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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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?

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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?

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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

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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

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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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O.E.C.D. Discussion Draft on Financial Transactions – A Listing of Sins, Little Practical Guidance

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O.E.C.D. Discussion Draft on Financial Transactions – A Listing of Sins, Little Practical Guidance

In July, the O.E.C.D. Centre for Tax Policy and Administration released Public Discussion Draft on B.E.P.S. Actions 8-10: Financial transactions (the “Discussion Draft”) addressing financial transactions (e.g., loans, guarantees, cash pools, captive insurance, and hedging). Michael Peggs and Scott R. Robson review the draft guidance and express disappointment. The Discussion Draft is not a thought leader, as tax authorities have successfully litigated the issues inherent in intercompany loans. Decided cases generally reflect a “not in my back yard” approach to deductions for interest expense. The Discussion Draft makes statements regarding allocation of risks in financial transactions that are inconsistent with arm’s length evidence. It also promotes decisions based on 20-20 hindsight. All these lead to several unanswered questions: What is the ultimate meaning of the term “arm’s length” when used in a cross-border financial transaction? Is it the terms and conditions that exist in actuality among lenders and borrowers, or is it the terms and conditions that should exist in the mindset of the tax authorities?

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German Anti-Treaty Shopping Rule Infringes on E.U. Law

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German Anti-Treaty Shopping Rule Infringes on E.U. Law

When do attacks on cross-border tax planning move from enough to too much? The European Court of Justice (“E.C.J.”) provided an answer in connection with German tax rules limiting access to the E.U. Parent Subsidiary Directive for dividends leaving Germany. For many years, German law provided an irrebuttable presumption of fraudulent or abusive tax planning when a multinational structure failed to meet a “one size fits all” set of factual parameters. The provision was struck down by the E.C.J. last year, modified slightly in response, and struck down again in July of this year. Pia Dorfmueller of P+P Pollath explains why the German tax law was found to violate European law – it provided a response that was not proportional to the alleged wrong-doing.

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Tax Basics of Intellectual Property→

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Published in Landslide Volume 10 Issue 6, © 2018 by the American Bar Association.

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A New Tax Regime for CFCs: Who Is GILTI?→

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Published by the Civil Research Institute in the Journal of Taxation and Regulation of Financial Institutions, vol. 31, no. 03 (Spring 2018): pp. 17-28.

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Have You Inherited a P.F.I.C.? – What it Means to Be a U.S. Beneficiary

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Have You Inherited a P.F.I.C.? – What it Means to Be a U.S. Beneficiary

In today’s global environment, it is not surprising to find that a beneficiary of a foreign estate or trust is living in the U.S. An interest in a foreign trust can be problematic for the beneficiary if the foreign trust invests through a foreign “blocker” corporation that holds passive assets (such as publicly traded stocks and securities) or a foreign mutual fund. These companies can stumble into P.F.I.C. categorization for U.S. tax purposes, which yields sub-optimal tax consequences for the U.S. beneficiary. Rusudan Shervashidze and Nina Krauthamer break down the U.S. tax rules that make a foreign corporation a P.F.I.C., the various ways in which a U.S. investor in a P.F.I.C. will be taxed, and the reporting obligations that are imposed on the U.S. investor in a P.F.I.C.

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