Published on June 28, 2016
1. #cbizmhmwebinar 1 CBIZ & MHM Executive Education Series™ Key International Tax Considerations in the Second Quarter Don Reiser & Laura Plotner June 28 and July 6, 2016
2. #cbizmhmwebinar 2 About Us • Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide A member of Kreston International A global network of independent accounting firms *MHM is an independent CPA firm providing audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider.
3. #cbizmhmwebinar 3 Before We Get Started… • To view this webinar in full screen mode, click on view options in the upper right hand corner • Click the Support tab for technical assistance • If you have a question during the presentation, please use the Q&A feature at the bottom of your screen
4. #cbizmhmwebinar 4 CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
5. #cbizmhmwebinar 5 Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business.
6. CBIZ & MHM 6 Don Reiser serves as the National Leader of the International Tax Practice for CBIZ. He has more than 30 years experience providing international tax consulting services to public and privately-held U.S. and foreign-based corporations as well as foreign individuals and businesses investing in the United States. Working closely with clients that span a variety of industries, Don addresses a broad range of domestic and foreign tax matters. 212.790.5724 • [email protected] Don Reiser Managing Director Presenters
7. CBIZ & MHM 7 Presenters Laura provides tax compliance and consulting services on a full range of tax issues. In addition to traditional tax engagements, her experience includes specific experience in multi-state issues, international tax services and working with public/SEC clients. She specializes in organizational and transactional planning related to state, local and international matters. 727.572.1400 • [email protected] Laura Plotner Managing Director
8. #cbizmhmwebinar 8 Agenda Administrative 02 01 03 04 Judicial Treaties Questions
9. #cbizmhmwebinar 9 ADMINISTRATIVE KEY INTERNATIONAL TAX CONSIDERATIONS IN THE SECOND QUARTER
10. #cbizmhmwebinar 10 Proposed Section 385 Regulations - Overview • On April 4, 2016, the Treasury Department and the IRS issued proposed regulations under Section 385 that, if finalized in their current form, would treat certain related party debt instruments as stock, in whole or in part, for U.S. federal income tax purposes • Issued at the same time as temporary regulations under Section 7874 on inversion transactions, but much broader in scope • Generally applies to debt between members of an “expanded affiliated group” (EAG) • Parent corporation, together with any corporation (U.S. or foreign) that is at least 80% owned, directly or indirectly, by the parent • 80% threshold based on vote or value • Recharacterized debt is treated as stock for all purposes of the Internal Revenue Code • Does not apply to debt between members of a U.S. consolidated group
11. #cbizmhmwebinar 11 Proposed Section 385 Regulations - Bifurcation Rule • Authorize the IRS (but not taxpayers) to bifurcate a single related- party debt instrument as part debt and part equity • Current law is based on an “all-or-nothing” characterization of the debt instrument • Bifurcation would apply if, based on the facts and circumstances at time of issuance, the instrument should be treated as part debt and part equity under general U.S. tax principles • Little guidance on when bifurcation is appropriate - example references ability to repay debt in full • Applies to debt between members of a “modified expanded group” • Modified expanded group is determined based on 50% vote or value threshold, rather than 80% • Includes groups with non-corporate parent (e.g., partnership) • Generally applies to related-party debt instruments issued after publication of final regulations
12. #cbizmhmwebinar 12 Proposed Section 385 Regulations - Recharacterization Rules • Proposed regulations provide rules that would automatically treat as stock certain debt instruments between members of an EAG that otherwise would be treated as debt for U.S. federal income tax purposes • Recharacterized debt instrument treated as stock for all U.S. tax purposes • General Rule • Debt instrument issued by a corporation to an EAG member is recharacterized as stock if issued in any of the following situations: • In a distribution with respect to the issuer’s stock (e.g., dividend distribution in form of a note) • In exchange for stock of an EAG member (e.g., note issued in a Section 304 transaction) • In exchange for property in an asset reorganization (e.g., note issued as boot in a “D” reorganization)
13. #cbizmhmwebinar 13 Proposed Section 385 Regulations - Recharacterization Rules • Funding Rule • Debt instrument issued by a corporation to an EAG member is recharacterized as stock if issued with a “principal purpose” of funding any of the three transactions described in the General Rule • Principal purpose generally determined based on facts and circumstances • However, a debt instrument issued by a corporation within 36 months before or after one of the transactions described in the General Rule is per se treated as issued with a principal purpose of funding such transaction • Exceptions to General Rule and Funding Rule • These rules do not apply to distributions or acquisitions that do not exceed the “current” year earnings and profits of the issuer • Debt instrument is not treated as stock if, when issued, the total issue price of all debt instruments held by members of the EAG that would otherwise be subject to the General Rule or the Funding Rule does not exceed $50 million • Certain other exceptions apply • Applies to debt instruments issued after April 4, 2016 - but reclassification only occurs 90 days after the regulations are finalized
14. #cbizmhmwebinar 14 Proposed Section 385 Regulations - Documentation Rules • Contemporaneous documentation requirements must be satisfied in order to treat a related- party debt instrument as debt for U.S. federal income tax purposes • Failure to comply with any of the documentation requirements results in equity treatment • Only applies to large taxpayer groups • The stock of any member of the EAG is publicly traded • The total assets of the EAG, as reflected on financial statements, exceed $100 million, or • The total annual revenue of the EAG, as reflected on financial statement, exceeds $50 million • Written documentation must establish the following: • The issuer’s legally binding obligation to pay a sum certain, on demand or on one or more fixed dates • The holder’s right to enforce the terms of the obligation (i.e., typical creditor rights) • A reasonable expectation that the issuer intends to, and is able to repay, the debt • The existence of an ongoing genuine debtor-creditor relationship (i.e., evidence of timely interest and principal payments or, evidence of actions taken to enforce creditor’s rights upon failure to make required payments or default)
15. #cbizmhmwebinar 15 Proposed Section 385 Regulations - Documentation Rules • Timing of documentation • Documentation of the first three debt characteristics must be prepared no later than 30 days after the debt is issued • Documentation of the ongoing debtor-creditor relationship must be prepared no later than 120 days after (1) the due date of each interest and principal payment or (2) the date of each default or acceleration event • Applies to debt instruments issued after publication of final regulations
16. #cbizmhmwebinar 16 BEPS Summary • BEPS Overview • Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. • The Organization for Economic Co-Operation and Development (OECD) has issued the BEPS Action Plan which outlines 15 key areas countries should address to curb tax avoidance by Multinational Entities.
17. #cbizmhmwebinar 17 BEPS Summary • U.S. adoption status • Many BEPS concepts already part of the Internal Revenue code: • Controlled Foreign Corporation rules • Limitations on deductions of net interest expense, generally by foreign-owned corporations • Transfer Pricing rules • Proposed Regulations issued December 21, 2015. (REG- 109822-15) would require annual U.S. country-by- country reporting for U.S. owned multinational enterprise groups (MNE)
18. #cbizmhmwebinar 18 Panama Papers • Leak of confidential documents from Panamanian law firm Mossack Fonseca • Documents revealed the tax arrangements of thousands of individuals including heads of state of several countries • Released by the “International Consortium of Investigative Journalists” (ICIJ) • Information for approximately 360,000 people and companies’ were released
19. #cbizmhmwebinar 19 Panama Papers • Secrecy of offshore tax havens is on the decline with more than 101 jurisdictions committing to the Common Reporting Standard (CRS) • The CRS is a program initiated by the OECD and Global Forum on Transparency • The program allows countries to automatically exchange financial account information in order to reduce instances of tax avoidance and evasion
20. #cbizmhmwebinar 20 FATCA Update • Background: • The U.S. Foreign Account Tax Compliance Act (FATCA) • Enacted in March 2010, came into effect in January 2014 • Requires Foreign Financial Institutions (FFIs) to report information about their U.S. account holders to the IRS • 30% withholding tax on gross income and other penalties are imposed on noncompliant FFIs • Banks, mutual funds, broker-dealers, hedge funds and private equity firms among others are considered FFIs
21. #cbizmhmwebinar 21 FATCA Update • IRS Notice 2016-08 • Released January 20, 2016 • Extended preexisting account compliance deadline from August 29, 2016 to July 1, 2018 • Eliminated the requirement that FFIs report 2015 gross proceeds paid to, or with respect to, an account held by a nonparticipating FFI • Allows a withholding agent to rely on a W-8 or W-9 series form that has been collected from the beneficial owner or payee of the payment through a qualified electronic system. A written statement confirming that the documentation was generated from a qualified system is required
22. #cbizmhmwebinar 22 FIRPTA Regulations • Background • Foreign Investment in Real Property Act of 1980 (FIRPTA) • Imposes a withholding tax on all dispositions of a U.S. real property interest by a foreign person • Applies to sales, exchanges, liquidations, redemptions, gifts, and transfers of U.S. real property interests by a foreign person • Purchasers must withhold a minimum percentage of the purchase price • Exemptions may lower or eliminate withholding entirely
23. #cbizmhmwebinar 23 FIRPTA Regulations • Temporary and Final regulations released on February 17, 2016 conform to changes outlined in the PATH Act (H.R. 2029) • Increased the maximum withholding rate from 10% to 15% • Increase does not apply to the sale of personal residences where the purchase price is less than one million dollars • Exempted certain foreign retirement funds from the application of FIRPTA • Increased foreign REIT ownership allowance from 5% to 10% • Added an exemption for “qualified” REIT shareholders • Modified the “cleansing rule” and the definition of a “domestically controlled” qualified investment entity
24. #cbizmhmwebinar 24 Form 8938 Reporting • Section 6038D, enacted as part of FATCA, requires individuals holding interests in specified foreign financial accounts to annually report those interests on Form 8938 - attached to Federal income tax return • Section 6038D(f) authorizes the IRS to issue regulations applying the Form 8938 filing requirement to any “domestic entity which is formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets • Prior to issuance of final regulations, only individuals were required to file Form 8938
25. #cbizmhmwebinar 25 Form 8938 Reporting • On February 23, 2016, the Treasury Department and the IRS issued final regulations implementing Section 6038D(f) • Form 8938 is required to be filed for certain domestic corporations or partnerships in which at least 50% of such entity’s gross income or assets is passive • At least 80% of the corporation or partnership must be owned, directly, indirectly or constructively, by a specified U.S. individual • Reporting threshold must be met • Eliminated principal purpose test under proposed regulations
26. #cbizmhmwebinar 26 Form 8938 Reporting •Passive income is defined consistent with definition contained in Section 1472 •Passive asset percentage is based on a weighted averaged test (using either fair market value or book value of assets) •A trust is a specified domestic entity if it has one or more specified persons as a current beneficiary, defined to include: • Any person who is entitled to, or may receive, a distribution of trust principal or income • A holder of a general power of appointment that was exercisable during the year (other than solely exercisable on the death of the holder)
27. #cbizmhmwebinar 27 Form 8938 Reporting •Certain exceptions to reporting apply •Applicable to tax years after December 31, 2015
28. #cbizmhmwebinar 28 Foreign-Owned Single-Member LLC Reporting • Section 6038A imposes reporting, recordkeeping and compliance obligations on a U.S. corporation if at least 25% of its stock (vote or value) is owned by one foreign person • On May 11, 2016, Treasury and the IRS issued proposed regulations that would treat a U.S. disregarded entity wholly owned by one foreign person as a U.S. corporation, separate from its foreign owner, for the limited purpose of the Section 6038A reporting, record maintenance and associated compliance requirements that apply to 25% foreign-owned U.S. corporations • Foreign-owned disregarded entity would be required to: • File Form 5472 for reportable transactions between the disregarded entity and its foreign owner (or other foreign related parties) • Obtain an EIN by filing Form SS-4 and identifying the entity’s “responsible party” • Exceptions to generally applicable record maintenance requirements for small corporations and de minimis transactions will not apply • Penalties associated with failure to file Form 5472 would apply • Proposed to be effective for taxable years ending on or after date that is 12 months after regulations are finalized
29. #cbizmhmwebinar 29 704 (b) Regulations - Update • Updated 704(b) regulations issued on February 3, 2016 • Intended to ensure that partnerships allocate foreign taxes among partners in the same way they allocate the income to which the taxes relate (treatment of creditable foreign tax expenditures (CFTE)) • Provide further clarification for the safe harbor method outlined in Treas. Reg. sec. 1.704-1(b)(4)(viii) • Specific updates • Treatment of inter-branch payments • Special rules for deductible allocations and guaranteed payments • The effect of a transferee partner’s Section 743(b) adjustment on income in a CFTE category
30. #cbizmhmwebinar 30 Due Date Changes • Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (H.R. 3236) • Due date changes enacted for all tax years beginning after December 31, 2015. Will take effect for all 2016 income tax returns • Intended to reduce the number of extended and amended individual returns by moving the initial due date for partnership returns to March 15th • C Corporation due dates to change again in 2026
31. #cbizmhmwebinar 31 Due Date Changes Return Type Original Due Date Extended Due Date Partnership Form 1065 (Calendar Year End) March 15 September 15th Partnership Form 1065 (Fiscal Year End) 15th day of 3rd month after year-end 15th day of the 9th month after year- end Trust and Estate Form 1041 April 15th September 30th C Corporation Form 1120 (Calendar Year End) Before 1/1/2026 – April 15th After 12/31/2026 – April 15th Before 1/1/2026 – Sept. 15th After 12/31/2026 – Oct. 15th C Corporation Form 1120 (FYE other than 6/30 or 12/31) 15th day of 4th month after year-end 15th day of 10th month after year-end C Corporation Form 1120 (6/30 FYE) Before 1/1/2026 – Sept. 15th After 12/31/2026 – Oct. 15th Before 1/1/2026 – April 15th After 12/31/2026 – April 15th Form 990 May 15th November 15th
32. #cbizmhmwebinar 32 FBAR Update • Proposed Regulation (RIN 1506-AB26) • Issued March 2, 2016 • Eliminate filing requirement for officers and employees on institutional accounts for which they have signature authority but no financial interest • The institution must have a filing obligation • The institution must maintain a list of all officers and employees with signature authority
33. #cbizmhmwebinar 33 FBAR Update • Eliminate summary reporting for persons with a financial interest in or signature authority over greater than 25 accounts • The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (H.R. 3236) changed due date from June 30th to April 15th, effective for the 2016 tax year • A six month extension to file will be available
34. #cbizmhmwebinar 34 New LB&I Examination Process • Large Business & International Division of the IRS • Published May 26, 2016 • Applies to all examinations beginning after May 1, 2016 • New process is contained in Publication 5125 which replaces Publication 4837 • New process takes an “issues based approach” • Each exam will have a case manager as well as a separate issue manager. The issue manager will be specialized in each issue and focus on their portion of the examination • The examination team is required to issue an Information Document Request (IDR) requesting the taxpayer’s acknowledgement of the facts for any unagreed issue before closing the case to Appeals
35. #cbizmhmwebinar 35 JUDICIAL KEY INTERNATIONAL TAX CONSIDERATIONS IN THE SECOND QUARTER
36. #cbizmhmwebinar 36 Guidant v. Commissioner, 146 T.C. No 5 (February 29, 2016) • Guidant, a medical device maker, filed a consolidated federal return • Guidant and certain U.S. subsidiaries entered into transactions with foreign affiliates including licensing intangibles, the purchase and sale of manufactured property, and the provision of services • Many product transactions involved a “round trip” from U.S. to subsidiaries in Ireland and Puerto Rico and back to the U.S.
37. #cbizmhmwebinar 37 Guidant v. Commissioner, 146 T.C. No 5 (February 29, 2016) • On audit, the IRS determined that the U.S. group’s intercompany transactions with its foreign affiliates were not at arm’s length and it adjusted the group’s taxable income under Section 482 • The IRS did not make specific adjustments to the separate taxable income of the U.S. subsidiaries involved in the transactions based on the information available and the complexity of the transactions. Instead, all transfer pricing adjustments were posted to the income of Guidant, the U.S. parent • Guidant filed a motion for partial summary judgment, claiming the IRS abused its discretion under Section 482 either by: • Failing to determine the true taxable income of each separate U.S. subsidiary involved in the intercompany transactions; or • Failing to make a separate Section 482 adjustment for each license, sale, purchase and services transaction
38. #cbizmhmwebinar 38 IRC 482 • In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.
39. #cbizmhmwebinar 39 Guidant v. Commissioner, 146 T.C. No 5 (February 29, 2016) • Tax Court held that neither Section 482 nor the regulations require the IRS, when exercising its authority under Section 482, to always determine the true separate taxable income of each controlled taxpayer in a consolidated group contemporaneously with the making of the resulting adjustments • Court further held that Section 482 allows the IRS to aggregate one or more related transactions when doing so provides the most reliable means of determining arm’s length consideration for intercompany transactions
40. #cbizmhmwebinar 40 Medtronic v. Commissioner, T.C. Memo 2016-112 • Medtronic developed, manufactured and sold medical device pulse generators (devices) and physical therapy delivery devices (leads) • Medtronic U.S. licensed to its Puerto Rican subsidiary a trademark and other intangible property (technology and know-how) required to manufacture the devices and leads in exchange for royalty payments • Medtronic characterized its Puerto Rican subsidiary as a full- fledged entrepreneur and used the comparable uncontrolled transactions (CUT) method to determine the arm’s length royalties for the trademark and manufacturing intangibles • The IRS asserted that the Puerto Rican subsidiary functioned as a contract manufacturer and applied the comparable profits method (CPM) to reallocate additional royalty income to Medtronic U.S.
41. #cbizmhmwebinar 41 Medtronic v. Commissioner, T.C. Memo 2016-112 • The Tax Court rejected the IRS’ argument that the CPM was applicable to the royalty payments, principally based on the ground that the government did not adequately consider the fact that product quality determined success in the medical device industry, and that the Puerto Rican subsidiary was ultimately responsible as the FDA-approved manufacturer of the medical devices • Accordingly, the Court held that Medtronic met its burden of showing that the IRS abused its discretion under Section 482 by making “arbitrary, capricious and unreasonable” allocations of income between Medtronic U.S. and its Puerto Rican subsidiary • The Court also rejected the IRS’ argument that Medtronic had transferred intangibles to its Puerto Rican subsidiary taxable under Section 367(d) • Although the Court agreed with Medtronic that the CUT was the best method to apply, it nevertheless increased the royalty under the licenses because Medtronic failed to make all of the necessary comparability adjustments required under that method
42. #cbizmhmwebinar 42 KEY INTERNATIONAL TAX CONSIDERATIONS IN THE SECOND QUARTER TREATIES
43. #cbizmhmwebinar 43 U.S. Model Income Tax Treaty • Revised U.S. Model Income Tax Treaty published by U.S. Treasury Department on February 17, 2016 • Non-binding document, but instead the starting point for U.S. treaty negotiations • Denies treaty benefits (reduced withholding taxes) on related party payments of interest, royalties and guarantee fees if the recipient benefits from a “special tax regime” (STR) with respect to such income • Exclusive list of circumstances in which a statute, regulation or administrative practice will be treated as an STR • Preferential rate for interest, royalties or guarantees fees as compared to income from goods or services • Permanent reduction in the tax base with respect to such income • Preferential tax rate or permanent tax base reduction for companies that do not engage in active trade or business in the residence country • Exception for preferential regimes that are generally expected to result in tax rate at least equal to the lesser of (1) 15%, or (2) 60% of the general corporate tax rate in that country
44. #cbizmhmwebinar 44 U.S. Model Income Tax Treaty • Denies treaty benefits for income attributable to a permanent establishment (located outside the taxpayer’s country of residence if either: • The income is subject to a low aggregate tax rate, or • The permanent establishment is located in a third country that does not have a tax treaty with the source state (e.g., U.S.) and the income is not taxed in the residence country • Denies treaty benefits for U.S. withholding taxes on U.S. source dividends, interest, royalties and certain guarantee fees paid by U.S. companies that are “expatriated entities” to a related foreign person within 10 years after expatriation
45. #cbizmhmwebinar 45 U.S. Model Income Tax Treaty • New limitation on benefits (LOB) articles that make it more difficult for third country residents to qualify for treaty benefits • Narrowed “active trade or business” test by requiring a more direct connection between the businesses in the source and residence states (similar business lines not sufficient) • Modified the “derivative benefits” test by: • Eliminating the geographic restrictions on who qualifies as an “equivalent beneficiary” • Requiring each intermediate owner to be a treaty resident and the intermediate owner treaty must include a STR provision • Added restrictions to the “base erosion” test • Applies to both the “tested company” that received the payment and the “tested group” (e.g., member with the company in tax consolidation, fiscal unity, group) • Payments to subsidiaries of public companies are base eroding payments • New headquarters company test would provide treaty benefits for dividends and interest received from multinational group members - but strict requirements to qualify
46. #cbizmhmwebinar 46 ? QUESTIONS
47. #cbizmhmwebinar 47 If You Enjoyed This Webcast… Upcoming Courses: • 7/7 & 7/20: Second Quarter Accounting and Financial Reporting Issues Update • 7/20 & 7/27: Tax Considerations for Your Tax-Exempt Organization • 7/26 & 8/2: Eye on Washington: Quarterly Business Tax Update Recent Publications: • IRS Clarifies When a Real Estate Developer May Exclude Cancellation of Debt Income • Buying a Business? Stock Purchase vs. Asset Purchase or the Best of Both Worlds • 2015-2016 WOTC Application Extended Until September 28 • Regulations Impose Corporate Level Tax on Transfers of C Corporation Property to RICs or REITs
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49. #cbizmhmwebinar 49 THANK YOU CBIZ & Mayer Hoffman McCann P.C. [email protected]