or, even worse, the Department rejecting the change and seemingly being “stuck” with a less than desirable assignment methodology.
  • Taxpayers and the Department do not appear to have equal rights under the Market-Based Sourcing Regulation. On the one hand, the Market-Based Sourcing Regulation provides that, once a taxpayer adopts a proper assignment methodology on an original return, neither the taxpayer nor the Department may modify the taxpayer’s methodology for assigning such sales on an amended return or otherwise (except for in the limited circumstances noted above).[29] On the other hand, however, the Department may substitute a method of assignment where it determines an assignment methodology is not reasonable–seemingly without regard to whether the assignment methodology may be proper under the Market-Based Sourcing Regulation.[30] In a January 2, 2015, letter addressed to Jessica Seney, Director of Government Affairs, Greater Boston Chamber of Commerce, and Bradley A. MacDougall, Vice President–Government Affairs, Associated Industries of Massachusetts, Michael T. Fatale, Chief–Rulings and Regulations Bureau, the Department addressed this concern by noting: (1) under the Market-Based Sourcing Regulation, neither the Department nor a taxpayer may modify a taxpayer’s methodology retrospectively where the taxpayer has properly assigned its sales, including where the taxpayer has used a method of reasonable approximation that is in accordance with the rules under the Market-Based Sourcing Regulation; and (2) this apparent inequity is necessary as part of the Department’s audit process, which does not allow for the Department and taxpayers to be on an “equal footing.” Only time will tell how and to what extent the Department utilizes this authority.


  [1] See also Mass. Ch. 36 (H.B. 3535), Acts of 2013. [2] Mass. Regs. Code tit. 830, § 63.38.1(14). [3] Mass. Gen. Laws ch. 63, § 38(f) (effective for taxable years beginning on or after January 1, 2014). [4] Mass. Gen. Laws ch. 63, § 38(f) (effective for taxable years beginning before January 1, 2014). [5] Mass. Gen. Laws ch. 63, § 38(f). [6] As used in the regulation, the term “section 38 manufacturer” means a corporation that is a manufacturing corporation within the meaning of Mass. Gen. Laws ch. 63, § 38(l)(1). [7] See Mass. Regs. Code tit. 830, § 63.38.1(9)(d)2-7. See also Mass. Regs. Code tit. 830, § 63.38.1(10), (12). [8] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.d.i-iii. [9] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.e.i. [10] Mass. Gen. Law ch. 63, § 38.1(f); Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.f.i. [11] Mass. Gen. Law ch. 63, § 38.1(f); Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.f.ii. [12] Mass. Gen. Law ch. 63, § 32B(d)(2)(iv); Mass. Regs. Code tit. 830, § 63.38.1(5)(c). [13] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.e.i. [14] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.e.ii. [15] Id. [16] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.i. [17] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.iii. [18] Id. [19] Id. [20] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.iv. [21] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.ii.(A), (E), and (F). [22] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.ii.(B). [23] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.ii.(C). [24] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.ii.(D). [25] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)4.b.iii. [26] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.h.i. [27] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.i and iii. [28] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.iii. [29] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.i. [30] Mass. Regs. Code tit. 830, § 63.38.1(9)(d)1.g.ii.(B).
 

Federal Tax Alert - February 2015

Mon, 02/09/2015 - 12:00am

President Obama released his $3.99 trillion fiscal year (FY 2016) federal budget proposals on February 2, 2015, calling for expansion of tax incentives for families, consolidation of education tax breaks, creation of new retirement savings opportunities, and tax increases for higher-income taxpayers. The President signaled his support for a reduction in the corporate tax rate but only if businesses agree to base broadening measures. The President also proposed a new tax regime on foreign earnings, a permanent research tax credit, repeal of the last-in, first-out method of accounting, permanently enhanced Code Sec. 179 expensing, and much more.
 

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R&D Tax Alert - January 2015

Thu, 01/29/2015 - 12:00am

On January 16, 2015, the Internal Revenue Service proposed long anticipated and taxpayer-friendly regulations concerning the section 41 research tax credit ("research credit") and its treatment of expenditures related to the development of software, both internal-use software ("IUS") and non-IUS.

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International Tax Alert - January 2015

Fri, 01/23/2015 - 12:00am

The United Nations ("UN") subcommittee on Base Erosion and Profit Shifting ("BEPS") Issues for Developing Countries has recently released China's responses to its questionnaire about countries' experiences regarding BEPS issues, along with responses received from other developing countries. In response to the UN questionnaire in late 2014, the Chinese State Administration of Taxation ("SAT") said that it views the transfer pricing actions of the international project to combat base erosion and profit shifting as the most important items in the project. This thought leadership piece summarizes the SAT's responses.

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International Tax Newsletter - January 2015

Thu, 01/22/2015 - 12:00am

The latest edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, such as the cancellation of consumption taxes on four types of products, as well as helpful tips on how to better understand and leverage these new developments.

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International Tax Alert - January 2015

Thu, 01/22/2015 - 12:00am

China's SAT Views Transfer Pricing as the Most Important Action Items in BEPS Plan

International Tax Alert - January 2015

Thu, 01/22/2015 - 12:00am

China's SAT Views Transfer Pricing as the Most Important Action Items in BEPS Plan

International Tax Newsletter - January 2015

Wed, 01/21/2015 - 12:00am

China Tax Newsletter

International Tax Newsletter - January 2015

Wed, 01/21/2015 - 12:00am

China Tax Newsletter

Federal Tax Alert - January 2015

Wed, 01/14/2015 - 12:00am
In 2014, we saw the resolution of a number of important federal tax issues from prior years as well as the emergence of new tax issues. Treasury and the IRS issued final regulations in key areas of the Patient Protection and Affordable Care Act (PPACA), along with final regulations and a myriad of guidance affecting individuals, business entities and more. The unfolding of new requirements, especially under the PPACA, generated new compliance and enforcement questions. The courts, all the way to the U.S. Supreme Court, weighed in on significant tax issues. Read the full year-in-review report for specific details as we look back on the tax developments that occurred last year.
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Federal Tax Alert - January 2015

Wed, 01/14/2015 - 12:00am

2014 Sets Stage for Tax Planning in 2015

Federal Tax Alert - January 2015

Wed, 01/14/2015 - 12:00am

2014 Sets Stage for Tax Planning in 2015

Federal Tax Alert - December 2014

Tue, 12/23/2014 - 12:00am
In a flurry of year-end activity, Congress approved and President Obama has signed into law the Tax Increase Prevention Act of 2014, which extends so-called "tax extenders" retroactively for one year (through 2014). It also includes the Achieving a Better Life Experience (ABLE) Act, creating tax-favored savings accounts for individuals with disabilities along with some tax-related offsets. Before adjourning, Congress also approved an Omnibus Spending Agreement for fiscal year (FY) 2015, which cuts funding for the IRS.
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BDO Indirect Tax News - December 2014

Tue, 12/23/2014 - 12:00am
The latest edition of BDO's Indirect Tax News features recent indirect tax developments in countries around the globe, including Switzerland, Australia and Chile.
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