Source: https://www.icpas.org/information/technical-topics/tax/international-tax-articles
Timestamp: 2019-03-23 06:41:07
Document Index: 53180084

Matched Legal Cases: ['§901', '§901', '§1', '§1', '§1', '§1']

Tax Court Rules Gain on Sale of Partnership Interest Is Not ECI +
New Minimum Tax Could Hit Inbound Corporations Beginning in 2018 +
The Tax Cuts and Jobs Act is perhaps the biggest alteration to the tax code since 1986. The changes hit all aspects of the tax spectrum, leaving taxpayers and tax advisors scrambling to review the changes to determine what the impact will be. Today we’ll focus on a new international provision designed to raise revenue in 2018 and beyond called the Base Erosion Anti-Abuse Tax (or “BEAT”).
BEAT’s concept is to discourage base erosion payments from U.S. corporations to their international affiliates. BEAT accomplishes this by imposing a new minimum tax for corporations making these otherwise deductible payments to foreign-related entities. BEAT will be particularly impactful for inbound corporations but can apply to a broad range of corporations. Let’s look at the mechanics of how BEAT works.
Who is subject to BEAT?
Domestic C corporations must pass two tests for BEAT to be applicable. First, the corporation must have average gross receipts (measured over a three-year period) of $500 million or more. Second, the corporation must have base erosion payments which are at least 3% of total deductions.
What are base erosion payments?
Base erosion payments are meant to be all-encompassing so the definition is broad. The definition includes any payments made to foreign-related entities (see Section 6038A for definition) with a few exceptions. The most notable exception is for cost of goods sold (“COGS”). Further exceptions exist for payments for services charged with no-markup, certain qualified derivative payments, and payments subject to U.S. withholding tax (though payments where the withholding tax is reduced by tax treaty are not eligible for this exception). Base erosion payments also include certain reductions in gross receipts.
Corporations meeting both the gross receipts and base erosion payment percentage test will need to perform a separate calculation to determine if/how much BEAT owed. This would be similar to performing an alternative minimum tax calculation in prior years for a corporation or an individual. Corporations would start with “normal” taxable income reported on the Form 1120 and add-back all applicable base erosion payments to determine a “modified” taxable income for BEAT purposes. Taxpayers would then apply the BEAT rate against the modified taxable income to determine the BEAT. Taxpayers will pay BEAT or regular income tax, whichever is greater.
What is the BEAT rate?
The BEAT rate is 5% for 2018, 10% for 2019 through 2025, and 12.5% for years after 2025.
Corporation A reported $20M of regular taxable income and $4M of regular income tax on its 2018 Form 1120. Assume corporation A meets both the gross receipts and base erosion payment percentage test. Included in the $20M of regular taxable income was a deduction for $40M of base erosion payments. Therefore, the modified taxable income for BEAT purposes is $60M. The BEAT rate in 2018 is 5% so the BEAT for 2018 would be $3M. Because the BEAT of $3M is smaller than the regular income tax of $4M, corporation A pays only the regular income tax of $4M.
What happens to this example in 2019?
Assume the same facts as the 2018 example. The BEAT rate in 2019 is 10% so the BEAT for 2019 would be $6M. Because the BEAT of $6M is higher than the regular income tax of $4M, corporation A would pay an additional $2M in federal tax due to the BEAT.
Please note there are special rates and rules for certain banks, securities dealers, and insurance companies which differ from the general rules outlined above. Taxpayers in those service areas should review the rules carefully.
BEAT will have wide-ranging impacts right away in 2018. BEAT will need to be factored in when making estimated quarterly income tax payments and included in any quarterly income tax provisions for financial statement purposes.
Like many of the new tax provisions, BEAT will need to be defined further by regulations and/or tax technical corrections. Specifically, what is the definition of COGS? Is this provision legal from a worldwide trade perspective? How are companies with Advanced Pricing Agreements impacted? Is other transition guidance needed? Watch this space for further updates.
Using Foreign Social Taxes as Foreign Tax Credits +
By: Roger Yule (rjyule@yahoo.com)
Using Foreign Social Taxes as Foreign Tax Credits By Roger J Yule, CPA, Wipfli LLP
The foreign tax credit mechanisms allowed in the Internal Revenue Code (“IRC”) provide procedures to allow foreign tax payments to offset the US tax on income that is foreign-sourced. This eliminates the double taxation of the income, and reduces the overall tax costs for the Taxpayer.
IRC §901(b)(3) allows a resident of the United States to claim as a tax credit against his U.S. Federal income tax the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country. For a tax credit to be creditable under §901, the person claiming the credit must generally establish that the foreign levy with respect to which the credit is claimed is an income tax within the meaning of IRC Reg §1.901-2(a)(1), and Reg §1.901-2A(b)(1). The payment cannot be a payment for a specific economic benefit pursuant to IRC Reg §1.901-2(a)(2)(i).
IRC Reg §1.901-2(a)(2)(ii)(C) states “…A foreign levy imposed on individuals to finance retirement, old-age, death, survivor, unemployment, illness, or disability benefits, or for some substantially similar purpose, is not a requirement of compulsory payment in exchange for a specific economic benefit, as long as the amounts required to be paid by the individuals subject to the levy are not computed on a basis reflecting the respective ages, life expectancies or similar characteristics of such individuals.” In other words, a foreign social tax is not considered a payment for an economic benefit as long as the tax is computed based on income, not age, life expectancy, or some similar factor. In Takeshi Wada, et ux. v. Commissioner, TC Memo 1995241, Code Sec(s) 446, the court held that a Japanese social tax was not allowed because the Taxpayer could not show that it was computed as a percent of wages and not based on age.
The Tax Court has ruled that Venezuelan social tax imposed on the salary of employees was found to be a creditable income tax for which a foreign tax credit is allowable; however, no credit was allowable for that portion levied on employers. Although the payments were referred to as “contributions,” they were made pursuant to Article 66 of the law by compulsorily insured persons and therefore were taxes. In a similar ruling, the Court held that amounts contributed pursuant to the National Insurance Act of Great Britain by employed or self-employed U.S. citizens were income taxes for which a foreign tax credit was allowable. There is also a Revenue Ruling on this (Rev. Rul. 72-579, 1972-2 CB 441).
A social tax paid by an individual to a foreign country in accordance with a totalization agreement in effect with the U.S. cannot be deducted or credited against his or her U.S. income tax (Sec. 317(b)(4), PL 95-216, 12/20/1977). Following this, the US Court of Claims held taxpayers were not entitled to a foreign tax credit for their French social security taxes. The Tax Court upheld the Court of Claims ruling and found that the IRS's disallowance of foreign tax credits claimed by a taxpayer for payment of French taxes paid pursuant to the U.S.-France totalization agreement was in accordance with the law. The US-UK Totalization Agreement does not cover National Insurance, only social taxes and social retirement pensions. Therefore the National Insurance remains a creditable tax. For Canada, while Rev Rul 68-411, 1968-2 CB
306 allows that a tax credit can be allowed for the Canada Pension Plan (“CPP”) payments, the US-Canada Totalization Agreement of 1984 supersedes this Ruling, therefore the CPP payments cannot be used as a foreign tax credit nor can they be deducted as a tax paid.
It appears that even if a Taxpayer does not elect coverage under a totalization agreement, he or she would not be allowed to deduct or tax a foreign tax credit. The law states the taxes cannot be used as a credit or deduction if the US has a totalization agreement in effect with that country.
In summary, sending an employee to work outside of the United States, or when deciding to become self-employed outside of the United States, one must take care to look at the various taxes that must be paid, and work within a complex framework to minimize the total tax paid, and maximize the foreign tax credits that are allowed.
U.S. Companies Doing Business in Canada +
IRS Tweaks Corporate Tax Inversion Rules +
District Court Explores Proper Review of FBAR Penalty Issues & Largely Rules Against Taxpayer +
Problems Remain with the IRS Offshore Voluntary Disclosure Program +
Short-term Obligation Exception Didn't Apply to CFC's Loans to U.S. Parent +
IRS Can Now Revoke Your Passport If You Owe Them Money +
IRS Issues Rules on New Federal Inheritance Tax +
IRS Explains Level of Lending & Underwriting Activities That Give Rose to U.S. Trade or Business +
Streamlined Procedures for Disclosing Unreported Foreign Assets +
OVDP-Offshore Voluntary Disclosure Program
SFCP-Streamlined Filing Compiiance Procedure
FO-Streamlined Foreign Offshore - applicable to US Citizens or lawful permanent residents or their estates who are non residents as described in Publication 54.
SDO-Streamlined Domestic Offshore - applicable to US Citizens or lawful permanent residents or their estates and are residents as described in Publication 54.
U S Individuals and estates only
Failed to report foreign financial assets and pay all taxes
Able to certify failures are related to non-willful conduct
Not currently under IRS examination/Audit
File all delinquent returns: An applicant for the Streamlined Foreign Compliance procedures must first file all delinquent or amended tax returns for the most recent three years for which the due date has already passed. At the same time, the taxpayer must file any associated informational returns, including Forms 3520, 5471, and 8938. In addition, the applicant must file any delinquent FBAR forms for the past six years for which the FBAR filing requirement has passed,
In order to ensure that your application under the Streamlined Foreign Compliance Procedures is accepted, it must be properly labeled as "Streamlined Foreign Offshore" or :Streamlined Domestic Offshore".. This labeling requirement is absolutely critical to identify that your returns are being submitted under the streamlined procedures.
Taxpayers are required to sign a Certification certifying (a) that the applicant is eligible for the Streamlined Foreign Compliance Procedure (b) that all required FBARs have now been filed and (c) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, was not the result of willful conduct. Copies of this certification must be attached to each and every tax return and informational return being submitted under the streamlined procedures.
Finally, the taxpayer must electronically file any delinquent FBARs for each of the most recent 6 tax years for which the FBAR due date has passed. The taxpayer must indicate 'Filed under Streamlined Procedures" in the explanation box. it puts IRS on notice that final step in the Streamlined Foreign Offshore Procedures submission process has been met.
No upfront clearance required from IRS to participate in the procedure.
Lot less expensive compared to OVDP. No late filing, late payment, information return, FBAR or accuracy-related penalties. The hefty penalty of 27.5% under OVDl is reduced to 5% for SDO. No penalty under SFO.
Must certify, under penalties of perjury, NON-WLLFUL conduct.
If the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FEAR penalties, information return penalties, or even referral to Criminal Investigation."
Once taxpayers enters the Streamlined Filing Compliance Procedure, he/she cannot file under OVDP.
IRS Delays Section 385 Documentation Requirements +
New Regulations Require Foreign-Owned Domestic Disregarded Entities to File Form 5472 +
Micro-Captive Insurance +
Final Section 987 Regulations Provide Guidance to Certain Qualified Business Units +
Disregarded entities required to comply in new proposed regulations to section 6038A +
IRS Publishes New Form W-8BEN-E Withholding Certificate with Expanded Treaty Benefits Claim +
Documentation Requirements for Related-Party Debt Instruments Under Proposed Section 385 Regulations +
Taxpayers Forces to Allow Production of Foreign Back Account Records +
Legislative Changes Require Captive Insurance Companies to Immediately Assess Their Operations +
Surface Transportation Act of 2015: Tax Provisions +
Proposed Regulations Eliminate 367 Goodwill Exception +