Tax Update

Tax Update

In this section of Jnet, we provide brief updates on legislative, judicial, and administrative developments in tax that may impact Japanese companies operating in the United States.

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July 2014

Old W-8 Forms May Be Used Until December 31, 2014

On July 7, the IRS has posted updated versions of the forms relating to withholding and FATCA reporting including Forms W-8IMY, W-8EXP, W-8ECI, and W-8BEN-E, noting that a withholding agent can accept the prior version of the form (i.e., the 2006 version) through the end of 2014.

Treasury regulations provide that the new forms must be used six months after the revision date (September 1, 2014 for the Form W-BEN-E and the Form W-8ECI and November 1, 2014 for the other two forms). However, the IRS had informally stated that it would allow such treatment, and the updated forms apparently are intended to provide a greater degree of comfort for withholding agents and foreign financial institutions (FFIs).

The language included in the notes on page one of each form makes clear that the 2006 version of the form obtained between now and the end 2014 will be valid for the normal validity period for purposes of withholding and until the end of the transition period for purposes of FATCA (i.e., December 31, 2014 for a "prima facia FFI" and June 30, 2016, for all other entities).

Final Regulations: Truncated TINs Allowed on Payee Statements, Other Documents

On July 14, the Treasury Department and IRS released final regulations (T.D. 9675) concerning the use of a "truncated taxpayer identification number" (TTIN), displaying only the last four digits of a taxpayer identifying number with either asterisks (*) or with Xs replacing the first five digits of the identifying number, in an effort to reduce the risk of identity theft when a taxpayer's entire identification number is used on payee statements or other documents (generally including a Schedule K-1 issued to a partner, S corporation shareholder, or trust beneficiary).

The final regulations adopt rules that were proposed in 2013 with certain changes. In general, the final regulations provide that when not prohibited by the Code, regulations or IRS guidance, a TTIN can be used on payee statements and certain other documents in lieu of:

  • A taxpayer's social security number (SSN)
  • IRS individual taxpayer identification number (ITIN)
  • IRS adoption taxpayer identification number (ATIN)
  • Employer identification number (EIN)

Under the 2013 proposed regulations, the use of a TTIN was permitted only if affirmatively authorized by the IRS. The preamble to the final regulations explains that a "modified approach" is being adopted to allow the use of a TTIN on any federal tax-related payee statement unless specifically prohibited so that there is no need to amend every information reporting regulation to permit the use of a TTIN.

The use of a TTIN, however, is not allowed on every document—e.g., tax returns and statements filed with the IRS—because complete taxpayer identifying numbers on returns and statements filed with the IRS are necessary for the IRS to determine compliance with the tax laws and validate the information provided.

The final regulations will be published in the Federal Register on July 15 and generally are effective for payee statements due after December 31, 2014.

Delaware: Unclaimed Property Voluntary Disclosure Program Extended

Delaware's Unclaimed Property Voluntary Disclosure Agreement (VDA) program, that was originally established in 2012, has been extended. Originally, the deadline for applying to participate in the VDA program was June 30, 2014. Legislation (Senate Bill 228) provides additional time under the program by:

  • Extending the deadline to enter into the VDA program to September 30, 2014
  • Extending the sunset date of the program from July 1, 2015, to July 1, 2016

Companies that have received an audit notice from the Delaware State Escheator, however, cannot participate in the VDA program.

The legislation also revises the penalty and interest provisions as applied to holders of Delaware unclaimed property that fail to remit property in a timely manner. Previously, holders of unclaimed property that fail to file an unclaimed property report are subject to a penalty equal to 5% per month of the amount required to be shown on the report. The maximum penalty cannot exceed 50% in the aggregate. Interest charges could also equal up to 50% of the amount required to be reported. Under the new legislation (Senate Bill 228):

  • The revised penalty for failing to file an unclaimed property report is the lower of 5% per month or $100 per day.
  • The maximum penalty that can be imposed is 50% of the amount required to be shown on the report—not to exceed $5,000.
  • The assessment of interest on the amount of a holder's outstanding unreported unclaimed property is repealed.

Senate Bill 228 does not indicate an effective date for the revised penalty and interest provisions.

New Jersey: Click-Through Nexus Legislation Enacted

Assembly Bill 3486 is enacted to introduce a click-through nexus statute effective for all sales made on or after July 1, 2014. The New Jersey statute is virtually identical to the click-through nexus statute enacted by New York State lawmakers in 2008. That measure was held to be constitutional on its face by New York's highest court last year. Under the new law, a seller will be presumed to be soliciting business through a New Jersey independent contractor or other representative if the seller enters into an agreement with the representative or independent contractor that has physical presence in the state to, directly or indirectly, through a link on an Internet website or otherwise, refer potential customers to the seller in exchange for a commission or other consideration. The presumption applies only if the seller has cumulative gross receipts in excess of $10,000 from sales to New Jersey customers resulting from all such agreements during the preceding four quarterly periods. The presumption can be rebutted if the seller demonstrates that the in-state representative or independent contractor with whom it has entered into an agreement did not engage in any solicitation activities on behalf of the seller that would satisfy the nexus requirements of the U.S. Constitution during the time period in question.

Michigan: Taxpayer May Use Compact Election to Compute Business Tax

On July 14, the Michigan Supreme Court issued a taxpayer-favorable decision holding that the taxpayer was entitled to use the Multistate Tax Compact's elective three-factor apportionment formula based on gross receipts, payroll, and property to calculate its 2008 Michigan Business Tax. International Business Machines Corp. v. Department of Treasury, No. 146440 (Mich. July 14, 2014)

The Michigan Court of Appeals in a November 2012 unpublished decision held that a taxpayer could not elect to use the Multistate Tax Compact's allocation and apportionment provisions in computing its Michigan Business Tax liability because the state's adoption of the mandatory MBT apportionment provisions implicitly repealed the Compact election.

In its July 14 opinion, the Michigan Supreme Court reversed the Court of Appeals and held that the modified gross receipts tax is an income tax for purposes of the Multistate Tax Compact and that the taxpayer was entitled to use the compact's elective three-factor apportionment formula to calculate its 2008 Michigan taxes.

June 2014

Temporary and Proposed Regulations Allows Alternative Simplified Credit Elections on Amended Returns

On June 2, the Treasury Department and IRS released temporary regulations (T.D. 9666) and, by cross-reference, proposed regulations (REG-133495-13) to allow the alternative simplified credit (ASC) election for purposes of the research credit on an amended return if a return claiming the credit has not previously been filed for that tax year.

The ASC is an elective method of computing the research credit. A taxpayer that elects to use the ASC is allowed a credit equal to 14% of the amount by which its qualified research expenses (QREs) for the tax year exceed 50% of its average QREs for the three preceding tax years. An electing taxpayer that does not have any QREs in one or more of the three preceding tax year is allowed an ASC equal to 6% of its QREs for the tax year. An election to use the ASC remains in effect until it is revoked with the consent of the IRS.

The preamble to the temporary regulations explains that Treasury and the IRS received numerous requests to amend the June 2011 regulations so as to allow taxpayers to make an ASC election on an amended return. Proponents of this change explained that the burden of substantiating qualified expenditures for the base period under the regular credit can be costly and time-consuming, and suggested that additional time was often needed to determine whether to claim the regular credit or the ASC. In response to these requests, the temporary and proposed regulations remove the rule prohibiting taxpayers from making an ASC election on an amended return.

The temporary regulations also provide, however, that a taxpayer that previously claimed the credit on an original or amended return for a tax year may not then make an ASC election for that tax year on an amended return. Also, the temporary regulations provide that a taxpayer that is a member of a controlled group in a tax year may not make an ASC election for that tax year on an amended return if any member of the controlled group for that year previously claimed the research credit using a method other than the ASC on an original or amended return for that tax year.

The temporary regulations apply to elections with respect to tax years ending on or after June 3, 2014. The temporary regulations expire on June 2, 2017. However, a taxpayer may rely on these regulations to make an ASC election for a tax year ending prior to June 3, 2014, if the taxpayer makes the election before the period of limitations for assessment of tax has expired for that year. Comments and requests for a public hearing with respect to the proposed regulations are due by the date that is 90 days after June 3, 2014.

Final Regulations to Modify Circular 230

On June 9, the Treasury Department and IRS released final regulations (T.D. 9668) that amend Circular 230 which provides standards for written tax advice and other rules concerning tax practitioners. The final regulations adopt the changed proposed in the notice of proposed rulemaking (REG–138367–06) issued On September 17, 2012 with some revisions.

The modifications adopted by the final regulations include the following:

  • Covered opinion rules are eliminated.
  • Requirements for written advice are revised to provide expanded rules to replace the covered opinion rules intended to be adhered by all practitioners when rendering written advice.
  • The requirement for firms to establish procedures to ensure compliance with Circular 230 is expanded to apply to all provisions in Subparts A, B, and C of Circular 230.
  • General standard of competence is updated to provide that a practitioner must possess appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.
  • A practitioner is prohibited from endorsing or otherwise negotiating any check issued to a client by the government in respect of a Federal tax liability, including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated.
  • Expedited suspension procedure is established to allow immediate suspension of a practitioner who has engaged in certain conduct.

The amended Circular 230 will apply to written tax advice rendered on or after June 12, 2014.

Final Version of Instructions for Form W-8BEN-E Released

On June 25, the IRS posted the final version of the instructions for Form W-8BEN-E,Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).

The IRS previously released the final version of Form W-8BEN-E. The form is intended to be completed by a non-U.S. entity who is certifying it is the non-U.S. beneficial owner of a payment of income for current withholding tax purposes as well as to provide its FATCA status as either payee or account holder of a foreign financial institution (FFI).

The instructions for Form W-8BEN-E explain that Form W-8BEN-E—along with Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP—reflects the withholding and documentation requirements of FATCA as follows:

  • Under FATCA, FFIs that are participating FFIs—and certain registered deemed-compliant FFIs—are generally required to identify their U.S. account holders, regardless of whether a payment subject to withholding is made to the account.
  • U.S. withholding agents and FFIs will be required to begin withholding under FATCA on certain payments beginning on July 1, 2014.
  • Form W-8BEN-E is to be used exclusively by entities to document their status both as a payee under FATCA and beneficial owner under the withholding tax rules (including a claim of treaty benefits for reduced withholding).
  • Individuals documenting their foreign status (or making a claim of treaty benefits for reduced withholding) are to use Form W-8BEN instead of Form W-8BEN-E.
  • An entity account holder holding accounts with certain FFIs that does not document its applicable FATCA status when required may be treated as a recalcitrant account holder or nonparticipating FFI and will be subject to 30% withholding on payments it receives from the FFI.

May 2014

Competent Authority Statistics for 2013 Released

On May 29, the IRS released a report providing statistics of Competent Authority actions for 2013. As the U.S. Competent Authority has jurisdiction over both the Advance Pricing and Mutual Agreement (APMA) Program and the Treaty Assistance and Interpretation Team (TAIT), the report contains statistics on mutual agreement procedure (MAP) request cases handled by both APMA and TAIT but excludes Advance Pricing Agreement (APA) information which is reported separately. Note that 2013 statistics are for 15 months starting from October 1, 2012 through December 31, 2013 while previous fiscal years covered 12 months from October 1 through September 30.

APMA

 

 

Requests Received

Cases Resolved

Adjustments Initiated By

Combined

Adjustments Initiated By

Combined

U.S.

Foreign

U.S.

Foreign

2009

24

134

158

30

55

85

2010

23

77

100

31

115

146

2011

25

141

166

18

119

137

2012

51

130

181

16

74

90

2013

48

218

266

40

119

159

 

 

Case Resolutions 2013

Adjustments Initiated By

Combined

U.S.

Foreign

Case Withdrawn by Taxpayer

5

9

14

Total Adjustment Withdrawn by Initiating Tax Authority

18

18

36

Full Correlative Relief

11

19

30

Partial Correlative Relief and Partial Withdrawal (Full Relief)

5

59

64

Partial Correlative Relief or Partial Withdrawal (Partial Relief)

1

7

8

No Relief

0

7

7

Total Number of Cases

40

119

159

 

 

Pending Requests

Adjustments Initiated By

Combined

U.S.

Foreign

2013

91

433

524



TAIT

 

Requests Received

Cases Resolved

Cases/Matters Initiated By

Combined

Cases/Matters Initiated By

Combined

U.S.

Foreign

U.S.

Foreign

2009

45

41

86

22

20

42

2010

31

48

79

23

41

64

2011

23

48

71

46

58

104

2012

18

37

55

16

34

50

2013

77

60

137

53

49

102

 

 

Pending Requests

Cases/Matters Initiated By

Combined

U.S.

Foreign

2013

91

118

209

Anti-Corporate Inversion Bills Submitted in both House and Senate

On May 20, Senator Carl Levin announced that legislation that would "tighten" rules on corporate tax avoidance through "inversion"―i.e. the practice of a corporate taxpayer re-incorporating offshore to avoid paying U.S. taxes—has been introduced as the Stop Corporate Inversions Act of 2014. The bill would:

  • Effectively impose a two-year sunset rule for inversions, including the practice of shifting a corporation's tax residence overseas through acquisition of an offshore company to avoid paying U.S. income taxes
  • Significantly reduce a tax "loophole" that allows U.S. companies that merge with foreign companies to reincorporate offshore in lower-tax jurisdictions to avoid being subject to U.S. tax on their overseas earnings.

Under current U.S. tax law, the merged company is treated as a foreign company if more than 20% of the stock of the merged company is owned by stockholders who were not stockholders of the U.S. company or if the merged company has at least 25% of its employees, sales, and assets where it is incorporated.

The legislation would increase the needed percentage change in stock ownership from 20% to 50% and would provide that the merged company would nevertheless continue to be treated as a domestic U.S. company for tax purposes if management and control of the merged company remains in the United States and either 25% of its employees or sales or assets are located in the United States.

The bill would add a two-year sunset rule with respect to inversions that do not meet the proposed stricter tests, so that Congress can consider a long-term solution as part of general corporate tax reform.

On May 23, House Ways and Means Committee ranking member Sandy Levin introduced a bill that contains provisions that are substantially similar to those proposed in the Senate bill.

Proposed Regulations - Revised Definition of "Acquiring Corporation" under Section 381

On May 6, the Treasury Department and IRS released proposed regulations (REG-131239-13) that modify the definition of an "acquiring corporation" under section 381.

Section 381 provides that the acquiring corporation ("Acquiring Corporation") in a tax-free reorganization will inherit the tax attributes of the target ("Target"). Current regulations under section 381 provide that the Acquiring Corporation for this purpose either will be the corporation that directly acquires the Target assets or another corporation if that other corporation receives all of the assets of the Target pursuant to the plan of reorganization.

Under this rule, for example, if Target merges into corporation X in a transaction constituting a tax-free reorganization and X transfers less than all of the Target assets to a wholly owned subsidiary ("Sub") as a part of the plan of reorganization, X will be the Acquiring Corporation and inherit all of Target's attributes. On the other hand, if X transfers all of Target's assets to Sub as part of the plan of reorganization, Sub will be the Acquiring Corporation and inherit all of Target's tax attributes.

The proposed regulations would provide that the first corporation to receive Target's assets in the reorganization would retain all of Target's attributes described in section 381(c) regardless of whether it transferred some, all, or none of Target assets pursuant to the reorganization.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.

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