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India Budget 2019-20

India Budget 2019-20

The first budget of the Modi 2.0 government was announced during the summer with a goal of bringing India to a growth trajectory. To that end, the Taxation Laws (Amendment) Ordinance, 2019, was introduced on September 20, 2019, to incorporate the proposed changes into law. Included are incentives for International Financial Services Centres, tax relief for start-ups, a boost for electric vehicles, and faceless tax examinations intended to ensure that tax examinations are carried out in a uniform way. Although anticipated by some, an inheritance tax was not introduced. Jairaj Purandare, the Founder and Chairman of JMP Advisors Pvt Ltd, Mumbai, explains the new provisions.

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Israeli C.F.C. Rules Apply to Foreign Real Estate Companies Controlled by Israeli Shareholders

Israeli C.F.C. Rules Apply to Foreign Real Estate Companies Controlled by Israeli Shareholders

Controlled foreign corporation (“C.F.C.”) laws are all the rage with parliaments around the world. Israel is no exception. Israeli shareholders controlling offshore companies that derive low-tax passive income and gains can be taxed in Israel even though no dividend is received. A recent decision by the Israeli Supreme Court addresses a fundamental question in this area. Is passive income determined on a groupwide basis or on a company-by-company basis? The answer affects Israeli residents owning a chain of C.F.C.’s when an intermediary company in the chain sells shares of an operating subsidiary. Daniel Paserman, who leads the tax group at Gornitzky & Co., Tel-Aviv, explains the holding in Tax Assessor for Large Enterprises v. Rosebud. Israeli residents may not like the answer.

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Do You Have to Withhold 30% on Payments to a Non-U.S. Independent Contractor?

Do You Have to Withhold 30% on Payments to a Non-U.S. Independent Contractor?

A common theme when a business engages the services of an individual is whether the individual is an independent contractor or an employee. The stakes become higher when the individual and the business are not resident in the same country. Galia Antebi address the applicable rules and special I.R.S. procedures for businesses located in the U.S. engaging service providers based in other countries to work in whole or in part in the U.S. Even when a tax treaty exempts the payment from income tax, businesses should be prepared to collect potentially refundable 30% withholding tax in the absence of an advance notice to the I.R.S.

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Preferred Yet Neglected — A Plea for Guidance on Redemptions of C.F.C. Preferred Stock in the Wake of U.S. Tax Reform

Preferred Yet Neglected — A Plea for Guidance on Redemptions of C.F.C. Preferred Stock in the Wake of U.S. Tax Reform

Most tax advisers in the U.S. view Code §1248 as a supporting part of U.S. C.F.C. rules. Under the provision, capital gain derived by a 10% shareholder of a C.F.C. from the sale or disposition of shares of the C.F.C. may be converted into dividend income to the extent of some or all of the accumulated earnings of the C.F.C. Prior to the Tax Cuts and Jobs Act of 2017, Code §1248 applied to all 10% U.S. Shareholders of a C.F.C. However, that is no longer the case. Whether the delinking was intentional is not clear. What is clear is that some U.S. Shareholders are not subject to Code §1248, and the tax consequences may be sub-optimal for the U.S. Shareholder. Neha Rastogi, Andreas A. Apostolides, and Stanley C. Ruchelman explain the pitfalls that may occur.

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U.S. Tax Litigation Update — The President’s Tax Returns and the New S.A.L.T. Cap

U.S. Tax Litigation Update — The President’s Tax Returns and the New S.A.L.T. Cap

·      Politics on the national and local levels in the U.S. have become a form of blood sport with no holds barred and no code of conduct that is equivalent to the Marquess of Queensberry rules that controlled the sport of boxing in England from 1867 onward.  This is evidenced by various political battles between President Trump and the Democrats in the House of Representatives and in state government.  Those battles have moved to Federal court.  Issues involve the disclosure by government of the president’s tax returns, the $10,000 cap imposed on deductions claimed for state and local income and real property taxes, and state proposed workarounds to ignore the cap.  Nina Krauthamer looks at all the head-spinning activity currently taking place.  Yes, bare-knuckle boxing as practiced by politicians in the U.S. is alive and well.

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Corporate Matters: F.I.R.R.M.A. Proposed Regulations Expand C.F.I.U.S. Oversite on Foreign Investment

Corporate Matters: F.I.R.R.M.A. Proposed Regulations Expand C.F.I.U.S. Oversite on Foreign Investment

C.F.I.U.S. is an interagency committee authorized to review certain transactions involving foreign investment in the U.S. Its mandate is to determine the effect of such transactions on the national security of the U.S. and, where appropriate, to deny approval to the transaction. F.I.R.R.M.A. was enacted in 2018 to expand the scope of transactions that are subject to C.F.I.U.S. review. Recently, the Treasury Department proposed regulations to implement the changes under F.I.R.R.M.A. Simon H. Prisk discusses the way in which the jurisdiction of C.F.I.U.S. has been expanded.

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U.S. Taxation of Cloud Transactions and Digital Content Transfers: 20-Year-Old Regulations Finally Move with the Times

U.S. Taxation of Cloud Transactions and Digital Content Transfers: 20-Year-Old Regulations Finally Move with the Times

The I.R.S. recently proposed revisions to the regulations applicable to the classification of cloud computing transactions. The existing regulations were adopted in 1998 and have not kept pace with computer-based transactions, which are an ever-growing and evolving area. To put things in perspective, when the current regulations were adopted, a typical internet connection could download 1GB in approximately 48 hours. Now, it takes less than 15 minutes. Hannah Daniels and Galia Antebi explain the three broad proposals intended to bring the regulations up to date. Oh, how times have changed!

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Cryptocurrencies – Latest Developments on Either Side of the Atlantic and Beyond

Cryptocurrencies – Latest Developments on Either Side of the Atlantic and Beyond

The issues raised by virtual currency and the underlying blockchain technology affect tax law, transfer pricing, regulatory rules, civil law accounting rules, and valuation. The issues in all these areas share one common goal: protection of users and investors through the prevention of fraud and abuse. Beate Erwin explains recent guidance by the Financial Action Task Force in this area and the likely effect of the guidance on national laws around the world.

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C.J.E.U. Judgments on Danish Beneficial Ownership Cases

C.J.E.U. Judgments on Danish Beneficial Ownership Cases

Earlier this year, the C.J.E.U. released two judgments dealing with the interpretation of the Parent-Subsidiary Directive (“P.S.D.”) and the Interest & Royalties Directive in the E.U.  In each case, a structure was meticulously built to comply with national and E.U. law allowing global investors to bring funds to the E.U. in return for dividends and interest that were subject to little or no national tax in any E.U. country.  Nothing in the structure was unique, other than the reticence of the Danish tax authorities to grant withholding tax exemptions.  To the surprise of many, the C.J.E.U. looked at the structure and concluded that it lacked economic substance and should be disregarded by reason of a general E.U. anti-abuse principal.  The internal E.U. recipients of the dividend and interest payments were not considered to be the beneficial owners of the income.  Almost 50 years after the Aiken Industries case in the U.S. Tax Court and 25 years after the anti-conduit regulations were adopted by the I.R.S., European substance-over-form rules have now been adopted by judicial fiat.  Thierry Lesage and Adnand Sulejmani of Arendt & Medernach SA, Luxembourg, meticulously explain the reasoning of the court and suggest that the court may have erred by conflating anti-abuse rules with beneficial ownership concepts.

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Employers in the Netherlands: Prepare for Changes to Labor and Dismissal Laws In 2020

Employers in the Netherlands: Prepare for Changes to Labor and Dismissal Laws In 2020

In May, the Dutch Senate adopted the Labor Market in Balance Act designed to reduce the gap in legal protection and financial compensation between employment arrangements under fixed-term contracts and employment arrangements with indefinite term. The act provides greater rights on termination and, as a result, is unpopular with employers. It also aims to resolve some of the negative effects of an earlier amendment to the law that has been the subject of relentless criticism. Rachida el Johari and Madeleine Molster of Sagiure Legal, Amsterdam, explain the way Dutch labor law will affect termination rights for employees and suggest a path forward for management. This is another area of E.U. law in which companies will need to re-educate executives on proper patterns of behavior.

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The Devil in the Detail: Choosing a U.S. Business Structure Post-Tax Reform

The Devil in the Detail: Choosing a U.S. Business Structure Post-Tax Reform

Prior to the T.C.J.A. in 2017, the higher corporate income tax rate made it much easier to decide whether to operate in the U.S. market through a corporate entity or a pass-thru entity. With a Federal corporate income tax rate of up to 35%, a Federal qualified dividend rate of up to 20%, and a Federal net investment income tax on the distribution of 3.8%, the effective post-distribution tax rate was 50.47%, before taking into account State and local taxes. With the post-tax reform corporate income tax rate of 21% and the introduction of the qualified business income and foreign derived intangible income deductions, the decision to choose a pass-thru entity is no longer apparent. In their article, Fanny Karaman and Nina Krauthamer look into some important tax considerations when choosing the entity for a start-up business in the U.S.

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Debt Characterization and Deductibility Under Domesticated International Rules

Debt Characterization and Deductibility Under Domesticated International Rules

The limitation of interest deductibility to 30% of adjusted E.B.I.T.D.A. has focused the attention of U.S. corporations and their lenders on new constraints. How does a borrower demonstrate the capacity to carry and service debt, and how do related parties demonstrate that the rate of interest and other terms attaching to a cross-border loan are arm’s length? Michael Peggs and Stanley C. Ruchelman address these issues, explaining the three methods used to identify the boundary between debt and equity: (i) the qualitative approach of case law (I know it when a I see it, although I can’t agree to a uniform standard of application), (ii) the data-driven approach of comparative analysis (I know it when I can measure the effect, much like gravity), and (iii) the procedural approach for borrowers as set out in the Code §385 regulations which were in effect for a short period of time (I know it when I follow the recipe in the regulatory cookbook).

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Qualified Opportunity Zones: Second Set of Proposed Regulations Offers Greater Clarity to Investors

Qualified Opportunity Zones: Second Set of Proposed Regulations Offers Greater Clarity to Investors

The Opportunity Zone tax benefit, which was crafted as part of the 2017 tax reform, aims to encourage taxpayers to sell appreciated capital properties and rollover the gains into low-income areas in the U.S.  One major benefit – reducing recognition of deferred gains by up to 15% – is available only to investments made before the end of 2019, although other benefits will continue to be available to later investments.  The clock is ticking on the 15% reduction, and the I.R.S. is accelerating the issuance of guidance.  In late April, the I.R.S. released a second set of proposed regulations that address many of the issues that were deferred in the initial set.  They also address issues raised by written comments and testimony at the well-attended public hearing in February.  In their article, Galia Antebi and Nina Krauthamer lead the reader through the important and the practical parts of the second set of guidance.

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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

Remember when Code §1248 was intended to right an economic wrong by converting low-taxed capital gain to highly-taxed dividend income? (If you do, you probably remember the maximum tax on earned income (50% rather than 70%) and income averaging over three years designed to eliminate the effect of spiked income in a particular year.) Tax law has changed, and dividend income no longer is taxed at high rates. Indeed, for C-corporations receiving foreign-source dividends from certain 10%-owned corporations, there is no tax whatsoever. This is a much better tax result than that extended to capital gains, which are taxed at 21% for corporations. Neha Rastogi and Stanley C. Ruchelman evaluate whether the conversion of capital gains into dividend income produces a meaningful benefit in many instances, given the likelihood of prior taxation under Subpart F or G.I.L.T.I. rules for the U.S. parent of a multinational group. Hence the question, is the conversion of taxable capital gains into dividend income under Code §1248 a real benefit, or is it simply a glistening

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Grecian Magnesite Put to Bed: Tax Court Ruling Affirmed on Appeal

Grecian Magnesite Put to Bed: Tax Court Ruling Affirmed on Appeal

The battle is over. It is agreed that the emporer’s new clothes are made of fairy dust, and Rev. Rul. 91-32 is not worth the paper on which it was printed in the I.R.S. Cumulative Bulletin for 1991. In June, the Court of Appeals for the D.C. Circuit affirmed the 2017 Tax Court ruling in the matter of Grecian Magnesite Mining v. Commr., which held that a foreign corporation was not liable for U.S. tax on the gain arising from a redemption of its membership interest in a U.S. L.L.C. treated as a partnership. In their article, Galia Antebi and Stanley C. Ruchelman address the history of the I.R.S. position and the disdain given to it by the courts. However, they caution that the taxpayer victory applies only to sales, exchanges, and dispositions effected through November 26, 2017. Thereafter, new Code §864(c)(8) modifies the law by adopting a look-thru rule when determining the character of gain from the sale of a membership interest. Win some, lose some.

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Updates & Other Tidbits

Updates & Other Tidbits

This month, Fanny Karaman, Galia Antebi, and Stanley C. Ruchelman look at interesting items of tax news, including (i) the I.R.S. announcement that French contribution sociale généralisée ("C.S.G.") and contribution au remboursement de la dette sociale ("C.R.D.S.") are now considered creditable foreign income taxes as they are no longer considered to fall under the provisions of the France-U.S. Totalization Agreement, (ii) the Senate Foreign Relations Committee has recommended approval of protocols to income tax treaties with Japan, Luxembourg, Spain, and Switzerland, paving the way for Senate approval, and (iii) proposed regulations under Code §951A now allow taxpayers to claim the benefit of the high-tax kickout to limit the inclusion of G.I.L.T.I. income, thereby allowing individuals to avoid current taxation of net tested income when the controlled foreign corporation incurs foreign income taxes imposed at a rate that exceeds 18.9%.

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India and the Digital Economy – The Emerging P.E. and Attribution Issues

India and the Digital Economy – The Emerging P.E. and Attribution Issues

The exponential expansion of information and communication technology has made it possible for businesses to be conducted in ways that did not exist 15 years ago.  It has given rise to new business models that rely almost exclusively on digital and telecommunication networks, do not require physical presence, and derive substantial value from data collected and transmitted through digital networks.  So how and where should these companies be taxed?  Sunil Agarwal, an advocate and senior tax partner of AZB & Partners New Delhi, evaluates proposals already enacted in India and the U.K. and those under consideration at the level of the European Commission and E.U. member countries Italy, France, and Austria.  Should the digital tax be a consumption tax passed on to the final consumer or a minimum income tax based on global profits or substantial economic presence?  At this point, consensus does not exist.

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2020 Will Mark the End of an Era: Swiss Corporate Tax Reform Accepted

2020 Will Mark the End of an Era: Swiss Corporate Tax Reform Accepted

On May 19, 2019, Swiss Federal and Genevan cantonal voters accepted proposed corporate tax reforms by a large majority.  As explained by Thierry Boitelle and Aliasghar Kanani of Bonnard Lawson Geneva, Switzerland will abolish its widely criticized cantonal special tax regimes and certain Federal regimes.  At the same time, Switzerland and the cantons will introduce generally applicable reduced and attractive corporate income tax rates and several new special regimes, meeting current international standards and requirements.  These changes will be effective as of 2020.

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Reflections on My 66 Years in Public Accounting

Reflections on My 66 Years in Public Accounting

Periodically in life, one comes across an individual who is best described as follows:  He or she “gets it.”  Difficult to describe analytically, in the tax world, the term means that (i) in solving technical problems, the person focuses the material, leaving the immaterial to others; (ii) in making decisions, the person can separate the important from the unimportant; and (iii) in advising others on the impact of a new accounting rule or provision of tax law, the person can digest the complex and explain it in a series of simple sentences.  Often, the individual is self-effacing.  Arthur J. Radin was all of the above.  He passed away in April.  In his memory, we are pleased to republish an article written for the CPA Journal describing the way professional accounting changed during his 60-year career and, more importantly, the way the world changed.  Arthur will be missed.

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Proposed F.D.I.I. Regulations: Deductions, Sales, and Services

Proposed F.D.I.I. Regulations: Deductions, Sales, and Services

The foreign derived intangible income (“F.D.I.I.”) regime allows for a reduced rate of corporate tax rate on hypothetical intangible income used in a U.S. business to exploit foreign markets.  Many implementation issues that were left open when the provision was enacted have been addressed in proposed I.R.S. proposed regulations issued early March.  In their article, Fanny Karaman and Beate Erwin explain (i) which taxpayers benefit from the regime, (ii) the way deductions are taken into account, (iii) whether the deduction is always available when a U.S. corporation sells on a foreign market, (iv) the way in which foreign use of sales or services is established, and (v) the way in which related-party transactions can qualify as F.D.D.E.I. sales or services.

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