Tax InBrief: May 2014
Read monthly updates on tax-related industry headlines, congressional and agency actions, announcements, rulemaking, and letters received.
UPDATED AS OF Wednesday, May 28, 2014
UPDATED AS OF Wednesday, May 28, 2014
- FASB and IASB Release New Revenue Recognition Standards: May 28, 2014
The International Accounting Standards Board and the U.S. Financial Accounting Standards Board issued sweeping new rules May 28 on how companies and nonprofit entities should recognize revenue. Public companies will start to apply the new rules in January 2017. Nonpublic entities will have a year longer to shift to the fresh standard. Commercial sectors that IASB and FASB believe are to see the most change in how revenue is reported include asset management, computer software, telecommunications, construction and real estate. The updates to the accounting standards can be viewed here.
- Companies Not Fazed by Anti-Inversion Legislation: May 27, 2014
Despite recent congressional efforts by Democrats to block companies from cutting their tax bills by moving their legal address outside the U.S. through a merger, companies are continuing to plan so-called inversions, according to a report by Bloomberg. Without any Republican support, companies are not taking the anti-inversion legislation seriously, according to the Bloomberg story. Read more about the anti-inversion legislation introduced in May in the Senate here, and in the House here.
- Pfizer Drops Bid to Acquire U.K.'s AstraZeneca: May 26, 2014
Drug maker Pfizer, Inc. dropped its nearly $120 billion bid to take over U.K.-based AstraZeneca, which, had it been successful, would have resulted in Pfizer moving its tax domicile to the U.K. where it would have a dramatically reduced tax bill. The high-profile inversion-that-never-was triggered strong reactions from Democrats on Capitol Hill, while Republicans pointed to the possible deal as another reason why comprehensive tax reform—including lower corporate rates and limiting taxes on foreign profits—should be embraced. Read more here.
- OECD Speeds Up Work for BEPS Deliverables: May 26, 2014
The Organization for Economic Cooperation and Development has decided to speed up its work on risk recharacterization and capital as part of an effort to address the most challenging transfer pricing issues in its action plan on base erosion and profit shifting (BEPS) , a top OECD transfer pricing official said May 26 during the OECD's webcast update on its 15-action plan to address BEPS. She and other OECD officials also addressed recent work on country-by-country reporting, tax issues related to the digital economy and the proposed multilateral treaty.
- EU Financial-Transaction Tax Plan Turns to Which Derivatives to Tax: May 23, 2014
European efforts to build a financial-transaction tax are turning to which derivatives to tax and how to leave room for future expansion, planning documents show. Greece, which holds the EU's rotating presidency until July 1, has proposed several options for taking the plan forward, according to the documents prepared for a May 28 working group meeting. One task will be to decide which derivatives to tax, while another will be to choose how the current plan should set the stage for a broader scope later on. Read more here.
- Sen. Paul Blocks Democrats' Effort to Ratify U.S.-Swiss Tax Treaty: May 22, 2014
The U.S.-Switzerland tax treaty remains stuck in the Senate after Sen. Paul blocked an effort to propel it forward by Senate Foreign Relations Committee Chairman Robert Menendez (D-NJ). Menendez was seeking unanimous consent that the full Senate move to a vote on the accord, citing concerns that the existing treaty allowed Credit Suisse to balk at turning over names of U.S. account holders even though it pleaded guilty to helping them cheat on their taxes.
- Credit Suisse Pleads Guilty, Agrees to Pay $2.6 Billion: May 19, 2014
The Swiss bank pleaded guilty to charges it helped Americans cheat on their taxes, making it the first global bank in a decade to admit to a crime in U.S. court. The plea also signals a tougher posture by the Justice Department, which has faced criticism that it avoided pursuing large banks after the 2008 financial crisis because of the potential economic fallout. The firm said the deal will cut second-quarter earnings by $1.79 billion.
- Europe's G-5 Finance Ministers Vow Strong Action on Tax Evasion, BEPS: April 28, 2014
Top finance officials from the European Union's leading economies have agreed to push for EU-wide measures to implement the OECD's international action plan to fight base erosion and profit shifting (BEPS), according to a statement by the French ministry of finance. The officials also agreed to contribute to the implementation of a global automatic tax information exchange by 2017. Read more here.
- Treasury to Focus on Preventing Inversions: April 30, 2014
Following the news of Pfizer's potential inversion, a U.S. Treasury official told Reuters that “cracking down on companies that reincorporate overseas to reduce their U.S. taxes is a priority for the administration.” President Obama's budget proposal for FY 2015 contained a provision that would make inversions more difficult to carry out. Read more here.
- Wyden Elected Chairman of JCT: April 14, 2014
Senate Finance Committee Chairman Ron Wyden (D-OR) has another chairmanship to add to his credentials. The Joint Committee on Taxation announced April 14 that Wyden was elected by the committee's members to serve as chairman, replacing Sen. Max Baucus who similarly served as head of both committees before stepping down in February to become the U.S. ambassador to China. Read more here.
- European Nations Agree to Rules to Fight Tax Evasion: March 20, 2014
On March 20, European nations agreed on the Savings Tax Directive, a broad policy to fight tax evasion. Specifically, the legislation proposes a European Union (“EU”) -wide automatic exchange of data on bank deposits. The purpose behind the Savings Tax Directive is to allow governments to identify and pursue tax evaders within the legal framework of their own country. The EU's progress with this piece of legislation reflects broader progress being made on a global scale to combat tax evasion.
- OECD Releases Two Tax Discussion Drafts: March 19, 2014
On March 19, the Organization for Economic Cooperation and Development (“OECD”) issued discussion drafts recommending: (1) that countries adopt new domestic rules to address the mismatch in tax outcomes of hybrid mismatch arrangements; and (2) related changes to the OECD Model Tax Treaty. The OECD indicated that the two discussion drafts are intended to provide stakeholders with substantive proposals for analysis and comment, which are due to the OECD by May 2.
- Senate Fails to Pass Extenders Package: May 15, 2014
Despite broad bipartisan support in the Senate for a two-year extension of more than 50 individual and business tax breaks known as extenders, the bill failed to rally enough votes to end debate and proceed to a vote on passage. In the days leading up to the failed cloture vote, Republican senators complained about the Democratic leadership's refusal to allow amendments to be added and debated on the floor, including an amendment that would repeal the medical device tax. More than 150 amendments were filed on the bill, but Senate Majority Leader Harry Reid blocked consideration of any amendments. Talks reportedly continue between Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Orrin Hatch (R-UT) in an attempt to agree on an acceptable package of amendments, but it appears increasingly likely that passage of the extenders will be delayed until after the midterm elections. Read more here.
- House Passes Permanent R&D Credit: May 9, 2014
The House voted 274-131 on May 9 to approve H.R. 4038, which would renew, simplify and make permanent the tax credit for research and development — the most costly of all the expired business tax provisions known as “extenders” and just one of the six tax extenders reported out of a Ways & Means Committee markup at the end of April. The bill is projected to cost $156 billion over the next decade and is not offset by spending cuts or tax hikes elsewhere — a fact that House Democratic leaders seized upon in their opposition to the bill and the White House cited earlier in the week when it threatened to veto the bill if it came to President Obama's desk. Read more here.
- Ways & Means Marks Up Business Tax Extenders: April 29, 2014
The House Ways & Means Committee marked up six tax bills to permanently extend select business tax provisions, including the research and development credit (R&D), the Subpart F exemption for active financing income and the look-thru rule for payments between related controlled foreign corporations. The Joint Committee on Taxation estimated the bill would cost $310 billion over ten years. More information on the results of the markup and links to descriptions of each of the provisions and their revenue estimates are available here.
- Ways & Means Exhibits Restrained Approach to Extenders: April 8, 2014
House Ways & Means Committee Chairman Dave Camp (R-MI) held the first in a series of hearings on his tax reform discussion draft on April 8. The hearing focused on the handful of business tax extenders that the retiring representative included and either made permanent or provided for long-term extensions in his tax reform discussion draft released February 26, 2014.
- Senate Finance Committee Marks Up Extenders Package: April 3, 2014
The Senate Finance Committee reported out a bipartisan package Thursday, April 3, 2014, that if enacted would extend a potpourri of expired and soon-to-expire tax breaks through the end of 2015. All but two of the 55 traditionally extended provisions made it into the package. Senate Majority Leader Harry Reid (D-NV) has indicated that he will bring the extenders legislation to the floor during the May work period. Results from the markup can be reviewed here.
- Portman Introduces Dynamic Scoring Bill: May 21, 2014
Sen. Rob Portman (R-OH) introduced legislation on May 21 that would require the Joint Committee on Taxation to “release dynamic scores for all major tax bills as a supplement to the existing static estimates.” The bill, which is unlikely to be considered in the Senate while Democrats are in control, requires the JCT to use existing dynamic models to predict how economic growth may influence the impact of legislation. According to Portman and others, static scoring is holding back major tax reform legislation. Read more here.
- House Republicans Concerned Over Bank Tax Proposal: March 14, 2014
On March 14, more than 50 House Republicans sent a letter to Chairman Camp, indicating that they are “deeply concerned” about the proposed tax on banks contained in his Tax Reform Act of 2014 and the impact it would have on lending and economic activity.
- Rep. Camp Releases Draft of Comprehensive Tax Reform: February 26, 2014
On February 26, House Ways and Means Committee Chairman Dave Camp (R-MI) released his long-awaited discussion draft to overhaul the U.S. tax Code. Even though the Chairman's plan faces long odds in Congress during this 2014 mid-term election year, many components likely will serve as benchmarks for future comprehensive tax reform efforts. Major features of the plan include:
o Reduction of top corporate rate to 25 percent from 35 percent, over 5 years.
o Repeal of corporate and individual AMT.
o Significant changes to capital cost recovery and various expenditures replaced with amortization.
o Capital gains and dividends: 40 percent excluded from ordinary income.
o Individual rate brackets reduced from seven marginal brackets to three: 10 percent, 25 percent, and 35 percent.
o The 35 percent rate includes a 10 percent surtax that applies to modified adjusted gross income (“MAGI”) above $400,000 and joint income above $450,000.
o MAGI = current adjusted gross income less charitable contributions and domestic manufacturing income, plus:
• Excluded health benefits, self-employed health deduction, Section 911 income, tax-exempt interest, untaxed Social Security benefits, 401(k) contributions.
o Foreign business income: 95-percent exemption for dividends received by U.S. corporations from foreign subsidiaries.
- Levin Goes Gloves-Off With Caterpillar: April 1, 2014
Sen. Carl Levin (D-MI), chairman of the Senate's Permanent Subcommittee on Investigations (PSI), put executives from Caterpillar Inc. and PricewaterhouseCoopers LLP in the hot seat on April 1 during a five-hour hearing delving into Caterpillar's international tax strategies. Executives from the multinational manufacturing company testified that the company pays a combined effective tax rate of 29 percent on both its domestic and international income, in compliance with all tax laws. Caterpillar is the most recent multinational firm to face PSI scrutiny over international tax practices. Apple, Microsoft and Hewlett-Packard have all faced similar investigations, with Levin pressing for stricter rules on profit shifting. Read more here.
A. Agency Announcements
FATCA/ INTERNATIONAL TAXATION
- FATCA Enforcement Eases Up: May 2, 2014
The IRS and Treasury Department issued Notice 2014-33 on May 2, announcing the agency will grant grace periods to foreign banks that make “good faith” attempts to comply with the reporting and withholding requirements of the Foreign Account Tax Compliance Act, slated for enforcement beginning July 1, 2014. Treasury officials said foreign banks' compliance efforts during the 2014 and 2015 transition period will be considered when determining whether to launch enforcement actions.
- IRS Releases New Version of FATCA Form: April 30, 2014
On April 30, 2014, the IRS released a new version of Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding, intended to help U.S. withholding agents meet their responsibilities under the Foreign Account Tax Compliance Act (“FATCA”), set for enforcement beginning July 1, 2014.
- “Killer B” Regs Slated For Revisions: April 25, 2014
The IRS announced on April 25 that it will revisit the “Killer B” regulations to Section367(b), which relate to the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving foreign corporations.IRS Notice 2014-32 said the agency plans to eliminate the deemed contribution model under the existing regulations, modify the amount of income and gain taken into account for purposes of applying the priority rules of section 367(a) and (b), and clear up ambiguities in the application of the anti-abuse rule.
- IRS Issues More FATCA Guidance: April 24, 2014
On April 24, 2014, the IRS offered more guidance to qualified intermediaries, withholding foreign partnerships and withholding foreign trusts under FATCA. The new guidance was issued via updates to the FATCA frequently asked questions (FAQs) and answers, available here.
- IRS Releases Final Version of Important FATCA Forms: March 4, 2014
On March 4, the IRS released final versions of several W-8 forms, which are a necessary for taxpayers attempting to comply with the FATCA. Specifically, the IRS released: (1) Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States; (2) Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals); and (3) Instructions for Form W-8BEN.
- IRS Issues FAQs on Taxation of Transactions Involving Virtual Currencies: March 25, 2014
On March 25, the Internal Revenue Service (“IRS”) issued Notice 2014-21, explaining that transactions involving Bitcoin and other such “convertible” virtual currencies may create a tax liability. The notice is scheduled to appear in Internal Revenue Bulletin 2014-16, which will be dated April 14. In a related news release, the IRS indicated that virtual currencies are treated as property for all U.S. tax purposes and affect transactions such as wages paid to an employee, payments to independent contractors, and reporting gain or loss on a sale or exchange.
IRS PRIORITY GUIDANCE
- Treasury and IRS Release Third-Quarter Update for Priority Guidance Plan: April 21, 2014
The IRS added 19 new projects to the annual list of priorities it issues and updates quarterly. The third-quarter update reflects a renewed focus on retirement benefits, including the one-per-year limit on individual retirement account rollovers and the procedures for issuing opinions and advisory letters for Section 403(b) pre-approved plans. An announcement accompanying the update said the agency will also focus on issues of “international taxation, health care and implementation of legislative changes.”
- Treasury and IRS Seeks Recommendations on Upcoming Priority Guidance: March 21, 2014
On March 21, the Treasury Department and IRS issued a notice announcing that they are seeking recommendations as to what should be included on their 2014-2015 priority guidance plan. Such recommendations should be submitted by May 1.
- Guidance Released for Windsor's Application to Retirement Plans: April 4, 2014
The Treasury Department and the Internal Revenue Service issued guidance April 4 in Notice 2014-19 for application of the U.S. Supreme Court's ruling in United States v. Windsor. The guidance says qualified retirement plan operations must reflect the outcome of the Windsor as of June 26, 2013—the date of the court's ruling in the case, which opened the way for federal recognition of same-sex marriage. A retirement plan won't be treated as failing to meet the requirements of tax code Section 401(a) for being considered a qualified plan merely because it didn't recognize the same-sex spouse of a participant as a spouse before June 26, 2013. The guidance also clarifies that retirement plans must come into compliance with Rev. Rul. 2013-17, which requires plans to use the state of celebration rule, as of Sept. 16, 2013.
B. Agency Rulemaking
REAL ESTATE INVESTMENT TRUSTS
Release Date: 5/12/14
Comment Deadline: 8/12/14
o The Internal Revenue Service issued proposed regulations that would clarify the definition of real property for purposes of the real estate investment trust (REIT) provisions of the Internal Revenue Code.
o According to IRS, the new proposed regs would provide a “framework to analyze the types of assets in which REITs seek to invest.”
o In a speech delivered the same day the proposed rules were announced, President Obama said the new rules would clarify the application of the REIT structure to renewable energy installations, starting with solar energy.
Release Date: 5/6/14
Comment Deadline: 8/5/14
o The Internal Revenue Service issued proposed regulations modifying the definition of an acquiring corporation under tax code Section 381 with regard to certain assets in reorganizations.
o The proposed rules provide that, in a transaction described in Section 381(a)(2), the acquiring corporation is the corporation that directly acquires the assets transferred by the transferor corporation, even if the transferee ultimately retains none of the transferred assets.
o The proposed rules are a follow-up to rules proposed in April 2012 on the allocation of earnings and profits in nonrecognition transfers of property from one corporation to another.
- (IRS) Tax Treatment of Qualified Retirement Plan Payment of Accident or Health Insurance Premiums (Final)
Effective Date: 5/12/14
o The IRS has issued final regulations clarifying the tax treatment of payments by qualified retirement plans for accident or health insurance.
o The final regs reflect the general rule under Code Sec. 402(a) that amounts held in a qualified plan that are used to pay accident or health insurance premiums are taxable distributions, unless described in certain statutory exceptions.
o The regs also provide an additional exception for arrangements under which amounts are used to pay premiums for disability insurance that replaces retirement plan contributions in the event of a participant's disability.
o These regs affect sponsors, administrators, participants and beneficiaries of qualified retirement plans.
Release Date: 4/1/14
Comment Deadline: 6/2/14
o The Pension Benefit Guaranty Corporation issued a proposed rule that would amend PBGC's regulations on allocation of assets and benefits payable in terminated single-employer plans to clarify the treatment of benefits resulting from a rollover distribution from a defined contribution plan or other qualified trust to a defined benefit plan, if the defined benefit plan was terminated and trusteed by PBGC.
Release Date: 4/30/14
Comment Deadline: 6/30/14
o The Internal Revenue Service seeks public comment on final rules on tax return preparer
penalties under Section 6695.
o The final regulations (T.D. 9570), issued in December 2011, significantly modified the Earned Income Tax Credit penalty rules for preparers who fail to comply with due diligence requirements.
o Comments should address: whether the collection of information has practical utility; the accuracy of the agency's estimates of the paperwork burden on taxpayers; ways to enhance the quality, utility and clarity of the information to be collected; ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and estimates of capital or start-up costs and costs of operation, maintenance and purchase of services to provide information.
C. Comment Periods Ended, Letters Received
- (IRS) Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Revision of Information Reporting and Backup Withholding Regulations
Release Date: 3/6/14
Comment Deadline: 5/5/14
o The IRS is issuing temporary regulations (TD 9658) that revise certain provisions of the final regulations regarding withholding of tax on certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, portfolio interest treatment for nonresident alien individuals and foreign corporations, and requirements for certain claims for refund or credit of income tax made by foreign persons.
o Three comment letters were received, including one from the Tax Executives Institute, which expressed concerns over the exceptions to the definition of a “foreign financial institution” (FFI).
- (IRS) Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities
Release Date: 3/6/14
Comment Deadline: 5/5/14
o The IRS and the Department of the Treasury issued final and temporary regulations that provide guidance under chapter 4 of Subtitle A (sections 1471 through 1474) of the Internal Revenue Code of 1986 (Code).
o These regulations address reporting by foreign financial institutions (“FFIs”) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities.
o Four comment letters were received, including comments submitted by the Tax Executives Institute and the International Swaps & Derivatives Association. The comments focused on concerns regarding grace periods and transition allowances made while organizations work to comply with the complex reporting and withholding requirements under the rules.
- (IRS) Definitions and Reporting Requirements For Shareholders of Passive Foreign Investment Companies
Release Date: 12/31/13
Comment Deadline: 3/31/14
o The IRS and Treasury issued temporary regulations under IRC Sections 1291 and 1298 to provide guidance on determining the ownership of a passive foreign investment company (PFIC), the annual filing requirements for shareholders of PFICs, and an exclusion from certain filing requirement for shareholders that constructively own interests in certain foreign corporations.
o Five comment letters were received. The most notable among them came from the Managed Funds Association (MFA), which emphasized its concerns with the regulations, specifically that “requiring hedge funds and other funds that have made a mark-to-market election under Section 475(f) of the Internal Revenue Code (“475(f) funds”) to track and report ownership of passive foreign investment companies on Form 8621 (“PFICs”) would impose significant burdens on such funds without providing the Internal Revenue Service (the “IRS”) with meaningful information.”
Release Date: 12/4/13
Comment Deadline: 3/5/14
o On December 4, 2013, the IRS issued final and re-proposed regulations on the treatment of dividend equivalent payments under section 871(m) of the Code.
o The final regulations extend to January 1, 2016, the applicability of the current statutory framework for determining covered notional principal contract (“NPC”) payments.
o The re-proposed regulations provide for a new delta-based approach for defining NPC payments made on or after January 1, 2016.
o On March 4, 2014, the IRS announced it would amend the regulations on the treatment of specified equity-linked instruments (ELIs) under tax code Section 871(m) to give the financial markets more time to implement necessary changes. The changes will limit “specified ELIs to ELIs issued on or after 90 days” from the date of publication.
o Seven comment letters were filed, including letters from the Association of Institutional INVESTORS, the International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Market Association (SIFMA), the U.S. Securities Markets Coalition, the Managed Funds Association (MFA), the U.S. Chamber of Commerce and the Investment Industry Association of Canada. The groups were generally critical of the proposed rules. Read more here.