In this Article, we have given information about the recent significant developments in USA in the sphere of international taxation. Since many Indian Corporates have substantial business interests in and dealings with USA, we hope the readers would find this information useful. This will help to create awareness about impending important changes in law and practices in USA.
1. IRS releases update on FATCA registration for financial institutions
The US Internal Revenue Service (IRS) has released IRS Announcement 2014-1 to provide an update on the Foreign Account Tax Compliance Act (FATCA) registration for financial institutions (FIs).
FIs can use the IRS FATCA registration website, which was launched on 19th August 2013, to register with the IRS under FATCA and to renew their status as a qualified intermediary (QI), withholding foreign partnership (WP), and withholding foreign trust (WT).
Announcement 2014-1 states that every FI that has made an online registration prior to January 2014 must revisit its account on or after 1st January 2014 to edit, sign its FFI agreement if registering as a participating FFI, and submit its registration information as final.
Announcement 2014-1 also states that the final FFI (Foreign Financial Institutions) agreement is expected to be published prior to 1st January 2014, that the final QI, WP, and WT agreements will be published in early 2014, and that the first IRS FFI list will be posted by 2nd June 2014. Announcement 2014-1 further states that Model 1 FIs will not need to register or obtain Global Intermediary Identification Numbers (GIINs) until on or about 22nd December 2014 to ensure inclusion on the IRS FFI list by 1st January 2015.
Announcement 2014-1 notes that the guidance in Announcement 2014-1 is consistent with the previous guidance in IRS Notice 2013-43 .
2. IRS issues Memorandum on creditable foreign taxes from inter-branch dealings
The Office of the Associate Chief Counsel (International) of the US Internal Revenue Service (IRS) has issued a Memorandum that discusses the determination of creditable foreign taxes for a US corporation, or a controlled foreign corporation (CFC), that engages in transactions with its foreign branch or foreign disregarded entity (DE), or with the foreign branch or DE of its affiliated corporation.
The Memorandum states that, because a foreign branch or DE and its US owner are treated as a single entity with the result that transactions between them do not give rise to income or expense for US tax purposes, an application of the arm’s length standard of the US transfer pricing rules to such disregarded transactions would not affect the amount of taxable income that the US owner recognizes for US tax purposes, and thus generally is not meaningful.
The Memorandum further states that, if the US tax owner reports too much income to the foreign country by means of non-arm’s length transfer prices and claims a foreign tax credit (FTC) for the overpaid foreign income taxes, the FTC may be disallowed under the non-compulsory payment rule of Treasury Regulation section 1.901-2(e)(5), which provides that a foreign tax is not considered paid for FTC purposes to the extent that the amount paid exceeds the amount of liability under foreign tax law.
The Memorandum concludes that the US transfer pricing principles may be relevant in determining whether non-arm’s length transfer prices result in non-compulsory payments of foreign tax to the extent foreign tax law, as modified by tax treaties, includes similar arm’s length principles, as most do, and further that taxpayers have the burden to establish to the satisfaction of the IRS that they have properly minimised their creditable foreign tax liability by exhausting all effective and practical remedies, including resort to competent authority proceedings.
The Memorandum also states that similar issues involving non-compulsory payments of foreign tax may arise in cases involving a CFC where a foreign branch or DE that is a part of a CFC engages in transactions with the CFC, a related but separately regarded CFC, a US shareholder of the CFC, or a US shareholder of a related but separately regarded CFC.
In addition, the Memorandum states that, under US tax treaties that adopt the authorized OECD approach (AOA) and thus apply the OECD Transfer Pricing Guidelines, by analogy, in determining the profits of a permanent establishment (PE), profits of a US PE may be determined based on all of the PE’s dealings, including transactions between the US PE and the foreign corporation of which it is a part (or another branch of such foreign corporation), even though such interbranch dealings would not give rise to income, gain, profits, or loss of the foreign corporation under the US Internal Revenue Code (IRC).
3. IRS released revised user guide for FATCA registration website
The US Internal Revenue Service (IRS) has released revised Publication 5118 (Rev. 12-2013), Foreign Account Tax Compliance Act (FATCA) User Guide.
The user guide provides instructions for using the FATCA Registration System to complete the FATCA registration process online, including what information is required, how registration will vary depending on the type of financial institution (FI), and step-by-step instructions for each question.
The FATCA Registration System is a web-based system that FIs may use to register completely online as a participating foreign financial institution (PFFI), a registered deemed-compliant FFI (RDCFFI), a limited FFI (Limited FFI), or a sponsoring entity (see United States-2, News 20 August 2013).
The IRS has also released the FATCA Registration Update Summary to provide a summary of the updates made to the FATCA Registration System. The summary indicates a last reviewed or updated date of 11th December 2013.
4 IRS issues updated Publication 54 – Tax Guide for US Citizens and Resident Aliens Abroad
The US Internal Revenue Service (IRS) has released the 2013 revision of Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad). The publication is dated 3rd December 2013.
Publication 54 explains the special rules used to determine the US federal income tax for US citizens and resident aliens who work abroad or who have income earned in foreign countries.
Revised Publication 54 is intended for use in preparing 2013 tax returns. It includes the 2013 amount for the foreign earned income exclusion ( $ 97,600) and the housing expense base amount ( $ 15,616) for the housing cost exclusion u/s. 911 of the US Internal Revenue Code (IRC). The limits for the maximum amounts that can be excluded and/or deducted under IRC section 911 are also discussed.
Publication 54 discusses the following items:
– US tax return filing requirements (Chapter 1);
– Withholding of US income, social security and Medicare taxes (Chapter 2);
– US self-employment tax (Chapter 3);
– IRC section 911 foreign earned income exclusion and foreign housing exclusion or deduction (Chapter 4);
– Other applicable exemptions, deductions, and credits (Chapter 5);
– Tax treaty benefits (Chapter 6); and
– How to obtain tax information and assistance from the IRS (Chapter 7).
Publication 54 also includes a list of tax treaties, which is updated through 31st October 2013.
5. Public comments requested on IRS Form for withholding on foreign partners
The US Internal Revenue Service (IRS) and the US Treasury Department have issued a notice requesting comments on IRS Form 8804 (Annual Return for Partnership With- holding Tax (Section 1446)); IRS Form 8804 (Schedule A) (Penalty for Underpayment of Estimated Section 1446 Tax by Partnerships); Form 8805 (Foreign Partner’s Information Statement of Section 1446 Withholding Tax); and Form 8813 (Partnership Withholding Tax Payment Voucher (Section 1446)).
U/s. 1446 of the US Internal Revenue Code (IRC), foreign partners are subject to US withholding tax on their allocable share of the US effectively connected taxable income (ECTI) of a partnership that is engaged in a trade or business in the United States. The withholding tax is imposed at the highest income tax rates applicable to the foreign partner, currently 35% for corporations and 39.6% for individuals. The withholding tax is collected by the partnership.
IRS Forms 8804, 8805, and 8813 are used to pay and report IRC section 1446 withholding tax based on ECTI allocable to foreign part- ners.
IRS Form 8804 is used to report the total liability under IRC section 1446 for the partnership’s tax year. IRS Form 8804 is also a transmittal form for IRS Form 8805. IRS Form 8804 has been modified for use in tax year 2013 to reflect the increase in the maximum tax rates for individuals to 39.6% with regard to ordinary income and to 20% with regard to capital gains.
IRS Form 8805 is used to show the amount of ECTI and the total tax credit allocable to the foreign partner for the partnership’s tax year. IRS Form 8813 is used to pay the with holding tax under IRC section 1446 to the United States Treasury. Form 8813 must accompany each payment of IRC section 1446 tax made during the partnership’s tax year.
The IRS requested that written comments be submitted no later than 27 January 2014. The mailing address and other contact information are listed in the notice.
6. Public comments requested on IRS Form for claiming FTC for corporations
The US Internal Revenue Service (IRS) and the Treasury Department have issued a notice to announce the intention to submit an information collection request to the US Office of Management and Budget (OMB) for its review and clearance with regard to IRS Form 1118 (Foreign Tax Credit-Corporations). The Treasury Department has also requested public comments on the form.
IRS Form 1118 and separate Schedules I, J, K are used by US domestic and foreign cor- porations to claim a credit for taxes paid or accrued to foreign countries or US posses- sions under section 901 of the US Internal Revenue Code (IRC). The IRS uses Form 1118 and related schedules to determine whether the corporation has computed the foreign tax credit (FTC) correctly.
To claim a FTC, it is generally required to file IRS Form 1118 with the US income tax return. A separate Form 1118 is required for foreign taxes paid on each designated category of income (i.e. passive category income, general category income, IRC section 901(j) income, certain income re-sourced by treaty, and lump- sum distributions).
7. Public comments requested on IRS Form for reporting transfer of property to foreign corporation
The US Internal Revenue Service (IRS) and the Treasury Department have issued a notice to announce the intention to submit an information collection request to the US Office of Management and Budget (OMB) for its review and clearance with regard to IRS Form 926 (Return by a US Transferor of Property to a Foreign Corporation). The Treasury Department has also requested public comments on the form.
IRS Form 926 is used by US persons to report exchanges or transfers of property to foreign corporations as required by section 6038B(a) (1)(A) of the US Internal Revenue Code (IRC).
Section 6038B of the IRC imposes such reporting requirements with regard to transactions involving subsidiary liquidations, corporate organizations, and corporate reorganizations, as described in sections 332, 351, 354, 355, 356, and 361 of the IRC.
The US transferor must file IRS Form 926 with its income tax return for the tax year that includes the date of the transfer.
A penalty may be imposed in the amount of 10% of the fair market value of the property at the time of the exchange or transfer if the US transferor fails to file IRS Form 926. The penalty is limited to USD 100,000 unless the failure to file IRS Form 926 was due to intentional disregard. The penalty does not apply if the failure is due to reasonable cause and not wilful neglect.
Moreover, under section 6501(c)(8) of the IRC, the period of limitations for assessment of tax on the exchange or transfer of the property is extended to the date that is 3 years after the information required to be reported is provided to the IRS.
8. Public comments requested on tax-free merg- ers and consolidations involving foreign corporations
The US Internal Revenue Service (IRS) and the US Treasury Department have issued a notice requesting comments on final regulations (TD 9243, Revision of Income Tax Regulations u/s. 358, 367, 884, and 6038B Dealing with Statutory Mergers or Consolidations u/s. 368(a)(1)(A) Involving One or More Foreign Corporations).
TD 9243 was issued on 26TH January 2006 to provide amendments to regulations that were affected by the revised merger and consolidation rules of concurrently-issued final regulations (TD 9242, Statutory Mergers and Consolidations) including amendments to the regulations u/s. 367 of the US Internal Rev- enue Code (IRC), dealing with US-inbound and outbound reorganisations, amendments to IRC section 884, dealing with the branch profits tax, and amendments to IRC section 6038B, dealing with the tax reporting obligations for US outbound transfers.
The notice states that the collection of information under TD 9243 is necessary to preserve US income taxation on gain of certain stock.
9. IRS proposes revised procedures for request- ing competent authority assistance
The US Internal Revenue Service (IRS) has issued Notice 2013-78 to propose a revised revenue procedure for requesting competent authority assistance under US tax treaties. The proposed revenue procedures would update and supersede the current procedures in Revenue Procedure 2006-54.
The US competent authority procedures permit taxpayers to request IRS assistance when they believe that the actions of the United States, the treaty country, or both, have resulted or will result in taxation that is contrary to the provisions of the treaty, for example, economic double taxation arising from transfer pricing adjustments u/s. 482 of the US Internal Revenue Code (IRC).
The proposed revenue procedure would pro- vide guidance on:
– requesting assistance from the US competent authority under the provisions of the US tax treaties; and
– determinations that the US competent author- ity may make on competent authority issues.
The proposed revenue procedure would include provisions that reflect the IRS’s structural changes relating to the US com- petent authority since 2006, including the establishment of the IRS Large Business and International Division (LB&I) that includes the office of the US competent authority, and provisions that effect a limited number of significant substantive changes, as summarised in a table contained in Notice 2013-78.
10. IRS proposes revised procedures for advance pricing agreements
The US Internal Revenue Service (IRS) has issued Notice 2013-79 to propose a revised revenue procedure with guidance on filing advance pricing agreement (APA) requests and on the administration of APAs. The pro- posed revenue procedures would update and supersede the current procedures in Revenue Procedure 2006-9, as modified by Revenue Procedure 2008-31.
The proposed revenue procedure would pro- vide the following:
– guidance and instructions on APAs; and
– guidance and information on the IRS’s administration of APAs.
The proposed revenue procedure would include provisions that reflect the IRS’s struc- tural changes relating to the APAs, including the establishment of the IRS Large Business and International Division (LB&I) and the creation of the Advance Pricing and Mutual Agreement Program (APMA) and provisions that effect a limited number of significant substantive changes, as summarised in a table contained in Notice 2013-79.
11. US Senate Finance Committee releases proposals for tax administration reform
The US Senate Committee on Finance has announced the issuance of a staff discussion draft on proposed reforms to the administration of the US tax laws. The announcement was made in a Press Release dated 20TH November 2013.
The issued discussion draft is the second in a series of discussion drafts to overhaul the US tax code. The discussion draft proposes a number of reforms to modernise the tax administration, minimise compliance burdens, combat tax-related identity theft and fraud, and reduce the tax gap.
The significant proposals in the discussion draft
include, among others:
– deadlines for filing certain information returns are accelerated to 21ST February (either on paper or electronically) so that taxpayers will receive the information needed to file their income tax returns on a more timely and orderly basis;
– taxpayers are no longer required to file cor- rected information returns if the error is less than $ 25;
– tax returns generated by a computer but filed on paper must contain a scannable code in order to enable the US Internal Revenue Service (IRS) to upload the return information more efficiently;
– the number of returns that trigger an elec- tronic filing requirement reduces over 3 years from 250 returns per year to 25;
– IRS Form W-2 (Wage and Tax Statement) no longer includes the taxpayer’s full social security number (SSN);
– access to databases containing SSNs of re- cently deceased individuals is restricted for 3 years;
– filing a tax return using another person’s
identity is a felony subject to a fine of up to
$ 250,000 and/or up to 5 years in prison; and
– banks must report the existence of bank accounts.
The discussion draft also includes a list of unaddressed issues on which public comments are requested.
The documents released by the Committee on Finance include the following:
– Tax Administration Reform Staff Discussion Draft Legislative Language;
– Tax Administration Reform Draft Summary;
– Tax Administration Reform One-Pager;
– JCT Technical Explanation of the Chairman’s Staff Discussion Draft of Tax Administration Reform;
– Tax Administration Reform Technical Correc- tions Legislative Language;
– JCT Explanation of Tax Administration Draft Technical Corrections; and
– List of Provisions Identified by the Staff of the Joint Committee on Taxation as Potential Deadwood.
12. US Senate Finance Committee releases pro- posals for international business tax reform
The US Senate Committee on Finance has announced the issuance of a staff discussion draft on international business tax reform. The announcement was made in a Press Release dated 19th November 2013.
The issued discussion draft is the first in a series of discussion drafts to overhaul the US tax code. It proposes a modern, competitive, simpler, and fairer international tax system by means of:
– reducing incentives for US and foreign multina- tionals to invest in, or shift profits to, low-tax foreign countries rather than the United States;
– reducing incentives for US-based businesses to move abroad, whether by re-incorporating abroad or merging with a foreign business;
– increasing the ability of US businesses to compete against foreign businesses in foreign markets;
– ending the lock-out effect (i.e. keeping the earnings of foreign subsidiaries offshore in- stead of repatriating such earnings to the United States); and
– simplifying the international tax rules so that firms with the most sophisticated tax advisors are not advantaged.
The significant proposals in the discussion draft
include, among others:
– all foreign income of US corporations is taxed immediately or permanently exempt, depend- ing on the type of the income;
– earnings of foreign subsidiaries from periods before the effective date of the proposal that have not been subject to US tax are subject to a one-time tax at a reduced rate payable over 8 years;
– international aspects of the “check-the-box” rules are eliminated; and
– base erosion arrangements are addressed to prevent foreign multinationals from making such arrangements to avoid US tax.
The discussion draft also includes a list of un- addressed issues on which public comments are requested.
The documents released by the Committee on Finance include the following:
– International Tax One Pager;
– International Tax Summary;
– International Tax Discussion Draft Common;
– International Tax Discussion Draft Option Y;
– International Tax Discussion Draft Option Z; and
– International Tax Discussion Draft Request for Comments.
In addition, the US Joint Committee on Taxa- tion (JCT) has issued a report with a technical explanation of the provisions in the discussion draft.
13. Joint Committee on Taxation issues report on international business tax reform proposals
The Joint Committee on Taxation of the US Congress (JCT) has released a report to provide a technical explanation of the staff discussion draft on international business tax reform issued by the US Senate Committee on Finance.
The report is entitled Technical Explanation of the Senate Committee on Finance Chairman’s Staff Discussion Draft of Provisions to Reform International Business Taxation. The report is dated 19th November 2013, and is designated JCX-15-13.
14. US Treasury Department updates FATCA model agreements
The US Treasury Department has released updated model Intergovernmental Agreements (IGAs) for the implementation of the Foreign Account Tax Compliance Act (FATCA). The updated model IGAs are dated 4th November 2013.
For the purpose of defining the term “financial account” under article 1, the updated model IGAs include new provisions that explain:
– the condition for interests to be treated as “regularly traded”;
– the meaning of an “established securities market”; and
– the circumstance in which an interest in a financial institution is not “regularly traded” and thus treated as a financial account.
The updated model IGAs expands the list of persons that are excluded from the definition of the term, “specified US person”. The up- dated model IGAs also modify, inter alia, the rules regarding related entities and branches that are non-participating financial institutions.
The updated model IGAs, which are available on the FATCA page of the Treasury Depart- ment website, are as follows:
– Reciprocal Model 1A Agreement, Preexisting TIEA or DTC (Updated 11-4-2013);
– Nonreciprocal Model 1B Agreement, Preexisting TIEA or DTC (Updated 11-4-2013);
– Nonreciprocal Model 1B Agreement, No TIEA or DTC (Updated 11-4-2013);
– Model 2 Agreement, Pre existing TIEA or DTC (Updated 11-4-2013);
– Model 2 Agreement, No TIEA or DTC (Updated 11-4-2013);
– Annex I to Model 1 Agreement (Updated 11- 4-2013);
– Annex I to Model 2 Agreement (Updated 11- 4-2013);
– Annex II to Model 1 Agreement (Updated 11- 4-2013); and
– Annex II to Model 2 Agreement (Updated 11- 4-2013).
15. Draft instructions for annual withholding form for foreign person’s US-source income issued to implement FATCA
The US Internal Revenue Service (IRS) has released a draft of revised Instructions for IRS Form 1042 (Annual Withholding Tax Return for US Source Income of Foreign Persons). The draft instructions are dated 6th November 2013. The IRS previously issued the revised Form 1042 in draft form.
When adopted as final, the draft Form 1402
and instructions will be used to report:
– the tax withheld under chapter 3 of the US Internal Revenue Code (IRC) (dealing with the normal withholding for foreign persons) on certain US-source income of foreign persons, including non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts;
– the tax withheld under IRC chapter 4 (i.e. the FATCA provisions);
– the 2% excise tax due on specified foreign procurement payments under IRC section 5000C; and
– payments that are reported on IRS Form 1042- S under IRC chapter 3 or 4. The draft Form 1042 modifies the current Form
1042 by:
– revising the current form for withholding agents to report payments and amounts withheld under IRC chapter 4 in addition to under IRC chapter 3;
– requiring a reconciliation of US source fixed or determinable annual or periodical (FDAP) income payments for chapter 4 purposes;
– including separate chapter 3 and 4 status codes for withholding agents; and
– adding lines for reporting the tax liability under chapters 3 and 4.
The current Form 1042 and the Instructions for the current Form 1042 are available on the IRS website (www.irs.gov).
16. IRS issues memorandum on US tax conse- quences of payments to foreign distributors
The Office of Associate Chief Counsel (International) of the US Internal Revenue Service (IRS) has issued a memorandum that discusses the character and source of certain payments made to foreign distributors by a multi-level marketing company and the related withholding responsibilities.
The facts reviewed in the Memorandum in- volve payments made by a US corporation to reward its foreign distributor for recruit- ing, training, and supporting the distributor’s lower-tier distributors to cultivate a multi-level chain of distributors (the “sponsorship chain”) for the sale of the US corporation’s products.
The Memorandum discusses the tax conse- quences of the payments (the “earnings”) that the foreign distributor received from the US corporation based on purchases of products from the US corporation by lowertier distributors in the distributor’s sponsorship chain.
The Memorandum reaches the following conclusions:
– the earnings constitute income from performance of personal services;
– the source of the earnings is based on where the services of the foreign distributor are performed with the result that income at- tributable to services performed in the United States is US source income and that income attributable to services performed outside the United States is foreign source income;
– the US corporation is required to withhold tax on the earnings of a distributor who is a non- resident foreign individual for the performance of services within the United States;
– the US corporation is not required to withhold tax on the earnings of a distributor that is a foreign corporation for the performance of services within the United States if the distributor provides the US corporation with IRS Form W-8ECI (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States); and
– the earnings are not subject to US tax if the distributor is a resident of a foreign country that has an income tax treaty with the United States; does not have a fixed base or permanent establishment in the United States to which the earnings are attributable; and provides the US corporation with IRS Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual) (in the case of an individual distributor) or IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) (in the case of a corporate distributor).
17. Public comments requested on IRS form for extending statute of limitations on cross- border transfers of stock and securities
The US Internal Revenue Service (IRS) and the US Treasury Department have issued a notice requesting comments on IRS Form 8838 (Con- sent To Extend the Time To Assess Tax Under Section 367—Gain Recognition Agreement).
IRS form 8838 is used to extend the statute of limitations for US persons who transfer stock or securities to a foreign corporation and enter into gain recognition agreements (GRAs) with the IRS. A GRA allows the trans- feror to defer the payment of US tax on the transfer.
IRS Form 8838 must be filed by a US transferor for a GRA that is entered into under section 367(a) of the US Internal Revenue Code (IRC) with regard to transfers of stock and securities to a foreign corporation in cross-border corporate transactions, i.e. incor- porations, liquidations, mergers, acquisitions and other reorganisations, as described in IRC section 367(a).
IRS Form 8838 must also be filed by a 80%-owned US subsidiary and its foreign parent corporation for a GRA that is entered into under IRC section 367(E)(2) with regard to a liquidation of the US subsidiary into the foreign parent corporation, as described in IRC section 332.
The IRS uses IRS Form 8838 so that it may assess tax against the transferor after the expiration of the original statute of limitation.
18. Public comments requested on withholding
certificates for foreign persons
The US Internal Revenue Service (IRS) and the US Treasury Department have issued a notice requesting comments on various IRS forms that are used as withholding certificates for foreign persons (i.e. certificates to claim reduced or zero withholding on US-source payments) and on the EW-8 MOU Program.
The following IRS forms are currently used as
withholding certificates for foreign persons:
– Form W–8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding);
– IRS Form W–8ECI (Certificate of Foreign Per- son’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States); – IRS Form W–8EXP (Certificate of Foreign Gov- ernment or Other Foreign Organization for United States Tax Withholding); and
– IRS Form W–8IMY (Certificate of Foreign In- termediary, Foreign Flow-Through Entity, or Certain US Branches for United States Tax Withholding).
The IRS is revising those forms to reflect the new withholding, due diligence, and reporting requirements under the Foreign Account Tax Compliance Act (FATCA). The IRS has issued the following drafts of the revised forms:
– a draft of IRS Form W–8BEN (for foreign individuals);
– a draft of IRS Form W–8BEN–E (for foreign entities);
– a draft of IRS Form W–8ECI;
– a draft of IRS Form W–8EXP; and
– a draft of IRS Form W–8IMY.
The EW-8 MOU (Memorandum of Understand- ing) Program is a voluntary collaborative programme between the IRS and withholding agents that have systems collecting IRS Forms W-8 electronically.
5. IRS issues Memorandum on cross-border re-organization transactions
The Associate Chief Counsel (Corporate) of the US Internal Revenue Service (IRS) has issued a Memorandum that discusses the US tax consequences of cross-border restructuring transactions undertaken by a taxpayer’s affiliated group.
The restructuring occurred in two stages a few months apart. The first stage (the “F Reorganization”) included a series of transac- tions that the taxpayer treated as a tax-free reorganisation described in section 368(a)(1)
(F) of the US Internal Revenue Code (IRC).
The second stage (the “Transaction”) in- volved a triangular reorganisation where a foreign subsidiary (F Sub 5) acquired stock of its foreign parent company (F Sub 4) by, in part, issuing notes (i.e. debts) to F Sub 4, and used the stock of F Sub 4 to acquire another foreign subsidiary (F Sub 6) from a US subsidiary. Subsequently, F Sub 5 repaid the notes to F Sub 4 (the “Payment”).
The Memorandum concludes that, based on the particular facts and circumstances of this case, the F Reorganisation and the Transac- tion should not be stepped together, or with the subsequent Payment, and should each be respected as qualifying for non-recognition treatment, respectively, under IRC sections 368(a)(1)(F) (dealing with the reorganisation of a single operating company as to the form or place of incorporation) and 368(a)(1)(C) (dealing with the acquisition of a target’s assets in exchange for an acquiring corporation’s stock). The Memorandum notes that both the F Reorganisation and the Transaction were supported by business considerations that satisfied the business purpose threshold applicable to IRC section 368 reorganisations.
The Memorandum next states that the fact that the Transaction involved a leveraged buyout (i.e. F Sub 5 WAS capitalised with lesser capital than the F Sub 4 Stock that it acquired) does not negate the fact that the Transaction was a value-for-value exchange.
The Memorandum also concludes that F Sub 5 is not required to recognise gain on the F Sub 4 stock when such stock was used to acquire F Sub 6 because the F Sub 4 stock had not appreciated while F Sub 5 held the stock. Gain would otherwise be required to be recognised under IRC section 1032 and the regulations thereunder dealing with the use of the stock of a parent corporation in a triangular reorganisation.
The Memorandum further concludes that, because the notes should be respected as debt, the Payment should constitute repayment of debts, not dividends or other amounts that would generate subpart F income.
The Memorandum notes that the restructuring transactions occurred prior to 22ND September 2006, and thus are not governed by IRS Notice 2006-85, which announced regulations that were later adopted under IRC section 367 as final regulations (TD 9526). Under the regulations, in a triangular reorganisation where a subsidiary (S) or its parent company
(P) (or both) is foreign, the property trans- ferred from S to P in exchange for P stock is treated as a distribution from S to P under IRC section 301(c) with the result that an inclusion in P’s gross income as a dividend, a reduction in P’s basis in its S or T (target) stock, and the recognition of gain by P from the sale or exchange of property may occur, as appropriate.
20. Draft instructions for form to report foreign person’s US-source income issued for FATCA
The US Internal Revenue Service (IRS) has released a draft of revised Instructions for IRS Form 1042-S (Foreign Person’s US Source Income Subject to Withholding). The draft instructions are dated 1st November 2013. The IRS previously issued the revised Form 1042-S in draft form.
The current Form 1042-S and the Instructions for the current Form 1042-S are available on the IRS website. The current Form 1042-S is used to report amounts paid to foreign persons (including persons presumed to be foreign) that are subject to US withholding under chapter 3 of the US Internal Revenue Code (IRC), including fixed or determinable annual or periodical (FDAP) income from US sources (e.g. US-source interest, dividends rent, royalties, pension, annuities).
The draft Form 1042-S revises the current form to accommodate new requirements under the Foreign Account Tax Compliance Act (FATCA). The revised form contains new boxes to re- quest withholding agents to indicate whether the withholding is made under IRC chapter 3 (i.e. the normal withholding for non-residents and foreign corporations) or under IRC chap- ter 4 (i.e. the FATCA provisions).
In addition, the draft form includes boxes requesting, among other information, the withholding agent’s Global Intermediary I dentification Number (GIIN) and additional in- formation about the recipient of the payment, including the recipient’s account number, date of birth, and foreign tax identification number, if any. GIIN indicates the identification number that is assigned to a participating foreign financial institution (FFI) or registered deemed-compliant FFI (including a reporting Model 1 FFI).
For withholding agents, intermediaries, flow- through entities, and recipients, the draft Form 1042-S requires that the chapter 3 status (or classification) and chapter 4 status be reported on the form according to codes provided in the draft instructions.
21. IRS issues memorandum on indirect FTC rules in connection with stock redemptions
The Associate Chief Counsel (International) of the US Internal Revenue Service (IRS) has issued a memorandum that discusses the interconnection of the indirect foreign tax credit (FTC) rules of section 902 of the US Internal Revenue Code (IRC) and the stock redemption rules of IRC sections 302 and 312.
IRC section 902 allows a US corporation to claim an indirect or deemed-paid FTC for foreign income taxes paid by its foreign subsidiary (referred to as the “section 902 corporation”) if the US corporation receives a dividend from the section 902 Corporation and certain conditions are met.
The amount of the foreign income taxes for which the indirect FTC may be claimed is equal to the same proportion of the section 902 Corporation’s “post-1986 foreign income taxes” (the FT pool) that the amount of the dividend bears to the section 902 Corpora- tion’s post-1986 undistributed earnings (the E&P pool) (i.e. indirect FTC = FT pool × (divi- dend received/E&P pool)).
The FT pool is defined by IRC section 902(C) as the foreign income taxes paid with respect to the taxable year in which the dividend is paid, as well as with respect to prior taxable years beginning after 31st December 1986. IRC sec- tion 902 reduces the amount of the FT pool to take into account dividends distributed by the section 902 CORPORATION in prior taxable years.
In the case reviewed in the Memorandum, a section 902 Corporation was 60% owned by a US parent company (USP) and was 40% owned by an unrelated foreign party (FP). The section 902 CORPORATIOn redeemed all of the stock owned by FP by way of a distribution of cash. IRC section 312(A) and (n)(7) reduces the section 902 CORPOration’s E&P pool to take into account the redemption. In the following year, the section 902 Corporation paid its entire remaining E&P to the USP as a dividend.
The issue of the Memorandum is whether the section 902 Corporation’s FT pool must be reduced for the purpose of calculating the USP’s indirect FTC although IRC section 302(A) treats the redemption as a sale or exchange transaction, rather than a dividend.
The Memorandum refers to Treasury Regulation section 1.902-1(a)(8), which provides that foreign taxes paid or deemed paid by a foreign corporation on or with respect to earnings that were distributed or otherwise removed from E&P in prior post-1986 taxable years must be removed from the FT pool. The Memorandum states that the language “otherwise removed” is broad enough to cover reductions of earnings under section 312(A)-Related redemptions that are treated as a sale or exchange transaction.
The Memorandum accordingly concludes that the section 902 Corporations’ FT pool must be reduced as a result of the redemption of the stock held by FP.
The Memorandum is designated AM2013-006. The Memorandum is dated 30th September 2013, and indicates that it was released on 25TH October 2013.
22. US Senate Finance Committee releases proposals for cost recovery and tax accounting rules
The US Senate Committee on Finance has announced the issuance of a staff discussion draft on proposed reforms to the cost recovery and tax accounting rules. These are the rules that are used to determine when a business can deduct the cost of investments and how businesses account for their income. The announcement was made in a Press Release dated 21ST November 2013.
The issued discussion draft is the third in a series of discussion drafts to overhaul US Internal Revenue Code (IRC). The significant proposals in the discussion draft include, among others:
– a single set of depreciation rules apply to all business taxpayers;
– the number of major depreciation rates is reduced from more than 40 to 5;
– the need for businesses to depreciate each of their assets separately is eliminated, except for real property;
– real property is depreciated on a straight-line basis over 43 years;
– research and experimental expenditures, as well as natural resource extraction expenditures, are capitalised and amortised over 5 years;
– the cash method of accounting and immedi- ate expensing of the cost of inventory are allowed for all businesses (other than tax shelters) with annual gross receipts under $ 10 million;
– the IRC section 179 expensing allowance (i.e. current year deduction in lieu of capitalisation and depreciation) is permanently increased to
$ 1 million with the phase-out threshold of $ 2 million, together with an expansion of the types of qualifying property; and
– the following rules would be repealed:
– the LIFO (last in, first out) method of account- ing for inventory;
– the lower of cost or market (LCM) rule for inventory;
– the like-kind exchange rules that permit tax- free roll-over transactions; and
– the completed contract method of accounting, except for small construction contracts.
The discussion draft also includes a list of un- addressed issues on which public comments are requested.
The documents released by the Committee on Finance include the following:
– Cost Recovery and Accounting Staff Discussion
Legislative Language;
– Cost Recovery and Accounting Summary;
– Cost Recovery and Accounting One Pager; and
– JCT Technical Explanation of Cost Recovery and Accounting Draft.
23. Regulations issued regarding withholding on payment of dividend equivalents from US sources
The US Treasury Department and the Internal Revenue Service (IRS) have issued final regu- lations (TD 9648) u/s. 871(m) of the Internal Revenue Code (IRC) to provide guidance to non-resident individuals and foreign corporations that hold specified notional principal contracts (“specified NPCs”) providing for payments that are contingent upon or determined by reference to US source dividend payments and to withholding agents.
IRC section 871(m) treats a “dividend equiva- lent” as a dividend from sources within the United States for purposes of the US gross basis income tax and subjects such dividend equivalent, if paid to a non-resident person, to the 30% withholding tax that applies to fixed or determinable annual or periodical income (FDAP income) from US sources.
The term dividend equivalent is defined by IRC section 871(M)(2) as:
– any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction (repo) that is contingent upon or determined by reference to a US source dividend payment;
– any payment made pursuant to a specified NPC that is contingent upon or determined by reference to a US source dividend payment; and
– any payment determined by the Treasury Department to be similar to the foregoing.
IRC section 871(m)(3)(A) defines a specified NPC as a NPC that contains terms or condi- tions that are specified in the statute, and applies this definition with regard to pay- ments made between 14th September 2010 and 18th March 2012. IRC section 871(m)(3)
(B) then provides that, with respect to pay- ments made after 18th March 2012, any NPC will be a specified NPC unless the Treasury Department determines that such contract is of a type that does not have the potential for tax avoidance.
Temporary regulations (RIN 1545-BK53, TD 9572), issued on 23RD January 2012, extended the section 871(m)(3)(A) statutory definition of a specified NPC through 31st December 2012 (see United States-1, News 25TH January 2012). The final regulations, inter alia, further extend the applicability of the definition to payments made before 1st January 2016.
The above definitions also apply for purposes of FATCA withholding under chapter 4 of the IRC. The Treasury Department and IRS state in the preamble to the final regulations that they will closely scrutinise other transactions that are not covered by IRC section 871(m) and that may be used to avoid US taxation and US withholding taxes.
The final regulations are designated Treasury Regulation sections 1.863-7, 1.871-15, 1.881-2, 1.892-3, 1.894-1, 1.1441-2 through -4, -6, and -7, and 1.1461-1.
The final regulations are effective on 5Th December 2013 and generally apply to payments made on or after 23rd January 2012 with exceptions.
In addition, the Treasury Department and the IRS contemporaneously issued proposed regulations (REG–120282–10) to provide, inter alia, a new definition of a specified NPC for payments made on or after 1st January 2016.
24. US Treasury Department reissues list of boy- cott countries that result in restriction of US tax benefits
The US Treasury Department has reissued its list of the countries that require cooperation with or participation in an international boy- cott as a condition of doing business.
The countries listed are Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, the United Arab Emirates, and the Republic of Yemen.
The list is dated 20th November 2013 and was published in the Federal Register on 27TH September 2013. The new list is unchanged from the list dated 26TH August 2013.
The listed countries are identified pursuant to section 999 of the US Internal Revenue Code (IRC), which requires US taxpayers to file reports with the Treasury Department concerning operations in the boycotting countries. Such taxpayers incur adverse consequences under the IRC, including denial of US foreign tax credits for taxes paid to those countries and income inclusion under subpart F of the IRC in the case of US shareholders of controlled foreign corporations (CFCs) that conduct operations in those countries.
[Acknowledgement/ Source: We have compiled the above information from the Tax News Service of IBFD for the period 01-10-2013 to 18-12-2013.]
