In this section of Jnet, we provide brief updates on regulatory developments in tax that may impact Japanese companies operating in the United States. Please contact your local KPMG representative or Makoto Nomoto, Partner, Tax, at email@example.com or 212 872 2190 with questions.
The Treasury Department and IRS released a notice of proposed rulemaking (REG-146097-09) providing guidance on the reporting requirements for interest on deposits maintained at U.S. offices of financial institutions and paid to nonresident alien individuals. A notice of proposed rulemaking of August 2002 has been withdrawn.
In early 2001, regulations were proposed that U.S. bank deposit interest paid to any nonresident alien individual must be reported annually to the IRS. At that time, reporting of U.S. bank deposit interest was only required on interest paid to U.S. persons or to a nonresident alien individual who was a resident of Canada. After considering comments received to the 2001 proposed regulations, Treasury and the IRS concluded that those regulations were “overly broad” and decided to withdraw them and issue new proposed regulations. In August 2002, “narrower” proposed regulations provided for the reporting of bank deposit interest paid to nonresident alien individuals that were residents of certain designated countries—in addition to Canada—specifically: Australia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom. The 2002 proposed rules also provide that payors could choose to report bank deposit interest paid to all nonresident aliens or to any nonresident alien who is a resident of any other country not listed.
Regulations proposed at this time withdraw the 2002 regulations, and extend the information reporting requirement to include bank deposit interest paid to nonresident alien individuals who are residents of any foreign country. The preamble explains the rationale for this extension, including: 1) a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed; 2) routine reporting to the IRS of all U.S. bank deposit interest paid to any nonresident alien individual will further strengthen the U.S. exchange of information program; and 3) enhanced voluntary compliance by U.S. taxpayers, by making it more difficult to avoid the U.S. information reporting system.
These regulations have a prospective effective date—that is, they are proposed to apply to payments made after December 31 of the year in which they are published as final regulations. Written or electronic comments must be received within by April 8, 2011. A hearing is scheduled for April 28, 2011.
On January 13, 2011, Illionis Governor Pat Quinn signed Senate Bill 2505, which include the following provisions:
- The bill increases the current corporate income tax rate from 4.8 percent to 7 percent for tax years beginning on or after January 1, 2011. For tax years beginning on or after January 1, 2015, the rate decreases to 5.25 percent, and then again to 4.8 percent for tax years beginning on or after January 1, 2025. Illinois also imposes a “personal property tax replacement tax” of 2.5 percent on top of the base corporate income tax rate, making the combined rate applied to corporations 9.5 percent for tax years 2011-2014, 7.75 percent for tax years 2015-2024, and 7.3 percent for tax years 2025 and after.
- The bill also raises the personal income tax rate from 3 percent to 5 percent for tax years beginning on or after January 1, 2011, and ending prior to January 1, 2015. The rate drops to 3.75 percent for tax years beginning on or after January 1, 2015, and to 3.25 percent for tax years beginning on or after January 1, 2025.
- The bill contains provisions applicable to both individuals and corporations allowing taxpayers with tax years that overlap the date on which a rate change occurs to use a weighted average of the two rates or to specifically account for income and expenses earned during each part of the tax year.
- The bill also establishes in law the maximum level of state general fund expenditures that that can occur in each of state fiscal years 2012 - 2015 and provides that if lawmakers exceed the spending cap, the tax increases are canceled and the rates revert to 2010 percentages.
- For all corporations, excluding S corporations, the bill suspends net operating loss carryovers for tax years ending after December 31, 2010, and prior to December 31, 2014. These tax years will not count toward the 12-year carryover period.
- The bill also changes the base on which taxpayers are to compute their estimated tax payments.
In Technical Advisory Memorandum (TAM) No. 6, the New Jersey Division of Taxation issued guidance on New Jersey’s nexus rules for foreign (non-New Jersey domiciled) corporations. In 2002, the Business Tax Reform Act expanded New Jersey’s nexus standards so that corporations deriving receipts from sources within New Jersey or having contacts within New Jersey were subject to Corporation Business Tax if the taxpayer’s New Jersey business activity created sufficient nexus.
In the TAM, the Division points out that several court decisions issued since the Business Tax Reform Act illustrate the types of businesses that are soliciting business from in-state customers or deriving income from in-state sources. In particular, the TAM notes that financial corporations, such as banks and credit card companies, will have nexus if these businesses “obtain or solicit business or receive gross receipts from sources within” New Jersey.
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was passed by the Congress and signed into law by President Obama on December 17, 2010. Main tax provisions of the Act include the following:
- Extension of Individual Income Tax Cut Provisions - The Act extends various individual income tax cut provisions for two years through 2012 including: the individual income tax rates in effect in 2010; the repeal of the personal exemption phase-out and the repeal of the limitation on itemized deductions for high income taxpayers; the maximum capital gains tax rate of 15% (or 0% for those below the 25% bracket); the marriage penalty relief provisions with respect to the standard deduction and the 15% regular income tax bracket; various credits as in effect in 2010 (including child tax credit, dependent care tax credit, adoption tax credit, employer-provided child care tax credit, and earned income tax credit); and various educational incentives as in effect in 2010 (including Coverdell Education Savings Accounts, exclusion of employer-provided education assistance, student loan interest deduction, exclusion of certain scholarships, and American Opportunity tax credit for college tuition).
- Temporary Employee Payroll Tax Cut – The Act reduces employee payroll taxes during 2011 by two percentage points (from 6.2% to 4.2%) with regard to wages up to $106,800.
- Individual Alternative Minimum Tax (AMT) Relief – The Act increases the AMT exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly).
- Reinstatement of Estate Tax - The Act generally reinstates the estate tax for decedents dying after December 31, 2009. The estate tax exclusion amount is $5 million per person, indexed for inflation for decedents dying in calendar years after 2011. The maximum estate tax rate would be 35%. The Act allows the estate of a 2010 decedent to elect no estate tax and modified carryover basis in lieu of the application of the Act’s provisions. The Act also makes certain changes to gift and generation-skipping taxes.
- Bonus Depreciation – For qualified property acquired and placed in service after September 8, 2010, and before January 1, 2012, the Act allows a 100% first-year deduction. For qualified property placed in service in 2012, the Act allows a 50% first-year deduction. An additional year of each of these rates is allowed for certain long-production period property and certain aircraft. Corporations may elect to take additional AMT credits in 2011 and 2012 if they agree to forego the use of bonus depreciation on qualified property placed in service in those years and depreciate such property using the straight-line method.
- Expensing of Certain Depreciable Property – The Act sets the limitation on the amount of property that could be expensed under section 179 at $125,000 for tax years beginning in 2012 with a phase out beginning when the total amount of eligible section 179 property exceeds $500,000. After 2012, the limit would revert to $25,000, with a phase out beginning at $200,000. The limit in 2010 and 2011 remains $500,000 with a phase out beginning at $2 million.
- Extension of Business Provisions – The Act extends certain expired and expiring business provisions generally through 2011 including: research and development credit; active financing exception under Subpart F; work opportunity tax credit; look-through treatment of payments between related controlled foreign corporations for Subpart F purposes; the 15-year cost recovery period for certain real property (leasehold improvements, restaurant buildings and improvements, and retail store improvements); election to expense advanced mine safety equipment; special expensing rules for U.S. film and television productions; expensing of “brownfields” environmental remediation costs; empowerment zones; District of Columbia enterprise zone; and the 100% exclusion of the gain from the sale of qualifying small business stock held for more than five years.
- Extension of Individual Provisions – The Act extends certain expired and expiring individual provisions generally through 2011 including: the election to deduct state and local general sales taxes; above-the-line deduction for qualified tuition and related expenses; the increased contribution limits and carryforward period for contributions of appreciated real property for conservation purposes; and tax-free distributions from individual retirement plans for charitable purposes.
- Extension of Energy Provisions – The Act extends certain expired and expiring energy provisions generally through 2011 including: grants for specified energy property in lieu of production and investment tax credits; income tax credits for certain biodiesel and renewable diesel; tax credit for manufacturers of energy-efficient residential homes; excise tax credits and outlay payments for various alternative fuels and alternative fuel mixtures; deferral of gain on certain sales of transmission property; suspension on the taxable income limit for purposes of depleting a marginal oil or gas well; production income tax credit for ethanol; the small ethanol producer income tax credit; excise tax credits and outlay payments for ethanol and for alcohol fuel mixtures; tariff on imported ethanol and ethyl tertiary-butyl ether; credit for manufacturing certain energy-efficient appliances in the United States; tax credit for energy-efficient property in existing homes; and investment tax credit for alternative fuel vehicle refueling property.
- Extension of Disaster Relief Provisions – The Act extends certain benefits provided with respect to New York Liberty Zone and Gulf Opportunity Zone generally through 2011.
The IRS has released an Action on Decision (AOD) in which the IRS announces that it does not acquiesce to the Tax Court’s result or reasoning in VERITAS Software Corp. v. Commissioner (133 T.C. No. 14 (Dec. 10, 2009)). In VERITAS, the Tax Court issued a taxpayer-favorable decision on issues concerning cost sharing arrangements involving buy-in payments for pre-existing intangible assets under the 1995 cost sharing regulations.
The AOD points to two specific areas where the Tax Court’s “factual findings and legal assertions are erroneous”:
- Definition of pre-existing intangible: According to the AOD, the Tax Court found the contributed pre-existing intangible property had no ongoing R&D value beyond the current generation product line due to the competitive nature of the industry and rapid obsolescence of existing products due to technological advances. However, in the AOD, the IRS found this reasoning to be erroneous and argued that pre-existing intangible property gives the cost-share participant buying-into the pre-existing technology a “head-start” in the future development of products that rely on the technology. Thus, the pre-existing intangible buy-in must reflect the value attributable to the intangible’s future development.
- Value of workforce in place: In the AOD, the IRS disagreed with the Tax Court’s decision that the R&D and marketing team elements of the intangibles do not come within the statutory and regulatory definition of intangibles by arguing that R&D and marketing teams provided substantial value above the total compensation expense to employ the individual team members.
As the IRS did not appeal VERITAS, the Tax Court’s opinion stands as the most recent legal guidance on the interpretation of what must be paid under the cost sharing regulations that were in effect before the new temporary cost sharing regulations were published in early 2009. The IRS’s non-acquiescence, however, indicates that the IRS will continue to pursue cost-sharing buy-in transactions regarding the transfer of intangibles to related parties.
On November 2, 2010, California voters casted votes on several tax-related propositions.
The voters defeated Proposition 24 which, if it had been approved by the voters, would have eliminated certain taxpayer-favorable provisions adopted in 2008 and 2009 as part of budget and revenue packages. Thus, the single-sales factor election allowed for certain general corporations for tax years beginning on or after January 1, 2011, remains in effect. Likewise, the 20-year net operating loss (NOL) carryforward and two-year NOL carryback provisions—as well as the rules allowing sharing of certain business credits between unitary group members—remain scheduled to go into effect as under current law.
One initiative that was approved by voters was Proposition 25. This measure eliminates the two-thirds (2/3rd) super-majority requirement for approving a budget, and institutes a simple-majority requirement. Proponents of this proposition believe it will simplify the budget process and help avoid costly delays associated with the failure on the part of lawmakers to adopt a budget by the June 15th deadline. If the legislature fails to pass a budget by the deadline, lawmakers will not be reimbursed for salary and expenses for every day until the day when a budget is passed.
In addition, California voters approved Proposition 26 which is intended to extend the 2/3rd majority requirement to a broader range of state taxes. Specifically, Proposition 26 amended the California constitution to require a two-thirds vote for “[a]ny change in state statute which results in any taxpayer paying a higher tax.” Previously, the Constitution only required two-thirds approval for tax laws enacted “for the purpose of increasing revenues.” Thus, under the prior law, legislators could draft a revenue-neutral bill that raised certain taxes, but lowered others, so that it could be approved by a simple majority because the bill was not viewed as “increasing revenues.”
The New York Supreme Court, Appellate Division, issued an opinion concerning constitutionality of “click-through nexus” statute in the Amazon.com case (Amazon.com, LLC v. N.Y. State Dep’t of Taxation & Fin., 2010 N.Y. Slip Op. 07823 (N.Y. App. Div. November 4, 2010)).
In 2008, New York’s tax law was amended to provide that a seller will be presumed to be soliciting business through an independent contractor or other representative, thus will be required to collect sales tax unless the presumption is rebutted, if the seller enters into an agreement with a New York resident to, directly or indirectly, through a link on an Internet Web site or otherwise, refer potential customers to the seller in exchange for consideration.
The taxpayer filed suit alleging that the 2008 amendment was unconstitutional under the Commerce Clause, Due Process, and Equal Protection Clauses. In response, the New York Department of Taxation and Finance filed a motion to dismiss the case, which was granted by the trial court on January 13, 2009. The taxpayer subsequently appealed to the New York Court of Appeals. The appeal was later transferred to the New York Supreme Court, Appellate Division.
After rejecting various arguments made by the taxpayer and the Department, the court examined the taxpayer's argument that their New York representatives were mere advertisers. However, the court determined that the “limited, if non-existent” discovery on this issue made it impossible to conclude whether the in-state representatives were engaged in sufficiently meaningful activity to create nexus for the taxpayer. As such, the court remanded the case to the lower court.
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