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.
On February 22, the Obama Administration released the framework of its corporate tax reform plan which would reduce the Federal corporate tax rate from 35% to 28%. The revenue cost of this rate reduction would be offset by the repeal or substantial modification of numerous tax preferences and incentives, as well as several more fundamental changes in the taxation of business income as follows:
Preservation of Tax Incentives:
- The research credit would be simplified and expanded, and also made permanent.
- The US manufacturing deduction would be reformed so as to further effectively reduce the corporate rate for domestic manufacturing to 25%.
Elimination of Tax Expenditures:
- "Last-in-first-out" accounting and oil and gas productions incentives would be repealed.
- Partnership carried interests would be taxed as ordinary income.
- Special depreciation rules for corporate aircraft would be eliminated.
Potential Revenue to Offset Rate Reduction:
- Elimination of accelerated depreciation system.
- Reduction of deductibility of interest.
- Introduction of a tax at the pass-through entity level.
- Elimination of double taxation of corporate income and harmonization of the corporate and non-corporate rates through integration with the individual income tax.
Taxation of Overseas Profits:
- Current taxation of the "excess" profits associated with intangible assets in offshore subsidiaries.
- Introduction of minimum tax on overseas profits of US businesses.
On February 13, the Obama administration released its Fiscal Year 2013 Budget. The $3.6 trillion in spending for the year beginning October 1 is matched by $2.3 trillion in revenue and $1.3 trillion in borrowing. The following highlights the main tax provisions included in the budget:
- Elimination of tax provisions benefitting high-income taxpayers including restoration of the 36% and 39.6% income tax rates, restoration of the 20% long-term capital gains tax rate, taxation of dividends as ordinary income, limitation of itemized deductions, and phase-out of personal exemptions.
- Restoration of the 2009-level estate and gift tax rates.
- Changes affecting US-based multinationals, elimination of preferences for oil and gas, enforcement and administrative reforms aimed at closing the tax gap, and changes in treatment of finance and insurance.
The bill to continue a 2% reduction in the payroll tax to 4.2% through December 31, 2012 (H.R. 3630) was passed by both chambers of Congress on February 17 and signed into law by President Obama on February 22. In addition to extending the payroll tax cut and unemployment benefits and to protecting Medicare providers from scheduled reduction (the “doc fix”), the legislation includes a provision to eliminate current-law timing shifts in the corporate estimated tax safe harbor requiring affected taxpayers to pay more than 100% of the amount of tax due.
On February 8, the Treasury Department and IRS issued proposed regulations (REG-121647-10) as guidance concerning information reporting by foreign financial institutions for US accounts and withholding on certain payments made to foreign financial institutions and other foreign entities under the Foreign Account Tax Compliance Act (FATCA). Since FATCA’s enactment in March 2010, the IRS has issued several rounds of guidance, but today’s regulations have been much anticipated by taxpayers affected by the FATCA withholding tax regime and the approaching January 1, 2013 effective date.
Several of the key provisions are:
- Extension of the transition period for the scope of information reporting and withholding on pass-through payments.
- Modification of due diligence procedures for the identification of accounts.
- Transitional rules for affiliates with legal prohibition on compliance.
- Refinement of the definition of financial account.
- An expanded scope of “grandfathered obligations.”
The Treasury Department and IRS released proposed regulations (REG-113770-10) providing guidance on the excise tax on medical devices. Effective January 1, 2013, an excise tax is imposed to the manufacturer or importer on the sale of certain medical devices. The tax is equal to 2.3% of the sale price. The proposed regulations provides rules concerning definition of “taxable medical device,” retail exemption, dual use devices, devices used in research, investigational devices, and dental instruments and equipment.
On February 13, the IRS released Revenue Procedure (“Rev. Proc.”) 2012-17 which sets forth the requirements for partnerships to follow in providing electronic substitute Schedule K-1, Partner’s Share of Income, Deductions, Credits, and Other Items. Under Rev. Proc. 2012-17, the partnership must receive the partner’s consent before providing K-1s electronically.
On February 14, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a notice (FinCEN Notice 2012-1) to further extend the filing due date for certain individuals (employees and officers of specified regulated entities) with only signature authority over, but no financial interest in, certain foreign financial accounts to file a Report of Foreign Bank and Financial Accounts, Form TD F 90-22-1 (FBAR) until June 30, 2013. Previously, FinCEN issued a notice to extend FBAR deadline for certain individuals until June 30, 2012.
On January 9, the IRS announced the “reopening” of an offshore voluntary disclosure program (OVDP) to provide opportunities for individual taxpayers with offshore financial accounts or assets to comply with their U.S. federal income tax obligations (IR-2012-5).
According to the IRS release, the IRS received 33,000 voluntary disclosures and collected more than $4.4 billion from the 2009 and 2011 offshore initiatives. As “hundreds of taxpayers” have come forward to make voluntary disclosures since the 2011 program closed in September 2011, these taxpayers will be treated under the provisions of the new OVDP program, according to the IRS.
The IRS reported that the new OVDP is similar to the 2011 program, with certain differences. For example, unlike last year’s program, there is no set deadline for individuals to apply for the program. However, as terms of the new program may be changed at any time, the IRS for example may decide to increase the penalties under the program for all or some taxpayers, or may decide to end the program at any point.
The overall penalty structure under the new program is the same as was in place under the 2011 program, except that taxpayers in the highest penalty category would be subject to a penalty of 27.5% (as opposed to 25% under the 2011 program) of the highest aggregate balance in their foreign bank accounts and value of foreign assets during the eight full tax years prior to the disclosure. Like the 2011 program, some taxpayers will be eligible for 5% or 12.5% penalties if the value of the offshore accounts or assets did not exceed $75,000 in any calendar year subject to the OVDP.
To participate under the new OVDP, taxpayers must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. More details on the OVDP are to be made available within the next month.
The U.S. Tax Court concluded a taxpayer that had acquired poultry processing plants in separate asset acquisitions was not entitled later to revise the classifications of the acquired property for depreciation purposes with a post-acquisition cost segregation study. Peco Foods, Inc. v. Commissioner, T.C. Memo. 2012-18 (January 17, 2012).
While the IRS disallowed the depreciation adjustments asserting that the taxpayer is barred by the statutory provision governing purchase price allocation (section 1060) from modifying the purchase price allocations in a manner inconsistent with the original allocation schedules in the asset purchase agreements, the taxpayer argued that the allocation schedule was silent as to the depreciation treatment of the assets and also that section 1060 applies only to the allocation of consideration and not to the determination of classification of assets for tax depreciation purposes.
The court rejected these arguments by the taxpayer, stating that the allocation schedule in the agreement was enforceable against the taxpayer, and that, because the parties agreed that the allocation was to be used “for all purposes (including financial accounting and tax purposes),” the taxpayer could not depart from the allocation for any purpose unless it could show enough ambiguity to support a change in the form of the transaction under the so-called Danielson standard, which sets a high threshold for refuting the terms of an agreement for tax purposes.
The Treasury Department and IRS released temporary regulations (T.D. 9571), and by cross-reference, proposed regulations (REG-113903-10) relating to the allocation and apportionment of interest expense. The temporary regulations do not completely overhaul the existing temporary regulations, but instead make targeted changes to three paragraphs of the regulations.
Reg. section 1.861-9T(e): A corporate partner with a 10% or greater interest in a partnership must allocate its direct interest expense to all of its assets, including its proportionate share of partnership assets. The prior temporary regulations set forth this rule only with respect to a distributive share of interest expense incurred by the partnership.
Reg. section 1.861-9T(h)(4): A taxpayer that apportions interest expense using the fair market value method must follow a specific multi-step process to determine the value of the assets.
Reg. section 1.861-11T(d)(6)(ii): Amendment is made to reflect the 2010 statutory change to section 864(e)(5)(A) which provides that a foreign corporation will be treated as a member of an affiliated group for interest allocation and apportionment purposes if: (1) more than 50% of the gross income of such foreign corporation is effectively connected income; and (2) the affiliated group owns at least 80% of the vote or value of the foreign corporation.
The temporary regulations are effective on January 17, 2012. Written or electronic comments concerning the proposed regulations and the outlines of topics to be discussed at the public hearing scheduled for April 3, 2012 must be received by March 13, 2012.
The U.S. Court of Appeals for the Third Circuit affirmed a decision of a federal district court regarding the New Jersey state law enacted in June 2010 to expand the scope of its Unclaimed Property Law to include stored-value cards (e.g., gift certificates and gift cards) (SVCs). The decision: (1) enjoined New Jersey from retroactively applying the new law to stored-value cards redeemable for merchandise or services; (2) enjoined New Jersey from enforcing the place-of-purchase presumption; but (3) declined to enjoin the data collection requirements or the two-year abandonment period applicable to stored-value cards. New Jersey Retail Merchants Association v. Sidamon-Eristoff, Nos. 10-4551 et seq. (3d Cir. January 5, 2012).
On December 23, the Treasury Department and IRS released the long-awaited “repair regulations.” These regulations, T.D. 9564 and REG-168745-03, contain the standards for determining whether and when a taxpayer must capitalize costs incurred in acquiring, maintaining, or improving any tangible property. The regulations are likely to affect all taxpayers in one way or another.
Issued in proposed and temporary form, the new regulations are generally effective for tax years beginning on or after January 1, 2012. Because the temporary regulations have the same binding effect as a final regulation, taxpayers must take steps to determine that they fully comply with the new regulations for their 2012 tax year. Changes to comply with the new regulations are a change in method of accounting that will generally require a section 481(a) adjustment. The IRS is expected to issue more detailed guidance in the near future regarding the implementation of these changes.
Although the new regulations follow the same overall format as earlier proposed regulations issued in 2006 and 2008, the new regulations also contain a number of significant changes including:
- Significant modifications in how the capitalization standards apply to buildings and structural components
- Significant changes in the deductibility of unrecovered costs of structural components following the improvement or retirement of those elements
- New definitions and rules applicable to “materials and supplies”
- Revised de minimis rules
- Clarifications in the application of the capitalization standards to “store remodels”
On December 23, the House and Senate passed, by unanimous consent, a new bill that would extend through February 2012 the 2% payroll-tax reduction, unemployment benefits, and “doc fix” reversing a scheduled cut in Medicare provider payments. The bill was signed into law by President Obama on the same day.
Regarding the 2% payroll-tax reduction, as the maximum amount of the wages subject to the Social Security (FICA) payroll-tax is $110,100 for 2012, if an employee’s wages during the first two months of 2012 exceed $18,350 (two-twelfths of the wage base of $110,100), an amount equal to 2% of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012. However, this rule would only apply if the payroll tax reduction is not extended for the remainder of 2012.
On December 14, the Treasury Department and IRS released temporary regulations (T.D. 9567) and, by cross-reference, proposed regulations (REG-130302-10) relating to provisions of the Hiring Incentives to Restore Employment (HIRE) Act that require foreign financial assets to be reported, under section 6038D, to the IRS. The requirement was introduced to improve tax compliance by U.S. taxpayers with offshore financial accounts is effective for tax years beginning after March 18, 2010.
The temporary regulations provide guidance relating to the statement to be attached to individual income tax returns to provide required information regarding foreign financial assets.
According to a related IRS release (IR-2011-117, December 14, 2011), the IRS will “in coming days” release a new information reporting form for taxpayers to use to report specified foreign financial assets for tax year 2011. Form 8938, Statement of Specified Foreign Financial Assets, will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts.
As explained by the IRS, individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return, and certain nonresidents who live in a U.S. territory. The IRS provides two examples:
- A married couple living in the United States and filing a joint tax return—they would not file Form 8938 unless their total specified foreign financial assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
- A married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
The instructions for Form 8938 would explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided. Form 8938 is not required of individuals who do not have an income tax return filing requirement.
The IRS noted that the new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Treasury Department.
Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which would also be explained in the instructions.
On December 16, legislation which provides significant changes to Illinois’ corporate income tax laws was signed into law by the governor. While net operating loss (NOL) carryovers were suspended for tax years ending after December 31, 2010 and prior to December 31, 2014 by another legislation enacted earlier during 2011, the bill allows NOL carryovers (capped at $100,000 per year) for tax years ending on or after December 31, 2012 and prior to December 31, 2014. The bill would also extend the recently-expired Research and Development credit for five years (through years ending prior to January 1, 2016). Likewise, the measure also extends for five years certain other exemptions, credits, or deductions that were scheduled to expire in 2011, 2012, or 2013.
In the tax procedure arena, the bill would prohibit the Department of Revenue from hearing all protests related to notices of tax liability or deficiencies for all taxes administered by the Department after July 1, 2013. Instead, such protests will be heard by an Independent Tax Tribunal Board to be established by law.
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