Ninth Annual Domestic Tax Conference. 24 April 2014 New York City

Transcription

1 Ninth Annual Domestic Tax Conference 24 April 2014 New York City

2 Compliance and reporting: recent developments and issues

3 IRS Circular 230 disclosure Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

4 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US. This presentation is 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.

5 Today s presenters Carolyn Bailey Ellen Berger Bill Campbell Smitha Hahn

6 Agenda Tax technical update Federal International State Tax controversy Tax function Tax compliance getting it done Workflow Challenges and opportunities Looking ahead 2014 reporting Tax legislative update

7 Tax technical update federal

8 What s new for 2013 federal return reporting Forms reporting Schedule D and Form 8949 Form 1122 Option to report aggregate totals on Schedule D, line 1a (short term) or line 8a (long term) rather than Form 8949 only applies to transactions for which: The corporation/partnership received a Form 1099-B (or substitute statement) that shows basis was reported to the Internal Revenue Service (IRS) and does not show a nondeductible wash sale loss in box 5 The corporation/partnership does not need to make any adjustments to the basis or type of gain or loss (short term or long term) reported on Form 1099-B (or substitute statement), or to its gain or loss Rev Proc automatic relief when Forms 1122 are not timely filed with an initial consolidated return No specific action required to obtain relief Retention of evidence and documentation of the original consolidated return, the causes for the omission and their eligibility for relief under the terms of the revenue procedure

9 What s new for 2013 federal return reporting Depreciation provisions extended The American Tax Relief Act of 2012 extended bonus depreciation provisions Extended for property placed in service before 31 December 2013; or 31 December 2014 for certain long production period property and transportation property Statement needed in return to elect out-of-bonus depreciation Election to accelerate alternative minimum tax (AMT) credits in lieu of bonus also extended

10 What s new for 2013 federal return reporting Tangible Property Regulations early adoption or 2014 return Final regulations Type 481(a) required Materials and supplies Deduct non-incidental materials and supplies (that are not rotable or Method 2014 cutoff temporary spare parts) when used or consumed Deduct incidental materials and supplies when paid or incurred Method 2014 cutoff Deduct non-incidental rotable and temporary spare parts (that meet the definition of materials and supplies under (c)(2)) when disposed of Method 2014 cutoff Change to the optional method for rotable and temporary spare parts Method Yes Capitalize and depreciate rotable, temporary or emergency Election N/A spare parts

11 What s new for 2013 federal return reporting TPR early adoption or 2014 return Final regulations Type 481(a) required Acquisition costs De minimis safe harbor to follow book method of expensing tangible Election N/A property (including amounts paid for materials and supplies) Capitalizing acquisition or production costs (including applicable inherently facilitative costs) and, if depreciable, depreciating such property under section 167 or section 168 Method Yes Deducting certain costs for investigating or pursuing the acquisition of Method 2014 cutoff real property Capitalizing non-dealer expenses that facilitate the sale of property Method Yes Deducting dealer expenses that facilitate the sale of property Method Yes Capitalizing employee compensation and/or overhead as facilitating the acquisition of property Election N/A

12 What s new for 2013 federal return reporting TPR early adoption or 2014 return Final regulations Type 481(a) required Improvements and repairs and uniform capitalization (UNICAP) Deduct repair and maintenance costs Method Yes Capitalize improvements to tangible property including change(s) to Method Yes unit of property Change to a reasonable allocation method for self-constructed assets Method Yes Change to the regulatory accounting method Method 2014 cutoff Capitalize otherwise deductible repairs if capitalized for books Election No Do not apply improvement rules to small taxpayer safe harbor Election No

13 Information reporting and withholding Foreign account reporting FBAR Who must file an FBAR FinCen Form 114? A US person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeded $10,000 at any time during the calendar year. When to file? E-filing is mandatory for FinCen Form 114, Report of Foreign Bank and Financial Accounts (supersedes TD F ) through FinCEN BSA e-filing system as of 1 July 2013 (may also apply to prior year amended filings). A question on Form 1040 Schedule B Part III asks whether the individual has reportable interest.

14 Information reporting and withholding Foreign account reporting FBAR Signature authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. Only individuals, not entities, are capable of possessing signature or other authority Only individuals who can give instructions directly to the financial institution (alone or jointly) Merely being in the chain of command is not signature authority Application to electronic systems Application to signature cards/checks

15 Information reporting and withholding Foreign account reporting FBAR For 2013 and 2014 reporting, FBAR continues to be in a holding pattern as far as companies responsibility to expand their reporting as a result of the new regulations that were issued in March The IRS, via FinCEN (Financial Crimes Enforcement Network), has continually delayed the expanded reporting requirements but has not eliminated the requirement that the expanded reporting will apply from 2010 forward (i.e., if the new regulations are not either modified or filing extended, five years of filing will be required in June of 2015). Companies should: Consider the impact of the expanded regulations on their existing filing and develop a plan to become compliant, if required Align any process they have for FBAR with what they are doing to support executives (expats) who might have 6038D reporting requirements Be aware of foreign account reporting requirements as they develop

16 Tax technical update international

17 What s new in 2013: Forms 5471, 8858, 8865, 5472 Form 5471 Net investment income tax: Beginning in 2013, certain US shareholders filing Form 5471 may be subject to the net investment income tax on their income from controlled foreign corporations (CFCs). Form 8858 A foreign disregarded entity (FDE) with multiple direct owners is now required to attach a statement that includes the information requested on line 4 of Form 8858 for each additional direct owner. An owner of an FDE where the activities of an FDE give rise to one or more qualified business units (QBUs) may need to complete a separate Schedule C-1 for each owner of each QBU arising from the activities of the FDE. Form 8865 Item G8a and Item G8b, regarding whether the filer has an interest in the foreign partnership that is a separate unit under Treas. Reg (d)-1(b)(4) (Dual Consolidated Issues) have been added. Form 5472 There have been no updates since 2012.

18 Automated Form 5471 penalty program Increase in IRS focus In 2008, the IRS initiated compliance focus on Form It led to implementation of automated penalty program for late-filed forms in The 2010 Hiring Incentives to Restore Employment (HIRE) Act put additional focus on international information returns by providing incomplete 5471 could extend the statute for the entire return. Tax Controversy and Risk Management Services (TCRMS) has contested more than 120 Form 5471 late-filing penalties. Service Center s ability to abate is limited so it frequently must take cases to appeals.

19 IRS expands automated Form 5471 penalty program to Form 5472 Automated penalty program expanded In March 2013, Form 5472 added to the penalty program Same issues as to contesting penalty assertion New angle late protective filings Regs: Treaty country resident having no permanent establishment (PE) is not a reporting corporation so not required to file Form 5472 but it must timely provide notice under Section 6114 (Form 8833). If a protective filing is late, the Form 8833 is untimely, therefore 5472 filing exception does not apply; in these situations, the IRS automatically generates a $10,000 penalty per form.

20 IRS expands automated Form 5471 penalty program to Form 5472 Filing season implications Due diligence Make sure process around filing an extension is done correctly Review all acquisitions for foreign entities requiring information return reporting (FAQ 18 will not last forever) Ensure information returns are filled out so as to be substantially complete Identify any risks that may require financial statement consideration

21 Overview of Form 8621 Filed by US persons with direct or indirect interest in a passive foreign investment company (PFIC) who: Received a distribution from, or sold stock in, an interest-charge PFIC (Section 1291) Held shares in a PFIC that is marked to market (Section 1296 and, presumably, Section 475) Held shares in a qualified electing fund (QEF) (Sections ) Or Wishes to make elections with respect to a PFIC Exception: if you hold stock in a PFIC through a domestic partnership and the domestic partnership properly files Form 8621, then you only need to file if there is an income inclusion under Section 1291.

22 Overview of Form 8621 Section 1298(f) new statutory requirement to file Form 8621 with respect to PFICs, and penalties for failure to do so, for tax years beginning after 18 March Allows Secretary to require annual reporting containing the information the Secretary requires for each US person who is a shareholder of a PFIC expands reporting requirements Notice /Notice : expanded reporting will not apply until guidance is issued; instructions to December 2011 revision of Form 8621: suspension remains in effect until Form 8621 is revised to reflect Section 1298(f) reporting requirements. Instructions revised December 2012 for Form 8621: the suspension of the expanded reporting under Section 1298(f) is extended until the regulations under Section 1298(f) are published. Instructions revised December 2013 for Form 8621: Part I, Summary of Annual Information, reflects the annual filing requirement of section 1298(f), which was added by section 521 of the HIRE Act. Part I must be completed with respect to taxable years ending on or after 31 December 2013, as required by Temporary Regulations section T. Beginning in 2013, certain US persons filing Form 8621 may be subject to net investment income tax (NIIT).

23 Tax technical update state

24 State overview State tax revenues have continued to rebound from the financial crisis Combination of spending cuts, some tax increases and increased enforcement has resulted in a more stable fiscal picture Marginal changes in existing taxes Rate changes and minor changes in base Tax incentives Tax reform multiple changes within existing tax structure General theme of broadening bases and lowering rates Continuing state reaction to Gillette and other Multistate Tax Compact (MTC) cases

25 Rate changes for tax year (TY) 2013 Indiana corporate income tax rate reduced from 8.0% to 7.5% after 30 June 2013 and before 1 July 2014 North Dakota tax rate bracket percentages decreased graduated rate of 1.48% to 4.53% Oregon corporate excise tax rate change 6.6% of the first $10 million of taxable income and 7.6% of taxable income greater than $10 million Pennsylvania continued phase-out of franchise tax; rate reduced from 0.189% to 0.089% Texas temporary rate reduction for 2014 report year; 0.5% tax rate also extended to additional industries (e.g., auto repair, rent to own, heavy equipment leasing) West Virginia corporate income tax rate reduced from 7.75% to 7.0%; phase-out of franchise tax; rate reduced from 0.27% to 0.20%

26 Allocation and apportionment changes for TY 2013 California, Michigan (corporate income tax (CIT)), and Pennsylvania require mandatory single sales factor (SSF) for most businesses California adopts market-based sourcing for sales other than tangible personal property Minnesota continued phase-in of SSF (2/2/96% for 2013) Missouri elective SSF (available for any original income tax return that is filed on or after 28 August 2013, regardless of the taxable year for which the original income tax return is being filed) New Jersey continued phase-in of SSF (5/5/90% for 2013) New Mexico double-weighted sales factor election for manufacturers available until 1 January 2020 New York City continued phase-in of SSF (16.5/16.5/67% for 2013) Utah Sales-factor-weighted taxpayers must use SSF. Non-sales-factor-weighted taxpayers have the option of electing to use an equally weighted three-factor formula or double-weighted sales factor formula Virginia continued phase-in of mandatory SSF for retailers; continued phase-in of elective SSF for manufacturers

27 Other state developments affecting 2013 returns Texas margins tax Small business exemption scheduled reduction to $600,000 for report year 2014 repealed; exemption extended to companies with revenue of $1 million or less New option for determining taxable margin $1 million subtraction from total revenue The four options now include total revenue less one of the following: cost of goods sold (COGS) for qualifying taxpayers, compensation, 30% of total revenue or $1 million COGS option now available for additional industries Pipeline transportation industry, movie theatres Additional costs allowed in COGS deduction Indirect labor, property taxes, travel expenses A method change to compute margin (e.g., compensation, COGS) is allowable via an amended return

28 Other state developments affecting 2013 returns Net operating losses (NOLs) Colorado limits amount to $250,000 for 2013 Illinois amended the deduction suspension to allow a deduction not to exceed $100,000 for a tax year ending on or after 31 December 2012 and prior to 31 December 2014 NOL carryforwards extended in Idaho and Nebraska Repeal of MTC California, District of Columbia, Minnesota, Oregon, South Dakota and Utah

29 TY 2013: new state business return electronic filing mandates Taxpayer mandates Maine partnerships are now required to e-file if federal is e-filed. Montana partnerships are now required to e-file (effective for tax years beginning on or after 1 July 2013). Ohio corporations and partnerships are now filing commercial activity tax (CAT) (amended to include both quarterly and annual filers). West Virginia corporations and partnerships have been mandated to e-file since 2012 in phases based on tax paid; however, the state was not able to accept e-filed returns. State has confirmed software vendors such as OneSource and GoSystem will be able to e-file 2013 returns. Preparer mandates Nebraska corporations and partnerships where 25 or more returns were prepared in the prior year. New York new preparer mandates based on the number of taxpayers documents prepared (10) instead of the number of returns prepared.

30 Tax technical update tax controversy

31 Large Business and International (LB&I) directive on information document requests (IDR) enforcement The new IDR enforcement process consists of three mandatory steps for examiners: Delinquency notice Pre-summons letter Summons The IDR enforcement process is effective beginning 3 March 2014 for IDRs issued in compliance with new requirements. Delinquency notices should not be issued prior to 3 April 2014.

32 Requirements for issuing IDRs Discuss the issue related to the IDR with the taxpayer and how the information requested is related to the issue under consideration and why it is necessary After consultation with taxpayer, determine what information will ultimately be requested in the IDR Ensure the IDR clearly states the issue that is being considered and that the IDR only requests information relevant to the stated issue Prepare one IDR for each issue; utilize numbers or letters for clarity and clear and concise language Ensure that the IDR is customized to the taxpayer or industry Provide a draft of the IDR and discuss the contents with the taxpayer After the discussion is complete, determine with the taxpayer a reasonable timeframe for response to the IDR; if no agreement on a response date, the examiner will set a reasonable response date for the IDR Ensure that the examiner commits to a date by which the IDR will be reviewed and a response is provided to the taxpayer on whether the information received satisfies the IDR; this date should be noted on the IDR

33 Step 1 delinquency notice Discuss the IDR and the IDR response with the appropriate personnel from both the IRS and the taxpayer to determine what information is missing Discuss the delinquency notice with the taxpayer and ensure their understanding of the next steps should they fail to provide information requested by the response date in the notice Issue delinquency notice within 10 calendar days of the IDR response date. Include in the notice a response date of no more than 15 calendar days after its issuance See that a territory manager approves any response date beyond 15 Provide a copy of the notice and the IDR to the assigned Counsel (from examiner)

34 Step 2 pre-summons letter A discussion should be held regarding the lack of response to the delinquency notice with the Team Manager, Specialist Manager, respective Territory Manager and Counsel, and a pre-summons letter should be prepared. The Territory Manager will discuss the pre-summons letter with the taxpayer and ensure their understanding of the next steps should they fail to provide information requested by the date established in the letter. A pre-summons letter signed by the Territory Manager no later than 14 calendar days after the due date of the delinquency notice. The pre-summons letter should include a response date that is generally 10 calendar days from the date of the letter. Any response date beyond 10 calendar days must be approved by a Director of Field Operations (DFO). The examiner must discuss the pre-summons letter with Counsel. The DFO must be aware of the letter prior to its issuance.

35 Step 3 summons Discuss the lack of response to the pre-summons letter with the Team Manager, Specialist Manager, Territory Manager(s), DFOs and Counsel, and prepare the summons Coordinate the issuance of the summons with the assigned Counsel Proceed according to the summons procedures in Internal Revenue Manual Section 25.5

36 IRS transfer pricing audit road map IRS issued transfer pricing audit road map on 14 February 2014 Provides best practices and reference materials for the IRS Provides a 24-month audit time line planning, execution and resolution Formalizes continuous involvement of transfer pricing specialists Emphasizes coordination within LB&I (exam team and specialists) and taxpayer, and fact gathering as a means to build a case Implications Prepare for scrutiny by knowledgeable professionals Build robust documentation of methodology at the time the return is prepared Use road map as a guide for building audit-ready files

37 Tax compliance getting it done

38 The challenges what we ve heard Continued staffing stress Goals to accelerate are not happening Re-use of data Provision = return Increased scrutiny at the state level Increased need for accuracy of CFC reporting

39 Tax compliance process traditional view Powered by technology Plan Manual administration Trial balances Non-TB data A&A Non US data I/C transaction 3 rd party data Gather Data requests 8865 R&D Analyze 5472 Entity workbooks 4797??? PtoR A&A international Income tax forms Tax returns Provision Deliver Forms reports e-filing Other manual 263A

40 Record-to-report a new view Powered by technology Beginning with transactions Record-to-report and the tax life cycle Record and process transactions Legal entity financial accounting Tax accounting and provisions Statutory accounting and reporting Income tax compliance Tax planning and forecasting Tax audit and controversy management Governance and control Real-time web-enabled portal Global data gather Dashboard Data analytics Reports Integrated workflows Standard automated workpapers Common database Content management system

41 Integrated workflows Planning Amend returns Audit Revenue Agent Report Uniform processes Provision Integrated resources Budgeting and forecasting Shared tools Estimates Extensions Returns Clearly defined roles and responsibilities Monitored control points Real-time status reporting and dashboards Global visibility Technology enablement CORPTax Workspace ONESOURCE Work flow Manager Sharepoint

42 Simplified example: significant transaction work flow Planner Significant transaction identified prior to implementation Documents collected Excel projection s Transaction memo Ready for broader analysis? Yes End work flow and mark final documents Tax acct Update or generate additional documents Excel projection s Transaction memo Provide tax accounting analysis Over $$? No Yes Get approval from VP of Tax (Sarbanes-Oxley control) Tax comp Update or generate additional documents Excel projection s Transaction memo Elections/filings Provide tax compliance analysis

43 Looking ahead 2014 reporting

44 What s new for 2014 federal return reporting Schedule M-3 Taxpayers with assets between $10 million and $50 million filing Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065-B Permitted to file Schedule M-1 in place of the Schedule M-3 Parts II and III Schedule M-3, Part I, lines 1-12 will continue to be required Effective for tax years ending on December 31, 2014, and later Form 1120 Schedule B, Form 1065 Schedule C or Form 8916-A not required Changes enacted to reduce filing burden and to simplify reporting for these corporations and partnerships LB&I continues to consider changes to Schedule M-3 and to the requirements for the book-to-tax reconciliation for: Corporations with $10 million to $50 million in total assets filing Form 1120-L, 1120-PC, or filing as a mixed group, including the requirement that mixed groups sub-consolidate and file Form 8916 Corporations and partnerships with $50 million or more in total assets

45 State TY 2014 changes Arizona phase-in of reduced tax rate, 6.5% for tax years beginning in 2014 Arizona enhanced sales factor formula weighting increased from 80% to 85% Indiana corporate income tax rate reduced from 7.5% to 7.0% after 30 June 2014 and before 1 July 2015 SSF fully phased in for Minnesota and New Jersey Massachusetts, Nebraska and Pennsylvania move to market-based sourcing for sales of services Massachusetts throw-out rule imposed for sales of services New Mexico top corporate tax rate change if net income over $1 million, tax is $56,000 plus 7.3% of excess over $1 million New Mexico electable double-weighted sales factor for manufacturers repealed and replaced with an electable SSF beginning 1 January 2014 New York City and Virginia continue phase-in of SSF North Carolina corporate income tax rate reduced to 6% Pennsylvania continued phase-out of franchise tax; rate reduced from 0.089% to 0.067% West Virginia corporate income tax rate reduced from 7.0% to 6.5% West Virginia franchise tax fully phased out

46 Looking ahead tax legislative update

47 Legislative outlook Tax extenders package President Obama s FY15 budget Chairman Ryan s FY15 budget The Path to Prosperity Chairman Camp s Tax Reform Act of 2014

48 What s ahead 2014 legislative proposals Camp s discussion draft Category Legislative proposal Corporate tax rate 25%. Eliminates current 15% rate on corporate income under $50,000 Business tax expenditures Reduces or eliminates many business tax expenditures Accelerated depreciation Generally limits depreciation allowances to the alternative depreciation system (as proxy for economic depreciation**); indexes depreciation for inflation Interest expense No general limitation on deduction for interest expenses; includes thin-capitalization rules Research and development Requires amortization of research expenses over five years. Limits and makes permanent the research tax credit Advertising Limits deductibility to 50% and requires the remaining portion to be amortized over 10 years; fully phased in by 2018 Other base broadening Repeals like-kind exchanges, modifies low-income housing tax credit, limits use of cash method of accounting, repeals last-in, first-out (LIFO) inventory method, and lower of cost or market rule. Terminates private-purpose tax-exempt bond financing. Increases taxes on financial services Bank tax Imposes quarterly 3.5 basis point bank tax on financial institutions with more than $500 billion in consolidated assets

49 What to expect for TY 2014 and the future State Tax cuts in states with revenue surpluses Tax/fee increases to fund specific programs and services Some states will reform their taxes States to watch include: FL, NE, NY, NC and OH Proposed alternatives to corporate income tax Continued suspension or limitation of NOL usage Economic nexus Continued phase-in of SSF Continued repeal of MTC

50 State what are governors and legislatures proposing? Rates Tax base Increases: personal income (NYC), CAT (OH), pass-through entity fees (DE) Decreases: corporate income (AZ, DC, ID, IL, IN, IA, MD, MO, NE, NM, NY, RI, VA and WV); personal income tax (MO, NE, OH, SC, WI), passthrough entity/business fees (FL, IL) Constitutional bar to increase personal income tax: GA Economic: nexus: AL, NY NOL: Establish NOL carryback (NJ) or carryforward (SD); Extend NOL carryforward (NM) Increase income tax exemption: FL Defer FAS 109 deduction: MA Update Internal Revenue Code (IRC) conformity: KY (from 2006 to 2013) Exempt domestic international sales corporation (DISC) from corporate income tax: VA Market sourcing: KY, NM, SD, VA Apportionment/ Destination Sourcing for pass throughs: CT sourcing Single sales factor: DC, KY Combined reporting Combined reporting: KY, MD, NM (banks only), RI; consolidated returns: VT Repeal Controversy Miscellaneous Business entity tax: CT Corporate net worth tax: GA Phase-out corporate income tax : MS, MO Repeal corporate minimum tax: RI Discretionary authority/burden of proof: MS, MO Amnesty program: LKA, MS, MO Independent tax court: AL Refund notification: OH Corporate tax disclosure: AZ, IL, MD, WA Department of Revenue (DOR) Whistleblower Program: KY Loophole closures: NJ Tax Haven: ME, WV Reform municipal tax code: OH Repeal preferential tax rates or treatment: MA, WA

51 Thank you!

52 Ninth Annual Domestic Tax Conference 24 April 2014 New York City