Annual International Bar Association Conference 2014 Tokyo, Japan Recent Developments in International Taxation United States

Transcription

1 Annual International Bar Association Conference 2014 Tokyo, Japan Recent Developments in International Taxation United States Summer A. LePree Holland & Knight LLP

2 1. RECENT HIGHLIGHTS 1.1. Foreign Account Tax Compliance Act ("FATCA") FATCA has continued to dominate the US tax landscape this past year. Treasury has continued to negotiate additional Intergovernmental Agreements (IGAs) at a rapid pace around the globe, and the US Internal Revenue Service (IRS) has continued to issue guidance in various forms modifying the rules and the implementation timelines for various aspects of those rules. The changes have been too voluminous to cover in full here. But particularly noteworthy changes during the past year have included the following. On July 12, 2013, the IRS released Notice , announcing a delay of several key timelines for implementation of many of the FATCA provisions. The commencement date for withholding on FDAP payments to new accounts, the cut-off dates for qualification as "grandfathered obligations" and "preexisting obligations", and certain required changes to onboarding procedures, all of which were set to take effect on January 1, 2014, were extended by the Notice to July 1, The Notice also provided updates relating to the IRS FATCA Portal, and addressed the treatment of FFIs located in jurisdictions that have signed IGAs with the United States during the period when those agreements are not yet technically in force. On August 19, 2013, registration through the FATCA Portal was made accessible to financial institutions. On October 29, 2013, the IRS released Notice , which contained a draft FFI Agreement and introduced the new entity category of "direct reporting nonfinancial foreign entity" as well as including certain coordination rules for FATCA and backup withholding, among other guidance. On December 26, 2013, the IRS issued Rev. Proc , which contained the final version of the draft FFI agreement previously released in Notice On February 20, 2014, Treasury and the IRS issued TD 9657 and TD 9658, containing proposed and temporary regulations relating to FATCA. These regulations implemented some of the changes announced in Notice (referenced above), as well as containing conforming rules for withholding under Chapter 3, Chapter 4, and backup withholding rules, coordinating Chapter 4 and IGAs, and providing other useful clarifications. On March 31, 2014, the IRS issued the final version of the new Form W-8BEN-E, which will be used by entities to identify both their Chapter 3 and Chapter 4 status to payors and withholding agents, though no instructions to this form have yet been issued. On April 2, 2014, Treasury and the IRS issued Announcement , in which they announced that those jurisdictions having agreed in substance to the terms of an IGA with the United States on or before July 1, 2014 will be treated through the end of 2014 as actually having an agreement in effect for purposes of FATCA compliance. As of the date of completing this article (June 2, 2014), the United States has 35 such IGAs (33 Model 1; 2 Model 2) that have been agreed to in substance. This announcement also extended the date by 10 days, to May 5, by which an FFI must register on the FATCA Portal to be included on the first list published by the IRS. On May 2, 2014, the IRS issued Notice , providing welcome transitional relief and effectively further delaying certain aspects of FATCA. First, the Notice provides that 2014 and 2015 are "transitional years" and that FFIs, NFFEs, and withholding agents using good faith to attempt to comply with FATCA generally will be subject to lighter enforcement for any failures. The IRS also announced in the Notice that it plans to again revise the regulations, but until that time taxpayers can rely on the Notice, to provide for the following extensions of time with respect to due diligence 2

3 procedures. Accounts opened on or before December 31, 2014 will be treated as "preexisting" for purposes of FATCA, which in turn generally extends the time for which new FATCA due diligence procedures must be followed (i.e., the time at which the FFI or withholding agent must request the new Forms W-8BEN-E or W-8IMY, etc., from relevant payees rather than relying on existing forms.) For "preexisting" accounts opened or held by prima facie FFIs, the withholding agent or payor FFI must obtain the new forms before January 1, 2015, or else begin withholding on withholdable payments as of that date. For such preexisting accounts of entities other than prima facie FFIs, the new forms generally are not required until July 1, For accounts opened on or after January 1, 2015, the new forms still must be collected by the earlier of 90 days after account opening or the date on which the first withholdable payment is made. If the withholding agent or FFI receives the new forms prior to the above deadlines or otherwise acquires knowledge of the other party's FATCA status, the foregoing extensions do not apply. With respect to IGAs, Treasury has been very active in negotiating and signing such agreements. More than a dozen new agreements have been signed, and dozens more have been agreed to in substance and are pending signature. As of the date of completion of this article (June 2, 2014), the US had signed a total of 28 Model 1 IGAs (most recently Liechtenstein on May 19) and 5 Model 2 IGAs, for a total of 33 IGAs currently in effect. Additionally, the US had reached 33 Model 1 agreements in substance (most recently the UAE on May 23) and 2 such Model 2 agreements. These additional 35 IGAs are also treated, at least through the end of 2014, as being in effect pursuant to Announcement , as discussed above Corporate Inversions- Section 7874 Temporary Regulations On January 17, 2014 the IRS published new temporary regulations under Section 7874, relating to corporate inversions. The regulations further expand the potential application of Section 7874 to various transactions. The temporary regulations largely incorporated the principles set our previously in Notice , with some modifications. In general, the temporary regulations make it harder for a non-us corporation to count stock issued in exchange for cash, marketable securities and certain other assets, in a transaction that also involves the acquisition of a U.S. corporation by the non-us corporation, in determining whether the non-us corporation satisfies the ownership tests applicable under Section 7874 to determine whether a US corporation has inverted without triggering Section The preamble to the regulations also expresses concern by the IRS about certain leveraged buy-outs that the IRS sees as inconsistent with the policies underlying Section 7874, and asks for comments on these issues and a specific illustrative transaction further explained in the preamble Expiration of Certain Subpart F Exceptions A couple of significant Subpart F related provisions expired as of January 1, These provisions- -- the "CFC look-through rule" under Section 954(c)(6), and the active financing and insurance exceptions under Section 954(h) and (i)-- have been extended several times before, sometimes retroactively, and it is possible that they will be so extended once again, and that such an extension could be retroactive to January 1, This issue will need to be monitored as members of Congress continue to negotiate certain tax-related legislative proposals. Both of the above sets of rules address the ability of US companies to avoid current US tax on the foreign earnings of foreign subsidiaries classified as controlled foreign corporations (CFCs). The CFC look-through rule (originally enacted in 2006), allowed dividends, interest, rents, and royalties to be paid between related CFCs without triggering current US income tax to the extent the payor CFC earned active foreign business income that was not classified as "subpart F income." In other words, this rule caused the character of the CFC's income, earned directly through its own activities, to flow-through to the parent, rather than being characterized as a dividend to the parent and thereby 3

4 converted from active income to subpart F income. The expiration of this look-through rule, if not reinstated retroactively, impacts many existing structures and requires those affected to take steps to restructure accordingly to avoid realizing increased Subpart F income. The active financing and insurance exceptions have been extended repeatedly since they were originally enacted in 1997, but as of January 1, 2014 these provisions also expired. These rules allowed banks, insurance companies, and other financial institutions that are CFCs to earn dividends and interest without incurring a current US tax if the CFCs were sufficiently engaged in active finance activities outside the United States. 2. TREATY UPDATES 2.1. Senate Holds Continue A US Senator, Senator Rand Paul, continues to prevent new US tax treaties and protocols from being ratified. This "hold," which prevents the Senate from being able to vote on the treaties to make them effective, has been in place since 2010 and Senator Paul has vowed as of May 2014 to continue to keep the hold in place. Senator Paul cites privacy concerns as his reasoning for instituting the hold. Until the hold is lifted, US treaties and protocols with Switzerland, Luxembourg, Chile, Hungary, and several other countries will remain in limbo. A collateral consequence of the hold is that the US- Switzerland IGA under FATCA cannot take full effect until the protocol to the US-Switzerland income tax treaty is passed by the full Senate. This is a concern for the US Justice Department currently as they seek to obtain information from Credit Suisse about US taxpayers as part of a plea deal. Until the protocol is passed, Credit Suisse cannot cooperate fully without potentially violating Swiss bank secrecy laws, and thus the new protocol is tied to the US Justice Department obtaining the agreed information New Treaties Because of the hold currently in effect in the Senate, discussed immediately above, no new treaties or protocols have been ratified in the past year. Treasury has been actively negotiating tax information exchange agreements (TIEAs) with several countries, generally simultaneous with or as a prerequisite to negotiating IGAs with those same countries. Such countries negotiating or amending TIEAs with the US in the past year have included the Cayman Islands (signed November 29, 2013), Jersey (signed December 19, 2013), Isle of Man (signed December 19, 2013), Guernsey (signed December 19, 2013), and Hong Kong (signed March 25, 2014). The Hong Kong TIEA is the first such agreement ever signed by Hong Kong. The TIEAs generally facilitate FATCA exchanges by providing the necessary legal basis in the partner country for the partner country tax authorities to provide information to the US upon request in relation to FATCA. 3. CASE LAW 3.1. Sun Capital, 724 F.3d 1259 (1 st Cir. 2013) On July 24, 2013, the First Circuit Court of Appeals issued its opinion in a closely watched private equity fund case, Sun Capital III LP et al. v. New England Teamsters & Trucking Industry Pension Fund et al. The Court held that the private equity fund in the case, Sun Capital Partners, was engaged in a trade or business for ERISA (The Employee Retirement Income Security Act of 1974) withdrawal liability purposes. This was technically not a tax case, and the IRS was not even involved in the case, nor was any income tax liability at issue. However, the case received significant attention because, in reaching its holding, the Court examined the distinction between investing (and thus not being considered engaged in a trade or business for US international tax purposes) and being engaged in business for general tax purposes. The Court discussed many 4

5 general trade or business tax cases in the private equity context, and relied on these cases to reach the conclusion that the fund was engaged in a trade or business for ERISA purposes. While the Court was quite careful to limit its holding to ERISA withdrawal liability and to state that the definition of trade or business need not be uniform for all purposes, commentators wondered whether the case could be read much more broadly to support the view that private equity funds in some cases are not mere investors for tax purposes, but rather are engaged in a US trade or business. This would result in many collateral US tax consequences, most notably triggering US income tax liability to the fund's non-us investors on income which is not subject to US tax in the absence of trade or business status, possible ordinary income treatment to US investors on sales of stock by the fund, possible unrelated business income tax implications to tax-exempt investors, and impact on deductibility of management fees by investors Windsor, 570 US 12 (2013) On June 26, 2013, the United States Supreme Court issued a 5-4 decision in the landmark case of United States v. Windsor, in which the Court held that certain provisions of the US "Defense of Marriage Act" or "DOMA" were unconstitutional in discriminating against same sex married couples. At issue were DOMA's definitions of "spouse" and "marriage," which only recognized heterosexual marriages for purposes of US federal laws and benefits. As a result of the Windsor case, legal same-sex marriages performed in one of the US states that permit such marriages or those legally performed in a foreign country are now recognized for US federal tax purposes (as well as other federal law purposes). Married same-sex couples are thus entitled to give and bequeath to each other unlimited amounts without incurring gift or estate tax (where both are US citizens), for example, and can file joint federal income tax returns as a married couple Eshel, 142 T.C. No. 11 (2014) In Eshel, the Tax Court confirmed that no foreign tax credit is permitted for French social security taxes (specifically, the contribution sociale généralisée (CSG) and the contribution pour le remboursement de la dette sociale (CRDS)), because such taxes are paid in accordance with the totalization agreement with France. 4. FUTURE DEVELOPMENTS 4.1. President's 2015 Budget Proposal On March 4, 2014, President Obama transmitted to Congress his fiscal year 2015 budget, which contains the administration s recommendations to Congress for spending and taxation for the fiscal year that begins on October 1. Some noteworthy US international tax proposals included the following items. First, codification of Revenue Ruling 91-32, which treats certain gain from the sale of partnership interests as ordinary income in some cases where the partnership is engaged in a US trade or business or has a US permanent establishment. In the absence of this special rule, nonresident aliens and foreign companies selling their US partnership interests should not be subjected to any US tax on resulting gain. Revenue Ruling is somewhat controversial, but if codified, this would presumably put an end to the debate. Some other proposals include limitations on the ability of domestic entities to expatriate from the United States (This proposal would essentially expand the scope of transactions to which current Section 7874 of the Internal Revenue Code applies by lowering certain thresholds. This Code Section combats certain corporate expatriations by continuing to treat the "expatriated" entity as a US corporation for US income tax purposes); restricting deductions for excessive interest of members of financial reporting groups; exempting foreign pension funds from the application of FIRPTA; and reciprocal reporting of information in connection with FATCA. 5

6 4.2. Various Proposals Targeting Base Erosion Much attention has been given to the issues of base erosion and profit shifting (also known as "BEPS") this past year, following the OECD's release of its "Action Plan on Base Erosion and Profit Shifting" in July of There is continuing widespread negative media and political attention in the United States focused on large, household names such as Google and Apple that are able to legally structure their affairs in a way that results in these companies paying relatively low effective tax rates on their worldwide income. Because corporate tax rates in most of the world are lower than in the US, US multinational companies have an incentive to shift their profits to lower tax countries where possible. In the US, various legislative proposals have been advanced that would seek to protect as much of the US tax base of these companies as possible by various means, including restricting interest deductions in situations where the US operations are overleveraged relative to the worldwide group, denying deductions for interest and royalty payments made to related parties involving hybrid arrangements and hybrid entities that would otherwise create stateless income, and focusing particularly on the issue of intangibles not being subject to sufficient effective tax rates. It is not yet clear which, if any of these proposals will become law. But the debate over US corporate tax rates and BEPS will certainly continue in the coming year Future Administrative Guidance FATCA will continue to occupy a substantial portion of Treasury's and the IRS's time and resources in the coming year. As various aspects of FATCA are rolled-out this year and in the coming years, Treasury and the IRS can be expected to continue to issue frequent guidance on many issues as they arise. Guidance also is expected in several other areas of international tax, including but not limited to guidance relating to taxation of transactions that take place in or are connected to "the cloud"; regulations under Section 956 dealing with loans to foreign partnerships; guidance under Section 367(d), dealing with outbound transfers of intangibles by US persons; guidance under Section 894 dealing with payments to hybrid entities; and guidance under Section 901(m), which limits foreign tax credits attributable to assets acquired in covered asset acquisitions. 6