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B.E.P.S. Action 7 – O.E.C.D. Calls for Improved International Coordination on the Allocation of Branch Profit

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One of three releases on July 4, the O.E.C.D.’s Additional Guidance on the Attribution of Profits to Permanent Establishments addresses the imponderable question – how much profit should be attributed to a P.E.?  The answer will make tax advisers quite happy: It depends on the facts, and the O.E.C.D. suggests that a coordinated global approach is required to avoid double taxation.  Stakeholders are invited to comment.  Michael Peggs examines five examples in the additional guidance.

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Proposed Regulations on Nondevice & Active Business Requirements Under Code §355

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Many jurisdictions have special provisions that apply when two businesses owned by a corporation or corporate group are divided and shares of group members are distributed to shareholders.  Sometimes referred to as a “demerger” in Europe and other times as a “butterfly” in Canada, in the U.S. these transactions are called Code §355 spin-offs, split-ups, and split-offs.  In the U.S., several hurdles must be overcome for the transaction to be free of tax at the level of the company making the distribution and the shareholder receiving the distribution.  The I.R.S. recently issued proposed regulations clarifying the application of two of these hurdles: the transaction must not be a “device” to distribute earnings, and companies conducting two or more active business must be involved.  The proposed regulations were motivated by a proposal by Yahoo! to distribute shares of Alibaba.  Rusudan Shervashidze and Andrew P. Mitchel analyze the proposed regulations and how they will apply to circumstances involving a spin-off of a corporation operating a small business but having a large investment asset.

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Tax 101: Foreign Settlors, U.S. Domestic Trusts, and U.S. Taxation

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Non-U.S. tax advisers to high net worth individuals are familiar, to some degree, with U.S. tax rules involving trusts, settlors, and beneficiaries.  While they may know that a grantor trust allows for income to be taxed to a grantor, they are not always conversant with the differences between U.S. income tax rules for grantors and the U.S. gift and estate tax rules that cause trust property to be included in the taxable estates of trust settlors.  Fanny Karaman, Kenneth Lobo, and Stanley C. Ruchelman explore the way these rules exist side by side – highlighting the differences, in the context of a nonresident, non-citizen settlor establishing a U.S. domestic trust for the benefit of an adult U.S. child wishing to acquire an apartment in the U.S.

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I.R.S. Issues Proposed Regulations Affecting Valuation Discounts for Gift and Estate Tax Purposes

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For corporate tax purposes, the I.R.S. maintains the view that a transaction between a taxpayer and a disinterested party – meaning a person that does not have an adverse interest to a taxpayer because tax neither increases nor decreases as a result of a particular term agreed upon – is not the result of arm’s length bargaining and can be disregarded where appropriate.  Now, the I.R.S. proposes to expand that approach to estate plans. The proposal is embedded in regulations issued under Code §2704. As a result, commonly used tools may no longer be available to reduce gift or estate tax.  Minority ownership discounts and unilateral governance rights that disappear at death are valuation planning tools that are at risk because of the common goals of the participants. Fanny Karaman, Stanley C. Ruchelman, and Kenneth Lobo explain.

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A New Way to Do the Splits: B.E.P.S. Guidance Falls Short of Enabling Global Formulary Apportionment

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From the moment the B.E.P.S. Project began in 2013, multinational enterprises have been concerned that tax authorities would be emboldened to apportion income resulting from the joint commercialization of intangible assets.  Surprise.  A July 4 publication of the O.E.C.D. Revised Guidance on Profit Splits discussion draft does not place an over-broad profit apportionment tool in the hands of tax authorities.  Michael Peggs explains why the transactional profit split method may not be appropriate in many instances. 

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European Registration & French Tax Law Create Pitfalls for U.S. Trusts

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Events that have taken place in the E.U. during July confirm that a U.S. person who establishes a U.S. domestic or foreign trust for the benefit of a European resident, may face significant pitfalls regarding confidentiality and tax.  While trusts historically constitute a testamentary dispositive tool in common law countries, the recent UBS and Panama Papers scandals have shed a harsh light on these instruments.  At the level of the E.U., enhancements to existing anti-money laundering provisions have been floated.  The legislation would eliminate certain exceptions to reporting.  In France, adverse tax rules already exist for trusts, settlors, and beneficiaries that fail to take into account fundamental differences among trust instruments.  In addition, wealth tax issues and public disclosure issues must be considered.  Fanny Karaman and Stanley C. Ruchelman explore these and other problem areas.

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Contract Manufacturing in a US-Controlled Group→

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First published by the Canadian Tax Foundation in (2016) 24:7 Canadian Tax Highlights.

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Insights Vol. 3 No. 6: B.E.P.S. Around the World

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Insights Vol. 3 No. 6: B.E.P.S. Around the World

This month, we review steps toward implementation of anti-B.E.P.S. provisions in various countries and the E.U.  Kenneth Lobo and Nina Krauthamer look at the latest items, including French tax raids on local offices of U.S. companies, disagreement with the E.U. over the adoption of blacklists and the tax treatment of C.F.C.’s, and pushback against proposed Code §385 regulations that deal with debt and equity.

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Disallowance for Failure to Withhold on Outbound Payment Violates India-U.S. Non-Discrimination Clause

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Disallowance for Failure to Withhold on Outbound Payment Violates India-U.S. Non-Discrimination Clause

To withhold, or not to withhold: that is the question.  Neha Rastogi and Nina Krauthamer review the Herbalife case in India that allowed an Indian subsidiary to deduct an administration fee paid to a related parent company for services performed in the U.S. without imposing an obligation on the company to withhold Indian tax.  The case, which relates to the tax year 2000 to 2001, has dragged on for many years.  In 2004, the law was changed, but the litigation continued.

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Property Contributions to Partnerships with Related Foreign Partners

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The Tax Section of the American Bar Association recently commented on a set of proposed rules that appear in Notice 2015-54.  When adopted, these rules would limit the ability of U.S. persons to transfer appreciated property to a partnership in a tax-free transaction when the partnership has a non-U.S. person as a partner.  The I.R.S. is concerned that through special allocations of gain, built-in appreciation in contributed assets may escape taxation.  The Tax Section makes a case for additional guidance concerning the methods proposed to eliminate that result.  Philip R. Hirschfeld and Nina Krauthamer discuss the I.R.S. proposal and A.B.A. comments.

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Proposed Reporting Requirements for Foreign-Owned U.S. Disregarded Entities

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Recently-proposed regulations will require information reporting for single member L.L.C.’s that are owned by non-U.S. persons and treated as disregarded entities. Typically, this structure is used for the acquisition of an apartment by camera-shy, high net worth individuals and offshore trading companies wishing to appear as U.S. persons. The regulations are designed to supply the I.R.S. with information about the operations and ownership so that information may be exchanged with tax treaty partner jurisdictions. Philip R. Hirschfeld and Nina Krauthamer examine the proposed reporting rules.

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Draft Valuation Rules for Indirect Transfers in India

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In May, draft rules were issued in India that implement legislation designed to reverse the holding in the Vodafone case. There, a taxpayer sold shares of an offshore company having as its principal asset shares of a large Indian telecommunication company. When Indian tax authorities attempted to tax the gain of the sale of foreign shares, the Indian Supreme Court held in the taxpayer’s favor and observed that the transaction was beyond India’s territorial tax jurisdiction. The law was changed in 2012, and in 2015, certain valuation benchmarks were set that established when tax would be imposed. Neha Rastogi, Kenneth Lobo, and Nina Krauthamer explain how the value of Indian and global assets will be determined. They also address associated reporting requirements.

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Required Taxable Inclusions from the Loss of §1248 Shareholder Status

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Rusudan Shervashidze and Andrew P. Mitchel continue their examination of U.S. tax rules applicable to cross-border reorganizations, formations, and liquidations.  This month, they review the rules embodied in Code §1248, a provision that converts capital gain from the sale of shares in a C.F.C. into dividend income for certain shareholders.  Although for individuals, the tax rates for qualified dividends and gains are the same, the source of the income is changed in a way that may allow a benefit for unused foreign taxes.  If the dividend is not qualified, tax is imposed at a much greater rate.  For corporations that are shareholders, dividend income may bring along indirect foreign tax credits.  Code §1248 also defines the extent of a toll charge if a foreign corporation undergoes a tax-free reorganization that eliminates C.F.C. status.

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Income Tax Treaties v. Domestic Law: An International Look at the Current Score

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Ask most tax advisers outside the U.S. about the way to resolve a conflict between the provisions of an income tax treaty and domestic law, and the almost universal view is to look to the treaty for resolution.  However, in some countries, an income tax treaty is not the last word in resolving conflicts.  In the U.S., the saving clause of a treaty preserves the supremacy of U.S. domestic tax rules as they affect U.S. citizens and residents, as defined in the treaty.  In Brazil, a presidential decree may govern the outcome.  And in India, a domestic tax provision may be crafted in such a way as to circumvent a treaty by altering the identity of the technical taxpayer.  Elizabeth V. Zanet, Galia Antebi, and Neha Rastogi examine ways in which those three countries directly or indirectly override treaty provisions that are deemed domestically undesirable.

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E.U. State Aid – The Saga Continues

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For several years, the European Commission has been on a mission to raise on a retroactive basis the income tax of large corporations that received favorable tax rulings from national authorities. Using as its tool the rules prohibiting State Aid, the Commission has gone after Fiat Chrysler, McDonald’s, Starbucks, and others.  Christine Long and Beate Erwin explore the Commission’s latest push and the outcry it is causing on both sides of the Atlantic.  Luxembourg and the Netherlands have appealed recent rulings and the mood in Washington, D.C. is chilly, at best.

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French Life Insurance Policies: A U.S. Income Tax Perspective

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The world of available insurance policies on an individual’s life is broad and complex within the context of only one country.  Add a foreign element, and one is faced with a legal and tax labyrinth.  Fanny Karaman and Stanley C. Ruchelman explain how a typical French life insurance policy is taxed for a policy holder having contacts with both France and the U.S.

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The End of the Negotiation: Protocol to India-Mauritius Tax Treaty Finally Released

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After several years of negotiations, a new protocol to the Mauritius-India Income Tax Treaty has been agreed between the parties.  In a nutshell, India benefits from amended provisions that are in line with other bilateral treaties, while Mauritius benefits from the adoption of grandfathering provisions regarding capital gains from the disposition of certain shares.  Investors in both countries will benefit from greater certainty in taxing outcomes.  Anurag Jain and Parul Jain of Attorneys BMR & Associates L.L.P., Gurgaon, address the highlights of the new provisions.

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U.S. Tax Residency Certification and Spanish Withholding Tax: Early Application Recommended

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Global taxpayers live in a process driven world. It is not enough to be correct when claiming a benefit, the paperwork must be completed.  In a detailed article on proper procedure, Beate Erwin and Christine Long explain that U.S. persons claiming treaty tax benefits with regard to payments from Spanish entities face two hurdles. First, they must meet the treaty qualification tests under the limitation on benefits article. Second, they must obtain a U.S. Tax Residency Certification from the I.R.S. before payment is met.

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Insights Vol. 3 No. 5: Updates & Other Tidbits

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In this month’s update, Elizabeth V. Zanet and Nina Krauthamer report on (i) attacks on cash pooling arrangements as part of earnings-stripping rules under Code §385, (ii) the latest regulations aimed at increasing financial transparency, including adoption of a customer due diligence (“C.D.D.”) final rule, (iii) proposed beneficial ownership legislation, and (iv) new reporting rules for foreign-owned, single member L.L.C.’s that engage in business with the foreign owner; as well as a new wave hiring by the I.R.S. of enforcement officers.

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Insights Vol. 3. No. 5: B.E.P.S. Around The World

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Kenneth Lobo and Stanley C. Ruchelman look at recent happenings in the world of B.E.P.S.  Items covered include (i) recent decisions of the Canada Revenue Agency regarding tax rulings that will be exchanged automatically with other countries, (ii) I.R.S. consideration of accepting early CbC reports from U.S.-based groups, (iii) multilateral procedures to deal with the expected flood of mutual agreement requests arising from double taxation claims when B.E.P.S.-generated taxation claims begin to appear, and (iv) the emerging need for B.E.P.S. compliance officers in multinational groups.

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