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 with questions.
The IRS has released the annual report on its Advance Pricing Agreement (APA) Program for the calendar year 2009 (Announcement 2010-21).
Number of Cases:
|Canceled or Revoked
Average Number of Months to Complete:
|Bilateral / Multilateral
From 2009 to 2010, no significant increase was observed with respect to the number of applications filed (which increased from 123 to 127) and the number of cases executed (which decreased from 68 to 63). As the number of new applications continues to exceed the number of cases executed, the number of pending cases jumped from 303 to 352. The average number of months to complete has decreased by 2.1 months for unilateral APAs and 3.0 months for bilateral / multilateral APAs.
As to the nature of the relationship between the controlled taxpayers, foreign parent / U.S. subsidiary remains to represent the largest population.
|Foreign Parent / U.S. Subsidiary
|U.S. Parent / Foreign Subsidiary
|Foreign Company and U.S. Branch
The IRS released Announcement 2010-30, announcing the release of draft Schedule UTP, Uncertain Tax Positions Statement, and related draft instructions. As a background, Announcement 2010-9, issued in late January 2010, stated that the IRS was developing a schedule that would require certain taxpayers to provide information about their uncertain tax positions that affect their U.S. federal income tax liability. Subsequently in early March 2010, the IRS released Announcement 2010-17 which stated that the filing of a new schedule for reporting uncertain tax positions pursuant to FIN 48 (or other accounting standards such as IFRS) would apply for returns relating to calendar year 2010 and for fiscal years that begin in 2010.
The draft instructions provide in part:
- A taxpayer is required to file Schedule UTP if the taxpayer (1) has uncertain tax positions; (2) has assets equal to or exceeding $10 million; (3) issued audited financial statements or is included in a related party’s audited financial statements; and (4) is a corporation required to file a Form 1120, an insurance company required to file a Form 1120 L or Form 1120 PC, or a foreign corporation required to file Form 1120 F (even if filing protective returns).
- On Part I of Schedule UTP, taxpayers are required to report tax positions taken in the current year’s tax return for which the decision whether to record the reserve was made at least 60 days before filing the tax return. On Part II of Schedule UTP, taxpayers are required to report tax positions taken in a prior year’s tax return for which the decision whether to record the reserve was made at least 60 days before filing the tax return. A corporation is not required to report a tax position already reported in a prior year tax return.
- Taxpayers are required to report tax positions taken in a tax return for which a reserve has not been recorded based on an IRS administrative practice or an expectation to litigate.
- The maximum tax adjustment (MTA), an estimate of the maximum amount of potential U.S. federal income tax liability for the tax position taken must be disclosed. For tax positions that relate to items of income, gain, loss, and deduction, taxpayers are to estimate the total amount in dollars and multiply by 0.35 (35%). For items of credit, taxpayers are to estimate the total amount of credit in dollars. The MTA does not include interest or penalties. The effects of a tax position on state, local, or foreign taxes are disregarded when computing the MTA.
- A determination of a maximum tax adjustment (MTA) amount is not required for valuation or transfer pricing tax positions. Instead, the MTA reporting requirement is satisfied by indicating whether the tax position is a valuation or a transfer pricing tax position, and by providing a ranking of these tax positions based on either the amount recorded as a reserve for U.S. federal income tax for that tax position or the estimated adjustment to federal income tax. For example, if the tax position is a transfer pricing tax position, indicate “TP” for transfer pricing followed by a number representing the ranking of the tax position within all reported transfer pricing tax positions (e.g., TP1, TP2, etc.) in the Maximum Tax Adjustment column of the Schedule UTP.
- No reporting is required with respect to tax position taken in a tax year beginning before December 15, 2009.
The IRS has invited public comments which are due June 1, 2010.
On March 18, 2010, President Obama signed the "Hiring Incentives to Restore Employment Act" The costs of the incentives of approximately $18 billion over 10 years are fully offset. The tax provisions in the Act include the following:
- "Incentives for Hiring and Retaining Unemployed Workers": A qualified employer is not required to pay the employer share of the old age, survivors, and disability (OASDI) portion of Social Security taxes on wages paid to a qualified employee for the remainder of calendar year 2010. Also, a general business credit of up to $1,000 to an employer for each qualified employee if the employee has continued to be employed by the employer for at least 52 consecutive weeks.
- "Expensing": As the Act extends a temporary increase in the amount of investment in depreciable property that may be deducted under section 179 for one year, the section 179 limitation is $250,000 of the cost of qualifying property placed in service for tax year beginning in 2010 (reduced by the amount by which such cost exceeds $800,000).
- "Qualified Tax Credit Bonds": An issuer of certain qualified tax credit bonds may make an irrevocable election on or before the issue date of the bonds to receive a payment under section 6431 in lieu of providing a tax credit to the holder of the bonds.
- "Extension of Current Surface Transportation Programs": Expenditure authority for the Highway Trust Fund and for the Sport Fish Restoration and Boating Trust Fund is extended through December 31, 2010. The Act also makes other changes to the rules concerning the Highway Trust Fund.
- "Foreign Account Tax Compliance": The Act introduces various provisions to strengthen foreign account tax compliance similar to those in the proposed "Foreign Account Tax Compliance Act" introduced in the House and Senate in November 2009.
- "Substitute Dividends and Dividend Equivalent Payments Received by Foreign Persons": A dividend equivalent payment will be treated as a dividend from U.S. sources subject to withholding tax if it is contingent upon, or determined by reference to, the payment of a dividend from U.S. sources made pursuant to (1) a securities lending or sale-repurchase transaction or (2) a “specified notional principal contract.”
- "Delay in Application of Worldwide Allocation of Interest": The effective date of the worldwide interest allocation rules is delayed by three years (i.e., until tax years beginning after December 31, 2020).
- "Corporate Estimated Tax": Certain corporate estimated taxes due in 2014, 2015, and 2019 are increased.
The Patient Protection and Affordable Care Act (“PPACA”) was signed into law by the president on March 23, 2010. PPACA was subsequently modified by the Health Care and Education Reconciliation Act of 2010 (“HCERA”) which was signed into law by the president on March 30, 2010. PPACA amended by HCERA constitutes the health care reform legislation which includes the following major tax provisions:
- "Individuals": After 2012, a new 3.8% tax is imposed on the lesser of net income from certain investment or the taxpayer’s modified adjusted gross income that exceeds the taxpayer’s threshold amount which is $250,000 for joint filers, $200,000 for single filers, and $125,000 for married separate filers. The employee portion of the Medicare tax (currently 1.45%) is increased by 0.9% on wages exceeding the above threshold amount after 2012. After 2013, while penalties will be imposed on failure to maintain required minimum essential health care coverage, a refundable tax credit (the “premium assistance credit”) will be granted to eligible individuals and families who purchase health insurance through an exchange. The threshold for the itemized deduction for unreimbursed medical expenses would be increased from 7.5% of AGI to 10% after 2012.
- "Industry and Employer Fees": A fee is imposed on each covered entity engaged in the business of manufacturing or importing branded prescription drugs for sale to any specified government program or pursuant to coverage under any such program for each calendar year beginning after 2010. After 2012, a tax equal to 2.3% of the sale price is imposed on the sale of certain taxable medical devices by the manufacturer, producer, or importer of the device. After 2013, an annual fee is imposed on any covered entity engaged in the business of providing health insurance with respect to U.S. health risks.
- "Employers": A “qualified small employer” that pays for at least 50% of qualified health insurance for its employees can receive a credit of up to 35% of the payments for tax years beginning in 2010 through 2013 and up to 50% of the payments for tax years after 2013. After 2013, a “large employer” that does not offer “minimum essential coverage” at an “affordable” rate, or pays less than 60% of the cost of health care benefits for full-time employees, must pay a penalty if any of the full-time employees are allowed or paid a tax credit or cost-sharing reduction for buying insurance from a State exchange plan. After 2017, a 40% excise tax on insurers if the aggregate value of employer-sponsored health insurance coverage for any employee exceeds a threshold amount.
- "Businesses": Effective upon enactment, a 40% penalty applies to tax understatements attributable to transactions lacking economic substance (20% with adequate disclosure). After 2011, a business is required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee including a corporation (other than a tax-exempt corporation). A $1 billion fund will be allocated in a form of a 50% nonrefundable investment tax credit for qualified investments in qualifying therapeutic discovery projects. Corporate estimate taxes due in 2014 is increased for corporations with assets of at least $1 billion.
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