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.
On January 2, the American Taxpayer Relief Act of 2012 was signed into law by President Obama averting the "Fiscal Cliff."
The Act includes provisions that:
- Extend permanently the 2001 and 2003 current individual income tax rates except for taxpayers with taxable income above a threshold amount ($450,000 for married individuals filing a joint return and $400,000 for single taxpayers)
- Restore the personal exemption phase-out and the itemized deduction limitation for taxpayers with adjusted gross income exceeding $300,000/$250,000 (joint filers/singles)
- Extend the current tax rates on capital gains and dividends except for taxpayers with taxable income above $450,000/$400,000 (joint filers/singles);for these taxpayers, the capital gains and dividend tax rate is 20%
- Provide permanent alternative minimum tax relief by increasing the exemption amount and indexing it for inflation
- Extend permanently the indexed estate, gift, and generation-skipping transfer tax exemption of $5 million but increase the top rate to 40%
- Extend the 50% bonus depreciation of capital expenditures for one year, and increase section 179 expensing for one year
- Extend many expired provisions, through 2013; provisions that expired at the end of 2011, such as the research credit, the Subpart F exception for active financing income, and look-through treatment for payments between related controlled foreign corporations, are extended retroactively from January 1, 2012
The Act also:
- Defers the budget sequesters until March 2013
- Extends federal extended unemployment benefits for one year
- Includes the Medicare "doc fix," which extends current Medicare payment rates for physicians through 2013
The Act does not extend the 2% payroll tax reduction that had been in effect for two years.
On January 24, representatives of the governments of the United States and Japan signed a new Protocol to the United States-Japan income tax treaty. The new Protocol includes:
- Zero rate of withholding tax on interest
- An expanded category of direct dividends potentially eligible for a zero rate of withholding tax (i.e., "at least 50%" instead of "more than 50%" and a reduced required holding period of six months)
- Amendments to existing treaty rules governing the taxation of capital gains in a manner that would permit the United States to fully apply the Foreign Investment in Real Property Tax Act (FIRPTA) by eliminating the opportunity to avoid the 5-year look back rule and also permit Japan to tax capital gains arising from the sale of shares in a company holding real property located in Japan even if the share-issuing company is not a resident of Japan.
- Rules for resolution, through mandatory binding arbitration, of certain cases that the tax authorities of the United States and Japan have been unable to resolve after a reasonable period of time
- Expansion of the provisions to enable the competent authorities to assist each other in the collection of taxes
- Amendments to the exchange of information provision.
The Protocol will enter into force after both countries satisfy their respective internal ratification procedures, and its provisions will have effect as follows:
- Withholding taxes - for amounts paid or credited on or after the first day of the third month next following the date on which the new treaty enters into force
- Other taxes - for tax periods beginning on or after the first day of January next following the date on which the new treaty enters into force
- Special rules apply to the application of articles concerning Mutual Agreement Procedure and exchange of information.
On January 17, the U.S. Treasury Department and IRS released final regulations for the Foreign Account Tax Compliance Act (FATCA). Since the enactment of FATCA in March 2010, Treasury and the IRS have issued several rounds of preliminary guidance, including proposed regulations. The new FATCA withholding and reporting requirements will become effective January 1, 2014. In finalizing the FATCA rules, Treasury and the IRS made efforts to minimize burdens, when possible, and address the issue of local law conflicts.
The final regulations include the provisions concerning the following:
- Harmonization with intergovernmental agreements
- Relaxation of certain documentation and due diligence requirements
- An expanded scope of "grandfathered obligations"
- Liberalization of requirements for certain retirement funds and savings accounts
- Limited FFIs – continued transition rule
- Bearer shares
- Registration process
The Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued a notice further extending the filing date for Report of Foreign Bank and Financial Accounts (FBAR) Form TD F 90-22.1, for certain individuals to June 30, 2014. Specifically, the individuals covered by the notice are employees and officers of specified regulated entities—including U.S. publicly traded companies and financial institutions—who have only signature authority over, but no financial interest in, certain foreign financial accounts. Previously, in February 2012, Treasury extended the FBAR filing deadline for these officers and employees to June 30, 2013.
On January 24, House Ways and Means Committee Chairman Dave Camp (R-MI) revealed a tax reform proposal on financial instruments. The proposal would:
- Impose annual mark-to-market accounting for certain financial derivatives and certain straddles excluding business hedges and provide that arising gains and losses would be treated as ordinary
- Simplify the business hedging rules and specifically certain identification rules
- Provide rules to prevent phantom cancellation-of-indebtedness income from debt restructurings involving certain significant modifications.
- Change the market discount rules to require a holder to recognize such discount over the remaining life of a bond instead of upon a sale or exchange.
- Determine a taxpayer's cost basis in certain substantially identical securities on an average cost basis amount to increase the accuracy of determining gains and losses.
- Expand the wash sales rules to include transactions involving certain related parties.
On December 5, the Treasury Department and IRS released final regulations (T.D. 9604) providing guidance on the 2.3 percent excise tax to be imposed on the sale of certain medical devices effective January 1, 2013. The tax was introduced by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act to fund President Obama's health care reform.
The final regulations adopt regulations that were proposed in February 2012 with certain changes reflecting written comments received and comments heard at the public hearing held on May 16, 2012.
Also, on the same day, the IRS posted a set of "frequently asked questions" (FAQs) concerning the medical device excise tax on its website and issued Notice 2012-77 as interim guidance regarding the determination of sale price and other issues related to the medical device excise tax. The IRS is also requesting comments concerning certain topics that are reserved in the final regulations.
On December 19, the U.S. Court of Appeals for the Ninth Circuit affirmed a decision of the Tax Court which found that a taxpayer's carryback of an alternative tax net operating loss (ATNOL) from 2004 to 2002 was not eligible to offset 100% of the alternative minimum taxable income (AMTI) in 2002 under a special rule that applied to 2001 and 2002 tax years (Metro One Telecommunications, Inc. v. Commissioner, No. 11-70819 (9th Cir. December 19, 2012)).
Generally, an alternative tax net operating loss (ATNOL) can be carried back two years, and carried forward to the next 20 years, but the ATNOL can offset only 90% of the AMTI for the year it is deducted. However, following the terrorist attacks of September 11, 2001, Congress enacted some incentive measures that included allowing ATNOLs from tax years ending during 2001 or 2002 to be carried back five years - rather than two years. The legislation also allowed carrybacks of ATNOLs from 2001 or 2002, and "carryovers" of ATNOLs into 2001 or 2002, to offset 100% of the AMTI in the year they is deducted.
The taxpayer in this case had an ATNOL for 2004 and carried it back two years, to 2002, but attempted to offset 100% of the AMTI in 2002. However, the IRS determined for 2002 that the 90% limitation applied to the ATNOL, and reduced the amount of the carryback from 2004, creating a deficiency in tax (specifically, the alternative minimum tax (AMT)) for 2002.
In proceedings before the Tax Court, the taxpayer argued that the 2004 ATNOL was a "carryover" of the ATNOL, even though it was to an earlier tax year. The taxpayer contended in part that the technical reference to the use of an ATNOL in a later tax year is a "carry forward" and that "carryover" was a more general reference that included both carry backs and carry forwards of the ATNOL.
The Tax Court determined that the Code did not allow for a "carryover" of an ATNOL to a prior period, finding among other things that the taxpayer's interpretation would "create illogic" and that Congress had not intended the result the taxpayer has asserted.
The Ninth Circuit affirmed, finding that the plain meaning of the term "carryovers" means net operating losses that are carried forward from one tax year to a subsequent tax year.
On December 7, the IRS publicly released a revocation of Private Letter Ruling (PLR) 201214007 which treated facility-specific power purchase agreements as part of the depreciable basis of the wind facilities to which they are associated (PLR 201249013).
In PLR 201214007 (publicly released April 6, 2012), the IRS concluded that when the taxpayer acquired wind energy facilities subject to facility-specific power purchase agreements (PPAs), no portion of the purchase price is to be allocated to the PPAs, and the portion of the purchase price of the wind facilities that was attributable to the PPAs is to be included in the depreciable basis of the property.
The conclusion reached in PLR 201214007 had potential implications on the incentives available to renewable energy projects. For instance, if the value of the PPAs is treated as part of the depreciable basis of renewable energy property, then the cost attributable to the PPA may be recovered over a much shorter period than if it was considered an asset separate from the renewable energy property (Renewable energy property is generally five-year MACRS property while PPAs are normally amortized over 15 years on a straight-line basis). The conclusion reached in PLR 201214007 also had the potential to increase a renewable energy facility's tax basis for investment tax credit purposes as well as the cash grant program.
In the revocation letter, the IRS stated that it has determined that PLR 201214007 is "not in accord with the current views of the Service." The revocation letter further states that "the portion of the purchase price paid by Taxpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities."
On November 20, the IRS released Notice 2012-73, which states that Treasury and the IRS expect to issue final regulations regarding the deduction and capitalization of repair expenditures related to tangible property in 2013.
In December 2011, Treasury and the IRS published new proposed regulations that cross-referenced the temporary regulations regarding repair expenditures and withdrew proposed regulations issued in 2008. The temporary regulations generally apply to tax years beginning on or after January 1, 2012. In response to the 2011 proposed regulations, numerous comments were sent in and made at a public hearing on May 9, 2012.
Notice 2012-73 states that the final regulations are expected to apply to tax years beginning on or after January 1, 2014 and permit taxpayers to apply the provisions of the final regulations to tax years beginning on or after January 1, 2012. Certain sections of the temporary regulations may be revised in a manner that might affect, and in certain cases simplify, taxpayers' implementation of the rules including the de minimis rule, the routine maintenance safe harbor rule, and the rules concerning dispositions. The revisions being contemplated would take into consideration all comments received, including comments requesting relief for small businesses.
Notice 2012-73 states that taxpayers choosing to apply the provisions of the temporary regulations to tax years beginning on or after January 1, 2012, and before the applicability date of the final regulations, may continue to obtain the automatic consent of the IRS Commissioner to change their methods of accounting under Rev. Proc. 2012-19 and Rev. Proc. 2012-20.
California voters approved Proposition 39 making the single-sales factor apportionment mandatory. Under the new law, taxpayers affected by the provision must apportion their income to California using a single-sales factor apportionment formula for tax years beginning on or after January 1, 2013.
The mandatory "single sales factor" does not apply to taxpayers engaged in "qualified business activities," which means that the taxpayer derives more than 50% of its gross receipts from agriculture, extractive, savings and loans, or banks and financial activities.
A unitary group that includes a corporation engaged in one or more "qualified business activities" must use single-sales factor apportionment if the overall unitary group does not derive more than 50% of its gross business receipts from qualified business activities.
On November 13, the California Franchise Tax Board (FTB) filed a petition asking the California Supreme Court to review the appellate court's decision in Gillette Co. v. Franchise Tax Board, which was re-issued on October 2, 2012 and held that a taxpayer could apportion its income to California using the Multistate Tax Compact (MTC)'s evenly-weighted three-factor formula, despite statutory language mandating the use of a three-factor double-weighted sales formula for general corporations.
In its petition for review, the FTB estimated that the decision will cost the state of California over $750 million if it is allowed to stand. The FTB also pointed out that the decision has implications nationally as it potentially affects the other states that remain full members of the Compact. The FTB argues that the MTC member states never believed that they had to withdraw from the Compact entirely in order to enact subsequent legislation altering or amending the Compact's apportionment formula. Minutes from a 1972 Multistate Tax Commission meeting were purportedly submitted as support for this viewpoint.
On November 27, the Michigan Court of Appeals addressed whether a taxpayer could elect to use the MTC's allocation and apportionment provisions in computing its Michigan Business Tax (MBT) liability despite the MBT Act's mandate for use of a single sales factor apportionment methodology (International Business Machines Corp. v. Dep't of Treasury, No. 306618 (Mich. Ct. App. November 20, 2012)). The Michigan court, in stark contrast to the California court in Gillette, held that entering into the compact was not akin to entering into a contract and the adoption of the MBT allocation and apportionment provisions implicitly repealed the compact election.
The U.S. Court of Federal Claims granted the government's motion to dismiss a consequential damages claim brought by a renewable energy cash grant applicant (LCM Energy Solutions v. United States, No. 12-321C (Fed. Cl. November 26, 2012)).
The cash grant program was originally enacted by the American Recovery and Reinvestment Act of 2009 and allowed renewable energy developers apply for a cash grant in lieu of claiming federal investment tax credits or federal production tax credits.
As the government only awarded 54% of the amount requested, the applicant subsequently filed suit against the government, seeking a full amount of the grant requested and consequential damages resulting from the government's failure to timely make the full payment.
The Court of Federal Claims affirmed the finding of a prior court and held that the applicant was entitled to the full amount of the grant but granted the government's motion to dismiss the applicant's claim for consequential damages. While the applicant argued that consequential damages were necessary to fulfill congressional intent to incentivize economic activity, the court concluded that the argument that such intent thus allowed for consequential damages lacked legal authority and precedent.
On November 29, the IRS announced updated procedures to strengthen the individual taxpayer identification number (ITIN) program requirements (IR-2012-98). For the first time, new ITINs will expire after five years in an effort to facilitate ITINs being used for legitimate tax purposes. ITIN applications will continue to require original documentation or copies certified by the issuing agency. In addition, the IRS finalized its earlier decision to no longer accept notarized copies of documents for ITINs. Most of the interim guidelines have been made permanent.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG LLP. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.