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Compensation & Benefits Alert - December 2016

Thu, 12/22/2016 - 12:00am
Affordable Care Act Reporting Still Required for 2016 but with Extended Deadlines for Participant Copies of Forms 1095-B and 1095-C

Summary The IRS released Notice 2016-70 on November 18, 2016, granting an automatic extension of the due dates for the distribution deadlines for the 2016 Forms 1095-B and 1095-C for all those required to file under the Affordable Care Act (“ACA”). However, this Notice does not extend the due date for providing Forms 1094-B, 1095-B, 1094-C, or 1095-C to the IRS.

The extended due dates are:
  • 1095-Bs/1095-Cs that must be provided to individuals is extended from January 31, 2017, to March 2, 2017
Notice 2016-70 also extends good-faith transition relief for filing an incorrect or incomplete information return.
Discussion Extension of Reporting Requirements
Under Code Section 6055, health coverage providers are required to file with the IRS, and distribute to covered individuals, forms showing the months in which the individuals were covered by “minimum essential coverage.”  Under Code Section 6056, applicable large employers (generally, those with 50 or more full-time employees and equivalents) are required to file with the IRS, and distribute to employees, forms containing detailed information regarding offers of, and enrollment in, health coverage.  The chart below shows the new deadline.
    Old Deadline New Deadline       Deadline to Distribute Forms to Employees and Covered Individuals Jan. 31, 2017 March 2, 2017
Further, the IRS noted that due to the new extended deadlines, no additional automatic or permissive extensions will be granted.

While the IRS states that they are ready to receive the forms, they understand that some employers, insurers, and other providers of the minimum essential coverage will need additional time to gather, analyze, and report the required information and prepare the 2016 Forms 1095-B and 1095-C to furnish to individuals.  Employers and other coverage providers are encouraged to furnish 2016 statements and file the information returns as soon as they are ready.

Extension of Good-Faith Transition Relief
Notice 2016-70 also provides short-term relief from penalties. This relief is granted to reporting entities that can show that they made good-faith efforts to comply with the information-reporting requirements for 2016, and applies to incorrect and incomplete information reported on the statement or return. Reporting entities that do not make a good-faith effort to comply with the regulations or that fail to file an information return or furnish a statement by the due date will not receive any relief.

Guidance to Individuals
Notice 2016-70 also provides guidance to individuals who might not receive a Form 1095-B or Form 1095-C by the time they file their 2016 tax returns.

For 2016 only, individuals who rely upon other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit when filing their income tax returns need not amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C. Individuals need not send this information to the IRS when filing their returns, but should keep it with their tax records.

Similarly, some individual taxpayers may be affected by the extension of the due date for providers of minimum essential coverage to furnish information under Code Sec. 6055 on either Form 1095-B or Form 1095-C. As a result of the extension, individuals may not have received this information before they file their income tax returns. For 2016 only, individuals who rely upon other information received from their coverage providers about their coverage for purposes of filing their returns need not amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections. Individuals need not send this information to the Service when filing their returns but should keep it with their tax records.
BDO Insights Even though a substantial change to the ACA is expected from the Trump administration, it is not likely to remove these filing requirements for 2016. 
 
For more information please contact one of the following practice leaders: 
  Joan Vines
Managing Director, National Tax Office
Compensation & Benefits    Carl Toppin
STS GES Senior Manager,
Compensation & Benefits
    Kim Flett
Managing Director, Tax
Compensation & Benefits    Peter Klinger
Principal, National Tax - Compensation & Benefits

International Tax Alert - December 2016

Thu, 12/22/2016 - 12:00am
Final Regulations for Certain Transfers of Property to Foreign Corporations
Summary The Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) have issued Final Regulations relating to certain transfers of property by U.S. persons to foreign corporations.  The Final Regulations affect U.S. persons that transfer certain property, including foreign goodwill and going concern value, to foreign corporations in non-recognition transactions described in Internal Revenue Code (“IRC”) Section 367.  
Background IRC Section 367(a) requires, in certain situations, U.S. persons to recognize gain on certain transfers of property to foreign corporations in certain non-recognition exchanges.  IRC Section 367(a)(3) provides an exception to the general recognition rule of IRC Section 367(a) for certain types of property that is used by the foreign transferee corporation in the active conduct of a foreign trade or business (“ATB exception”).  If a U.S. person makes a Section 351 or 361 transfer of intangible property described in Section 936(h)(3)(B) (“Section 936 intangibles”) to a foreign corporation, the application of Section 367(d) will need to be considered.  Section 367(d)(1) generally provides that, except as provided in regulations, if a U.S. person transfers any intangible property, within the meaning of Section 936(h)(3)(B), to a foreign corporation in an exchange described in Section 351 or 361, Section 367(d) (and not Section 367(a)) applies to such transfer.  Section 367(d)(2)(A) provides further that a U.S. transferor that transfers intangible property subject to Section 367(d) is treated as having sold the property in exchange for payments that are contingent on the productivity, use, or disposition of the property.  Specifically, the U.S. transferor is treated as receiving amounts that reasonably reflect the amounts that would have been received annually in the form of such payments over the useful life of such property, or in the case of a disposition following such transfer (direct or indirect), at the time of the disposition[1]
 
On May 16, 1986, Temporary Regulations under IRC Sections 367 and 6038B were published. On September 16, 2015, Proposed Regulations under these sections were published. The Proposed Regulations generally provided five substantive changes from the 1986 Temporary Regulations:
 
  1. Eliminating the favorable treatment for foreign goodwill and going concern value by narrowing the scope of the active trade or business exception under IRC Section 367(a)(3) (“ATB exception”) and eliminating the exception under Temporary Regulation Section 1.367(d)-1T(b) that provided that foreign goodwill and going concern value was not subject to IRC Section 367(d);
  2. Allowing taxpayers to apply IRC Section 367(d) to certain property that otherwise would be subject to IRC Section 367(a);
  3. Removing the twenty-year limitation on useful life for purposes of Section 367(d) under Temporary Regulation Section 1.367(d)-1T(c)(3);
  4. Removing the exception under Temporary Regulation Section 1.367(d)-5T(d)(2) that permitted certain property denominated in foreign currency to qualify for the ATB exception; and
  5. Changing the valuation rules under Temporary Regulation Section 1.367(d)-1T to better coordinate the regulations under IRC Sections 367 and 482 (including Temporary Regulations under IRC Section 482 issued with the Proposed Regulations (see Temporary Regulation Section 1.482-1T(f)(2)(i)).
 
Specifically, with regard to the ATB exception, the Proposed Regulations revised the categories of property that are eligible for the ATB exception so that foreign goodwill and going concern value cannot qualify for the exception. Under the 1986 Temporary Regulations, all property was eligible for the ATB exception, subject only to five narrowly tailored exceptions. In addition to limiting the scope of the ATB exception, the Proposed Regulations also implemented changes to the ATB exception that were intended to consolidate various provisions and update the 1986 Temporary Regulations in response to subsequent changes to the Code.
 
The Final Regulations generally finalize the Proposed Regulations, as well as portions of the 1986 Temporary Regulations, as amended by T.D. 9803.  The preamble to the Final Regulations states that, although minor wording changes have been made to certain aspects of those portions of the 1986 Temporary Regulations, the Final Regulations are not intended to be interpreted as making substantive changes to those regulations.  The Treasury Decision also withdraws certain Temporary Regulations.
  Final Regulations The preamble to the Final Regulations discusses various comments received in response to the Proposed Regulations along with Treasury’s and the Service’s responses to such comments. Certain key items from the preamble are discussed below.
 
  1. Foreign Goodwill and Going Concern Value
Several comments to the Proposed Regulations asserted that eliminating the favorable treatment of foreign goodwill and going concern value would be an invalid exercise of regulatory authority under IRC Section 367.

In particular, one comment asserted that the ATB exception must apply to transfers of foreign goodwill and going concern value, because (i) foreign goodwill and going concern value is not a Section 936 intangible, and so is subject to Section 367(a) rather than Section 367(d), and (ii) the legislative history indicates that Congress expected that the transfer of such value should be tax-free. The comment further asserted that, because goodwill and going concern value is inextricably linked to the conduct of an active trade or business, the ATB exception necessarily encompasses such transfers.  Other comments asserted that finalizing the Proposed Regulations would represent an unreasonable exercise of regulatory authority because the Proposed Regulations eliminated the favorable treatment of all transfers of purported foreign goodwill and going concern value, rather than just those transfers that Treasury and the Service determine are abusive.
 
In addition, several comments asserted that the Proposed Regulations were inconsistent with Congressional intent and cited statements from the legislative history to Section 367, such as the following:
 
The committee does not anticipate that the transfer of goodwill or going concern value developed by a foreign branch to a newly organized foreign corporation will result in abuse of the U.S. tax system. . . . The committee contemplates that the transfer of goodwill or going concern value developed by a foreign branch will be treated under [the exception for transfers of property for use in the active conduct of a foreign trade or business] rather than a separate rule applicable to intangibles.[2]

In response to these comments, the preamble notes that IRC Section 367 generally provides for income recognition on transfers of property to a foreign corporation in certain transactions that otherwise would qualify for non-recognition.  While IRC Section 367(a)(3)(A) includes a broad exception to this general rule for property used in the active conduct of a trade or business outside of the United States, grants of rulemaking authority in IRC Sections 367(a)(3)(A) and (B) authorize the Secretary to exercise administrative discretion in determining the property to which non-recognition treatment applies under the ATB exception.  In addition, the preamble notes that IRC Section 367(d) reflects a clear policy that income generally should be recognized with respect to transfers of Section 936 intangibles.  The 1984 legislative history to IRC Section 367 explains that Congress intended for the Secretary to use his “regulatory authority to provide for recognition in cases of transfers involving the potential of tax avoidance.”[3]  The preamble further provides that Treasury and the Service have determined that the Proposed Regulations and the Final Regulations are consistent with that intention and the authority granted to the Secretary under IRC Section 367, based on the fact that the statute does not refer to foreign goodwill and going concern value and the determination that, as described in the preamble to the Proposed Regulations, the favorable treatment of foreign goodwill and going concern value contravenes the policy that income generally should be recognized with respect to transfers of Section 936 intangibles.

The preamble also discusses subsequent changes to the regulatory, statutory and market context in which the 1984 legislative history was drafted (e.g., the fact that before 1993, goodwill and going concern value was not amortizable, the increase in relative importance of intangibles in the economy and in the profitability of business, the enactment of the “check-the-box” regulations and Subpart F “look-thru” rule in IRC Section 9654(c)(6), issuance of temporary regulations related to cost sharing arrangements, etc.), in order to reconcile the statements in the 1984 legislative history expressing the expectation that an exception for foreign goodwill and going concern value would not result in abuse with the Service’s contrary experience administering the statute during the intervening years.

Several comments to the Proposed Regulations requested certain exceptions be included for outbound transfers of foreign goodwill and going concern but the Final Regulations do not adopt any such exceptions.
In addition, several comments requested that Treasury and the Service address whether goodwill and going concern value should be characterized as a Section 936 intangible, and thus subject to Section 367(d), or instead as property subject to Section 367(a). Comments also requested that the regulations provide certainty to taxpayers that have taken the position that goodwill and going concern value is not described in Section 936(h)(3)(B) by providing that such taxpayers will be permitted to treat goodwill and going concern value as property subject to Section 367(a) rather than Section 367(d).

In response to these comments, the preamble notes that Treasury and the Service believe that it is appropriate to retain the approach provided in the Proposed Regulations, which allows taxpayers to apply Section 367(d) to certain property that otherwise would be taxed under Section 367(a) but which continues to require taxpayers to apply Section 367(d) to all property described in Section 936(h)(3)(B). Because the identification of items that are neither explicitly listed in Section 936(h)(3)(B)(i) through (v) nor explicitly listed as potentially qualifying for the ATB exception generally will require a case-by-case functional and factual analysis, the Final Regulations do not address the characterization of such items as similar items (within the meaning of Section 936(h)(3)(B)(vi)) or as something else.  In general, the preamble notes that the potential rules under Section 367 for identifying and valuing transferred property are beyond the scope of the Final Regulations.
 
  1. Useful life of Property
The Proposed Regulations eliminated the 20-year limitation on useful life for intangible property subject to Section 367(d) that was included in Temporary Regulation Section 1.367(d)-1T(c)(3), because of Treasury and Service concerns that the limitation results in less than all of the income attributable to transferred intangible property being taken into account by the U.S. transferor.

The Final Regulations modify the Proposed Regulations by providing that in cases where the useful life of the transferred property is indefinite or is reasonably anticipated to exceed twenty years, taxpayers may, in the year of transfer, choose to take into account Section 367(d) inclusions only during the 20-year period beginning with the first year in which the U.S transferor takes into account income pursuant to Section 367(d).  However, the preamble notes that Treasury and the Service have determined that this optional limitation should not affect the present value of all amounts included by the taxpayer under Section 367(d).  Accordingly, the Final Regulations specifically require a taxpayer that chooses to limit Section 367(d) inclusions to a 20-year period to include, during that period, amounts that reasonably reflect amounts that, in the absence of the limitation, would be required to be included over the useful life of the transferred property following the end of the 20-year period.

In addition, the Final Regulations provide that, if a taxpayer chooses to limit inclusions under Section 367(d) to a 20-year period, no adjustments will be made for taxable years beginning after the conclusion of the 20-year period.  Thus, after the statute of limitations expires for taxable years during the 20-year period, a taxpayer will have no further Section 367(d) inclusions as a result of the Commissioner’s examination of taxable years that begin after the end of the 20- year period. However, the preamble notes that, consistent with the commensurate-with-income principle, for purposes of determining whether income inclusions during the 20-year period are commensurate with the income attributable to the transferred property, and whether adjustments should be made for taxable years during that period while the statute of limitations for such taxable years is open, the Commissioner may take into account information with respect to taxable years after that period, such as the income attributable to the transferred property during those later years.

Also, the Final Regulations revise the definition of useful life to provide that useful life includes the entire period during which exploitation of the transferred intangible property is reasonably anticipated to affect the determination of taxable income, in order to appropriately account for the fact that exploitation of intangible property can result in both revenue increases and cost decreases.
 
  1. Qualification of property denominated in foreign currency for the ATB Exception
Although Section 367(a)(3)(B)(iii) provides that the ATB exception does not apply, and therefore that Section 367(a)(1) applies, to foreign currency or other property denominated in foreign currency, current Temporary Regulation Section 1.367(a)-5T(d)(2) generally provided that Section 367(a)(1) nonetheless did not apply to certain transfers of property denominated in the currency of the country in which the transferee foreign corporation is organized.  The Proposed Regulations eliminated this regulatory exception from the general rule in Section 367(a)(3)(B)(iii) that turns off the ATB exception for such property.

The Final Regulations, which corresponds to existing Temporary Regulation Section 1.367(a)-5T(d)(2), reflects amendments that increase consistency with the rules in Sections 987 and 988. In particular, the terms “foreign currency” and “property denominated in foreign currency” are no longer used.  Rather, Proposed Regulation Section 1.367(a)-2(c)(3) is revised to refer to nonfunctional currency and other property that gives rise to a Section 988 transaction of the taxpayer described in Section 988(c)(1)(B), or that would give rise to such a Section 988 transaction if it were acquired, accrued, or entered into directly by the taxpayer.  The preamble notes that these modifications do not substantially change the scope of property subject to the rule at Temporary Regulation Section 1.367(a)-5T(d)(2).
 
  1. Other Issues
The preamble notes that Treasury and the Service generally agree that additional guidance under Sections 367(a) and (d) is desirable and would benefit both taxpayers and the government including guidance on issues such as (i) the valuation of intangibles subject to Section 367(d) and the forms that deemed payments should take, including guidance providing parity with the Section 482 form-of-payment rules; (ii) whether a receivable is created upon an audit-related adjustment; (iii) the tax basis consequences under Section 367(d), including how Section 367(d) applies to intangibles subject to the Section 197 anti-churning rules; (iv) coordination of the general rules and disposition rules in Section 367(d); (v) issues raised in connection with Notice 2012-39; (vi) the definition of “property” for purposes of Section 367; and (vii) the subsequent transfer rules under the ATB exception.  Unfortunately, the preamble simply states that these issues are beyond the scope of this project.
 
  1. Applicability Dates
The Final Regulations generally apply to transfers occurring on or after September 14, 2015, the date the Proposed Regulations were filed with the Federal Register, and to transfers occurring before September 14, 2015, resulting from entity classification elections that are filed on or after September 14, 2015.
For dates of applicability to these regulations, see Treasury Regulation Sections 1.367(a)-1(g)(5), 1.367(a)-2(k), 1.367(a)-4(b) and 1.367(a)-6(j); 1.367(d)-1(j) and 1.6038B-1(g)(7).
BDO Insights BDO can assist our clients with understanding the complexities of the Final Regulations. Companies should take particular note of the applicability dates and review how these rules can apply to both planned and completed outbound transfers to foreign corporations.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax Practice Leader          Chip Morgan        Partner    Joe Calianno
Partner and International Tax Technical Practice Leader    Brad Rode
Partner 
    William F. Roth III
Partner, National Tax Office   Jerry Seade
Principal    Scott Hendon
Partner    Monika Loving
Partner    Annie Lee
Partner   Sean Dokko
Senior Manager 
  [1] Prior to the changes discussed in this Alert, Temporary Regulation Section 1.367(d)-1T(b) generally provided that IRC Section 367(d) and Temporary Regulation Section 1.367(d)-1T did not apply to the transfer of foreign goodwill or going-concern value, as defined in Temporary Regulation Section 1.367(a)-1T(d)(5)(iii).  For the application of the rules under Section 367(d), see Treasury Regulation Section 1.367(d)-1 and Temporary Regulation Section 1.367(d)-1T. [2] H.R. Rep. No. 98-432, pt. 2, at 1317-19 (1984). [3] S. Rep. No. 98-169, at 364 (1984) (emphasis added).

International Tax Alert - December 2016

Thu, 12/22/2016 - 12:00am
Final, Temporary and Proposed Regulations for Section 987 Qualified Business Units
Summary The Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) have issued Final, Temporary and Proposed Regulations under Internal Revenue Code (“IRC”) Section 987.  The Final, Temporary and Proposed Regulations contain rules relating to the determination of the taxable income or loss of a taxpayer with respect to a qualified business unit (“QBU”) subject to Section 987, as well as the timing, amount, character, and source of any Section 987 gain or loss.  The regulations also provide guidance on the recognition and deferral of foreign currency gain or loss under IRC Section 987 with respect to a QBU that has a different functional currency than that of its owner (a “Section 987 QBU”).
Background Section 987 generally provides that, when a taxpayer owns one or more QBUs with a functional currency other than the U.S. dollar and such functional currency is different than that of the taxpayer, the taxable income or loss of the taxpayer with respect to each QBU is determined by computing the taxable income or loss of each QBU separately in its functional currency and translating such income or loss at the appropriate exchange rate.  Section 987 further requires the taxpayer to make “proper adjustments” (as prescribed by the Secretary) for transfers of property between QBUs having different functional currencies, including by treating post-1986 remittances from each such QBU as made on a pro rata basis out of post-1986 accumulated earnings and by treating Section 987 gain or loss as ordinary income or loss and sourcing such gain or loss by reference to the source of the income giving rise to post-1986 accumulated earnings.  Section 989(b)(4) provides that, “[e]xcept as provided in regulations,” the appropriate exchange rate with respect to a QBU means “the average exchange rate for the taxable year” of the QBU.  Additionally, Section 989(c)(5) directs the Secretary to “prescribe such regulations as may be necessary or appropriate to carry out the purposes of [subpart J of the IRC], including regulations … providing for the appropriate treatment of related party transactions (including transactions between qualified business units of the same taxpayer) ….”
 
On September 25, 1991, Treasury and the Service issued Proposed Regulations under Section 987 (the “1991 Proposed Regulations”). The 1991 Proposed Regulations generally provided that the net income of a QBU with a functional currency other than that of the taxpayer was determined annually. Such determination was based on the profit and loss appearing on the QBU's books and records, adjusted to conform to U.S. tax principles, and translated into the functional currency of the taxpayer using the weighted average exchange rate for the taxable year. The 1991 Proposed Regulations also provided for the recognition of exchange gain or loss upon a remittance from the QBU's equity pool. The 1991 Proposed Regulations also provided for a basis pool, which consisted of the basis of the capital and earnings in the equity pool, expressed in the functional currency of the taxpayer. Using these equity and basis pools, the 1991 Proposed Regulations included a formula for calculating the Section 987 gain or loss on a remittance from a Section 987 QBU.
 
On September 6, 2006, Treasury and the Service published a notice of proposed rulemaking (REG-208270-86, 71 FR 52876) that proposed new regulations under Section 987 (“2006 Proposed Regulations) and withdrew the 1991 Proposed Regulations.  The 2006 Proposed Regulations adopted a different paradigm referred to as the foreign exchange exposure pool (“FEEP”) method.  In general, the FEEP method provided that, as under the 1991 Proposed Regulations, the income of a Section 987 QBU is determined by reference to the items of income, gain, deduction, and loss booked to the Section 987 QBU in its functional currency, adjusted to reflect U.S. tax principles.  However, the basis of certain “historic assets” and the deductions for depreciation, depletion, and amortization of such assets were translated at the historic rates for such assets.  Translating these items at historic rates represented a major difference from the 1991 Proposed Regulations and prevented the imputation of foreign currency gains or losses to such assets.  Additionally, the 2006 Proposed Regulations required the adjusted basis and amount realized with respect to marked assets to be translated using a spot rate, which for assets acquired in a prior taxable year would be the spot rate for the closing balance sheet of the prior taxable year.
 
Consistent with the 1991 Proposed Regulations, the FEEP method used a balance sheet approach to determine exchange gain or loss, which was not recognized until the section 987 QBU makes a remittance.  Under the FEEP method, exchange gain or loss with respect to “marked items” was determined annually but is pooled and deferred until a remittance is made.   A marked item generally is defined under the 2006 Proposed Regulations as an asset (marked asset) or liability (marked liability) that would generate Section 988 gain or loss if such asset or liability were held or entered into directly by the owner of the Section 987 QBU. The balance sheet approach, together with the use of historic rates for historic items (generally defined as an asset or liability that is not a marked item), allowed taxpayers and the Service to distinguish between items whose value is highly responsive to changes in the functional currency of the owner and items for which exchange rate changes have no effect on value, or only an uncertain or remote effect that is more appropriately recognized upon a realization event with respect to the item.
 
The 2006 Proposed Regulations defined a remittance as a net transfer of amounts from a Section 987 QBU to its owner during a taxable year, determined in the owner's functional currency.  When a Section 987 QBU makes a remittance, a portion of the pooled exchange gain or loss was recognized.  In general, the amount taken into account equaled the Section 987 QBU's net unrecognized exchange gain or loss multiplied by the owner's remittance proportion.  The owner's remittance proportion generally equaled the amount of the remittance divided by the aggregate basis of the section 987 QBU's gross assets reflected on its year-end balance sheet, determined in the owner's functional currency, without reduction for the remittance.
 
Treasury and the Service received many written comments in response to the 2006 Proposed Regulations.  After consideration of the comments, the 2006 Proposed Regulations, as revised by TD 9794, were adopted as Final Regulations.  Temporary Regulations (TD 9795) and Proposed Regulations (REG-128276-12) under Section 987 were published contemporaneously with the Final Regulations.
 
Key Highlights to the Final, Temporary and Proposed Regulations
Discussed below are some of the key items in the Final, Temporary and Proposed Regulations.
 
  1. Final Regulations
The Preamble to the Final Regulations discusses some of the comments received in response to the 2006 Proposed Regulations along with Treasury’s and the Service’s responses to such comments.  Such items include:
 
  1. Retaining the general framework of the FEEP method despite concerns relating to the administrability of such method, but making several modifications to reduce the complexity, including permitting more items to be treated as Section 987 marked items, simplifying the treatment of marked items so that net income attributable to such items is translated the average exchange rate, and simplifying the adjustments that are required to translate basis recovery for historic items at the historic rate;
  2. Providing guidance on entities that are not subject to the regulations, including clarifying what types of financial entities are subject to the regulations;
  3. Declining to adopt a recommendation to apply Section 988 in lieu of Section 987 to an owner of a Section 987 QBU that has a relatively small amount of marked items;
  4. Revising the definition of “portfolio stock” to be based solely on value;
  5. Enhancing the consistency of the attribution rules and QBU concept between Section 987 and other parts of subpart J of the IRC;
  6. Confirming the “offsetting position” factor in Section 1.987-2(b)(3)(ii)(C) of the 2006 Proposed Regulations is necessary to prevent the use of transactions involving offsetting gains and losses to selectively recognize losses without recognition of gain and not restricting the parameters of the offsetting position factor;
  7. Declining to adopt an ordinary course transaction exception from the definition of “transfer” between two Section 987 QBUs of the same taxpayer or by a Section 987 QBU and its home office that are taken into account in determining the amount of a remittance;
  8. Declining to extend the “grouping rules” in Section 1.987-1(b)(2)(ii) of the 2006 Proposed Regulations to corporations that file a consolidated return, declining to extend the grouping rule to Section 987 QBUs that are directly owned with Section 987 QBUs that are indirectly owned through Section 987 aggregate partnerships, and declining to permit an owner to elect to group less than all of its Section 987 QBUs with the same functional currency;
  9. Modifying Section 1.987-4 of the 2006 Proposed Regulations for the computation of net unrecognized exchange gain or loss for tax-exempt income and non-deductible expenses.  In addition for Section 1.987-4, explicitly accounting for foreign taxes claimed as a credit, which must be translated at the same rate at which such taxes were translated under Section 986(a);
  10. Clarifying that a foreign corporation that owns a Section 987 QBU must apply the rules in Section 1.987-3 in determining earnings and profits with respect to the Section 987 QBU;
  11. Retaining the requirements in Section 1.987-4(a) of the 2006 Proposed Regulations requiring the determination of the net unrecognized Section 987 gain or loss of a Section 987 QBU by the owner annually and Section 1.987-9 of the 2006 Proposed Regulations requiring the taxpayer to keep annual records that are sufficient to establish each Section 987 QBU's Section 987 gain or loss;
  12. Retaining the approach of the 2006 Proposed Regulations in requiring the Section 987 QBU owner to use the asset method of Section 1.861-9T(g) to characterize and source section 987 gain or loss, including for determining the extent to which Section 987 gain or loss gives rise to subpart F income.  In addition, including rules which will allow taxpayers to offset a Section 987 net loss characterized by reference to assets that give rise to subpart F income to offset a Section 988 net gain, and vice versa, in determining subpart F income;
  13. Retaining the approach of the 2006 Proposed Regulations to apply to partnerships based on an approach (the aggregate approach) that treats a partnership as an aggregate of its partners, rather than as an entity separate from its partners but only for so-called “section 987 aggregate partnerships,” which are defined in Section1.987-1(b)(5) as partnerships for which all of the capital and profits interests are owned, directly or indirectly, by persons that are related within the meaning of Section 267(b) or 707(b). Treasury and the Service anticipate that regulations for apply Section 987 to other partnerships (non-aggregate partnerships) will be developed under a separate project and may adopt a different approach;
  14. Clarifying when a Section 987 QBU terminates and including an example illustrating that when a Section 987 QBU elects to be treated as a corporation under the check-the-box regulations, the Section 987 QBU terminates due to the deemed transfer of assets from the Section 987 QBU to the owner immediately prior to the deemed transfer of assets from the owner to the transferee corporation under Section 351.  The Temporary Regulations provide rules under which certain Section 987 gain or loss that otherwise would be recognized upon a combination, separation, termination, or other event with respect to a Section 987 QBU is deferred and recognized upon a subsequent event to the extent assets of the Section 987 QBU continue to be reflected on the books and records of a Section 987 QBU in the same controlled group.  Under these rules, a Section 351 transfer of some or all of the assets of a Section 987 QBU within a consolidated group generally would not result in recognition of Section 987 gain or loss, provided the transferred assets continue to be reflected on the books and records of a Section 987 QBU;
  15. Requiring under a mandatory “fresh start” transition method for all Section 987 QBUs that have not already implemented the 2006 Proposed Regulations to be deemed to terminate before adoption of the new regime (the Final Regulations do not include an election to use the deferral method).  Under the fresh start transition method, unrecognized Section 987 gain or loss determined under a prior Section 987 method is not taken into account, and marked assets and liabilities reflected on a Section 987 QBU’s balance sheet on the transition date are translated using a historic rate.  Taxpayers that adopted the 2006 method generally already transitioned to that method in accordance with the principles of Section 1.987-10 of the 2006 Proposed Regulations, so it is not necessary or appropriate for taxpayers to transition from the 2006 method to the Final Regulations under the fresh start method, though certain sections of the Final Regulations may still need to be considered (e.g., historic rates, and unrecognized Section 987 gain or loss with respect to a QBU).
  16. Providing several elections to mitigate potential complexity or administrative burden associated with complying with these regulations.  Section 1.987-1(g) provides rules for making the elections;
  17. Reflecting other modifications to the language and structure of the 2006 Proposed Regulations, as well as the inclusion of additional examples, to enhance clarity.  Treasury and the Service do not intend these changes to be interpreted as substantive changes to the 2006 Proposed Regulations.
 
  1. Temporary and Proposed Regulations
The Temporary Regulations and, by cross reference to, the Proposed Regulations, contain rules relating the recognition and deferral of foreign currency gain or loss with respect to a Section 987 QBU in connection with certain QBU terminations and certain other transactions involving partnerships. The Temporary Regulations also contain rules providing:
  1. An annual deemed termination election for a Section 987 QBU;
  2. An elective method, available to taxpayers that make the annual deemed termination election, for translating all items of income or loss with respect to a QBU at the yearly average exchange rate;
  3. Rules regarding the treatment of Section 988 transactions of a Section 987 QBU;
  4. Rules regarding QBUs with the U.S. dollar as their functional currency;
  5. Rules regarding combinations and separations of Section 987 QBUs;
  6. Rules regarding the translation of income used to pay creditable foreign income taxes;
  7. Rules regarding the allocation of assets and liabilities of certain partnerships for purposes of Section 987.
Also, the Temporary Regulations contain rules under IRC Section 988 requiring the deferral of certain IRC Section 988 losses that arises with respect to related party loans.
 
  1. Applicability Dates
For the applicability dates of such regulations, see Treasury Regulation Section 1.987-11 and Temporary Regulations Sections 1.987-1T(h), 1.987-2T(e), 1.987-3T(f), 1.987-4T(h), 1.987-6T(d), 1.987-7T(d), 1.987-8T(g), 1.987-12T(j), 1.988-1T(j) and 1.988-2T(j).
BDO Insights BDO can assist our clients with understanding the complexities of the Final, Temporary and Proposed Regulations under IRC Section 987 and also advise on how these rules will impact income earned through a Section 987 QBU.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax Practice Leader          Chip Morgan        Partner    Joe Calianno
Partner and International Tax Technical Practice Leader    Brad Rode
Partner 
    William F. Roth III
Partner, National Tax Office   Jerry Seade
Principal    Scott Hendon
Partner    Monika Loving
Partner    Annie Lee
Partner   Sean Dokko
Senior Manager 
 

State and Local Tax Alert - December 2016

Thu, 12/22/2016 - 12:00am
U.S. Supreme Court Declines to Hear Colorado’s Sales and Use Tax Customer Notice and Reporting Requirements Dispute  
Summary On December 12, 2016, the U.S. Supreme Court denied two petitions for a writ of certiorari in Direct Marketing Ass’n v. Brohl, No. 16-267 and Brohl v. Direct Marketing Ass’n, No. 16-458.  The Court declined to review a federal circuit court of appeal’s decision that upheld Colorado’s sales and use tax customer notice and reporting requirements for remote sellers, thus allowing the decision to stand.  The Court also declined to grant Colorado’s petition asking that Quill Corp. v. North Dakota, 504 U.S. 298 (1992) be overturned.
  Details Background
In 2010, Colorado enacted Colo. Rev. Stat. § 39-21-112.3.5, which imposes notice and reporting obligations on retailers that do not collect sales tax on their sales to Colorado customers.  Specifically, a non-collecting retailer is subject to the following notification and reporting requirements:
 
  • At the time of each sale – A non-collecting retailer must provide a Colorado purchaser with notice that its purchase is subject to sales or use tax, unless it is specifically exempt.  The notice must contain specific verbiage outlined in Colo. Rev. Stat. § 39-21-112.3.5 and failure to provide the required notice may result in a $5 penalty for each instance of noncompliance.
  • By January 31st of each year - A non-collecting retailer must send an annual notice to a Colorado purchaser who had made $500 or more of Colorado purchases in the preceding calendar year that summarizes the total amount paid by the purchaser.  This notice must: (i) contain the date of purchase, a description of the type of item purchased, and the dollar amount of the purchase; (ii) include a statement that Colorado law requires that the consumer file a sales or use tax return and pay tax on all taxable Colorado purchases for which no tax has been collected by the retailer; and (iii) indicate that the non-collecting retailer is required by law to provide the Colorado Department of Revenue with the total dollar amount of purchases made by the Colorado purchaser.  Failure to provide the required notice may result in a $10 penalty for each instance of noncompliance.
  • No specified due date – A non-collecting retailer must provide a customer information report to the Colorado Department of Revenue that contains Colorado purchaser names, addresses, and total amounts of Colorado purchases in the past calendar year.  Failure to file the required report may result in a penalty equal to the product of $10, and the number of Colorado purchasers that should have been included in the report.
The Direct Marketing Association (“DMA”), an industry group of businesses and organizations that market and sell products via catalogs, advertisements, broadcast media, and the Internet, challenged the law as discriminatory against and imposing an undue burden on interstate commerce in violation of the “dormant” Commerce Clause of the United States Constitution.  On February 22, 2016, the United States Court of Appeals for the Tenth Circuit held that the Colorado law does not violate the Commerce Clause and upheld Colorado’s sales and use tax customer notice and reporting requirements for remote sellers.  See the BDO SALT Alert that discusses this decision in more detail.
 
Petitions for Review
On August 29, 2016, DMA filed with the U.S. Supreme Court a petition for a writ of certiorari and maintained that the Colorado law discriminates against interstate commerce by imposing burdens on out-of-state companies that in-state companies are not required to bear.  On October 3, 2016, the Colorado Department of Revenue filed a conditional cross-petition for a writ of certiorari and asked that if the Court took the case, the Court should revisit and overturn the physical presence requirement of Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  On December 12, 2016, the U.S. Supreme Court denied both petitions.
  BDO Insights
  • The Supreme Court’s denial of review makes the Tenth Circuit decision binding on states within the circuit (i.e., Colorado, Kansas, New Mexico, Oklahoma, Wyoming, and Utah).  Colorado has not enforced its sales and use tax customer notice and reporting requirements for remote sellers due to an injunction that was issued.  However, Colorado will likely ask a court to dissolve the injunction as a result of the Supreme Court’s denial.
  • Colorado non-collecting retailers should consider whether they have a sales and use tax customer notice and reporting obligation, regardless of whether they have a physical presence in Colorado.  If an obligation exists, such a remote retailer should ensure that it has the systems in place to notify and report as required by the law.
  • States other than Colorado that have adopted similar use tax notification and reporting requirements include Louisiana, Oklahoma, and Vermont.  See the BDO SALT Alert that discusses the Louisiana and Vermont use tax notification and reporting requirements, and the BDO SALT Alert that discusses the Oklahoma use tax notification requirement.  The Supreme Court’s decision not to review Direct Marketing could encourage other states to pursue similar legislation.
   

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

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






   
Southwest:
Gene Heatly
Tax Managing Director

Tom Smith
Tax Partner
 

BDO Indirect Tax News - December 2016

Wed, 12/21/2016 - 12:00am
Brought to you by BDO International, the latest quarterly edition of Indirect Tax News includes current developments in indirect tax from across the world, including Switzerland, Argentina, Colombia, Denmark, France, Germany, Hungary, Ireland, Italy, Latvia, Macedonia, The Netherlands, Philippines, Romania, Singapore, Slovakia, Spain, and United Kingdom. Some highlights of this issue include:
 
  • SWITZERLAND: Changes to Swiss VAT Law
  • ARGENTINA: Tax amnesty and VAT deferrals
  • COLOMBIA: VAT and sales tax reform 2017

View the Newsletter

China Tax Newsletter - December 2016 Issue 2

Wed, 12/21/2016 - 12:00am
The second edition of BDO China's China Tax Newsletter for December 2016 features tax-related news and developments in China, including topics such as:   
  • Announcement on Issues Related to Construction Services Provided Outside the Territory of China
  • Notice on Continuous Implementation of VAT Policies on Equipment Purchased by R&D Organisations
  • Announcement on the Launch of the Pilot Program of Tax Collection and Administration Reform

Download

BDO 600 Compensation Survey (Boards - 2016)

Mon, 12/19/2016 - 12:00am


The tenth annual BDO 600 survey details director compensation practices of publicly traded companies in the energy, financial services–banking, financial services–non-banking, healthcare, manufacturing, real estate, retail, and technology industries.    Companies in the six non-financial service industries have annual revenues between $100 million and $3 billion. Companies in the two financial services industries have assets between $100 million and $6 billion. All data in our survey is from proxy statements filed between March 2015 and March 2016.   Some key stats from this survey include:
  • 0% -- In fiscal year 2015, director compensation remained unchanged from 2014 levels
  • 45% -- Overall, companies pay 45% of director compensation in cash (up 2% from last year) and 55% in equity
  • Technology continues to be the highest-paying industry, followed closely by Healthcare..

Download Full Study

International Tax Alert - December 2016

Fri, 12/16/2016 - 12:00am
Proposed and Temporary Regulations for Foreign Tax Credit Limitation Purposes
Summary The Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) have issued final regulations under Internal Revenue Code (“IRC”) Section 6038A (the “Final Regulations”). The Final Regulations impact reporting, record maintenance and compliance for domestic disregarded entities wholly owned by a foreign person.
Background On May 6, 2016, Treasury and the Service issued proposed regulations that would amend Treasury Regulation §301.7701-2(c) to treat a domestic disregarded entity that is wholly owned by one foreign person as a domestic corporation separate from its owner, for the limited purposes of the reporting and record maintenance requirements (including the associated procedural compliance requirements) under IRC Section 6038A. The proposed regulations are discussed in more detail in our Tax Alert IRS Proposes Regulations Requiring New Reporting Requirements Under Internal Revenue Code (“IRC”) Section 6038A for Foreign-Owned Domestic Disregarded Entities dated May 2016. The proposed regulations would have applied to taxable years of the entities described in §301.7701- 2(c)(2)(vi) ending on or after the date that is 12 months after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register.

In addition to generally soliciting comments on all aspects of the proposed rules, the preamble to the proposed regulations specifically requested comments on possible alternative methods for reporting a domestic disregarded entity's transactions in cases in which the foreign owner of the domestic disregarded entity already has an obligation to report the income resulting from those transactions—for example, transactions resulting in income effectively connected with the conduct of a U.S. trade or business. The Final Regulations reflect a limited number of changes by Treasury and the Service to the proposed regulations.  These changes are discussed below.
Final Regulations First, the Treasury and the Service state in the preamble to the Final Regulations that the generally applicable exceptions to the requirements of Section 6038A should not apply to a domestic disregarded entity that is wholly owned by a foreign person. Accordingly, the proposed regulations provided that the exceptions to the record maintenance requirements in §1.6038A-1(h) and (i) for small corporations and de minimis transactions would not apply to these entities. However, the proposed regulations did not address the additional exception provided in §1.6038A-2(e)(3), under which a reporting corporation is not required to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under IRC Sections 6038A and 6038C), with respect to a related foreign corporation when a U.S. person that controls the related foreign corporation files a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, containing required information with respect to reportable transactions between the reporting corporation and the related foreign corporation for the taxable year. Similarly, the proposed regulations did not address the additional exception provided in §1.6038A-2(e)(4), under which a reporting corporation is not required to file Form 5472 with respect to a related foreign corporation that qualifies as a foreign sales corporation for a taxable year for which the foreign sales corporation files Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation. Upon final consideration of the proposed regulations, Treasury and the Service have concluded that, consistent with the scope and intent of the proposed regulations, the reporting requirements of the proposed regulations should apply without regard to the exceptions generally applicable under §1.6038A-2(e)(3) and (4). The exceptions in §1.6038A-2(e)(3) and (4) are revised accordingly in the Final Regulations.

Second, to facilitate entities' compliance with the requirements of Section 6038A, including the obligation of reporting corporations to file Form 5472, the Final Regulations provide that these entities have the same taxable year as their foreign owner if the foreign owner has a U.S. return filing obligation. If the foreign owner has no U.S. return filing obligation, the Final Regulations provide that the taxable year of these entities is the calendar year unless otherwise provided in forms, instructions, or published guidance.

Third, Treasury and the Service have concluded that for ease of administration, these regulations should apply to taxable years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017.

The proposed regulations would have applied to taxable years ending on or after the date that is 12 months after the date of publication of the final regulations in the Federal Register, without regard to the date on which the taxable year began.

The Final Regulations adopt the proposed regulations as so amended and with certain other minor clarifications.
BDO Insights The Final Regulations expand the reporting that is required under IRC section 6038A. Please contact a BDO international tax specialist to assist you in reviewing how these rules may impact your Company’s reporting requirements.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax Practice Leader          Chip Morgan        Partner    Joe Calianno
Partner and International Tax Technical Practice Leader    Brad Rode
Partner 
    William F. Roth III
Partner, National Tax Office   Jerry Seade
Principal    Scott Hendon
Partner    Monika Loving
Partner    Annie Lee
Partner   Sean Dokko
Senior Manager   

International Tax Alert - December 2016

Fri, 12/16/2016 - 12:00am
Proposed and Temporary Regulations for Foreign Tax Credit Limitation Purposes Summary The Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) have issued Proposed and Temporary Regulations under Internal Revenue Code (“IRC”) Section 901(m). The Proposed and Temporary Regulations contain rules that limit the ability to claim foreign tax credits that arise from certain types of transactions.
Background On August 10, 2010, Section 212 of the Education Jobs and Medicaid Assistance Act added Section 901(m) to the Code. IRC Section 901(m)(1) provides that, in the case of a covered asset acquisition (“CAA”), the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to relevant foreign assets (“RFAs”) will not be taken into account in determining the foreign tax credit allowed under IRC Section 901(a), and in the case of foreign income tax paid by a Section 902 corporation (as defined in IRC Section 909(d)(5)), will not be taken into account for purposes of IRC Section 902 or 960. Instead, the disqualified portion of any foreign income tax (the disqualified tax amount) is permitted as a deduction under IRC Section 901(m)(6).

Under IRC Section 901(m)(2), a CAA is:
  1. A qualified stock purchase (as defined in IRC Section 338(d)(3)) to which IRC Section 338(a) applies;
  2. Any transaction that is treated as an acquisition of assets for U.S. income tax purposes and as the acquisition of stock of a corporation (or is disregarded) for purposes of a foreign income tax;
  3. Any acquisition of an interest in a partnership that has an election in effect under IRC Section 754; and
  4. To the extent provided by the Secretary, any other similar transaction.
IRC Section 901(m)(3)(A) provides that the term “disqualified portion” means, with respect to any CAA, for any taxable year, the ratio (expressed as a percentage) of:
  1. The aggregate basis differences (but not below zero) allocable to such taxable year with respect to all RFAs; divided by
  2. The income on which the foreign income tax referenced in IRC Section 901(m)(1) is determined (or if the taxpayer fails to substantiate the income on which the foreign income tax is determined to the satisfaction of the Secretary, such income shall be determined by dividing the amount of such foreign income tax by the highest marginal tax rate applicable to the taxpayer’s income in the relevant jurisdiction).
IRC Section 901(m)(3)(B)(i) provides the general rule that the basis difference with respect to any RFA will be allocated to taxable years using the applicable cost recovery method for U.S. income tax purposes. IRC Section 901(m)(3)(B)(ii) provides that, except as otherwise provided by the Secretary, if there is a disposition of an RFA, the basis difference allocated to the taxable year on the disposition will be the excess of the basis difference of such asset over the aggregate basis difference of such asset that has been allocated to all prior taxable years. The statute further provides that no basis difference with respect to such asset will be allocated to any taxable year thereafter.

IRC Section 901(m)(3)(C)(i) provides that basis difference means, with respect to any RFA, the excess of:
  1. The adjusted basis of such asset immediately after the CAA, over
  2. The adjusted basis of such asset immediately before the CAA.
If the adjusted basis of an RFA immediately before the CAA exceeds the adjusted basis of the RFA immediately after the CAA (that is, where the adjusted basis of an asset with a built-in loss is reduced in a CAA), such excess is taken into account as a basis difference of a negative amount under IRC Section 901(m)(3)(C)(ii).

IRC Section 901(m)(4) provides that an RFA means, with respect to a CAA, an asset (including goodwill, going concern value, or other intangible) with respect to such acquisition if income, deduction, gain, or loss attributable to such asset is taken into account in determining the foreign income tax referenced in IRC Section 901(m)(1).

IRC Section 901(m)(7) provides that the Service may issue regulations or other guidance as is necessary to carry out the purpose of IRC Section 901(m).

In 2014, Treasury and the Service issued Notice 2014-44 (2014-32, IRB 270) and Notice 2014-45 (2014-34 IRB 388) (collectively, the “2014 Notices”), that announced their intention to issue regulations addressing the application of IRC Section 901(m) to dispositions of RFAs following CAAs and to acquisitions of an interest in a partnership which has an election in effect under IRC Section 754. Notice 2014-44 also announced that future regulations would provide successor rules for the continued application of IRC Section 901(m) after a subsequent transfer of an RFA with remaining basis difference.
Key Highlights to the Proposed and Temporary Regulations The Proposed and Temporary Regulations under IRC Section 901(m) include the rules described in the 2014 Notices and also provide additional guidance regarding the calculation of the foreign tax credit when there is a CAA.

The Proposed Regulations were issued at the same time as the Temporary Regulations. In addition to cross-referencing the Temporary Regulations, the Proposed Regulations provide guidance under IRC Section 901(m) concerning issues not addressed in the Temporary Regulations.

Some of the key highlights to the Proposed and Temporary Regulations are discussed below.
  1. Proposed Regulation Section 1.901(m)-1 and Temporary Regulation Section 1.901(m)-1T provide definitions that apply for purposes of the regulations.
  2. Proposed Regulation Section 1.901(m)-2 and Temporary Regulation Section 1.901(m)-2T identify transactions that are CAAs and provides rules for identifying RFAs with respect to a CAA. Proposed Regulation Section 1.901(m)-2(b) identifies six categories of transactions that constitutes CAAs, three of which are specified in the statute (incorporated by cross reference to the Temporary Regulations) and three of which are additional categories of transactions that are identified as CAAs pursuant to the authority granted under IRC Section 901(m)(2)(D). The three newly identified CAAs would be any transaction (or series of transactions occurring pursuant to a plan) to the extent it is treated as:
  1. An acquisition of assets for purposes of U.S. income tax and as an acquisition of an interest in a fiscally transparent entity for purposes of a foreign income tax;
  2. A partnership distribution of one or more assets the U.S. basis of which is determined by IRC Section 732(b) or IRC Section 732(d) or which causes the U.S. basis of the partnership’s remaining assets to be adjusted under IRC Section 734(b), provided the transactions result in an increase in the U.S. basis of one or more of the assets distributed by the partnership or retained by the partnership without a corresponding increase in the foreign basis of such assets; and
  3. An acquisition of assets for purposes of both U.S. income tax and a foreign income tax provided the transaction results in an increase in the U.S. basis without a corresponding increase in the foreign basis of one or more assets.
  1. Proposed Regulation Section 1.901(m)-3 provides rules for computing the disqualified portion of foreign income taxes, describes the treatment under IRC Section 901(m)(1) of the disqualified portion and provides rules for determining whether and to what extent basis difference that is assigned to a given taxable year is carried over to subsequent years.
  2. Proposed Regulation Section 1.901(m)-4 and Temporary Regulation Section 1.901(m)-4T provides rules for determining basis difference with respect to an RFA. Temporary Regulation Section 1.901(m)-4T provides for a special rule for determining basis difference with respect to an RFA that arises as a result of an acquisition of an interest in a partnership that has a Section 754 election (a “Section 743(b) CAA)”).  
Proposed Regulation Section 1.904(m)-4 provides rules for an election to use foreign basis for purposes of determining basis difference with respect to an RFA. In particular, Proposed Regulation Section 1.901(m)-4(c) provides for a foreign basis election, pursuant to which basis difference is equal to the U.S. basis in the RFA immediately after the CAA less the foreign basis in the RFA immediately after the CAA (including any adjustments to the foreign basis resulting from the CAA). Proposed Regulation Sections 1.901(m)-4(c)(2) through (4) provide rules for making a foreign basis election. A foreign basis election generally is made by the RFA owner (U.S.). A foreign basis election is made separately for each CAA and with respect to each foreign income tax and each foreign payor. If the RFA owner (U.S.) is a partnership, however, each partner in the partnership (and not the partnership) may independently make a foreign basis election. For this purpose, a series of CAAs occurring as part of a plan (referred to in the regulations as an “aggregated CAA transaction”) are treated as a single CAA. The Proposed Regulations contain examples illustrating the scope of the foreign basis election.
 
The election is made by using foreign basis to determine the basis differences for purposes of computing a disqualified tax amount and an aggregate basis difference carryover. Subject to certain exceptions, the election generally must be reflected on a timely filed original federal income tax return for the first U.S. taxable year that the foreign basis election is relevant.
  1. Proposed Regulation Section 1.901(m)-5 and Temporary Regulation Section 1.901(m)-5T provide rules for taking into account basis difference under an applicable cost recovery method or as a result of a disposition of an RFA. Proposed Regulation Section 1.901(m)-5 includes rules for allocating that basis difference, when necessary, to one or more persons subject to IRC Section 901(m), and rules for assigning that basis difference to a U.S. taxable year.
  2. Proposed Regulation Section 1.901(m)-6 and Temporary Regulation Section 1.901(m)-6T provides successor rules for applying IRC Section 901(m) to subsequent transfers of RFAs that have basis difference that has not yet been fully taken into account. Proposed Regulation Section 1.901(m)-6 includes rules for transferring an aggregate basis difference carryover of a person subject to IRC Section 901(m) either to another aggregate basis difference carryover account of such person or to another person subject to IRC Section 901(m).
  3. Proposed Regulation Section 1.901(m)-7 provides de minimis rules under which certain basis differences are not taken into account under IRC Section 901(m). In general, a basis difference with respect to an RFA is not taken into account for purposes of IRC Section 901(m) under the de minimis rules if either:
  1. The sum of the basis differences for all RFAs with respect to the CAA is less than the greater of $10 million or 10 percent of the total U.S. basis of all RFA's immediately after the CAA; or
  2. The RFA is part of a class of RFAs for which the sum of the basis differences of all RFAs in the class is less than the greater of $2 million or 10 percent of the total U.S. basis of all RFAs in the class.
For this purpose, the classes of RFAs are the seven asset classes defined in Treasury Regulation Section 1.338-6(b).[1] Treasury and the Service decided that transactions between related parties should be more tightly regulated, and therefore, the threshold dollar amounts and percentages to meet the de minimis exemptions for related party CAAs are lower than those for unrelated party CAAs, replacing the terms “$10 million,” “10 percent,” and “$2 million” wherever they occur with the terms “$5 million,” “5 percent,” and “$1 million,” respectively. In addition, an anti-abuse provision at Proposed Regulation Section 1.901(m)-7(e) denies application of the de minimis exception to CAAs between related parties that are entered into or structured with a principal purpose of avoiding the application of Section 901(m).
  1. Proposed Regulation Section 1.901(m)-8 provides guidance on the application of IRC Section 901(m) to pre-1987 foreign income taxes and anti-abuse rules relating to built-in loss assets.
For applicability dates of the Temporary Regulations see, Temporary Regulation Sections 1.901(m)-1T(b), 1.901(m)-2T(f), 1.901(m)-4T(g), 1.901(m)-5T(i) and 1.901(m)-6T(d).

The Proposed Regulations will apply to CAAs occurring on or after the date of publication of the Treasury decision adopting the rules in the Proposed Regulations as final regulations in the Federal Register. Taxpayers may, however, rely on the Proposed Regulations prior to the date the regulations are applicable provided that they both consistently apply Proposed Regulation Section 1.901(m)-2 (excluding Proposed Regulations Section 1.901(m)-2(d)) to all CAAs occurring on or after December 7, 2016 and consistently apply Proposed Regulation Section 1.901(m)-1 and Sections 1.901(m)-3 through 1.903(m)-8 (excluding Section 1.901(m)-4(e)) to all CAAs occurring on or after January 1, 2011. For this purpose, persons that are related (within the meaning of IRC Section 267(b) or 707(b)) will be treated as a single taxpayer. For details, see Proposed Regulation Sections 1.901(m)-1(b), 1.901(m)-2(f), 1.901(m)-3(d), 1.901(m)-4(g), 1.901(m)-5(i), 1.901(m)-6(d), 1.901(m)-7(g) and 1.901(m)-8(d).
BDO Insights BDO can assist our clients with understanding the complexities of the Proposed and Temporary Regulations under IRC Section 901(m) and also advise on how these rules may impact them from claiming foreign tax credits.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax Practice Leader          Chip Morgan        Partner    Joe Calianno
Partner and International Tax Technical Practice Leader    Brad Rode
Partner 
    William F. Roth III
Partner, National Tax Office   Jerry Seade
Principal    Scott Hendon
Partner    Monika Loving
Partner    Annie Lee
Partner   Sean Dokko
Senior Manager     
[1] The seven classes detailed in Treasury Regulation Section 1.338-6(b) include (1) cash and general deposits; (2) actively traded personal property within the meaning of IRC Section 1092(d)(1) and Treasury Regulation Section 1.1092(d)-1, certificates of deposits, and foreign currency; (3) debt instruments, including accounts receivable, and other assets that the taxpayer marks to market at least annually, with certain exceptions; (4) the taxpayer’s stock in trade or other property of a kind that would be properly included in the taxpayer’s inventory if on hand at the close of the taxable year, or property that the taxpayer holds primarily for sale to customers in the ordinary course of its trade or business; (5) all assets not in Classes (1) – (4); (6) all section 197 intangible assets other than goodwill and going concern value; and (7) goodwill and going concern value. 

Expatriate Tax Newsletter - December 2016

Thu, 12/15/2016 - 12:00am
BDO's Expatriate Newsletter covers timely tax-related updates and regulations from countries around the globe. The December 2016 issue highlights developments in India, Poland, Sweden, and more. 

Topics include: 
  • India: Salary received in India by non-resident taxpayer – taxable as per recent ruling
  • Poland: New laws on social insurance premiums for Polish employees posted abroad
  • Sweden: Tax penalty waivers based on information received from abroad

Download

2016 Year-End Tax Planning for Individuals

Thu, 12/15/2016 - 12:00am


Individual income taxes, whether paid through employer withholding or quarterly estimates, are probably one of your largest annual expenditures. So, just as you would shop around for the best price for food, clothing, or merchandise, you want to consider opportunities to reduce or defer your annual tax obligation. This Tax Letter is intended to assist you in that effort.
Download the Tax Letter

2016 Year-End Tax Planning for Businesses

Wed, 12/14/2016 - 12:00am


The time to consider tax-saving opportunities for your business is before its tax year-end. Some of these opportunities may apply regardless of whether your business is conducted as a sole proprietorship, partnership, limited liability company, S corporation, or regular corporation. Other opportunities may apply only to a particular type of business organization. This Tax Letter is organized into sections discussing year-end, and year-round, tax-saving opportunities for:
 
  • All businesses
  • Partnerships, limited liability companies, and S corporations
  • Regular (C) corporations

Download the Tax Letter

International Tax Alert - December 2016

Mon, 12/12/2016 - 12:00am
United Kingdom announces reform of the substantial shareholdings exemption Summary As part of the Autumn Statement issued on November 23, 2016, the UK government announced that it would be reforming the substantial shareholdings exemption (“SSE”) in response to consultation with businesses launched in May this year.
 
In the response document issued on December 5, 2016, the government announced several changes to the mechanics of the capital gains tax exemption on shares, which should make the rules easier to apply and provide businesses with more certainty over their application.
  Background The UK’s capital gains tax exemption on shares, the SSE, was introduced in 2002, and while the exemption was generally available for disposals of shares in trading companies by corporate members of trading groups, the rules were complex and their application was not always certain.
 
Further, and in contrast to participation exemptions in other EU countries, the exemption was not generally available for large institutional investors investing in real estate through intermediate companies.
 
In response to these concerns, changes are being made to the SSE rules that will take effect for disposals occurring on or after April 1, 2017.  
Details Broadly, under the current legislation, the following conditions must be met for a disposal of shares to be exempt from capital gains tax:
 
  1. The investing company must have held at least 10 percent of the ordinary share capital in the company being disposed throughout a 12- month period beginning not more than two years before the date of the disposal;
  2. The investing company must have been a sole trading company or member of a qualifying trading group throughout the relevant testing period (usually the twelve months prior to the disposal), and immediately after the disposal; and
  3. The company being disposed of must be a qualifying company (i.e. a trading company or holding company/sub-holding company of a trading group) throughout the relevant testing period (again, usually the twelve months prior to disposal), and immediately after the disposal.
 
The following changes to the rules are being introduced in the Finance Bill and take effect for disposals on or after April 1, 2017:
 
  • The condition outlined in paragraph 2 above is being removed.  It will no longer be necessary to test the trading status of the company making the disposal to qualify;
  • The period in paragraph 1 above, over which the SSE requirement can be satisfied, is being extended from 12 months in a two year period to 12 months within the six years prior to disposal
  • For unconnected party disposals, the requirement in paragraph 3 above, that the company being disposed of be a trading company immediately after the disposal, is being removed; and
  • The exemption will be extended to companies owned by certain qualifying institutional investors where the trading conditions are not met. For these investors the substantial shareholding condition may be met if the investing company’s shareholding is less than 10 percent of the ordinary share capital but the cost of the acquisition was at least GBP 50 million.  In terms of ownership of the company making the disposal, where at least 80 percent of the ordinary share capital of that company is owned by qualifying institutional investors, 100 percent of the gain will be exempt.  However, where between 25 percent and 80 percent of the company is owned, the percentage of the gain that is exempt will be reduced proportionally.

BDO Insights The changes to the SSE regime will be welcomed by businesses.  In particular, the removal of the requirement that the company making the disposal be a member of a trading group should greatly reduce the amount of compliance required in order to satisfy the SSE and provide businesses with more certainty as to the application of the rules.
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax
Practice Leader          Joe Calianno
Partner and International Technical
Tax Practice Leader, National Tax Office   Ingrid Gardner
Managing Director UK/US Tax Desk   Scott Hendon
Partner    Monika Loving
Partner   Chip Morgan
Partner    William F. Roth III
Partner, National Tax Office   Brad Rode
Partner    Jerry Seade
Principal   Annie Lee
Partner

International Tax Alert - December 2016

Mon, 12/12/2016 - 12:00am
New Guidance on Triangular Reorganizations Involving Foreign Corporations 
Summary In Notice 2016-73 (the “Notice”), the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) announced their intention to issue regulations under Internal Revenue Code (“IRC”) Section 367 to modify the rules relating to the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving one or more foreign corporations, and the consequences to persons that receive parent stock or securities pursuant to such triangular reorganizations. The Notice also announced the intention to issue regulations under IRC Section 367 to modify the amount of income inclusion required in certain inbound non-recognition transactions.
Details Treasury Regulation Section 1.367(b)-10 (the “Killer B regulations”) applies to certain triangular reorganizations in which a subsidiary corporation acquires stock or securities of its parent corporation in exchange for property and then exchanges the acquired parent stock or securities for stock, securities or property of a target corporation. Assuming no exception applies and the Killer B regulations apply to the transaction, the parent corporation is generally treated as receiving a distribution from the subsidiary corporation typically equal to the amount of the property transferred by the subsidiary corporation to the parent corporation to acquire the parent corporation stock and securities. This deemed distribution generally is treated as a separate transaction that occurs before the acquisition of parent corporation stock (special rules apply if the parent corporation does not control the subsidiary corporation at the time of the transfer).
 
  1. General Rules
The “367(a) priority rule” in Treasury Regulation Section 1.367(b)-10(a)(2)(iii) provides that the Killer B regulations generally do not apply to the transaction if, in an exchange under IRC Section 354 or 356, one or more U.S. persons exchange stock or securities of the target corporation and the amount of gain in the target corporation stock or securities recognized by such U.S. persons under IRC Section 367(a)(1) is equal to or greater than the sum of the amount of the deemed distribution that would be treated by the parent corporation as a dividend under IRC Section 301(c)(1) and the amount of such deemed distribution that would be treated by the parent corporation as gain from the sale or exchange of property under IRC Section 301(c)(3) (together, referred to as “Section 367(b) income”) if the Killer B regulations otherwise would apply to the transaction.

The “367(b) priority rule” in Treasury Regulation Section 1.367(a)-3(a)(2)(iv) provides a similar priority rule that turns off the application of IRC Section 367(a) to an exchange under IRC Section 354 or 356 that occurs in connection with a transaction if the amount of gain that would otherwise be recognized under IRC Section 367(a)(1) (without regards to any exceptions thereto) is less than the amount of the Section 367(b) income recognized under the Killer B regulations.

The Killer B regulations also include an anti-abuse rule that applies if a transaction is engaged in with a view to avoid the purpose of the Killer B regulations.

Treasury and the Service also issued Notice 2014-32 (2014-20 IRB 1006) on April 25, 2014, which announced the intention to issues regulations modifying and clarifying the Killer B regulations. Notice 2014-32 provided, among other items, that Section 367(b) income only includes a IRC Section 301(c)(1) dividend or IRC Section 301(c)(3) gain that would arise if the Killer B regulations applied to the transaction only to the extent such dividend income or gain would be subject to U.S. tax or would give rise to an income inclusion as Subpart F income that would be subject to U.S. tax. In addition, Notice 2014-32 also addressed certain aspects of the anti-abuse rule in the Killer B regulations.
 
  1. Changes Made by the Notice
The Notice states that Treasury and the Service are aware that certain taxpayers are engaging in transactions to repatriate earnings and basis of foreign corporations without incurring U.S. income tax by exploiting the 367(a) priority rule. The Notice provides examples of the transactions at issue.

To address these concerns, the Notice provides that the regulations will modify the 367(a) priority rule to apply only when the target corporation is a domestic corporation. Accordingly, when the target corporation is a foreign corporation, the Killer B regulations, as modified by the rules described in the Notice, will apply to the transaction assuming no other exception applies.

The Notice also provides that the regulations will modify the 367(b) priority rule to provide that, in an exchange under IRC Section 354 or 356 that occurs in connection with a transaction described in the Killer B regulations, to the extent one or more U.S. persons exchange stock or securities of a foreign corporation for stock or securities of the parent corporation acquired by the subsidiary corporation in exchange for property (as defined in Treasury Regulation Section 1.367(b)-10(a)(3)(ii), as modified by the regulations described in the Notice), IRC Section 367(a)(1) will not apply to such U.S. persons with respect to the exchange of the stock or securities of the foreign corporation.[1] Rather, the exchange will be subject to Treasury Regulation Sections 1.367(b)-4 and 1.367(b)-4T, as modified by the regulations described in the Notice.

The Section 367(b) priority rule, as modified by Notice 2014-32, will continue to apply when the target corporation is a domestic corporation. In addition, IRC Section 367(a) will apply to the exchange of stock or securities of a foreign corporation to the extent such target stock or securities are exchanged for parent corporation stock or securities that are not acquired by the subsidiary corporation for property (as defined in Treasury Regulation Section 1.367(b)-10(a)(3)(ii), as modified by the Notice) in the transaction.

In addition, Treasury and the Service announced in the Notice their intention to modify Treasury Regulation Sections 1.367(b)-4 and 1.367(b)-4T to provide that, in an exchange under Section 354 or 356 that occurs in connection with a transaction described in the Killer B regulations, to the extent an exchanging shareholder exchanges stock or securities of a foreign acquired corporation for parent corporation stock acquired by the subsidiary corporation in exchange for property (as defined in Treasury Regulation Section 1.367(b)-10(a)(3)(ii), as modified by the regulations described in the Notice) in the transaction, then such shareholder must (1) include in income as a deemed dividend the section 1248 amount attributable to the stock of the foreign acquired corporation that it exchanges and (2) after taking into account the increase in basis provided in Treasury Regulation Section 1.367(b)-2(e)(3)(ii) resulting from the deemed dividend (if any), recognize all realized gain with respect to the stock or securities of the foreign acquired corporation exchanged that would not otherwise be recognized.[2]

For purposes of the preceding paragraphs, an exchanging shareholder is a U.S. person or a foreign person that exchanges stock of a foreign acquired corporation in a prescribed exchange, regardless of whether such U.S. person is a Section 1248 shareholder or such foreign person is a foreign corporation in which a U.S. person is a Section 1248 shareholder.
 
  1. All Earnings and Profits Amount
The Notice also provides that Treasury and the Service intend to modify how the “all earnings and profits amount” in Treasury Regulation Section 1.367(b)-2(d) which requires certain U.S. shareholders to recognize taxable income in certain inbound transactions (e.g., a IRC Section 332 liquidation or a IRC Section 368 asset reorganization), is calculated. These complex rules will generally apply if there is “excess asset basis” with respect to a foreign acquired corporation.[3]

In addition, the regulations to be issued under Treasury Regulation Section 1.367(b)-3 will include an anti-abuse rule to address transactions engaged in with a view to avoid the purposes of the new rules regarding the all earnings and profits amount described in the Notice.

The regulations detailed in the Notice are intended to apply to transactions completed on or after December 2, 2016, and to any inbound transaction treated as completed before December 2, 2016, as a result of an entity classification election that is filed on or after December 2, 2016. No inference is intended regarding the treatment of the repatriation transactions at issue detailed in the Notice under current law (e.g., these transactions are currently subject to challenge under the anti-abuse rule in Treasury Regulation Section 1.367(b)-10).
BDO Insights BDO can assist our clients with understanding the complexities of the Killer B regulations and also advise on how the rules described in the Notice may impact certain repatriation transactions.

 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner and International Tax Practice Leader          Chip Morgan        Partner    Joe Calianno
Partner and International Tax Technical Practice Leader    Brad Rode
Partner 
    William F. Roth III
Partner, National Tax Office   Jerry Seade
Principal    Scott Hendon
Partner    Monika Loving
Partner    Annie Lee
Partner   Sean Dokko
Senior Manager    [1] The Notice provides that the definition of property provided in Treasury Regulation Section 1.367(b)-10(a)(3)(ii) will be modified to include subsidiary stock that is non-qualified preferred stock (as defined in IRC Section 351(g)(2)), [2] For this purpose, a “foreign acquired corporation” refers to a foreign corporation whose stock or assets are acquired by another foreign corporation in a IRC Section 351 transaction or a IRC Section 368(a)(1) reorganization. [3] The term “excess asset basis” means, with respect to a foreign acquired corporation, the amount of which the inside asset basis of the foreign acquired corporation exceeds the sum of (1) the earnings and profits of the foreign acquired corporation attributable to the outstanding stock of the foreign acquired corporation, (2) the aggregate basis in the outstanding stock of the foreign acquired corporation determined immediately before the inbound transaction and without regard to any basis increase described in Treasury Regulation Section 1.367(b)-2(e)(3)(ii) resulting from such inbound transaction, and (3) the aggregate amount of liabilities of the foreign acquired corporation that are assumed by the domestic acquiring corporation in the inbound transaction determined under the principles of IRC Section 357(d). The amount of such increase will be equal to the specified earnings with regards to such stock (if any). The Notice provides details on the calculation of specified earnings.

State and Local Tax Alert - December 2016

Wed, 12/07/2016 - 12:00am
Ohio Supreme Court Holds That Physical Presence Isn’t Necessary For Imposition of Commercial Activity Tax
Summary On November 17, 2016, the Ohio Supreme Court decided Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760, Newegg, Inc. v. Testa, Slip Opinion No. 2016-Ohio-7762, and Mason Cos., Inc. v. Testa, Slip Opinion No. 2016-Ohio-7768.  The court held that a taxpayer’s physical presence in Ohio is not a necessary condition for imposing the Commercial Activity Tax (“CAT”).  In addition, the court held that the CAT’s $500,000 sales-receipts presence standard satisfies the substantial nexus requirement of the “dormant” Commerce Clause under the United States Constitution, even if a taxpayer does not maintain a physical presence with the state.
  Details Background
 
Crutchfield Corporation (“Crutchfield”) is a company based in Virginia that sells consumer electronics through the Internet from locations outside of Ohio and ships its products using the U.S. Postal Service or common-carrier delivery services.  During the periods at issue, Crutchfield did not employ any personnel and did not maintain any facilities in Ohio.  Crutchfield’s sole business in Ohio consisted of shipping goods from outside of the state to its consumers in Ohio.  Newegg, Inc. and Mason Cos., Inc. included similar fact patterns and were companion cases to Crutchfield.
 
The Ohio tax commissioner originally issued multiple quarterly CAT assessments from 2005 to 2012, which imposed the CAT on revenue Crutchfield earned from its Internet sales of electronic products that it shipped into the state.  The CAT is a tax for the privilege of doing business in Ohio and is imposed on the Ohio taxable gross receipts of companies doing business in the state.  Crutchfield contested the assessments and argued that the assessments violated the substantial nexus standard of the Commerce Clause because the company lacked a physical presence in the state.  On February 26, 2015, the Ohio Board of Tax Appeals (“BTA”) affirmed the assessments and noted that it lacked jurisdiction to invalidate an Ohio tax statute on constitutional grounds.  The taxpayers subsequently appealed the decision to the Ohio Supreme Court.
 
Crutchfield’s Arguments
 
On appeal to the Ohio Supreme Court, Crutchfield argued that it lacked a substantial nexus with Ohio due to its lack of physical presence in the state.  Crutchfield maintained that a physical presence is necessary to create substantial nexus under the Commerce Clause for the imposition of the CAT, and relied on the U.S. Supreme Court’s ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  In addition, Crutchfield argued that the decision in Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, 483 U.S. 232 (1987) effectively imposed a physical presence requirement on business privilege taxes measured by gross receipts such as the CAT (and the Washington Business and Occupation Tax in Tyler Pipe).
 
Ohio Supreme Court Holding and Analysis
 
The Ohio Supreme Court first held that, although a physical presence in the state may provide a sufficient basis for finding substantial nexus in the state, the Quill physical presence requirement does not apply to a business privilege tax such as the CAT.  According to the Ohio Supreme Court, as long as imposition of a business privilege tax is based on an adequate quantitative standard that ensures that the taxpayer’s nexus with the state is substantial, then such tax may be imposed under the Commerce Clause even if the taxpayer lacks a physical presence.  The court held that the $500,000 sales-receipts threshold under Ohio Rev. Code § 5751.01(I)(3), which Crutchfield met during the periods at issue, was an adequate quantitative standard for constitutional CAT purposes.
 
In reaching this conclusion, the court interpreted the Quill decision’s physical presence requirement as limited to sales and use taxes.  In addition, the court noted that gross receipts taxes on an interstate seller should be comparable constitutionally to a net income tax, because the legal and economic incidence of both types of taxes are imposed on the seller.  Conversely, the economic incidence of a sales or use tax is imposed on the consumer.  The court stated that following the Quill decision, most state courts have explicitly rejected the extension of the Quill physical presence standard to taxes based on or measured by net income.  The court found the affirmation of the economic presence nexus in net income tax cases as supporting its conclusion that the physical presence standard does not apply to the CAT.  In response to Crutchfield’s argument that Tyler Pipe effectively imposed the Quill physical presence standard on business privilege taxes, the court held that the most accurate characterization of Tyler Pipe is that a taxpayer’s physical presence is a sufficient, but not necessary, condition for imposing a business privilege tax.
 
In the absence of a physical presence requirement, the court then evaluated the CAT’s constitutionality and its burden on interstate commerce.  In its analysis, the court relied on Pike v. Bruce Church, 397 U.S. 137 (1970), noting that when a state statute “regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” The court found that the burdens imposed by the CAT on interstate commerce were not “clearly excessive” in relation to Ohio’s legitimate interest in imposing the tax evenhandedly on the receipts of in-state and out-of-state sellers.  In addition, the court noted that the state attempted to remove the possibility of the CAT being excessive by setting a minimum sales-receipts threshold.  Therefore, the court held that the $500,000 sales-receipts threshold complies with the substantial nexus requirement and affirmed the BTA’s decision imposing the CAT assessments.  The dissenting opinion argued that the CAT was indistinguishable from the taxes at issue in Quill and Tyler Pipe, and the sales-receipts threshold should have been held unconstitutional.
  BDO Insights
  • Out-of-state taxpayers with no physical presence in Ohio, but who meet or exceed the $500,000 sales-receipts threshold, should evaluate their nexus exposure for purposes of the Ohio CAT.  As part of such evaluation, taxpayers should consider whether to participate in Ohio’s voluntary disclosure program.
  • While the taxpayers in these companion cases will likely seek review by the United States Supreme Court, the Ohio Supreme Court has upheld the CAT’s $500,000 sales-receipts threshold as substantial nexus.  Taxpayers that do not maintain an Ohio physical presence, but that meet or exceed the sales-receipts threshold, will need to file CAT returns for current and future tax periods.  Such taxpayers, however, should consider filing protective refund claims should the United State Supreme Court issue a writ of certiorari and decide in favor of the taxpayers.    
  • While Crutchfield et al. could support other states with similar sales-receipts thresholds for purposes of establishing nexus for their gross receipts taxes (e.g., Washington’s $250,000 sales-receipts threshold), the ruling of the Ohio Supreme Court appears limited to taxes on or measured by net income and gross receipts.  The Quill physical presence standard is under attack in multiple states with regards to sales and use taxes (e.g., Alabama, South Dakota, Tennessee, and Vermont).  See the Alabama BDO SALT Alert, the South Dakota BDO SALT Alert, the Tennessee BDO SALT Alert, and the Vermont BDO SALT Alert that discuss the economic nexus standards in those states.  These states argue that the physical presence standard is outdated for the current remote retailing environment and technology and are attempting to assert jurisdiction to impose sales and use tax collection obligations on remote sellers having only a sales-receipts threshold “contact” with the state.  The distinctions drawn by the Ohio Supreme Court in Crutchfield et al. between business privilege taxes and sales and use taxes appear to preclude the cases from supporting these state sales and use tax economic presence nexus efforts.  
 

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

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






   
Southwest:
Gene Heatly
Tax Managing Director

Tom Smith
Tax Partner
 

Compensation & Benefits Alert - December 2016

Wed, 12/07/2016 - 12:00am
Fringe Benefit Items to Include On 2016 Form W-2
As 2016 draws to a close, we would like to remind you about the proper inclusion of fringe benefits in an employee’s and/or shareholder’s taxable wages. Fringe benefits are defined as a form of pay for performance of services given by a company to its employees and/or shareholders as a benefit. Fringe benefits must be included in an employee’s pay unless specifically excluded by law. Please note the actual value of the fringe benefits provided must be determined prior to December 31 in order to allow for the timely withholding and depositing of payroll taxes. Below you will find important information regarding the identification and accounting for several customarily provided fringe benefits.
 
Please be aware that the 2016 tax year Forms W-2 and 1099-MISC (with income reported in Box 7) are now due to the IRS by January 31, 2017.
 
The failure to include taxable fringe benefits in an employee’s/shareholder’s Form W‑2 may result in lost deductions and additional tax and civil penalties.
  Common Taxable Fringe Benefits
  Employer-paid group-term life insurance coverage in excess of $50,000
 
This fringe benefit is subject to the withholding of Social Security and Medicare taxes (FICA) only. Though the amount is included in gross wages, federal and state income tax withholding is not required.
 
Employee business expense reimbursements/allowances under non-accountable plans
 
Any payments of an allowance/reimbursement of business expenses for which the employee does not provide an adequate accounting (i.e., substantiation with receipts or other records), or return any excess allowance/reimbursement to the company, is considered to have been provided under a non-accountable plan and are required to be treated as taxable wages for purposes of federal, state and local (if applicable) income tax withholding; employer and employee FICA tax; and federal and state unemployment taxes (FUTA and SUTA). However, if the employee provides an adequate accounting (i.e., substantiation with receipts or other records) of the expenses incurred, or is “deemed” to have substantiated the amount of expenses under a per diem arrangement, then the reimbursement amounts are excludable from taxable income/wages.
 
Value of personal use of company car
 
This fringe benefit (unless reimbursed by the employee) is subject to FICA, FUTA, FIT, and SIT. However, you may elect not to withhold FIT and SIT on the value of this fringe benefit if the employee is properly notified by January 31 of the electing year or 30 days after a vehicle is provided. For administrative convenience, an employer can elect to use the 12-month period beginning November 1 of the prior year and ending October 31 of the current year (or any other 12-month period ending in November or December) to calculate the current year’s personal use of a company car if the employee is properly notified no earlier than the employee’s last paycheck of the current year and no later than the date the Forms W-2 are distributed. Once elected, the same accounting period generally must be used for all subsequent years with respect to the same automobile and employee.
 
Many companies have moved away from providing company cars in lieu of a cash payment to reimburse the employee for the business use of their personal automobile.  Car allowances paid in cash without any substantiation of business use are fully taxable and subject to all of the tax withholdings of FICA, FUTA, FIT, and SIT.
 
Value of personal use of company aircraft
 
This fringe benefit (unless reimbursed by the employee to the extent permitted under FAA rule) is subject to FICA, FUTA, FITW, and SITW. The value calculated is based on the Standard Industry Fare Level formula provided by the Internal Revenue Service. Expenses related to personal entertainment use by officers, directors and 10 percent or greater owners that are in excess of the value treated as compensation to key employees are nondeductible corporate expenses. Feel free to contact us for assistance calculating the value of the personal use of company aircraft.
 
De minimis benefits
 
De minimis benefit amounts can be excluded when the benefit is of so little value (taking into account the frequency) that accounting for it would be unreasonable or administratively impractical. A common misconception is that if a fringe benefit is less than $25, then it is automatically considered a de minimis benefit. However, there is no statutory authority for this position. If a fringe benefit does not qualify as de minimis, generally the entire amount of the benefit is subject to income and employment taxes (FICA, FUTA, FITW, and SITW). De minimis benefits never include cash, gift cards/certificates or cash equivalent items no matter how little the amount, season tickets to sporting or theater events, use of an employer’s home, apartment, boat, or vacation home, and country club or athletic facility memberships. Gift cards/certificates that cannot be converted to cash and are otherwise a de minimis fringe benefit, which is redeemable for only specific merchandise, such as ham, turkey or other item of similar nominal value, would be excluded from income. However, gift cards/certificates that are redeemable for a significant variety of items are deemed to be cash equivalents. Any portion of such a gift card/certificate redeemed would be included in the employees’ Forms W-2 and subject to income and employment taxes as detailed above.
 
Value of employee achievement awards, gifts and prizes
 
This fringe benefit is subject to FICA, FUTA, FITW, and SITW. In general, employee achievement awards, gifts, and prizes that do not specifically qualify for exclusion are only deductible for the employer up to $25 per person per year, unless the excess is included as taxable compensation for the recipient. Any gifts in excess of $25 per person per year to employees in the form of tangible or intangible property are includable as a taxable fringe benefit for employees. There are two exclusions from the general rule for employee achievement awards:
 
  1. Achievement awards for length of service (must be greater than five years and not awarded to same employee in the prior four years) or safety, each of them being made as part of a meaningful presentation may be excluded from an employee’s taxable income. The exclusion applies only for awards of tangible personal property and is not available for awards of cash, gift cards/certificates, or equivalent items. The exclusion for employee achievement awards is limited to $400 per employee for nonqualified (unwritten and discriminatory plans) or up to $1,600 per employee for qualified plans (written and nondiscriminatory plans).
  2. Certain non-cash achievement awards, such as a gold watch at retirement or nominal birthday gifts, may fall within the exclusion for de minimis benefits.  
 
Value of qualified transportation fringe benefits
 
Qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are subject to FICA, FUTA, FITW, and SITW. For 2016, the statutory limits are $255 per month for qualified parking AND $255 for transit passes and van pooling.   An employee can be provided both benefits for a total of $510 per month tax free with the excess being included in Form W-2. Note that amounts exceeding the limits cannot be excluded as de minimis fringe benefits.
 
Employers can also exclude up to $20 per month for the reimbursement of qualified bicycle commuting expenses, but only for months in which the employee actually commuted to work by bicycle.  This benefit is more restrictive than the transit and parking benefits in that  employees cannot make a pre-tax election to reimburse the expense and employees who receive qualified bicycle commuting reimbursements may not take advantage of any other qualified transportation fringe benefits in that same month.
 
Also, the value of any de minimis transportation benefit provided to an employee can be excluded from Form W-2.  A de minimis transportation benefit is any local transportation benefit provided to an employee that has so little value after taking into account the frequency that accounting for it would be unreasonable.  For example, an occasional taxi fare home for an employee working overtime or departing business dinner may be provided tax free. 
 
Some Local Jurisdictions Require Mass Transit Options
 
The District of Columbia requires employers with 20 or more employees to offer qualified transit benefits.  While D.C. employers are not necessarily required to subsidize the cost of their employee’s commuting expenses under the new law, they are required to provide an arrangement for employees to make a pre-tax election to take full advantage of the maximum statutory limits for transit, commuter highway, or bicycling benefits. San Francisco and New York City have adopted similar laws in an attempt to promote the use of available mass transit options, and to reduce automobile-related traffic and pollution. You should check your local requirements for each employee location.
 
Value of personal use of employer-provided cell phone
 
Since January 1, 2010, employer-provided cell phones are no longer treated as a taxable fringe benefit as long as the cell phone is provided to the employee primarily for noncompensatory business reasons, such as the employer’s need to contact the employee at all times for work-related emergencies, or the need for the employee to be available to speak to clients when the employee is away from the office.  Notice 2011-72 clarifies the exclusion of the cell phone’s value from the employee’s income as a working condition fringe benefit.
 
This change in the law also eliminated the need for the rigorous substantiation of the business use of employer-provided cell phones that were otherwise required for “listed property.”
 
Rules require taxation of certain fringe benefits to 2-percent S corporation shareholders
 
In addition to the adjustments previously discussed, certain otherwise excludable fringe benefit items are required to be included as taxable wages when provided to any 2-percent shareholder of an S corporation. A 2-percent shareholder is any person who owns directly or indirectly on any day during the taxable year more than 2 percent of the outstanding stock or stock possessing more than 2 percent of the total combined voting power. These fringe benefits are generally excluded from income of other employees, but are taxable to 2-percent Scorporation shareholders similar to partners. If these fringe benefits are not included in the shareholder’s Form W-2, then they are not deductible for tax purposes by the S Corporation.  (See Notice 2008-1.) The disallowed deduction creates a mismatch of benefits and expenses among shareholders, with some shareholders paying more tax than if the fringe benefits had been properly reported on Form W-2.
 
The includable fringe benefits are items paid by the S corporation for:
 
Health, dental, vision, hospital and accident (AD&D) insurance premiums, and qualified long-term care (LTC) insurance premiums paid under a corporate plan.
 
These fringe benefits are subject to FITW and SITW only (not FICA or FUTA). These amounts include premiums paid by the S corporation on behalf of a 2-percent shareholder and amounts reimbursed by the S corporation for premiums paid directly by the shareholder. If the shareholder partially reimburses the S corporation for the premiums, using post-tax payroll deductions, the net amount of premiums must be included in the shareholder’s compensation. 2-percent shareholders cannot use pre-tax payroll deductions to reimburse premiums paid by the S corporation.
 
Cafeteria plans
 
A 2-percent shareholder is not eligible to participate in a cafeteria plan, nor can the spouse, child, grandchild or parent of a 2-percent shareholder. If a 2-percent shareholder (or any other ineligible participant, such as a partner or nonemployee director) is allowed to participate in a cafeteria plan, the cafeteria plan will lose its tax-qualified status, and the benefits provided will therefore be taxable to all participating employees, therefore nullifying any pretax salary reduction elections to obtain any benefits offered under the plan.
 
Employer contributions into health savings accounts (HSA)
 
This fringe benefit is subject to FITW and SITW only (not FICA or FUTA). If the shareholder partially reimburses the S corporation for the HSA contribution, using post-tax payroll deductions, the net amount of the contribution must be included in the shareholder’s compensation. 2‑percent shareholders cannot use pre-tax payroll deductions to reimburse HSA contributions paid by the S corporation.  However, these 2 percent owners can take a corresponding above-the-line deduction for the cost of their HSA contributions on their personal tax return.
 
Short-term and long-term disability premiums
 
These fringe benefits are subject to FICA, FUTA, FITW, and SITW.
 
Group-term life insurance coverage
 
All group-term life insurance coverage is treated as taxable, not just coverage in excess of $50,000. The cost of the insurance coverage (i.e., the greater of the cost of the premiums or the Table I rates) is subject to the withholding of FICA taxes only. The cost of the insurance coverage is not subject to FUTA, FITW, or SITW. Please note that you should not include the cost associated with any life insurance coverage for which the corporation is both the owner and beneficiary (e.g., key man life insurance) in the shareholder’s Form W-2.
 
Other taxable fringe benefits
 
Employee achievement awards, qualified transportation fringe benefits, qualified adoption assistance, employer contributions to medical savings account (MSA), qualified moving expense reimbursements, personal use of employer-provided property or services, and meals and lodging furnished for the convenience of the employer must also be included as compensation to 2‑percent shareholders of an S corporation. All of the above fringe benefits are subject to FICA, FUTA, FITW, and SITW.
 
Nontaxable fringe benefits
 
The following fringe benefits are NOT includible in the compensation of 2-percent shareholders of an S corporation: qualified retirement plan contributions, qualified educational assistance up to $5,250, qualified dependent care assistance up to $5,000, qualified retirement planning services, no-additional-cost services, qualified employee discounts, working condition fringe benefits, de minimis fringe benefits, and on-premises athletic facilities.
 
For more information please contact one of the following practice leaders: 
  Joan Vines
    Rob Kaelber
    Carl Toppin
    Paul Cheung
    Alex Lifson
    Erica Paul
 

China Tax Newsletter - December 2016

Mon, 12/05/2016 - 12:00am
The December 2016 edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, including the following topics: 
 
  • Notice on the Adjustment to Policies of Consumption Tax on Cosmetics 
  • Announcement of the Shenzhen Local Taxation Bureau and the Shenzhen Municipal Office, SAT on Entrusted Levying and Collection of Local Taxes and Dues
  • Notice of the Shenzhen Local Taxation Bureau on Adjustments to Pre-tax Deduction and Exemption Standards Relating to IIT for 2016
  Download

Private Client Services Tax Alert

Fri, 12/02/2016 - 12:00am
Year End Planning with the Lame Duck Session and President-elect Trump


The election is over, so now we can start speculating as to what will happen in the lame duck session, and what a Trump-Pence Administration might mean for tax policy.  Your advisors here at BDO have put our collective wisdom together, and offer the following suggestions as we approach year end.


Lame Duck Session

With the Republican retention of majorities in both the House and the Senate, and Trump’s victory, the Republican Congressional leaders have little reason to cooperate with the Democrats on pending matters, or otherwise show any motivation to pass legislation in this session.  Congress does have to pass a government funding bill in this session.  Currently, the government is only funded through December 9.  Congress has the option to only fund through a date in this first quarter or for the entire fiscal year.  The general view in Washington is that they will only fund through sometime in the first quarter, so that Republican leadership can influence the funding priorities when President Trump is in office and approve the bill.


Personal and Business Tax Rates

The Trump-Pence tax proposals published in September 2016 and the House GOP Blueprint released in June 2016 both propose to reduce the number of personal income tax brackets and to lower the top marginal rate to 33 percent.  The two plans also contain retaining preferential rates for long-term capital gains.

The plans also call for reduced rates on business income, including pass through income from partnerships and S corporations.  The Trump-Pence proposal recommends 15 percent rate on small business income, the House GOP Blueprint envisions a 25 percent rate.  The existing top rate on business income flowing to an individual tax return is 39.6 percent, therefore, both proposals would offer significant tax relief to pass through business owners. 


Other Provisions Impacting Individuals

There is also agreement between the two plans that both the Alternative Minimum Tax (“AMT”) and the Net Investment Income tax (“NIIT”) should be repealed.  The complexity of the AMT has been criticized for years by the Republican Party.  The 3.8 percent NIIT surtax was enacted as part of the Affordable Care Act, and has been targeted since inception, so it is not a surprise that both plans also contain the repeal of this tax.

The GOP Blueprint includes some broad language that they also intend to repeal “special-interest” provisions to improve the system and make it fairer.  It is unclear what provisions this language targets.  In the Trump-Pence proposal, there is a provision to tax carried interest income at ordinary income tax rates instead of the capital gain rate.


New Deduction Scheme

Both plans call for a new way of looking at itemized deductions.  The Trump-Pence proposal is to keep the existing rules but to cap all itemized deductions at $100,000 for single filers and $200,000 for married filing joint (“MFJ”).  The House GOP Blueprint is more transformative.  It calls for elimination of the itemized deduction concept and retention of only the mortgage interest deduction and the charitable deduction.


Transfer Tax Scheme

The Trump-Pence plan and the House GOP Blueprint both call for the repeal of the estate and generation skipping transfer taxes.  The Trump-Pence plan states that capital gains held until death and valued over $10 million will be subject to tax.  It also says there will be special treatment of small businesses and family farms.  The language is vague, so it is too early to tell exactly what these proposals mean in practice, as different groups have interpreted the proposal to mean different things.  Additionally, the Trump-Pence plan proposes to disallow a deduction for contributions of appreciated assets into a private charity established by the decedent or decedent’s relatives.

In terms of the gift tax, both proposals are unclear as to the impact.  Some commentators have stated that the proposals also repeal the gift tax while others have said the proposals do not.  We will have to wait for clarity on that issue.  A repeal of the gift tax would have significant income tax implications, as individuals could transfer property at will to minimize the income tax on sales of property.


BDO Insights

Given these potential changes, actions you may want to consider include:

  • Deferring income recognition – with lower rates a distinct possibility, deferring income to 2017 seems prudent;
  • Deferring generation of capital gains and other investment income subject to NIIT – both proposals promote the repeal of the NIIT;
  • Accelerating the payment of state income taxes if itemized deductions are over $200,000 (MFJ);
  • Accelerating the funding of charitable contributions if itemized deductions are over $200,000 (MFJ); and
  • Reevaluating any planned transfer tax planning in light of possible repeal of the estate tax with your advisory team.

By all accounts, the next 12 months could be a very active period for tax policy.  As such, we recommend that once the dust settles and there is new legislation in place, everyone review the new rules with their BDO team to determine the specific impact and opportunities on their personal, business and transfer tax planning. 
For more information, please contact one of the following regional practice leaders: 
  Joan Holtz
Partner - Private Client Services                      Sharon Berman
Regional Practice Leader - Private Client Services   Jeff Kane
National Managing Partner - Private Client Services   Mike Campbell
Regional Practice Leader - Private Client Services   Jack Nuckolls
Technical Director - Private Client Services   Marty Cass
Regional Practice Leader - Private Client Services   Brooke Anderson
Regional Practice Leader - Private Client Services   Jerry Guillott
Regional Practice Leader - Private Client Services   Chuck Barragato
Regional Practice Leader - Private Client Services   Traci Kratish
Managing Director - Private Client Services

BDO World Wide Tax News - November 2016

Mon, 11/28/2016 - 12:00am
The November 2016 issue of the World Wide Tax Newsletter, published by BDO International, covers tax issues of international interest, including: Brexit tax implications in the U.K., the new regime of Managed Investment Trusts in Australia, advance rulings for new investments in Italy, fiscal disclosure in Argentina, and more. 
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BDO Transfer Pricing News - November 2016

Mon, 11/28/2016 - 12:00am
This 21st issue of BDO’s Transfer Pricing Newsletter focuses on recent developments in the field of transfer pricing in Austria, China, Luxembourg, Russia, the United Kingdom and the United States. As you can read, the ongoing work on OECD’s BEPS project results in changing and new legislation around the world.
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