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I.R.S. Adds New Issues of Focus for Cross-Border Audits

I.R.S. Adds New Issues of Focus for Cross-Border Audits

In late 2018, LB&I announced five additional campaigns aimed at determining whether taxpayers are complying with tax rules in the following areas of the law: (i) foreign tax credits claimed by U.S. individuals, (ii) offshore service providers that assist taxpayers in creating foreign entities and tiered structures to conceal the U.S. beneficial ownership of foreign financial accounts, (iii) F.A.T.C.A. compliance by F.F.I.’s and N.F.F.E.’s, (iv) tax return compliance by foreign corporations that ignore the fact that they are engaged in a U.S. trade or business under the rules of U.S. tax law, and (v) late issuance of Work Opportunity Tax Credit (“W.O.T.C.”) certifications that result in the need to file amended tax returns and result in a misuse of I.R.S. resources when returns are filed without the W.O.T.C certifications. The move follows more than two years, of I.R.S. publications that alert the public to certain issue-based approaches being followed by examiners. Galia Antebi and Elizabeth V. Zanet summarize the new releases.

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Mirror, Mirror, On the Wall, Which Is My Tax Home of Them All? – Foreign Students Face Dilemma in the U.S.

Mirror, Mirror, On the Wall, Which Is My Tax Home of Them All? – Foreign Students Face Dilemma in the U.S.

The U.S. Department of State administers the Exchange Visitor Program, which designates sponsors to provide foreign nationals with opportunities to participate in educational and cultural programs in the U.S. and return home to share their experiences. These students receive taxable stipends, file tax returns, and reduce taxable income by costs associated with participation. Unfortunately, a recent Tax Court case, Liljeberg v. Commr., has determined that the travel and lodging costs of these individuals could not be deducted. Neha Rastogi and Beate Erwin explain that while home is where the heart is, a “tax home” is where a person is expected to live taking into consideration the person’s principal place of employment.

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Insights Vol. 6 No. 1: Updates & Other Tidbits

Insights Vol. 6 No. 1: Updates & Other Tidbits

This month, Rusudan Shervashidze and Stanley C. Ruchelman look at several interesting items, including (i) the publication of draft legislation by the Crown Dependencies of Guernsey, Jersey, and Isle of Man calling for the existence of economic substance for resident companies engaged in certain businesses and defining what that means, (ii) the denial of benefits incident to foreign earned income for a military contractor in Afghanistan who maintained a place of abode in the U.S., (iii) an increase in fees charged by the I.R.S. to issue residency certificates, (iv) the establishment of a working group to combat transnational tax crime through increased enforcement collaboration among tax authorities in several countries, and (v) changes to China’s residency rules and the sharing of taxpayer financial information under C.R.S. 

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How to Handle Dual Residents: The I.R.S. View on Treaty Tie-Breaker Rules

How to Handle Dual Residents: The I.R.S. View on Treaty Tie-Breaker Rules

The first step in advising a foreign individual who is neither a U.S. citizen nor a green card holder on U.S. income tax laws is to determine the person's residence for income tax purposes. But what is to be done when the individual is resident in multiple jurisdictions? A recent LB&I International Practice Unit offers a quick understanding of the tax issues I.R.S. examiners raise when dealing with individuals who are dual residents for tax purposes. Virtually all income tax treaties entered into by the U.S. contain a tiebreaker rule under which the exclusive residence of an individual is determined for purposes of applying the income tax treaty. Fanny Karaman and Beate Erwin explain how these rules are applied. One point to remember is that the tiebreaker test for treaty residence purposes does not affect an individual's obligation to file an F.B.A.R. form.

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C-Corps Exempt from Full Scope of Foreign Income Inclusion

C-Corps Exempt from Full Scope of Foreign Income Inclusion

One of the principal highlights of the T.C.J.A. is the 100% dividends received deduction ("D.R.D.") allowed to U.S. corporations that are U.S. Shareholders of foreign corporations. At the time of enactment, many U.S. tax advisers questioned why Congress did not repeal the investment in U.S. property rules of Subpart F. Under those rules, investment in many different items of U.S. tangible and intangible property are treated as disguised distribution. In proposed regulations issued in October, the I.R.S. announced that U.S. corporations that are U.S. Shareholders of C.F.C.'s are no longer subject to tax on investments in U.S. property made by the C.F.C. Stanley C. Ruchelman explains the new rules and their simple logic – if the C.F.C. were to distribute a hypothetical dividend to a U.S. Shareholder that would benefit from the 100% D.R.D., the taxable investment in U.S. property will be reduced by an amount that is equivalent to the D.R.D. allowed in connection with the hypothetical dividend.

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A Deep Dive into G.I.L.T.I. Guidance

A Deep Dive into G.I.L.T.I. Guidance

The I.R.S. has published proposed regulations on the global intangible low-taxed income ("G.I.L.T.I.") regime, which is applicable to those controlled foreign corporations that manage to operate globally without generating effectively connected income taxable to the foreign corporation or Subpart F Income taxable to its U.S. Shareholders. In a detailed article, Rusudan Shervashidze, Elizabeth V. Zanet, and Stanley C. Ruchelman examine the proposed regulations and all their complexity.

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The U.K. Digital Sales Tax – It Could Be You

The U.K. Digital Sales Tax – It Could Be You

On November 7, 2018, the U.K. government confirmed that it will proceed with the introduction of a digital services tax ("D.S.T.") on large businesses. The tax will be charged beginning April 2020. It will apply to three key areas, which the government has concluded derive a huge value from the participation of U.K. users and are largely untaxed. Eloise Walker of Pinsent Masons, London, provides an overview of the D.S.T., cautioning that problems exist in identifying both the revenue to which the D.S.T. will apply and the hallmarks of jurisdiction that must exist in order for the tax to be imposed.

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Revised Swiss Corporate Tax Reform Will Keep Switzerland a Top Corporate Location

Revised Swiss Corporate Tax Reform Will Keep Switzerland a Top Corporate Location

Beginning in 2015, Switzerland has struggled over the adoption of a tax system that is consistent with B.E.P.S. Many different stakeholders are involved, ranging from the Swiss Federal government to the cantons, various political parties, and the E.U. At last, a version of tax reform has been adopted by the Swiss Federal National Assembly. Known as the Federal Act on Tax Reform and A.H.V. Financing ("T.R.A.F."), it contains provisions designed to please all participants while maintaining Switzerland's global reputation as an attractive jurisdiction for multinational enterprises. Danielle Wenger and Manuel Vogler of Prager Dreifuss AG, Zurich, guide the reader through the various iterations of the reform and the provisions of the T.R.A.F.

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Alta Energy Affirms Treaty Benefits: A Canadian Case Study for Applying the M.L.I.

Alta Energy Affirms Treaty Benefits: A Canadian Case Study for Applying the M.L.I.

As part of its attack on B.E.P.S., the O.E.C.D. published its Multilateral Instrument, a device that revised more than 1,200 income tax treaties. One of the provisions of the M.L.I. targets treaty shopping by the adoption of, among other things, a principal purpose test ("P.P.T."). In simple terms, the P.P.T. disallows a treaty benefit when a principal purpose of a transaction is to obtain that benefit. Transactions in accordance with the object and purpose of the provisions of a treaty are not affected by the P.P.T. Many North American tax advisers know that the P.P.T. is based on a provision of Canadian law known as the General Anti-Avoidance Rule or G.A.A.R. A recent decision of the Tax Court of Canada addresses the application of G.A.A.R. to a cross-border tax plan set up by a U.S. financial institution designed specifically to obtain enhanced Canadian tax benefits by rechanneling a U.S. investment in Canada into a U.S. investment into Luxembourg that was then invested into Canada. The Canada Revenue Agency ("C.R.A.") attacked the Luxembourg company's entitlement to treaty benefits relying heavily on G.A.A.R. Kristy J. Balkwill and Benjamin Mann of Miller Thomson L.L.P., Toronto, explain the decision and its potential impact on the P.P.T. The case has been appealed by C.R.A.

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In the Fight Against Money Laundering, Europe Tackles Cash Controls

In the Fight Against Money Laundering, Europe Tackles Cash Controls

In early October, the European Council adopted a regulation aimed at improving controls on cash entering or leaving the E.U. The new regulation provides necessary tools to address threats arising from terrorist financing, money laundering, tax evasion, and other criminal activities. It is based on current standards for combating money laundering and terrorism financing developed by the Financial Action Task Force (“F.A.T.F.”). Among other things, the new regulation requires a declaration of unaccompanied cash – that is, (i) cash sent by post, freight, or courier shipment and (ii) highly liquid instruments and commodities, such as checks, traveler’s checks, prepaid cards, and gold.  Once the new regulation is signed by the European Council and the European Parliament, it will be published in the E.U. Official Journal and will enter into force 20 days thereafter. Galia Antebi explains all.

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Corporate Matters: Ichabod Crane Visits His Executive Employment Attorney

Corporate Matters: Ichabod Crane Visits His Executive Employment Attorney

Washington Irving’s “The Legend of Sleepy Hollow” tells the story of poor Ichabod Crane, a school teacher attacked by a headless horseman. It is a tale fitting for Halloween by a 19th Century American author famous for his stories about rural New York State, somewhere near the Tappan Zee Bridge. In this latest retelling, George Birnbaum, a New York State attorney whose practice focuses on labor law, brings a new twist to the story. Here, it comes to light that Ichabod made poor decisions regarding his employment contract, and those decisions exacerbated work-related problems flowing from the attack.

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Transition Tax – Proposed Regulations Are Here

Transition Tax – Proposed Regulations Are Here

The I.R.S. has published proposed regulations on Code §965, which requires a U.S. Shareholder to pay income tax on a pro rata share of previously untaxed foreign earnings held in a C.F.C. and certain other foreign corporations. The tax is commonly referred to as the transition tax. It is designed to tax deferred foreign income prior to the transition to a participation exemption system for intercompany dividends from certain foreign corporations. A multi-step computation is required to (i) measure post-1986 E&P, (ii) allocate E&P deficits among affiliated foreign corporations, (iii) calculate the aggregate foreign cash position, (iv) compute allowed deductions, and (v) determine foreign tax credits. Elizabeth V. Zanet, Rusudan Shervashidze, and Beate Erwin detail the required steps as well as special rules applicable to individuals.

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Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

In August, the I.R.S. issued much-awaited proposed regulations under the new Code §199A covering Qualified Business Income (“Q.B.I”). This provision of recently enacted U.S. tax law allows entrepreneurial individuals to claim a 20% deduction on taxable business profits of a sole proprietorship, partnership, L.L.C. or S-corporation. Galia Antebi, Nina Krauthamer, and Fanny Karaman ask and answer the pertinent questions: Who may benefit? How do the rules addressing R.E.I.T.’s and publicly traded partnerships (“P.T.P.’s”) affect Q.B.I when a net negative result is reported by the R.E.I.T. and the P.T.P.? When is an individual’s income effectively connected to a trade or business and when is the. income a form of disguised salary for which no deduction is allowed? What is a specified trade or business (“S.S.T.B.”)  for which the resulting income cannot benefit from the Q.B.I. deduction? How does the de minimis rule work under which a limited Q.B.I. deduction is allowed S.S.T.B. income does not exceed a specified ceiling? How does the ceiling based on W-2 wages work when calculating the Q.B.I. deduction? 

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Extension of German Taxation on Foreign Companies Holding German Real Estate

Extension of German Taxation on Foreign Companies Holding German Real Estate

In August, the German Federal government proposed draft legislation that will expand the scope of German taxation to cover the sale of shares in “real estate rich companies” by nonresident taxpayers. The draft legislation proposes that capital gains from shares in non-German companies will be subject to German taxation if more than 50% of the share value is attributable to German real estate. The legislative proposal has wide application, reaching a shareholding that exceeds a 1% threshold at any time in the five years preceding the sale. Dr. Petra Eckl, a partner at GSK Stockmann + Kollegen in Frankfurt, explains the proposal and the practical exposure that arises from its overly broad language.

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Dutch Corporate Tax Reform: Dividend Tax Remains, A.T.A.D. Arrives, and Tax Rates Drop

Dutch Corporate Tax Reform: Dividend Tax Remains, A.T.A.D. Arrives, and Tax Rates Drop

Across the globe, the landscape for international tax is in a constant state of change. Nowhere is this more evident than in the Netherlands. On the third Tuesday of September, a repeal of the dividend withholding tax was announced. Within a month, it was withdrawn. Paul Kraan, a partner of Van Campen Liem in Amsterdam, discusses the remaining tax proposals presented by the Dutch government on the eve of the third Tuesday of September. These include provisions related to A.T.A.D. 1, such as G.A.A.R., an exit tax for corporations, a C.F.C. anti-abuse rule, and a cap on the deductibility of net interest expense.  Also discussed is an existing unilateral exemption from withholding tax on cross-border dividend payments in (i) the context of an income tax treaty and (ii) the presence of economic substance for the direct or indirect shareholder. This exemption is likely to remain in the law.

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Hybrid Mismatches: Where U.S. Tax Law and A.T.A.D. Meet

Hybrid Mismatches: Where U.S. Tax Law and A.T.A.D. Meet

When U.S. tax planners attend foreign conferences, it is not uncommon to hear pointed barbs that the U.S. is an outlier when it comes to rules enforcing “best practices” on global business transactions. However, when it comes to reverse hybrids and hybrid mismatches, the rules are not all that different on both sides of the Atlantic. Fanny Karaman and Beate Erwin compare approaches taken by ATAD 2 with U.S. tax law after the Tax Cuts and Jobs Act.

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The Opportunity Zone Tax Benefit – How Does it Work and Can Foreign Investors Benefit?

The Opportunity Zone Tax Benefit – How Does it Work and Can Foreign Investors Benefit?

State Aid to entice investment and development in a specific region is bad in Europe but encouraged in the U.S. The Tax Cuts and Jobs Act added an important new provision that is expected to unlock unrealized gains and defer the tax on the gain when it is invested in active operating businesses in distressed areas designated as “Opportunity Zones.” The tax is deferred until the targeted investment is sold, or until 2026 at the latest. A progressive partial step-up in basis is also granted if the investment is held for a minimum of five years. The entire appreciation in value of the new targeted investment is excluded from tax if held for ten years. In a plain English primer, Galia Antebi and Nina Krauthamer explain the concept and the necessary implementation steps and consider whether the new provision can eliminate F.I.R.P.T.A. tax for foreign investors.

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F.A.T.C.A. – Where Do We Stand Today?

F.A.T.C.A. – Where Do We Stand Today?

When F.A.T.C.A. was adopted in 2010, the hoopla from the U.S. Senate promoted the idea that the I.R.S. would become invincible in rooting out recalcitrant Americans not wanting to pay tax and the financial institutions willing to assist them. In principle, information in U.S. tax returns could be compared with F.A.T.C.A. reporting by foreign financial institutions to identify which taxpayers remained offside and which banks had insufficient reporting systems. A recent report by the Treasury Inspector General for Tax Administration (“T.I.G.T.A.”) concluded that after spending nearly $380 million, the I.R.S. is still not prepared to enforce F.A.T.C.A. compliance. In their article, Rusudan Shervashidze and Nina Krauthamer summarize the principal shortfalls and possible solutions identified by T.I.G.T.A. and which suggested action plans the I.R.S. will contemplate.

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Tax Considerations of I.P. When Expanding a Business Offshore

Tax Considerations of I.P. When Expanding a Business Offshore

If a client asks a U.S. tax adviser about the U.S. tax cost of contributing intangible property (“I.P.”) to a foreign corporation for use in an active business, the response can be a dizzying array of bad tax consequences beginning with a deemed sale in a transaction that results in an ongoing income stream. While that is a correct answer, it need not be the only answer. Elizabeth V. Zanet and Stanley C. Ruchelman explore alternatives to a capital contribution of I.P. to a foreign corporation, including (i) the use of a foreign hybrid entity and (ii) licensing the I.P. to a foreign entity in order to benefit from the F.D.I.I. tax deduction. Each alternative may provide interesting tax results, but attention to detail will be required.

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Insights Vol. 5 No. 8: Updates & Other Tidbits

Insights Vol. 5 No. 8: Updates & Other Tidbits

This month, Rusudan Shervashidze, Neha Rastogi, and Nina Krauthamer look at several interesting updates and tidbits, including (i) potential tax reasons for Cristiano Ronaldo’s move to Italy, (ii) a law suit brought by high-tax states against the U.S. Federal government in connection with the T.C.J.A. limitations on deductions for state and local taxes, (iii) the finding of the European Commission that the aid given to McDonalds by the Luxembourg government did not constitute illegal State Aid, and (iv) a successful F.A.T.C.A. prosecution against a former executive of Loyal Bank Ltd.

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