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.

Related content

October 2015

Senate Foreign Relations Hearing on U.S.-Japan Treaty Held

On October 29, the Senate Foreign Relations Committee held a hearing on pending income tax treaties and Protocols including a protocol to amend the U.S.- Japan Income Tax Treaty, which was signed in January 2013. Robert Stack, Treasury Department's Deputy Assistant Secretary for International Tax Affairs, and Thomas Barthold, Joint Committee of Taxation's Chief of Staff, presented testimonies before the committee.

In addition to the protocol to amend the U.S.-Japan Treaty, treaties and protocols with the following countries were discussed: Switzerland, Luxembourg, Hungary, Chile, Spain, and Poland. Also, the hearing covered the protocol to amend the OECD Convention on Mutual Administrative Assistance in Tax Matters.

Ratification requires the consent of the Senate. A signed tax treaty is first referred to the Senate Foreign Relations Committee for consideration. A public hearing for the tax treaty is typically held. The Senate Foreign Relations Committee then reports the treaty with a recommendation to the full Senate.

The Senate Foreign Relations Committee in early 2014 approved and reported tax treaties and/or Protocols with Switzerland, Luxembourg, Hungary, Chile, Spain, and the Protocol amending the OECD convention on mutual administrative assistance in tax matters. However, approval by the full Senate under unanimous consent motions had been blocked by Senator Rand Paul (R-KY).

In advance of the hearing, the Joint Committee on Taxation released an explanation (JCX-136-15) of a Protocol to amend the U.S.-Japan Treaty on October 28.

BEPS Final Recommendations: Reaction from Ways and Means Chair

On October 5, House Ways and Means Chairman Paul Ryan (R-WI) issued a statement, following the OECD's release of final recommendations under the base erosion and profit shifting (BEPS) project.

The statement issued by the Ways and Means Committee criticizes the current U.S. tax system which discourages repatriation by pointing out that "trillions of dollars of American capital are locked out of the United States and, as a result, U.S. companies are being targeted by governments eager to tax away their earnings."

The Ways and Means statement also criticized the fact that the Obama administration has not responded to earlier correspondence addressed to Treasury Secretary Jack Lew from both Chairman Ryan and Senate Finance Committee Chairman Orrin Hatch (R-UT), in which the leaders of the congressional tax writing committees outlined their concerns about Treasury's planned country-by-country reporting that would reflect one of the BEPS initiatives.

Internet Tax Moratorium Extended to December 11

The Internet Tax Freedom Act has been extended until December 11, 2015, as part of a continuing resolution to fund the federal government through December 11, as passed by Congress and signed by President Obama. The legislation prevents state and local governments from taxing internet access, or imposing multiple or discriminatory taxes on electronic commerce. States and localities that had imposed and enforced taxes on internet access prior to October 1, 1998, may continue to do so under "grandfather provisions" (seven states impose tax internet access). With this most recent extension, the original three-year moratorium enacted in 1998 will have been extended a total of six times, including temporary extensions.

Who will be Next Ways and Means Chairman?

On October 29, the House elected Paul Ryan (R-WI) to be its Speaker. After being sworn in, Ryan resigned his seats on the Committee on Ways and Means and the Joint Committee on Taxation. As a result, there will be a new chairman of the House Ways and Means Committee.

It is not clear at this time when the new Ways and Means chair will be selected. Members of the committee who have expressed interest in becoming the next chairman include: Rep. Kevin Brady (R-TX), Rep. Devin Nunes (R-CA), and Rep. Pat Tiberi (R-OH). The committee announced that Sam Johnson (R-TX), the committee's most senior member, will serve as interim chairman.

With Ryan leaving, the Ways and Means Committee, it also is possible that another Republican will be added as a member to the committee.

Proposed Regulations Defining "Married Couples" for Tax Purposes

On October 21, the Treasury Department and IRS released a notice of proposed rulemaking concerning the definition of married couples for purposes of provisions in the Code.

The proposed regulations note that after decisions of the U.S. Supreme Court, the IRS and Treasury determined that, for federal tax purposes, marriages of couples of the same-sex are to be treated the same as marriages of couples of the opposite-sex and that prior guidance using terms such as "husband," "wife," and "husband and wife" are to be interpreted in a neutral way to include same-sex spouses as well as opposite-sex spouses.

JCT's Macroeconomic Estimate of Permanent "Bonus Depreciation" Bill

The Joint Committee on Taxation (JCT) issued a report—JCX-134-15 (October 27, 2015)—describing the macroeconomic effects of H.R. 2510, "Bonus Depreciation Modified and Made Permanent," as ordered by the House Committee on Ways and Means.

H.R. 2510 would make "bonus depreciation" permanent and would modify certain rules applicable to qualified leasehold improvements, passenger automobiles, and long-term contracts. The bill also would make permanent and modify the election to increase the alternative minimum tax (AMT) credit in lieu of bonus depreciation; would provide rules for certain partnerships with a single corporate partner; and would provide special rules for fruit- and nut-bearing plants.

The JCT report includes a table showing that, without taking into account macroeconomic effects, H.R. 2510 is estimated to decrease revenues to the federal government by approximately $280.7 billion over the 10-year budget period. However, the table also shows that the bill is estimated to result in approximately $13.7 billion of additional revenues over that period due to the bill's positive macroeconomic effects. Thus, taking into account the macroeconomic impact, the JCT estimates that the bill would, on a net basis, decrease revenues by approximately $267 billion over the 10-year budget period.

The JCT used its Macroeconomic Equilibrium Growth (MEG) model to simulate the macroeconomic effects of the bill. The JCT report indicates that growth generated by an increase in the stock of capital resulting from the bill is projected to reduce the revenue loss from the bill by about $30.7 billion over the 10-year budget period. However, an increase in interest rates generated by the increase in federal debt resulting from the bill is expected to increase the cost of federal debt service by about $17 billion over that same period. Thus, the overall budgetary effects of changes in economic growth are projected to reduce the deficit by $13.7 billion over the 10-year budget period.

California: Federal Conformity Legislation Signed Into Law

Governor Brown signed legislation (Assembly Bill 154) updating California's conformity to the Internal Revenue Code. Unlike most states, California does not adopt the Internal Revenue Code as a whole, but conforms only to specified Code sections. Assembly Bill 154 updates California's general "specified date" of conformity from January 1, 2009, to January 1, 2015 applicable to tax years beginning on or after January 1, 2015. As such, California will generally conform to numerous changes that were made to federal income tax laws during that six-year period, except as otherwise provided.

September 2015

IRS LB&I Division to be Reorganized

The IRS's Large Business & International (LB&I) Division announced major changes to its audit methodology and organizational structure. The announcement came at the September 17 TEI / IRS financial services conference in New York City, where LB&I Commissioner Doug O'Donnell and Financial Services Industry Director, Rosemary Sereti outlined a proposed migration from the IRS's heavy reliance on the coordinated industry case (CIC) examinations to an environment in which LB&I will apply a more nuanced approach to identifying and addressing compliance risks. The risk identification will be heavily based on data analytics drawn from a range of sources and evaluated centrally by specialized LB&I staff.

Notwithstanding the overall move to greater focus on specific issues, LB&I expects that certain large enterprises—by virtue of their size, complexity, and significance—will continue to be examined using CIC techniques.

A new organizational design will be put in place to facilitate transition to the new ways of doing business. The new LB&I will be organized around nine "practice areas." Four of the practice areas will be organized geographically. Each practice are would be managed by Directors of Field Operations (DFO) and Territory Managers (TM). The other five practice areas are delineated along technical or subject matter lines:

  • Pass-through entities
  • Enterprise activities
  • Cross-border activities
  • Withholding and international individual compliance
  • Treaty and transfer pricing operations

LB&I is scheduled to implement the new structure in early calendar year 2016.

Rev. Proc. 2015-44: Appeals Arbitration Program is Eliminated

On September 8, the IRS released Rev. Proc. 2015-44 that announces that Appeals arbitration program is being eliminated. According to the revenue procedure, over the 14 years during which the Appeals arbitration program was available, only two cases were settled using arbitration.

California: Receipts from Occasional Sale Excluded From Sales Factor

The California Franchise Tax Board (FTB) addressed whether receipts from sale of major line of business were excludable from the taxpayer's sales factor for state apportionment purposes.

Under California's regulations, gross receipts arising from an occasional sale of a fixed asset or other property used or held in the regular course of a taxpayer's trade or business are excluded entirely from the sales factor. The taxpayer at issue sold one of two lines of business with significant gross receipts and gain and requested guidance as to whether receipts from the sale of the line of business would be excluded under the occasional sale regulation.

The FTB noted that two elements must be met for gross receipts to be excluded: the sale must be substantial and occasional. California regulations provide that a sale will be considered substantial if excluding the receipts results in a five percent or greater decrease in the sales factor denominator. Excluding the receipts at issue resulted in the taxpayer's sales factor denominator decreasing by 33 percent. The FTB next addressed whether the sale of the line of business was occasional in nature. Under California's regulations, a sale will be considered occasional if the transaction is outside the taxpayer's normal course of business and occurs infrequently. Although the taxpayer had from time to time acquired and disposed of brands and their associated assets, there was no indication such activity was a regular and systematic occurrence in the taxpayer's corporate life. In addition, this was the first time the taxpayer had disposed of an entire line of business, including all the brands within that line. The FTB concluded that the receipts at issue were excludable from the numerator and denominator of the sales factor.

New York: Draft Nexus Regulations Released

The New York Department of Taxation and Finance released draft regulations providing guidance on the state's revised nexus standards. As part of the corporate franchise tax reform enacted in 2014 and effective beginning in 2015, New York State adopted general economic nexus standards, under which companies with over $1 million dollars of receipts attributable to New York State based on the new customer-based sourcing rules will be deemed to have nexus with the state. New York City, which conformed to many of the state reforms, did not adopt the state's economic nexus standards.

Comments on the 30-page draft nexus regulation will be accepted through December 3, 2015. In addition, the Department is also working on additional regulations to address other areas of reform, including the state's new customer-based sourcing rules.

Indiana: Department Cannot Forcibly Combine Taxpayer with Affiliates

The Indiana Tax Court issued a decision holding that the Department of Revenue could not require a taxpayer to file a combined return with certain affiliates (Rent-A-Center East, Inc. v. Department of State Revenue, No. 49T10-0612-TA-00106 (September 10, 2015)).

Under Indiana law, separate entity filing is the default reporting methodology. However, the Department of Revenue has statutory authority to require a taxpayer to file a combined return with certain of its affiliates if the Department is unable to fairly reflect the taxpayer's adjusted gross income through use of its other discretionary powers.

The Department argued that the taxpayer must be forced to file a combined return because (1) the taxpayer and its affiliates were engaged in a unitary business and (2) the payment and deduction of royalties and management fees to affiliates distorted the taxpayer's Indiana source income.

The Indiana Tax Court rejected the Department's claims pointing out that (1) it would render Indiana's separate-entity taxing scheme superfluous if a taxpayer could be required to file a combined return simply because it was engaged in a unitary business and (2) the intercompany transactions with the affiliates were arm's length and did not distort the taxpayer's Indiana source income based on the transfer pricing study prepared for federal purposes.

North Carolina: "Contingent" business tax reform is enacted

In North Carolina, the governor on September 18, signed House Bill 97—the long-delayed budget bill—that includes tax reform measures affecting business taxpayers. In general, assuming companion legislation is enacted, the measures are effective January 1, 2016. Hence, these provisions are "contingent."

Among the changes affecting business taxpayers are measures providing for:

  • A corporate income tax rate reduction to 3% if a threshold amount in the "general fund" is satisfied by taxes collected for the preceding fiscal year
  • A phase-in of the single sales factor apportionment over a three-year period
  • Related member interest disallowance rules 
  • Franchise tax base changes
  • Sales tax base expansion

August 2015

New Revenue Procedures on Competent Authority Assistance, APAs

On August 12, the IRS released two revenue procedures that offer guidance on the process for taxpayers to request and obtain the assistance of the U.S. Competent Authority ("USCA") under the U.S. network of income tax treaties (Rev. Proc. 2015-40) and that provide guidance regarding the advance pricing agreement ("APA") program (Rev. Proc. 2015-41).

Rev. Proc. 2015-40 concerning the USCA Assistance represents substantial changes from Rev. Proc. 2006-54 and the draft revenue procedure in Notice 2013-78. The processes set forth in Rev. Proc. 2015-40 are generally welcomed by taxpayers because the processes 1) are intended to encourage broad access to the Advance Pricing and Mutual Agreement program ("APMA") for USCA assistance; 2) allow taxpayers to maintain control over the scope of their access to these processes; and 3) provide for clarified and enhanced taxpayer involvement in certain aspects of these processes.

The new procedures also demonstrate an effort to better align the USCA processes with those of Article 14 of the Organisation for Economic Cooperation and Development ("OECD") base erosion and profit shifting ("BEPS") initiative, which relates to improvements in dispute resolution as well as other ongoing OECD initiatives to improve competent authority processes.

The major changes made by Rev. Proc. 2015-40 include the following:

  • Pre-filing procedures are required only with respect to requests involving taxpayer-initiated positions so that APMA can decide whether to accept the matter. 
  • Taxpayers will not be required to expand the scope of a competent authority request to include interrelated issues or additional years as a condition of receiving competent authority assistance. 
  • It is clarified that the USCA may consult with taxpayers with respect to certain additional issues that may arise in connection with competent authority requests, such as issues relevant to the determination of foreign tax credits and repatriation payments. 
  • Additional guidance is provided on requesting discretionary determinations under the limitation on benefits ("LOB") articles of U.S. tax treaties. The user fee for requests for discretionary LOB relief is increased.
  • The USCA will not condition assistance on the taxpayer's notification of the USCA, or on obtaining its concurrence, with respect to signing a standard Form 870 with IRS Examination. Similarly, a taxpayer will not be required to obtain the USCA's agreement prior to entering into a closing agreement or similar agreement with IRS Examination, but in these cases the assistance provided by the USCA will be limited to seeking correlative relief from the foreign competent authority, thus potentially not eliminating double taxation. 
  • Additional information is provided on the process followed by the USCA in conducting its review under the simultaneous appeals procedure.
  • Clarifications and refinements are made with regard to the bases on which the USCA may decline to accept a competent authority request or may cease providing assistance.

Rev. Proc. 2015-40 generally is effective for competent authority requests filed on or after October 30, 2015.

Rev. Proc. 2015-41 addresses the process of requesting and obtaining APAs from APMA and provides guidance on administration of executed APAs. It updates and supersedes Rev. Proc. 2006-9, as modified by Rev. Proc. 2008-31. A proposed version of this revenue procedure was released for public comment in Notice 2013-79.

The major changes made by Rev. Proc. 2015-40 include the following:

  • It is clarified that APMA may require, as a condition of continuing with the APA process, that the taxpayer expand the proposed scope of its APA request to cover interrelated matters and/or additional years. 
  • Rollback years may be formally covered within an APA. 
  • Taxpayers are required to execute consent agreements to extend the period of limitations for assessment of tax for each year of the proposed APA term.
  • The user fees for APA requests are increased. Total user fees may be reduced for multiple APA requests filed by the same controlled group within a 60-day period.
  • A pre-filing memorandum is mandatory if 1) the taxpayer seeks to file a unilateral APA request for an issue that could be covered by a bilateral APA; 2) the taxpayer seeks to file an abbreviated APA request; or 3) the covered issues involve certain intangibles issues, global trading, business restructuring, or certain unincorporated, pass-through, hybrid, or disregarded entities.

Rev. Proc. 2015-41 generally applies to all APA requests filed after August 31, 2015.

LB&I - 12 New International "Practice Units" Released

During August 2015, the IRS's Large Business and International ("LB&I") division released 12 additional "practice units," or training aids, intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions covering the following areas:

  • Branch-level interest tax concepts
  • Non-services FDAP income
  • Short-term loan exclusion from United States property
  • Bona fide residence test for purposes of qualifying for IRC section 911 tax benefits
  • U.S. persons residing abroad claiming additional child tax credit
  • Calculating foreign earned income exclusion – Self-employed individual
  • Sourcing of fringe benefits for FTC limitation
  • U.S. territories – Determining bona fide residency status
  • Sourcing of salary and compensation
  • Calculating foreign earned income exclusion – Employee
  • Payee documentation for treaty benefits
  • Effectively connected income (ECI)

The practice units often discuss the theories and legal authorities for examiners to rely upon when challenging a particular transaction, and identify documents an examiner will request and review.

Delaware: Unclaimed Property Reform Signed Into Law

Senate Bill 141, which adopts certain reforms to Delaware's unclaimed property law, was signed into law.

Most significantly, the look-back period for unclaimed property audits is now limited generally to 22 years. Historically, Delaware auditors have gone back as far back as 1981.

Further, Senate Bill 141 requires that the state must notify the unclaimed property holder of its right to enter into a voluntary disclosure agreement ("VDA") under which a shorter 19-year look back period is applied if the holder completes a review of its records and make payment (or enter into a payment plan) within two years of filing its VDA application.

Senate Bill 141 also reinstates the imposition of interest on late or unremitted unclaimed property amounts reported and remitted on or after March 1, 2016, at the rate of 0.5 percent per month (not to exceed 25 percent of the unpaid amount). Imposition of interest was eliminated in June 2014.

Finally, Senate Bill 141 requires that an employee of the holder—rather than a third-party adviser—be named as the primary contact for all unclaimed property correspondence.

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.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform