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.
Highway Bill Enacted
President Obama on December 4 signed into law the "Fixing America's Surface Transportation (FAST) Act"—a bill extending authorization for spending from the highway trust fund and other related funds through September 30, 2020.
The legislation includes tax provisions and measures that extend a variety of highway-related taxes such as the taxes imposed upon gasoline, diesel fuel and kerosene, and certain tires through September 30, 2022. It also extends the heavy vehicle use tax through September 30, 2023.
In addition, the legislation also contains a number of tax enforcement provisions including:
Proposed Regulations on Country-by-Country Reporting
On December 21, the Treasury Department and IRS released proposed regulations (REG-109822-15) that would require annual country-by-country (CbyC) reporting for parent entities of large U.S.-based multinational groups (U.S. MNE groups).
These proposed regulations generally are designed to coordinate with the model CbyC reporting template and instructions set forth in Action 13 of the OECD/G20 base erosion and profit shifting ("BEPS") project. However, some aspects of the proposed regulations represent a more detailed or slightly different approach from the approach delineated in Action 13.
The preamble notes that the proposed regulations, while generally consistent with international standards, are tailored to be consistent with the information reporting requirements applicable to U.S. persons under the relevant Code sections pursuant to which they were issued.
The proposed regulations contain the operative provision, relevant definitions, the reporting period, contents of the return, method for reporting financial amounts, time and manner for filing, maintenance of records, exceptions to furnishing information, and effective/applicability dates.
As noted in the preamble, the form to be used for CbyC reporting is currently under development by the IRS and is not officially numbered. Nonetheless, the form will be based on the Action 13 model template CbyC report.
The regulations are proposed to be applicable to tax years of ultimate parent entities of MNE groups beginning on or after the date of publication of the final regulations. Given the late publication date for the proposed regulations, final regulations would not be expected until sometime during 2016, pushing the first reportable period for of calendar year MNE groups to 2017.
The proposed regulations provides a general exception to CbyC reporting in cases when the annual revenue for the U.S. MNE group for the immediately preceding annual accounting period was less than $850 million. The Action 13 threshold for reporting is €750 million.
California Supreme Court Reverses Appellate Court on Apportionment Case
On December 31, the California Supreme Court reversed the findings of an appellate court and held that several taxpayers could not elect to apportion their income to California using the allocation and apportionment provisions contained in the Multistate Tax Compact in lieu of the apportionment formula mandated under state law (Gillette Co. v. Franchise Tax Board, S206587).
In the high court's view, the Multistate Tax Compact is not a binding reciprocal agreement among states, and the legislature's 1993 repeal of the election was effective even if California had not withdrawn from the Compact entirely.
Standard Mileage Rates Decrease for 2016
On December 17, the IRS released Notice 2016-1 providing the standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business, charitable, medical, or moving expense purposes in 2016.
Notice 2016-1 provides that beginning January 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
Revised IRS Position: No 1% Excise Tax on Foreign Reinsurance
On December 23, the IRS released Rev. Rul. 2016-3 announcing that the IRS will no longer apply the one percent (1%) excise tax imposed by section 4371(3) to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer. With the new revenue ruling, prior IRS guidance, Rev. Rul. 2008-15, is revoked.
Rev. Rul. 2016-3 states that the IRS reconsidered Rev. Rul. 2008-15, in light of a May 2015 decision of the U.S. Court of Appeals for the District of Columbia Circuit that section 4371 does not impose federal excise tax on foreign-to-foreign retrocession transactions.
The IRS has not indicated when it will finish processing pending refund claims on cascading excise taxes that were previously paid.
Federal Agencies Prohibited from Contracting with Tax-Delinquent Corporations
On December 3, the U.S. Defense Department, General Services Administration, and National Aeronautics and Space Administration jointly released an interim rule that prohibits the federal government from entering into a contract with any corporation having a delinquent federal tax liability or felony conviction under federal law (unless the agency has determined that suspension of the corporation is not necessary to protect the interests of the government).
The interim rule has an effective date of February 26, 2016, and includes a certification requirement regarding tax matters for contracts having a value greater than $5 million.
Senate Foreign Relations Approves the U.S.-Japan Income Tax Treaty Protocol
On November 11, the Senate Foreign Relations Committee has approved the Protocol to amend the U.S.-Japan Income Tax Treaty and the following income tax treaties and Protocols with Switzerland, Luxembourg, Hungary, Chile, Spain, Poland, and OECD. All but the Protocol with Japan had been previously approved and reported by the Foreign Relations Committee, but have not been considered by the full Senate.
President signs "Budget Act," Partnership Reforms Enacted
President Obama on November 2 signed into law H.R. 1314, the "Bipartisan Budget Act of 2015."
The legislation suspends the limit on public debt (the "debt ceiling") through March 15, 2017, and increases defense and discretionary spending for fiscal years 2016 and 2017 above the levels set by the Budget Control Act of 2011.
The revenue offsets include changes to two partnership-related tax provisions:
The revenue table shows that the new rules for partnership audits and adjustments would raise approximately $9.325 billion over the 10-year budget period while the amendments relating to the definition of a partner would raise approximately $1.894 billion over that period.
Congressional Hearings on BEPS
On November 24, the Senate Finance Committee and the House Ways and Means Committee's Subcommittee on Tax Policy both announced hearings relating to the OECD's base erosion and profit shifting ("BEPS") project.
The Senate Finance Committee's hearing will examine the BEPS project final recommendations, and the European Union's "state aid" investigations. In announcing the hearing, Chairman Hatch stated:
"In today's global economy, many nations, including the United States, are facing tax base erosion as multinational companies shift profits, activities and property from high-tax to low-tax jurisdictions. With the OECD's BEPS project, the Obama Administration and the international community have sought to find solutions to address taxation challenges in an increasingly globalized and digital economy. And while such efforts are laudable, the recommendations contained in the OECD's BEPS reports raise a number of serious concerns about taxpayer confidentiality and the Treasury Department's statutory authority to implement regulations as envisioned by the project. At the same time, the EU has launched investigations into American multinationals that have resulted in increased uncertainty and foreign tax liabilities for our businesses abroad. Given these concerns and developments, I expect a robust discussion at this hearing on what the OECD BEPS project means for U.S. taxpayers and our tax system moving forward, as well as how the EU State Aid investigations could potentially affect tax revenues paid to the U.S. Treasury."
The witnesses at the hearing will include Robert Stack from the U.S. Treasury Department and Dorothy Coleman from the National Association of Manufacturers.
The hearing of the House Ways and Means Subcommittee on Tax Policy will focus on the OECD BEPS project final recommendations and their effect on U.S. multinational companies. In announcing the hearing, Rep. Boustany (R-LA), the chairman of the subcommittee, stated:
"The direction of the OECD's BEPS project final reports has sent a troubling indication of a desire to target American companies, in an unprecedented attempt to erode the U.S. tax base. The effect on U.S. jobs and U.S.-based research and development activities will have dire consequences for our economy and for our continued ability to compete with foreign corporations. We must take swift action to fix our broken tax code so that American companies and their employees can continue to be leaders in the global marketplace."
Witnesses have not yet been announced.
Notice on Corporate Inversions
Notice 2015-79—released November 19, 2015, by the Treasury Department and IRS—announces their intention to issue regulations relating to inversion transactions and post-inversion restructuring transactions.
Notice 2015-79 provides for rules that:
Of significant importance, Notice 2015-79 does not include earnings stripping guidance, but does provide that Treasury and the IRS are still considering such guidance and other anti-inversion guidance.
Pennsylvania: Court Holds NOL Cap Violates "Uniformity Clause"
The Pennsylvania Commonwealth Court held that the net operating loss (NOL) deduction limit, as in effect in 2007, violated the "Uniformity Clause" of the Pennsylvania Constitution as applied to the taxpayer. The court concluded that the appropriate remedy was to allow the taxpayer to apply an uncapped NOL deduction and to refund the tax paid as a result of the unconstitutional cap (Nextel Communications Inc. v. Pennsylvania, No. 98 F.R. 2012 (Pa. Commw. Ct. November 23, 2015).
For corporate net income (CNI) tax purposes, Pennsylvania has limited the amount of net NOL deductions for many years. Under Pennsylvania law in effect for the tax year at issue (2007), the NOL deduction was limited to the greater of 12½% of taxable income or $3 million.
The taxpayer, a telecommunications company doing business in Pennsylvania and other states, carried forward $150 million of NOLs to the 2007 tax year in which it had $45 million in Pennsylvania income. Applying the 12½% limitation rule resulted in a deduction of $5.6 million NOL.
The taxpayer subsequently requested a refund of tax paid for 2007 on the basis that the NOL cap, asserted that the cap violated the Uniformity Clause of the Pennsylvania Constitution. After the Board of Appeals and the Board of Finance and Revenue determined that they lacked authority to rule on the taxpayer's constitutional challenge and thus denying the taxpayer's claim for refund, the case went before the Commonwealth Court.
Before the court, the taxpayer argued that the limitation on the net loss deduction favored businesses with taxable income of $3 million or less and was therefore unconstitutional under the Commonwealth's Uniformity Clause, which provides that: "All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax . . . ." In the taxpayer's view, the net loss deduction limitation worked in favor of small taxpayers in a positive net loss carryover position and against similarly-situated larger taxpayers. Accordingly, the taxpayer asserted that the limitations create an unconstitutional progressive CNI tax structure, where small taxpayers pay a lower effective tax rate than larger, similarly-situated, taxpayers, even though the statutory rate is fixed at 9.99 percent.
The Commonwealth Court agreed with the taxpayer and held that the NOL cap violated the Uniformity Clause. Tax professionals believe it is likely that the case will be appealed and that the legislature may also attempt to design a remedy.
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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.