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The Sun is Setting on the T.C.J.A.: Time to Set Gaze on Pre-T.C.J.A. Tax Law

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The Sun is Setting on the T.C.J.A.: Time to Set Gaze on Pre-T.C.J.A. Tax Law

The Tax Cuts and Jobs Act (“T.C.J.A.”) was enacted in 2017, bringing substantial alterations to the tax landscape for individuals and corporations. Many of these alterations are set to expire at the end of 2025. Understanding these changes, including their implications and timelines, is crucial for individuals and corporations. Michael Bennett addresses some of the more problematic provisions that are scheduled to reappear in the tax law. Among other things, individual tax rates will increase, the standard deduction will decrease, S.A.L.T. deductions will be allowed, corporate tax rates will increase, the Q.B.I. deduction will expire, the corporate tax on G.I.L.T.I. will increase, and the tax benefit for F.D.I.I. will decrease.

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Notice 2023-80: U.S. Foreign Tax Guidance for Pillar 2

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Notice 2023-80: U.S. Foreign Tax Guidance for Pillar 2

On December 11, 2023, the I.R.S. issued Notice 2023-55 (the “Notice”), announcing the intention to issue proposed regulations addressing the interaction between the Pillar 2 GloBE Rules and specific U.S. tax provisions, including the foreign tax credit rules and dual consolidated loss rules. The issuance of this guidance is timely, as the I.I.R.’s of most countries took effect at the start of this year. The U.T.P.R.’s are scheduled to come online in 2025. In his article, Michael Bennett tracks the way Notice 2023-80 addresses GloBE model rules and the foreign tax credit. Topics include the application of the foreign tax credit rules in the U.S. to final Top-Up Tax, the Q.M.D.T.T. in general, how the application of the separate levy rules will apply to a foreign country’s I.I.R., U.T.P.R., and Q.D.M.T.T, and the interplay of the GloBE rules of B.E.P.S. 2 and the dual consolidated loss rules of U.S. tax law.

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Christensen v. U.S. – Reducing the N.I.I.T. by Claiming an F.T.C.

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Christensen v. U.S. – Reducing the N.I.I.T. by Claiming an F.T.C.

In Christensen, the Federal Claims Court allowed U.S. citizen/French tax resident taxpayers to claim the foreign tax credit to reduce the net investment income tax (“N.I.I.T.”) using Article 24(2)(b) of the France-U.S. Income Tax Treaty. This approach countered the Code’s explicit disallowance of the foreign tax credit as a way to reduce the N.I.I.T. The Federal Claims Court decision built upon the Tax Court’s previous decision in Toulouse, where the Tax Court denied the foreign tax credit claimed against the N.I.I.T. by a U.S. citizen/French resident taxpayer. Michael Bennett explains that the disparity in outcomes did not stem from a conflict in reasoning. Rather, it resulted from the application of different provisions of the treaty.

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Entering a New Dimension – O.E.C.D. Transfer Pricing Guidance as Hard Tax Law

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Entering a New Dimension – O.E.C.D. Transfer Pricing Guidance as Hard Tax Law

Except for the U.S., transfer pricing law frequently includes a provision that references the O.E.C.D. T.P. Guidelines as the guidance that must be used to interpret other provisions of relevant law. Nonetheless, national tax administrations publish their own interpretive guides to the O.E.C.D. T.P. Guidelines, thereby adding to a body of administrative guidance that can vary from country to country. The European Commission has recently proposed a Council Directive on transfer pricing released as part of the Business in Europe: Framework for Income Taxation (“B.E.F.I.T.”). The Directive proposes to codify the arm’s length principle and elements of its interpretation from the O.E.C.D. T.P. Guidelines. This elevates the O.E.C.D. T.P. Guidelines into E.U. law, thereby making them more than an arm’s length principle interpretive standard. It does so with several subtle and not-so-subtle variations. Michael Peggs and Michael Bennett caution that making soft law into hard law impairs the ability of tax administrations to compromise on points of controversy.

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Code §367 and Unassuming Outbound Transfers

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Code §367 and Unassuming Outbound Transfers

U.S. tax law provides for the deferral of taxation for a person transferring assets in connection with certain tax-free corporate reorganizations or transactions. However, the same may not be true when the reorganization or transaction involves a U.S. person who transfers shares to a foreign corporation. In these situations, the Code causes gain to be triggered for the U.S. person unless the transferred assets consist solely of shares of stock of a target corporation and certain arrangements are made by the U.S. transferor to grant the I.R.S. the right to collect deferred tax on a retroactive basis in the event of a future (i) retransfer of those shares by the foreign corporation or (ii) a transfer by the target corporation of its underlying assets. These rules appear in Code §367(a) – which imposes tax – and I.R.S. regulations related to a gain recognition agreement (“G.R.A.”) – which allows tax deferral for the original transfer. Not all transfers that are subject to the rules of Code §367(a) are obvious. To illustrate, a U.S. person that is a passive investor in a foreign partnership may face U.S. tax immediately by reason of Code §367(a) when that partnership transfers shares of stock to a foreign corporation in return for shares of that corporation in a transaction that ordinarily is tax-free under Code §351 or 368(a)(1)(B). While the transaction is effected between two foreign entities, the transferor foreign partnership is tax transparent in the U.S., meaning that the partner is deemed to have made an indirect transfer of assets. In his article, Michael Bennett describes the tax issue and explains how a G.R.A. is a simple way to obtain the benefit of deferral.

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All Eyes on the I.C.-D.I.S.C. Part Two: I.R.S. Examinations

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All Eyes on the I.C.-D.I.S.C. Part Two: I.R.S. Examinations

The Interest Charge Domestic International Sales Corporation (“I.C.-D.I.S.C.”) is an undervalued tax planning tool for exporters that can provide substantial tax advantages to U.S. export companies and their shareholders. In the March edition of Insights, Michael Bennet addressed the technical aspects, and tax benefits of the I.C.-D.I.S.C. In this month’s edition, he addresses Part Two reviewing the I.R.S. examination procedure and key aspects taxpayers should keep in mind. Based on the I.C.-D.I.S.C. audit guide published by the I.R.S., the article explains the steps that should be followed to stand up to the questions that will be asked by the examiner. Those who read Part One are strongly urged to read Part Two to understand the internal steps to be taken to ensure the I.C.-D.I.S.C. benefit is real after an I.R.S. examination is completed.

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Insights Volume 10 Number 2: Updates & Other Tidbits

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Insights Volume 10 Number 2: Updates & Other Tidbits

This month, Michael Bennett and Wooyoung Lee look briefly at four items. The first is Bittner v. U.S., a Supreme Court case holding that the non-willful penalty for failing to file a complete and accurate F.B.A.R. form is $10,000 for the annual form and not $10,000 for each account. The second is Aroeste v. U.S., a U.S. District Court case holding that a dual resident individual whose residence is allocated to a treaty partner jurisdiction is not a U.S. person for purposes of filing F.B.A.R. reports. The third is a concession by the I.R.S. that a person had reasonable cause for the failure to file Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) when following bad advice from his tax adviser. Finally, the BE-12 Benchmark Survey of Foreign Direct Investment in the U.S., conducted every five years by the Department of Commerce’s Bureau of Economic Analysis, is due this year. The final due date for filing is (i) May 31 for those filing by mail or fax or (ii) June 30 for those filing electronically.

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All Eyes on the I.C.-D.I.S.C. Part I: the Export Gift That Keeps on Giving.

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All Eyes on the I.C.-D.I.S.C. Part I: the Export Gift That Keeps on Giving.

Regardless of their political affiliations, presidential administrations and members of Congress share the goal of maintaining U.S. competitiveness on the global market. We often hear statements directed toward strengthening the U.S. manufacturing sector and bringing production activity back to the U.S. These words would be futile without implementing initiatives favoring U.S. business interests. An often-overlooked incentive is the Interest Charge Domestic International Sales Corporation (“I.C.-D.I.S.C.”) regime. For an export business operated in the form of an L.L.C. owned by individuals, an I.C.-D.I.S.C. can produce tax savings for export profits of about 40% for the owners, when operated properly. More importantly, it can be run on automatic pilot once set up. In Part I of a two-part series, Michael Bennett explains the basics of setting up and operating an I.C.-D.I.S.C. In Part II, he will discuss issues that have been raised in years past when the goal of a D.I.S.C. was to promote exports by permanently deferring the export profits rather than recognize taxable income immediately, but at lower rates.

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Anti-Abuse Developments: A New Normal in the Netherlands

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Anti-Abuse Developments: A New Normal in the Netherlands

“Doe normaal” is practical advice in the Netherlands encouraging one to act normal.  In the past, that phrase would describe commonly used plans to reduce tax. Today, if the old normal is followed by a multinational group effecting an acquisition, the group could end up facing unintended tax consequences. Legislators and tax authorities are increasingly examining traditionally “normal” acquisition structures and financing arrangements in a quest to combat deemed abusive tax arrangements.  Like its fellow E.U. Member States, the Netherlands has shifted its tax policy agenda in recent years in line with international and E.U. initiatives to target perceived abuse. In a similar way, the U.S. has targeted abusive arrangements for several decades via common law doctrines and codified anti-abuse rules, including the economic substance doctrine and conduit financing regulations.  Michael Bennett, a U.S. attorney, recounts recent developments in the Netherlands based on a two-year assignment as a U.S. tax adviser in the Amsterdam Office of a major international law firm. He also addresses “economic substance” rules followed for close to a century in the U.S. This is Mr. Bennett’s first article for Insights as an associate of Ruchelman P.L.L.C.

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