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 firstname.lastname@example.org or 212 872 2190 with questions.
The IRS released Notice 2011-32 which designates the Japan earthquake and tsunami as a “qualified disaster” under section 139. The IRS’s designation enables individuals to exclude qualified disaster relief payments from gross income. Qualified disaster relief payments include any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary expenses (not compensated for by insurance or otherwise):
- Incurred for personal, family, living, and funeral needs as a result of a qualified disaster, or
- Incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need is attributable to a qualified disaster.
In addition, the designation as a qualified disaster enables employer-sponsored private foundations to assist victims in areas affected by the Japan earthquake and tsunami. The IRS will presume that qualified disaster relief payments made by each of such private foundations to employees and their family members in areas affected by the earthquake and tsunami in Japan are consistent with the foundation’s charitable purposes.
However, it should be noted that the Notice does not affect the deductibility of contributions made to charitable organizations providing relief to victims of the earthquake and tsunami in Japan. In general, contributions to organizations formed outside the United States are not deductible as charitable contributions.
The Small Business Paperwork Mandate Elimination Act of 2011 was passed by the House and the Senate and was signed into law by President Obama on April 14, 2011. The Act repeals a provision of Patient Protection and Affordable Care Act enacted in March 2010 that would have required businesses to file an information return (generally Form 1099-MISC) for payments for goods and services aggregating at least $600 per year to a single payee (including corporations) beginning in 2012.
As a revenue offset for the $21 billion cost attributed to reduced reporting requirements, the bill would reduce the amount of the refundable tax credit for eligible individuals and families who purchase health insurance through an exchange under the Patient Protection and Affordable Care Act beginning in 2013.
The White House on March 1 issued a statement supporting the Form 1099 repeal provision while objecting to the revenue offset. However, it did not threaten a veto.
The IRS issued Notice 2011-34 on April 8 to update and revise earlier guidance on procedures to comply with the Foreign Account Tax Compliance Act (“FATCA”) in response to certain priority concerns identified by commentators following the publication of Notice 2010-60 in August 2010. In an effort to curb perceived tax abuses by U.S. persons with offshore bank accounts and/or investments, FATCA, signed into law in March 2010 as part of the Hiring Incentives to Restore Employment Act, adds a new regime to impose a penal withholding tax on certain foreign financial institutions that refuse to disclose the identities of their US customers. The effective date for the new regime is January 1, 2013.
The key priority issues set forth in Notice 2011-34 include:
- Procedures that participating foreign financial institutions (FFIs) are to follow in identifying U.S. accounts among their pre-existing individual accounts
- Guidance on the definition of “passthru payment” and the obligation of FFIs to withhold on passthru payments
- Guidance on certain categories of FFIs that are deemed compliant
- Guidance on the obligation of FFIs to report with respect to U.S. accounts
- Rules for the treatment of qualified intermediaries
- Guidance on expanded affiliated groups of FFIs
- The effective date of FFI Agreements
Senate Bill 2753 that would phase in single sales factor apportionment was signed into law by Governor Christie on April 28, 2011. Under current law, corporations filing corporation business tax returns in New Jersey apportion business income using a three-factor formula based on property, payroll and double-weighted sales. For privilege periods beginning on or after January 1, 2012, the sales fraction will account for 70 percent of the apportionment, and property and payroll will each be weighted at 15 percent. For privilege periods beginning on or after January 1, 2013, sales will be weighted at 90 percent, and property and payroll will each be 5 percent. Sales will account for 100 percent of the apportionment formula for privilege periods beginning on or after January 1, 2014.
The IRS released three revenue procedures concerning capitalization and depreciation of network assets for taxpayers in the telecommunications industry:
- Rev. Proc. 2011-22 provides a safe harbor method of accounting for determining the recovery periods for depreciation of certain tangible assets used by wireless telecommunications carriers.
- Rev. Proc. 2011-27 provides two safe harbor approaches—a network asset maintenance allowance method and a units of property method—that taxpayers may use to determine whether expenditures to maintain, replace, or improve wireline network assets must be capitalized.
- Rev. Proc. 2011-28 provides two safe harbor approaches—a network asset maintenance allowance method and a units of property method—that taxpayers may use to determine whether expenditures to maintain, replace, or improve wireless network assets must be capitalized.
The IRS has released the annual report on its Advance Pricing Agreement (APA) Program for the calendar year 2010 (Announcement 2011-22).
Number of Cases:
|Revised or Amended
|Canceled or Revoked
Average Number of Months to Complete:
|Bilateral / Multilateral
From 2010 to 2011, the number of applications filed increased from 127 to 144 while the number of cases executed also increased from 63 to 69. The number of pending cases stayed virtually the same (352 in 2010 and 350 in 2011). The average number of months to complete has increased by 0.5 months for unilateral APAs and decreased by 2.6 months for bilateral / multilateral APAs.
As to the nature of the relationship between the controlled taxpayers, foreign parent / U.S. subsidiary still represents the largest population.
|Foreign Parent / U.S. Subsidiary
|U.S. Parent / Foreign Subsidiary
|Foreign Company and U.S. Branch
The IRS announced that Compliance Assurance Process (CAP), a pilot program under which large corporate taxpayers working collaboratively with an IRS team to identify and resolve potential tax issues before filing the tax return, is being expanded and made permanent (IR-2011-32). Taxpayers in the CAP program generally tend to be subject to shorter and narrower post-filing examinations.
As the IRS explained, with the CAP program’s growing popularity, the CAP program is being expanded by adding two additional components to the existing program:
- A new pre-CAP program will provide interested taxpayers with a clear roadmap of the steps required for gaining entry into CAP.
- A new CAP maintenance program is a simplified program intended for taxpayers who have been in CAP, have fewer complex issues, and have established a track record of working cooperatively and transparently with the IRS.
Details of the permanent program, including the new pre-CAP program and CAP maintenance program, are included in a revision to the Internal Revenue Manual, a revised application, a set of frequently asked questions (FAQs), and memorandums of understanding (MOUs) that corporations are required to submit to participate in pre-CAP and CAP programs.
The CAP pilot program began in 2005 with 17 taxpayers. The IRS has reported that in FY 2011, there are 140 taxpayers participating in the CAP program. The CAP program is available only to taxpayers with assets of $10 million.
On March 10, 2011, Governor Quinn of Illinois signed House Bill 3659 which amends the Illinois use tax and service use tax laws by adopting click-through nexus provisions applicable to certain retailers. Specifically, under the new law, a “retailer maintaining a place of business in Illinois” includes retailers that enter into contracts with in-state persons who, in exchange for consideration or commission, refer customers to the retailer by a link on the in-state person’s Internet website. In addition, retailers that contract with in-state persons who sell the same or substantially the same line of products or services (using similar marks or trade names) and who are paid commissions upon the sale of tangible personal property or services by the retailer, are also deemed to be maintaining a place of business in Illinois. These provisions will apply to retailers whose cumulative volume of gross receipts from all such contracts with Illinois persons during the previous four quarterly periods ending on the last day of March, June, September and December exceeds $10,000. These provisions are effective July 1, 2011.
It is important to note that, unlike the similar laws in New York, North Carolina and Rhode Island, the Illinois law is not framed as a presumption of nexus that may be rebutted by the retailer establishing that the in-state residents do not solicit sales on behalf of the retailer. In other words, there is no opportunity for the retailer to rebut the presumption that these relationships with Illinois persons, standing alone, create nexus. Note that there is another legislative proposal, Senate Bill 1783, that would repeal these new provisions.
On February 14, 2011, the Obama administration released its FY 2012 budget which contains a number of tax proposals. On the same day, the Treasury Department released the “Green Book,” General Explanations of the Administration’s Fiscal 2012 Revenue Proposals.
The president transmits to Congress each year a proposed budget for its consideration. Congress may reject any or all of the president’s recommendations. In fact, only a handful of the revenue proposals in last year’s budget were enacted. As in the past, the president’s FY 2012 budget describes tax proposals in general terms, but it does not include statutory language. While the president called for reduction of corporate income tax rate during this year’s State of the Union address, it is not a part of the administration’s FY 2012 budget proposal.
A great many of the tax proposals in the FY 2012 budget are identical or at least very similar to those in the budgets for FY 2011 and FY 2010. Some of the major tax proposals included in the FY 2012 budget are as follows:
Individuals: Even though President Obama agreed to extend the Bush era tax cuts on high-income taxpayers for 2 years in December 2010, FY 2012 proposal would generally repeal them after 2012. Beginning in 2013, the proposal assumes that the current 0% and 15% rates on qualified dividends and long-term capital gains would be permanently extended for middle-class taxpayers. For “upper income taxpayers” (those who would be in the two highest ordinary income tax brackets), without legislative action, while a 20% rate would be applied to net long-term capital gains, qualified dividends would be taxed at the 36% or 39.6% rate beginning in 2013. The proposal would apply a 20% rate to qualified dividends received by upper income taxpayers after 2012. The proposal would also impose limitation on itemized deductions of high income taxpayers. In addition, the proposal would expand the Child and Dependent Care Tax Credit and extend American Opportunity Tax Credit and Earned Income Tax Credit for larger families.
Businesses: The proposal would enhance and permanently extend the research and experimentation credit, repeal Last-In, First Out (LIFO) method and Lower-of-Cost-or Market (LCM) method of accounting for inventories, permanently eliminate capital gains tax on investments in small business stock, and deny deduction for punitive damages.
International: The proposal would defer deduction of interest expense related to deferred foreign source income, determine foreign tax credit on a pooling basis, limit shifting of income through intangible property transfers, and modify the tax rules for dual-capacity taxpayers. Also, the proposal would revise the earnings stripping rule by tightening the limitation on the deductibility of interest paid by an “expatriated entity” to related persons.
Energy: The proposal contains various items specifically applicable to the energy sector including enhancement and extension of existing incentives such as credits for qualifying advanced energy manufacturing projects, introduction of new incentives such as credits for energy-efficient commercial buildings and sellers of qualified plug-in electric vehicles, and repeal of tax benefits provided to natural resources producers such as percentage depletion, expensing of intangible drilling costs, exploration and development costs, and domestic manufacturing deduction.
Financial Institutions and Products: The proposal would institute a “financial crisis responsibility fee” to recover taxpayer dollars that were used to support various financial institutions under the Troubled Asset Relief Program (TARP). Also, the proposal would modify rules concerning tax exempt bonds and other financial products.
Other Industries: The proposal contains various items specifically applicable to insurance and real estate sectors.
Tax Administration: The proposal would partially repeal additional Form 1099 reporting requirements which were enacted in the 2010 health care reform and will take effect for payments made after December 31, 2011. Specifically, the proposal would repeal the requirement to report payments made for property (e.g., supplies, materials, and inventory items) by businesses before ever taking effect but would retain it for payments made to corporations.
Others: The proposal would tax carried interests in investment services partnership interest as ordinary income. Also, the proposal would make changes to rules concerning estate, gift, and generation-skipping transfer taxes, employee benefits, federal unemployment insurance tax, and exempt organizations.
The IRS announced that it launched the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI) designed to allow taxpayers to bring funds located offshore back into the U.S. tax system and to help those with undisclosed income from offshore accounts to resolve their tax liabilities (IR-2011-14, February 8, 2011). The new voluntary disclosure initiative will be available through August 31, 2011.
This voluntary disclosure initiative is the second program offered by the IRS to taxpayers with foreign accounts. The first special voluntary disclosure program closed in October 2009, with approximately 15,000 voluntary disclosures. The IRS reports that since that time, more than 3,000 taxpayers have come forward with foreign bank accounts.
The new 2011 offshore voluntary disclosure initiative’s overall penalty structure is higher than that of 2009 initiative. Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest, and penalties by the August 31, 2011 deadline.
The IRS released additional information including a list of frequently asked questions and guidelines on how to participate on its website.
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