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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January

Tennessee: Proposed legislation would adopt single-receipts factor apportionment

Legislation (Senate Bill 8) recently introduced in Tennessee, would adopt single-receipts factor apportionment for franchise and excise tax purposes. Specifically, effective for tax years beginning on or after July 1, 2017, a taxpayer’s net earnings and net worth would be apportioned to Tennessee by use of the receipts factor only. For tax years beginning on or after July 1, 2016, net earnings and net worth are apportioned to Tennessee using a three-factor formula with triple-weighed sales (i.e., the sales factor accounts for 60 percent of the overall apportionment factor). Prior to this law change taxpayers apportioned their tax base to Tennessee using a three-factor double-weighted sales formula. Other fairly recent changes to Tennessee’s corporate tax regime include new factor presence nexus standards that apply for tax years beginning on or after January 1, 2016. Under these standards, taxpayers with over $500,000 of Tennessee-sourced sales will be deemed to have substantial nexus with Tennessee for franchise and excise, as well as business tax purposes. Also effective for tax years beginning on or after July 1, 2016, changes have been made to the state’s related-party addback rules and new market-based sourcing provisions apply. Please stay tuned to TWIST for future updates on Tennessee Senate Bill 8.

New York: Voluntary compliance program reach back period reduced from twenty to ten years

The New York State Comptroller has recently revised the reach-back period for unclaimed property holders that participate in the Comptroller’s unclaimed property voluntary compliance ("VCA") program. Prior to January 1, 2017, holders were subject to a look-back period back to the 1996 report year. Under the new guidelines―applicable to enrollees in the voluntary compliance program after January 1, 2017―the look-back for general ledger property types (e.g., unclaimed wages, accounts payable checks, refund checks, merchandise credits, and gift certificates) has been shortened to report year 2007.

Organizations that hold unclaimed property but have not filed required reports, as well as those that have previously filed but did not report all property types are eligible to participate in the program. Benefits of participation include the elimination of interest or penalties and a shorter reach-back period than would be expected under an unclaimed property audit (the audit reach back period is to January 1, 1992 for General Ledger items).

New York: MTA surcharge increased for 2017 tax year

The Metropolitan Transportation Business Tax Surcharge (MTA Surcharge) is imposed on the portion of New York State franchise tax (before the deduction of credits) allocated to the Metropolitan Commuter Transportation District (MCTD). Under the state’s 2014 tax reform legislation, for tax years beginning on or after January 1, 2016, the MTA surcharge rate is to be determined by the Commissioner by regulation so as to ensure that the revenues attributable to the surcharge remain revenue neutral.

In December 2016, the New York Department of Taxation and Finance amended regulations (as an emergency measure) providing that for tax years beginning on or after January 1, 2017, and before January 1, 2018, the MTA surcharge rate has increased from 28 percent to 28.3 percent. It should be noted that on the generally applicable 6.5 percent business income tax rate for 2017, the surcharge equates to an additional 1.839 percent. These regulations were published in the state register on December 21, 2016. This rate will remain in effect until the Commissioner sets a new rate.

December

South Carolina: New option for reporting federal adjustments

The South Carolina Department of Revenue has issued Revenue Procedure #16-1, which outlines a new optional, streamlined method of reporting federal changes to South Carolina. Currently, taxpayers must file amended South Carolina returns reporting any federal adjustments within 180 days after a final determination is issued by the IRS. Revenue Procedure #16-1 includes an approved sample worksheet for reporting changes under the streamlined reporting method. However, a taxpayer-created spreadsheet will be acceptable, provided that all information on the approved sample reporting format is reflected. Taxpayers using the optional method can submit their adjustments to the Department of Revenue by email or regular mail. Note that this optional reporting method is available only to report federal tax changes made by the IRS. For all other adjustments, taxpayers must file amended returns. The effective date of Revenue Procedure #16-1 is for federal tax adjustments reported to the Department on or after November 1, 2016.

Tennessee: New economic nexus standards also apply to state business tax

In recent years, a number of states, including Tennessee, have adopted economic nexus standards for corporate income tax purposes. In Tennessee, those standards also apply to the state's business tax. As background, the Tennessee business tax is really two taxes—the state business tax and the city business tax. These gross-receipts type taxes are assessed for the privilege of conducting business within the state and certain cities and are based on receipts from the sale of both tangible personal property and services. Businesses are subject to city business tax if they have a physical location where business is conducted in a city that imposes a business tax. There is a different nexus standard for state business tax. In 2015, the Tennessee legislature adopted factor-presence nexus standards for excise (income), franchise, and state business tax purposes. Under these standards, a taxpayer whose total receipts from the sale in Tennessee of tangible personal property or services exceed the lesser of $500,000 or 25 percent of the taxpayer's total receipts during the tax period, will be deemed to have Tennessee nexus. Thus, businesses that lack a physical presence in Tennessee may nevertheless be subject to the state-level business tax. The state business tax is a gross receipts tax, meaning Public Law 86-272 protection does not apply.

Notice 2016-79: Standard mileage rates, decrease for 2017

On December 13, 2016 the IRS issued an advance version of Notice 2016-79 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 2017.

Notice 2016-79 [PDF 13 KB] provides that beginning January 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 53.5 cents per mile for business miles driven (down from 54 cents per mile for 2016)
  • 17 cents per mile driven for medical or moving purposes (down from 19 cents per mile for 2016)
  • 14 cents per mile driven in service of charitable organizations (no change)

Final regulations: Reporting obligations of foreign-owned disregarded entity

The U.S. Treasury Department and IRS released on December 12, 2016 for publication in the Federal Register final regulations (T.D. 9796) that treat a domestic disregarded entity, wholly owned by a foreign person, as a domestic corporation for the limited purposes of the reporting and recordkeeping requirements under section 6038A.

The final regulations [PDF 206 KB] amend existing regulations under section 6038A and section 7701, and will require affected domestic disregarded entities to file Form 5472 at such time and in such manner as the IRS Commissioner may prescribe in forms or instructions.

Overview

The release finalizes regulations that were proposed in May 2016 with "a limited number of changes" including:

  • A clarification that other exceptions in the previously existing regulations will not apply to prevent filing of Form 5472 under the new final regulations
  • The addition of rules addressing the tax year of domestic disregarded entities that now will be required to report
  • A revision to the effective date provision of the proposed regulations, for the new reporting and recordkeeping requirements

Background

Regulations proposed in May 2016 provided that domestic disregarded entities—deemed to be foreign-owned domestic corporations—would be required:

  • To file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engage in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code), and identify an expanded number of "reportable transactions" between the entity and its foreign owner or other foreign related parties
  • To maintain records establishing the accuracy of the information return and the correct U.S. tax treatment of the transactions
  • To obtain an employer identification number (EIN) by filing Form SS-4, and thus would be required to report responsible party information to the U.S. government

Final regulations

The preamble to the final regulations and the text of the final regulations clarify that:

  • The exceptions to the reporting requirements under Reg. section 1.6038A-2(e)(3) and (4) with respect to small corporations and de minimis transactions are revised so as not to apply to a domestic disregarded entity that is wholly owned by a foreign person.
  • To facilitate compliance with the reporting requirements and filing of Form 5472, domestic disregarded entities will have the same tax year as their foreign owner if the foreign owner has a U.S. return filing obligation; however, if a foreign owner has no U.S. return filing obligation, the tax year of a domestic disregarded entity will be the calendar year.
    The final regulations also provide that they apply to tax years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017 (whereas the proposed regulations would have applied to tax years ending on or after the date that was 12 months after the date of publication of the final regulations in the Federal Register, without regard to the date on which the tax year began).
    The final regulations will be published in the Federal Register on December 13, 2016.

Alabama: Domestic production activities deduction limitation based on federal, not Alabama, taxable income

Recently, the Alabama Tax Tribunal rejected a taxpayer's attempt to base its domestic production activities deduction (DPAD) limitation on Alabama taxable income. The taxpayer at issue was an Ohio corporation that manufactured, distributed, and sold paint and paint-related products. For federal income tax purposes, the taxpayer filed as part of a consolidated tax return for the years at issue (2007-2009). In Alabama, the taxpayer filed separate returns. The DPAD is a federal income tax deduction for income attributable to “domestic production activities.” The amount of allowable DPAD for the tax years at issue was 6 percent of the lesser of (1) qualified production activities income, or (2) taxable income. In an earlier administrative decision, the ALJ had held that the DPAD taxable income limitation should be applied on a separate entity basis when a taxpayer files consolidated for federal purposes, but files a separate Alabama return.

The issue in the instant case was whether the limit was based on a taxpayer's separate federal taxable income or the taxpayer's separate pre-apportioned Alabama taxable income, which was its federal taxable income with the required Alabama adjustments. This approach resulted in a greater deduction because Alabama taxable income, before apportionment, resulted in a greater limitation. As support for its position, the taxpayer cited to an Alabama regulation that provides, in part, that when gain, loss, income, basis, or any other item is to be determined in accordance with federal law, such computations shall be applied to the amount determined under Alabama law. The taxpayer argued that this required a federal limitation, such as the DPAD limitation, to be applied to Alabama's definition of taxable income. The Department argued that this regulation meant that federal limitations are to be applied to the amount of federal taxable income determined under Alabama law. The Tax Tribunal agreed with the Department. Notably, another section of the Alabama regulation at issue required that the federal limitation be calculated by using a taxpayer's separate entity federal taxable income. The regulation, when read in its entirety, supported the Department's interpretation.

November

Overtime rules, scheduled for December 1, are put on hold

Changes to the overtime standards from the Department of Labor were scheduled to be effective December 1, 2016. However, a court challenge may affect implementation of these new rules.

Overview

The Fair Labor Standards Act (FLSA) establishes the federal minimum wage and overtime requirements. Currently, the regulations generally mandate that employees working in excess of 40 hours per week are paid overtime at a rate of 1.5 times their regular wage unless they are classified as “exempt” under a two-part test based on the employee’s specific job duties and a salary threshold (currently $23,660).
The rules were recently revised for the first time in over a decade through Department of Labor (DOL) regulations (scheduled to be effective December 1, 2016) that, among other things, increase the salary threshold to a standard salary level of $47,476, or the 40th percentile of weekly earnings for full-time, salaried workers in the lowest wage Census Region (currently the South). As a result of this higher salary threshold, it has been estimated that this shift will cause at least 4.2 million employees who are currently classified as exempt to be at risk of becoming non-exempt.

Challenge and district court injunction

Twenty-one states and 50 business groups brought suit challenging the rules in the U.S. District Court for the Eastern District of Texas, noting that the significant compliance costs would cause irreparable harm by forcing states and businesses to substantially increase their labor costs.
Federal District Court Judge Mazzant enjoined enforcement of the rules, noting that the provision “creates essentially a de facto salary-only test.” Judge Mazzant further concluded that the rules violate the Administrative Procedures Act by implementing an automatic wage update without the requisite notice and comment period. An appeal by the Labor Department would be to the U.S. Court of Appeals for the Fifth Circuit—a court that previously blocked executive action on immigration.

What to do?

Employers had been ramping up for changes to the FLSA based on the DOL regulations schedule to take effect on December 1, 2016. Employers need to review their proposed overtime policies and be prepared to consider halting implementation on some or all revisions to existing overtime policies/procedures while continuing to monitor developments as the case proceeds through the courts and the new administration takes office next year.

Comparison of House Republican "blueprint" and Trump's tax proposals

With Donald Trump in the White House as of January 20, 2017, and Republicans controlling both the House and the Senate in the next Congress, the odds of significant tax legislation being enacted in 2017 or 2018 have increased significantly.

Tax legislation originates in House

Under the U.S. Constitution, revenue measures must originate in the House. It seems likely that the House will start the tax reform process by moving a bill that is based on the "blueprint" for tax reform that House Republicans released in June 2016, modified to include additional detail and to incorporate input from the Trump Administration. During the course of the presidential campaign, Trump modified elements of his tax proposals to correspond more closely with the blueprint, although differences remain.


For more information, please contact:
Mie Igarashi | +1 404 222 3212 | mieigarashi@kpmg.com

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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