Wednesday, March 25, 2020
text of final Covid-19 Senate Bill “Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’.
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Final Covid-19 Text of Bill for Senate Vote [PDF Link] “Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’.
Tax and Benefits sections of Final Bill described below by Senate Finance Committee (March 25, 2020)
DIVISION A – KEEPING WORKERS PAID AND EMPLOYED, HEALTH CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION
TITLE II—ASSISTANCE FOR AMERICAN WORKERS, FAMILIES, AND BUSINESSES
Subtitle A—Unemployment Insurance Provisions
Section 2101. Short Title
This title is called the Relief for Workers Affected by Coronavirus Act
Section 2102. Pandemic Unemployment Assistance
This section creates a temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to those not traditionally eligible for
unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.
Section 2103. Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations
This section provides payment to states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through December 31, 2020 to pay
Section 2104. Emergency Increase in Unemployment Compensation Benefits
This section provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
Section 2105. Temporary Full Federal Funding of the First Week of Compensable Regular Unemployment for States with No Waiting Week
This section provides funding to pay the cost of the first week of unemployment benefits through December 31, 2020 for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits.
Section 2106. Emergency State Staffing Flexibility
This section provides states with temporary, limited flexibility to hire temporary staff, rehire former staff, or take other steps to quickly process unemployment claims.
Section 2107. Pandemic Emergency Unemployment Compensation
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available.
Section 2108. Temporary Financing of Short-Time Compensation Payments in States with Programs in Law
This section provides funding to support “short-time compensation” programs, where employers reduce employee hours instead of laying off workers and the employees with reduced hours receive a pro-rated unemployment benefit. This provision would pay 100 percent of the costs they incur in providing this short-time compensation through December 31, 2020.
Section 2109. Temporary Financing of Short-Time Compensation Agreements
This section provides funding to support states which begin “short-time compensation” programs. This provision would pay 50 percent of the costs that a state incurs in providing short-time compensation through December 31, 2020.
Section 2110. Grants for Short-Time Compensation Programs
This section provides $100 million in grants to states that enact “short-time compensation” programs to help them implement and administer these programs.
Section 2111. Assistance and Guidance in Implementing Programs
This section requires the Department of Labor to disseminate model legislative language for states, provide technical assistance, and establish reporting requirements related to “shorttime compensation” programs.
Section 2112. Waiver of the 7-day Waiting Period for Benefits under the Railroad Unemployment Insurance Act
This section temporarily eliminates the 7-day waiting period for railroad unemployment insurance benefits through December 31, 2020 (to make this program consistent with the change made in unemployment benefits for states through the same period in an earlier section of this subtitle).
Section 2113. Enhanced Benefits under the Railroad Unemployment Insurance Act
This section provides an additional $600 per week payment to each recipient of railroad unemployment insurance or Pandemic Unemployment Assistance for up to four months (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).
Section 2114. Extended Unemployment under the Railroad Unemployment Insurance Act
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of regular unemployment benefits are no longer available (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).
Section 2115. Funding for the Department of Labor Office of Inspector General for Oversight of Unemployment Provisions
This section provides the Department of Labor’s Inspector General with $25 million to carry out audits, investigations, and other oversight of the provisions of this subtitle.
Section 2116. Implementation
This section gives the Secretary of Labor the ability to issue operating instructions or other guidance as necessary in order to implement this subtitle, as well as allows the Department of Labor to waive Paperwork Reduction Act requirements, speeding up their ability to gather necessary information from states.
Subtitle B – Rebates and Other Individual Provisions
Section 2201. 2020 recovery rebates for individuals
All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.
For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as IRS will use a taxpayer’s 2019 tax return if filed, or in the
alternative their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
Section 2202. Special rules for use of retirement funds
Consistent with previous disaster-related relief, the provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.
A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
Section 2203. Temporary waiver of required minimum distribution rules for certain retirement plans and accounts
The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to
individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
Section 2204. Allowance of partial above the line deduction for charitable contributions
The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.
Section 2205. Modification of limitations on charitable contributions during 2020
The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of
adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent. Section 2206. Exclusion for certain employer payments of student loans The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
Subtitle C – Business Provisions
Section 2301. Employee retention credit for employers subject to closure due to COVID-19
The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Section 2302. Delay of payment of employer payroll taxes
The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
Section 2303. Modifications for net operating losses
The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.
Section 2304. Modification of limitation on losses for taxpayers other than corporations
The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.
Section 2305. Modification of credit for prior year minimum tax liability of corporations
The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
Section 2306. Modification of limitation on business interest
The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.
Section 2307. Technical amendment regarding qualified improvement property
The provision enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.
Section 2308. Temporary exception from excise tax for alcohol used to produce hand sanitizer
The provision waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020
Friday, March 20, 2020
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Tuesday, March 17, 2020
The high wealth income tax gap is an estimate of the difference between the total amount of income tax collected from high wealth private groups and the amount we estimate would have been collected if every one of these taxpayers was fully compliant with the law.
High wealth private groups are defined as Australian resident individuals who, together with their associates, control wealth of more than $50 million. For the purpose of estimating this gap, we include:
- registered individuals linked to a high wealth private group
- companies where ownership by the head individual is 40% or more.
Companies with total business income greater than $250 million are included in the large corporate groups income tax gap.
The income of high wealth private groups includes distributions from trusts and partnerships that are part of their structure; these amounts are accounted for as part of this gap estimate.
In 2016–17, there were approximately 5,000 high wealth private groups with more than $50 million in net wealth. They comprised 9,000 individuals and 18,000 companies. In total, they paid $9.3 billion in income tax and employed 780,000 employees.
Estimate of the tax gap
For 2016–17, the net income tax gap estimate for high wealth private groups was $772 million or 7.7%. This means we estimate that high wealth private groups paid more than 92% of the total theoretical tax payable for 2016–17.
The estimate is an aggregate of the income tax gap for individuals and companies in our population of high wealth private groups. On average, high wealth individuals contribute to 53% of the total net gap and high wealth companies account for slightly less, approximately 47%.
High wealth income tax performance
High wealth private groups voluntarily contributed over $9 billion in income tax for the 2016–17 income year. This is more than 90% of the revenue we were expecting from them.
This shows the vast majority are reporting and paying tax correctly. We understand sometimes people will make honest mistakes, this is usually due to:
- not correctly recording or reporting transactions outside of the normal course of business
- not correctly accounting for private use of business funds or assets
- not reporting income earned from overseas investments or related partnership or trust distributions.
We encourage you to seek advice from your tax advisor as part of your tax governance.
The majority of high wealth private groups are already taking the right steps to avoid these errors and pay the right amount of tax. These include:
- investing in strong tax governance practices and system controls
- talking to your tax advisor, or us, if you’re planning to change your business or wealth management arrangement
- using our tools and services to get greater certainty about the tax consequences, including early engagement and commercial deals services.
We have a number of strategies in place to help reduce the gap. We are improving our detection of errors and deliberate tax avoidance through data and analytics. We are also:
- increasing our engagement to talk to you about our view of your tax affairs, supporting you to correct past mistakes, and mitigate future tax issues and risks
- providing guidance in the form of practical compliance guidelines, rulings and taxpayer alerts.
Also, from 2020–21 the expansion of the reportable tax position schedule will apply to large private companies and corporate groups.
This is our first release of the income tax gap estimate for the high wealth population. As we calculate additional estimates over future years, we will be able to see clearer long-term trends.
Find out about:
- Australian tax gaps – overview
- Principles and approaches to measuring gaps
- About privately owned and wealthy groups
- Tailored engagement
- How we assess risk
- Tax performance programs for private groups
- High wealth private groups tax performance program
Monday, March 16, 2020
I have four tax policy suggestions for Congress that it can include in a taxpayer coronavirus relief bill. I welcome acronym suggestions for this proposed bill's name, especially a creative bill name whose acronym is "Zombie" or "Eat Brains". The four tax relief suggestions that will mitigate damage caused by Covid-19 are:
Proposal 1 (stop medical bankruptcy): In 2020 the itemized deduction for medical expenses is reduced by 7.5% of a taxpayer's AGI. For 2020, I propose eliminating the 7.5% reduction of medical expenses attributed to the coronavirus or any 2020 flu (or zombie bite), such as hospitalization. Medical diagnosis should suffice. Not going to be used by many people. But the people who do use will really need it - those that do not awake as zombies that is.
Proposal 2 (stop restaurant bankruptcy): The administration proposes the suspension of the Social Security and Medicare payroll tax to jump-start consumer spending, presumably after the removal of quarantine orders to stay indoors or at least six feet away from each other. Not very targeted. Someone like me may just shift the payroll tax relief and use it instead to upward adjust my 403(b) retirement savings for 2020, taking advantage of my full $19,500 contribution allowance for 2020 (and because I am 50 years old or older - add another $6,000 retirement 'catchup' to that $19,500 for a full $25,500), Not only have I not spent the money to help the economy rebound, I have reduced my tax due for 2020 because my retirement contributions reduce my taxable income. I have saved tax twice!! While I quite like that idea personally, I feel empathy for all the local restaurant owners who may go bankrupt unless I go out to eat at more local restaurants once I assured that 2020 was not the year of the zombie apocalypse.
A better-targeted proposal to save our nation's local restaurants and the local farmers that supply them is to allow taxpayers an itemized deduction up to $1,000 for an individual and $2,000 for a married filing jointly 2020, beyond the standard deduction, of 100% of restaurant meals expense between June 1 and October 31, at U.S. restaurants with the last three years gross annual receipts averaging less than [$5 million - whatever is reasonable so that big chains are not included, Small Business Administration uses a maximum of $8 million for full-service restaurants (NAICS 722511)- I'm OK with that]. I know - many reasons not to do this, such as Americans will become hooked on eating out at local restaurants. Wait, why is that a bad thing? And we will need to address the tax abusers who will order one slice of pizza and 20 bottles of wine, to go. So maybe the maximum meal receipt must be set at $100 per meal receipt per adult. That should allow plenty of food for a couple, and alcohol, and leave enough for the children to still have mac & cheese. Plus it requires ten different restaurant trips. Local restauranteurs and the local farmers can hold out hope that 2020 will not require filing for bankruptcy protection. November is Thanksgiving when people eat out anyway, at least in the restaurants that have remained open. By the way, I am purposely leaving business out of this. Business has a 50% business meal deduction anyway. And my policy suggestion is about Americans being social and not talking business at the dinner table (and perhaps not politics either).
Proposal 3 (stop hotel bankruptcy): And let's not forget about locally-owned hotels with average gross receipts below $8 million (SBA uses $35 million for hotels and $8 million for B&B Inns so maybe I am way off base with just $8 million - see NAICS subsector 721 Accomodation). A $500 itemized deduction for 2020 for a U.S. hotel stay (not Air BnB homes or apartments, actually licensed hotels/BnB Inns) for an individual or couple between June 1 and October 31. Might not buy a weekend at the Ritz but the Ritz probably exceeds the small business amount of revenue a year. Is it sound tax policy? Huey Long (I'm from Louisiana) promised a chicken in every pot and a car in every yard. I promise a get-a-way weekend at a small(ish) hotel.
Proposal 4 (keep employees employed): A tax credit (I am not sure the right amount, let the Labor Secretary decide, something around $5,000 an employee) to employers of less than 500 employees who do not reduce the monthly payroll of the employees, or fire any employees, between June 1 and September 30. October 1 employers start thinking about Christmas hiring for the shopping season. I can imagine some mathematically-inclined employees thinking "I am going to walk into my boss' office and projectile vomit because the cost of losing the tax credits for firing me is too high." OK, so firing 'for cause including projectile Zombie vomiting on the boss ' will be allowed without loss of the tax credit. Now if a business wants to expand and hire a lot of employees up to 500 that's great. I propose that all employees employed and start fulltime work before June 1st qualify for a reduced $4,000 tax credit (basically $1,000 a month of employment for June through September).
These four proposals are enough to keep the economy, restaurants, hotels, and employees out of recession and bankruptcy. But I have more proposals not currently part of the current bill, but common sense dictates should be (well, maybe not). Why have we heard nothing from the House to encourage donations of toilet paper rolls to local shelters? And why hotels and restaurants, but not spas? I'll leave it to the politicians (and lobbyists) to argue about. Meanwhile, I look forward to receiving your comments while I set up my anti-zombie chicken wire barricade around the yard.
I'll be covering these and related issues in my weekly Tax Facts Intelligence Newsletter.
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Sunday, March 15, 2020
What will be the impact of the Covid-19 (coronavirus) on tax filings due by April 15? (Or will we all be eaten by zombies by then?)
If the illness known as Covid-19 generated by the coronavirus does not cause a zombie apocalypse (it's almost April 1st, expect wide coverage of zombies in your neighborhood), then we still need to plan for our tax payments due April 15th this year. Not talking about 2019 but rather the first of the 2020 estimated tax payments. However, it is likely that taxpayers with business or investment income may reduce the 2020 quarterly estimated tax payments that will be due April 15 this year, June 15, September 15, and January 15 of 2021. Why?
2019 was a good income year for most taxpayers earning investment and business income. But 2020 will likely be a depressed income year, maybe even a recession (for those not eaten by zombies). Thus, estimated tax payments to avoid a penalty, generally, 90% of the tax that is estimated to be due for 2020, should be much reduced from the 2019 level paid. (Contrarian investor taxpayers that shorted the market may actually need to make higher estimated taxpayers because the contrarians are likely to have a great capital gain year).
What are the changes enacted in the Tax Cuts and Jobs Act of 2017 that, because of the coronavirus, impact 2020's estimated tax payments?
- A taxpayer's ability to reduce tax because of a net operating loss ("NOL") in 2020 has been reduced by the TCJA. An NOL resulting in 2020 cannot be applied to taxes paid in the previous two-years of 2019 and 2018 to claw those taxes back. Before the TCJA, the NOL "carry-back" of two-years was allowed. NOLs may still be carried forward. Excess NOL in 2020 may be used to reduce 2021's income and thus tax due.
However, the TCJA even modifies how much NOL may be used to reduce 2020's taxable income. Starting in 2018, the TCJA modified the tax law on "excess business losses" by limiting losses from all types of business for noncorporate taxpayers. An "excess business loss" is the amount of a taxpayer's total deductions from business income that exceeds a taxpayer’s "total gross income and capital gains from business plus $250,000 for an individual taxpayer or $500,000 for married taxpayers filing a joint return." Said another way, the business loss in 2020 is limited to a maximum of $250,000 for an individual taxpayer. Yet, the remainder does not evaporate like a vampire stabbed with a stake in the heart. The remainder may be carried forward to 2021. The remainder is called a "net operating loss" or NOL.
But the TCJA has another limitation for the carry forward of an NOL. The NOL may only be used in 2021 to reduce the taxpayer's taxable income by 80%. The remainder NOL in 2021, if any, that resulted from 2020's original loss and 2021's limitation to just 80% of taxable income may again be carried forward, to 2022, yet again subject to the 80% of taxable income limitation. The NOL may keep rolling forward indefinitely, subject to the 80% limitation until it is all used.
- High net wealth taxpayers that generate gross receipts greater than $26 million may be subject to the TCJA's limitation of interest expense for 2020. The TCJA included a rule that limits the amount of interest associated with a taxpayer's business income when the taxpayer has on average annual gross receipts of more than $26 million since 2018. The limitation does not apply to a taxpayer whose business income is generated from providing services as an employee, and a taxpayer that generates business income from real estate may elect not to have the limitation apply.
The amount of deductible business interest expense that is above a taxpayer's business interest income is limited to 30% of the taxpayer’s adjusted taxable income (called "ATI"). For 2020, ATI will probably be significantly lower than in 2019 and 2018. A taxpayer calculated ATI taking the year's taxable income then reducing it by the business interest expense as if the limitation did not apply. The remaining amount is then further reduced by any net operating loss deduction; the 20% deemed deduction for qualified business income, any depreciation, amortization, or depletion deduction, and finally, any capital loss. The business interest expense allowable for 2020 is 30% of that remainder. The lost business income resulting from the coronavirus in 2020 may lead the remainder to be zero, and 30% of zero is zero. Like the NOL above, the business interest expense if not usable in 2020 does not vanish. It carries forward to 2021 and each year thereafter, applying the same limitation rules each year.
- Many taxpayers may end 2020 in a capital loss position if the stock market does not fully recover by December. If a taxpayer’s capital losses are more than the year's capital gains, then $3,000 of that loss may be deducted from the taxpayer's 2020 regular income. Remaining capital loss above the $3,000 may be carried forward to apply against 2021 income, and so on until used up.
- The IRS may offer taxpayers more time beyond the April 15th deadline to file and pay 2019's tax in 2020. The filing and payment for 2019, and estimated tax for 2020, is due on or before April 15. But the IRS has indicated that it may extend that deadline. A taxpayer may, regardless, file a request for a six-month extension on or before April 15, 2020, that is automatically granted if filed on time. But any tax owing for 2019 will still be due April 15, 2020, after which interest begins to be charged by the IRS to the taxpayer's tax debt. Check the IRS website here for whether, because of the coronavirus, it has extended the payment deadline beyond April 15, 2020. Can the IRS extend the deadline, legally? Yes. Because Congress enacted a section of the Internal Revenue Code (our tax law) "§ 7508A" which is aptly named "Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions". The President declared an official national emergency (see here).
- Taxpayers are not required to exhaust the deductible required by a high-deductible health plan (called "HDHP") before using the HDHP to pay for COVID-19 related testing and treatment.
I'll be covering these and related issues in my weekly Tax Facts Intelligence Newsletter.
Friday, January 31, 2020
In September 2019, the Government commissioned Sir Amyas Morse to lead the independent loan charge review. The loan charge is designed to tackle disguised remuneration tax avoidance schemes. These are tax arrangements that seek to avoid income tax and national insurance contributions by paying scheme users income in the form of loans, usually via an offshore trust, with no expectation that the loans will ever be repaid.
On 20 December 2019, the Government published the review and the Government’s response to the review. The Government accepted all but one of the review’s recommendations (HCWS14).
HM Revenue & Customs (HMRC) has today published draft legislation to give effect to these changes, alongside explanatory notes and a tax information and impact note. These can be found using the links below.
The draft legislation and explanatory notes: https://www. gov.uk/government/collections/finance-bill-2019-20
The tax information and impact note: https://www.gov. uk/government/collections/tax-information-and-impact-notes-tiins
HMRC will hold an informal four-week consultation on the draft legislation to invite views from stakeholders. The Government intend to legislate for the changes in the forthcoming Finance Bill, which will be introduced after the Budget.
The draft legislation that the Government have published today does not cover the Government’s commitment that HMRC will repay settlements where voluntary restitution has been paid by individuals and employers for years no longer subject to the loan charge because the year is unprotected. Legislation giving effect to this commitment, together with details of the repayment scheme, will be published separately ahead of the Finance Bill. The scheme will be legislated for at the earliest opportunity in the Finance Bill, alongside the other changes to the loan charge.
HMRC has also published further guidance for taxpayers on the changes to the loan charge following Sir Amyas’s review. This supplements the guidance published on 20 December.
Find out how the changes to the loan charge affect you https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review
Disguised remuneration: guidance following the outcome of the independent loan charge review https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review/guidance
Thursday, January 30, 2020
Factual background (read case here)
12. The underlying facts were not in dispute and can be summarised as follows. It will be seen later in this decision, however, that HMRC contest certain other findings of fact by the FTT.
13. Mr Hicks was one of a number of participants in the Montpelier Scheme. The Montpelier Scheme was marketed by Montpelier Tax Consultants (IOM) Ltd (“Montpelier”) and was disclosed to HMRC on Form AAG 1 under the Disclosure of Tax Avoidance Scheme Rules (“DOTAS”) received by HMRC on 24 September 2008. The Form AAG 1 stated that the arrangement was available to self-employed derivative traders who worked at least 10 hours per week on average in the trade. The trader acquired dividend rights with the intention that the cost of such rights was a deductible expense of the trade but the dividend income was not taxable as a result of section 730 Income and Corporation Taxes Act (“section 730”).
14. Under the Montpelier Scheme, Mr Hicks entered into a contract to acquire the rights to 5 dividends (all payable on 5 February 2009) of £300,000 each at a total cost of £1,498,035. Entities controlled by Montpelier lent Mr Hicks the funds to acquire the right to acquire the dividends. On 27 February 2009, Mr Hicks paid Montpelier an up-front fee of £75,000 pursuant to a Professional Service Agreement (“PSA”). The PSA stated that a further £75,000 was contingent upon agreement of the losses by HMRC. Mr Hicks claimed the deduction in full (i.e. £150,000 in respect of the fees) in his 2008/09 accounts.
15. In his tax returns, Mr Hicks relied on section 730 to exclude the receipt of the £1.5 million dividend income from his trading income during the income tax year ended on 5 April 2009. By excluding the dividend income under section 730 (and deducting the fees paid under the PSA) Mr Hicks’ taxable profit of £425,899 was reduced to nil and a loss of £1,221,867 was created. This loss was carried forward under section 83 Income Tax Act 2007 to reduce the taxable profits of his trade (i.e. his pre-existing derivatives trade) in the two subsequent years from £483,696 to nil (2009/10) and £348,594 to nil (2010/11). Therefore, Mr Hicks claimed that his participation in the Montpelier Scheme reduced his taxable profits of £1,258,189 for 10 the three relevant tax years to nil.
Tuesday, January 28, 2020
Global tax chiefs undertake unprecedented multi-country day of action to tackle international tax evasion
A globally coordinated day of action to put a stop to the suspected facilitation of offshore tax evasion has been undertaken this week across the United Kingdom (UK), United States (US), Canada, Australia and the Netherlands. Stoke-on-Trent man, 59, first to be arrested in £200 million global tax fraud swoop stretching from UK to Australia
The action occurred as part of a series of investigations in multiple countries into an international financial institution located in Central America, whose products and services are believed to be facilitating money laundering and tax evasion for customers across the globe.
It is believed that through this institution a number of clients may be using a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime.
The coordinated day of action involved evidence, intelligence and information collection activities such as search warrants, interviews and subpoenas. Significant information was obtained as a result and investigations are ongoing. It is expected that further criminal, civil and regulatory action will arise from these actions in each country.
This is the first major operational activity for the Joint Chiefs of Global Tax Enforcement, known as the J5, formed in mid-2018 to lead the fight against international tax crime and money laundering. This group brings together leaders of tax enforcement authorities from Australia, Canada, the UK, US and the Netherlands.
"This is the first coordinated set of enforcement actions undertaken on a global scale by the J5 – the first of many," said Don Fort, US Chief, Internal Revenue Service Criminal Investigation.
"Working with the J5 countries who all have the same goal, we are able to broaden our reach, speed up our investigations and have an exponentially larger impact on global tax administration. Tax cheats in the US and abroad should be on notice that their days of non-compliance are over," Fort said.
Australian Tax Office (ATO) Deputy Commissioner and Australia's J5 Chief, Will Day, said that this operation shows that the collaboration between the J5 countries is working. "Today's action shows the power of our combined efforts in tackling global tax crime, fraud and evasion."
"This multi-agency, multi-country activity should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime."
The ATO has commenced investigations into Australian based clients of this institution who are suspected to have undeclared income. The Australian Criminal Intelligence Commission (ACIC) is playing a supportive intelligence role, and investigations into more clients may follow.
"Never before have criminals been at such risk of being detected as they are now. Our increased collaboration, data analytics and intelligence sharing mean there is no place worldwide you can hide your money to avoid contributing your obligations," Day said.
Hans van der Vlist, Chief and General Director Fiscal Information and Investigation Service (FIOD), the Netherlands, said, "This is the first outcome of an operational collaboration between five countries on tackling professional enablers that facilitate offshore tax crime.
The international investigation started on information obtained by the Netherlands. By sharing this information and working together an international impact is created. Together as the J5 we will try to close the net on tax criminals."
Canada Revenue Agency (CRA) Chief Eric Ferron said, "I am very pleased with the role the CRA is playing in what will be the first of many major operational activities for the J5. This coordinated operation shows that the collaboration between J5 countries is working. Tax evaders beware; today's action shows that through our combined efforts we are making it increasingly difficult for taxpayers to hide their money and avoid paying their fair share."
Simon York, Chief and Director of Her Majesty's Revenue and Customs (HMRC)'s Fraud Investigation Service said, "Tax evasion is a global problem that needs a global response and that is what the J5 provides. This kind of international action shows that we can, and we will take on the most collaboration underlines our commitment to tackling these harmful, sophisticated and complex crimes and that we are committed to levelling the playing field for honest businesses and taxpayers.
"International tax evasion robs our public services of vital funds, undermines economies and, left unchecked, can enrich the dishonest at the expense of the honest majority.
Working together, HMRC and our J5 partners are closing the net on tax criminals, wherever they are, to ensure nobody is beyond our reach. The message to them is clear – the J5 are closing in."
Monday, December 2, 2019
The U.S. Treasury Department and IRS today issued proposed and final regulations relating to two significant international tax provisions of the Tax Cuts and Jobs Act (TCJA): foreign tax credits (FTC) and the base erosion and anti-abuse tax (BEAT).
“The Tax Cuts and Jobs Act has made America’s business environment more competitive. Tax cuts have led to companies bringing back close to a trillion dollars and creating countless opportunities for hardworking Americans,” said Secretary Steven T. Mnuchin. “Today’s guidance continues to modernize our tax system, ensure a thoughtful and deliberate transition from a worldwide towards a territorial system, protect the U.S. tax base, and provide taxpayers with the clarity they need to plan and grow their businesses.”
FTCs generally provide relief to U.S. taxpayers paying or accruing foreign income taxes. Changes to the treatment of FTCs under the TCJA included adding new foreign tax credit limitation categories, providing new foreign tax credit rules related to the enactment of the global intangible low taxed income (GILTI) regime, and eliminating the fair market value asset valuation method for interest expenses.
Today’s proposed regulations include rules on the allocation and apportionment of research and experimental deductions that will generally allow taxpayers subject to the GILTI regime to increase their use of foreign tax credits. The final regulations finalize proposed regulations issued in December 2018. Those regulations include a rule treating certain assets as 50 percent exempt for expense allocation purposes, as well as rules on applying the new FTC limitation categories. This includes a taxpayer favorable elective transition rule for carryovers of FTCs.
The BEAT provides a backstop to prevent multinational enterprises from eroding the US tax base by unduly reducing their U.S. tax liability. The final regulations released today reflect comments received from taxpayers and facilitate compliance with the statute. They provide detailed guidance regarding which taxpayers will be subject to the BEAT, how to determine base erosion payments, and the calculation of the base erosion minimum tax amount.
The new proposed regulations provide further guidance on other operational aspects of BEAT. They provide a rule for applying BEAT when taxpayers elect to waive certain deductions, and provide additional guidance for applying the BEAT to groups of related taxpayers and to partnerships.
Wednesday, October 2, 2019
IR-2019-160: The IRS issued a draft of the tax year 2019 Form 1065, U.S. Return of Partnership Income (PDF), and its Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc (PDF). The changes to the form and schedule aim to improve the quality of the information reported by partnerships both to the IRS and the partners of such entities.
For example, among the changes is the addition of a checkbox that allows a taxpayer to indicate if certain grouping or aggregation elections have been made. The changes also reflect updates consistent with changes resulting from the Tax Cuts and Jobs Act.
The additional information requested in the draft Form 1065 and Schedule K-1 is intended to aid the IRS in assessing compliance risk and identifying potential noncompliance while ensuring that compliant taxpayers are less likely to be examined. The IRS believes these changes to Form 1065 and Schedule K-1 will improve tax administration in the partnership arena, an area of critical importance to the IRS.
In addition, certain similar changes can be found in the draft of the tax year 2019 Form 1120-S, U.S. Income Tax Return for an S Corporation (PDF), and its Schedule K-1 , Shareholder’s Share of Income, Deductions, Credits, etc.,(PDF) which were also released today.
Over the past decade and a half, tax filings by partnerships have seen an increase. For calendar year 2004, about 2.5 million partnerships filed Form 1065; by calendar year 2017, that number had risen to more than 4 million, an increase of 59 percent. The rise in filings by partnerships was considerably greater than the rise in filing by C-corporations and S-corporations, combined, which rose about 14 percent over the same timeframe. This increase in filings reinforces the IRS’s need to improve the data available for its compliance selection processes.
The draft 2019 Form 1065 and Schedule K-1, as well as the draft Form 1120-S and its Schedule K-1, are near-final forms. The drafts are intended to give tax practitioners a preview of the changes and software providers the information they need to update systems before the final version of the updated forms and schedules are released in December.
The IRS is now accepting comments until Oct 30 at IRS.gov/FormComments.
Sunday, August 25, 2019
ICIJ collaborated with 54 journalists from 18 countries, including first-of-a-kind partnerships with reporters in Tanzania, Mauritius and the United States. Journalists explored more than 200,000 records, ranging from tax advice from major audit firms to audio recordings. Read the ICIJ findings here.
Saturday, August 24, 2019
ICIJ is publishing details of more than 200 companies as part of the investigation – that the Mauritius office of Conyers Dill & Pearman assisted.
Monday, August 19, 2019
IRS has begun sending letters to virtual currency owners advising them to pay back taxes, file amended returns; part of agency's larger efforts
he Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.
"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties," said IRS Commissioner Chuck Rettig. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."
The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.
For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.
Taxpayers are pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.
Last year the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
Virtual currency is an ongoing focus area for IRS Criminal Investigation.
IRS Notice 2014-21 (PDF) states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.
The IRS anticipates issuing additional legal guidance in this area in the near future.
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.
Saturday, August 17, 2019
Let's take ‘it must be the politics of the judges’ off the table. Altera’s panel included the majority decision by two President Bill Clinton appointees and a vigorous dissent by a President Barack Obama appointee. Amazon’s three-judge unanimous decision panel includes an appointee each of President’s Clinton and Obama, and a President George W. Bush appointee who wrote it (and received a unanimous Senate confirmation vote).
The salient issue of both cases, and the cost sharing arrangement (CSA) cases that precede them, is whether the IRS’ can disregard the behavior of third-party comparable transactions and if so, then which U.S. inputs may the IRS insist be included.
In Altera (i.e. the 2003 CSA regulations version), based on its re-do of the 1995 CSA regulations applicable to Amazon, the IRS sought to include the sharing of the stock-based compensation (SBC) costs incurred by the U.S. corporation. In Amazon, the IRS doubled down and required Amazon’s foreign subsidiary, for the privilege of building out Amazon throughout Europe, to pay for Amazon’s U.S. intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovation, the value of Amazon’s workforce in place, Amazon’s going concern value, goodwill, and growth options.
The Amazon Ninth Circuit panel stated:
The dispositive issue in this case is whether, under the 1994/1995 regulations, the “buy-in” required for “pre-existing intangible property” must include compensation for residual-business assets. To answer this legal question, we consider the regulatory definition of an “intangible,” the overall transfer pricing regulatory framework, the rulemaking history of the regulations, and whether the Commissioner’s position is entitled to deference under Auer v. Robbins, 519 U.S. 452 (1997). We agree with the tax court that the definition of an “intangible” in § 1.482-4(b) was not intended to embrace residual-business assets.
Today’s Amazon decision and June’s Altera decision are incongruent and certainly will lead the full Ninth Circuit en banc to reconsider these cases and establish judicial consistency. This is not a matter of distinguishing decisions because Amazon was determined under 1995 cost sharing regulations versus Altera under the 2003 regulations. The fundamental issue is whether the IRS is allowed to disregard its own regulations about the arm’s length standard, ignoring evidence of third-party comparable transactions, when it does not like the outcome. The Ninth Circuit called the IRS out when it stated:
“The Commissioner’s reliance on Xilinx thus suffers the same defect as his “made available” argument based on § 1.482-7A(g)—he assumes the very conclusion he’s aiming to prove. Although the regulatory provisions the Commissioner cites are consistent with his position, they do not provide independent support and they are likewise consistent with Amazon’s view.”
In Xilinx, the Ninth Circuit relied upon the arm’s length standard to determine the intragroup cost allocation. Xilinx was more similar to Altera in that the IRS position hinged on the sharing of the employee stock option costs. In Xilinx, the Ninth Circuit held that that employee stock option (“ESO”) expenses in cost-sharing agreements related to developing intangible property are not subject to reallocation under the applicable CSA pre-2003 regulations. The Court concluded that third parties jointly developing intangibles and transacting on an arm’s length basis would not include ESO expenses in a cost sharing agreement. The IRS issued an Action on Decision whereby the IRS acquiesced in the Xilinx outcome but with two caveats. The acquiescence only applied for taxable years prior to August 26, 2003 and the IRS did not acquiesce to the Court’s analysis of why the IRS lost. The IRS explained its acquiescence
“The Service acquiesces in the result only for such ESOs because the significance of the Ninth Circuit’s opinion is mooted by the 2003 amendments…”
I think that the IRS arguments in Amazon are more of a stretch than it made in Xilinx and I do not think that its 2003 amended regulations mooted the Xilinx issue, much less the Amazon one. I appreciate that the IRS attorneys are doing what good litigators do (I am not a litigator, just a transfer pricing academic): generate innovative arguments and keep probing when the law and the facts don’t support the client’s position. I like the IRS’ proposals for accounting for the value of the residual business assets of Amazon. It makes business sense from an integrated group, managerial economics, perspective. But not from a transfer pricing tax-regulatory framework perspective that purports to measure itself by an arm’s length reflection of 3rd party transactions. At least, not for the years in question in either case.
To come back to the title of this post, will Amazon and Altera be left to stand side-by-side, the appearance of a split intra-circuit? Or will these two cases be onward distinguished by other panels based on the date of the applicable regulations? The Amazon panel, in a footnote at page 6, might appear to favor the appearance of harmony:
This case is governed by regulations promulgated in 1994 and 1995. In 2009, more than three years after the tax years at issue here, the Department of Treasury issued temporary regulations broadening the scope of contributions for which compensation must be made as part of the buy-in payment. … In 2017, Congress amended the definition of “intangible property” …. If this case were governed by the 2009 regulations or by the 2017 statutory amendment, there is no doubt the Commissioner’s position would be correct.
However, Altera is a 2003 CSA regulation case, and thus not meant to be included in the pronouncement of the footnote.
Amazon @ Tax Court Level
In a 207 page opinion the Tax Court ruled March 23, 2017 that the IRS’s adjustment with respect to Amazon.Inc buy-in payment for an intragroup cost-sharing agreement (CSA) is arbitrary, capricious, and unreasonable. Not a surprising loss given the decisions against the IRS on CSAs: VERITAS in 2009 and the following year Xilinx The Tax Court held that Amazon’s choice of the comparable uncontrolled transaction (CUT) method with appropriate upward adjustments in several respects is the best method to determine the requisite buy-in payment. Moreover, the Court found that the IRS abused its discretion in determining that 100 percent of Technology and Content costs constitute Intangible Development Costs (IDCs), and that Amazon’s cost-allocation method with adjustments supplies a reasonable basis for allocating costs to IDCs.
The Court found that the IRS committed a series of errors in calculating the buy-in value of the preexisting intangibles. Amazon’s valuation was based upon a limited useful life of seven years or less for the preexisting intangibles whereas the IRS’ commissioned Horst Frisch Report assumed that the intangibles have a perpetual useful life. Under Amazon’s approach, after decaying or “ramping down” in value over a seven-year period, Amazon’s website technology as it existed in January 2005 would have had relatively little value left by year-end 2011. But approximately 58 percent of the Horst Frisch Report proposed buy-in payment, or roughly $2 billion, is attributable to cash flows beginning in 2012 and continuing in perpetuity.
One does not need a Ph.D. in economics to appreciate the essential similarity between the DCF methodology that Dr. Hatch employed in Veritas and the DCF methodology that Dr. Frisch employed here. (Amazon.com Inc., Tax Court 2017 at 76.)
Amazon cited the court’s decision in VERITAS as one of the basis that the IRS’ adjustment with respect to the buy-in payment was arbitrary, capricious, and unreasonable. Like in VERITAS, in Amazon.com Inc the Tax Court again rejected the IRS’ approach of “aggregation” of the intangibles to determine valuation, holding it neither yields a reasonable means nor the most reliable one. Specifically, the Court rejected the business-enterprise approach of aggregating pre-existing intangibles which are subject to the buy-in payment and subsequently developed intangibles which are not. Secondly, the Court noted that the business-enterprise approach improperly aggregates compensable “intangibles” such as software programs and trademarks with residual business assets such as workforce in place and growth options that do not constitute “pre-existing intangible property” under the cost-sharing regulations in effect during 2005-2006. Finally, in this regard, the Court stated that the IRS ignored its own regulations whereby even if the IRS determines that a realistic alternative exists, the Commissioner “will not restructure the transaction as if the alternative had been adopted by the taxpayer,” so long as the taxpayer’s actual structure has economic substance.
Amazon.com Inc. (2017), VERITAS, Xilinx, Altera, and Medtronic involved restructurings that transferred ownership of intellectual property and technology intangibles from a United States parent to a foreign subsidiary. VERITAS granted its Ireland subsidiary the right to use certain preexisting intangibles in Europe, the Middle East, Africa, and Asia pursuant to its intragroup CSA. As consideration for the transfer of preexisting intangibles, its Ireland subsidiary made a $166 million buy-in payment to VERITAS based upon a CUT to calculate the payment. The IRS in a notice of deficiency chose a discounted cash flow income method with a resulting buy-in payment adjustment of $2.5 billion. Moreover, the IRS argued that the buy-in payment must take into account access to VERITAS’ research and development team, marketing team, distribution channels, customer lists, trademarks, trade names, brand names, and sales agreements. The Tax Court found the IRS’s determinations arbitrary, capricious, and unreasonable, and that instead VERITAS’ CUT method with appropriate adjustments is the best method to determine the requisite buy-in payment. The Tax Court found that the IRS’ discounted cash flow method was improperly used when the IRS valued the buy-in payment as if the intangibles had a perpetual useful life. The IRS issued an ‘action on decision’ that it disagreed with the Court’s factual determination and reasoning and thus would disregard the decision.
How Do 3rd Parties Transact?
In Altera I, the Tax Court held that Treasury failed to support its belief with any evidence in the administrative record that third parties would share ESO costs, failed to articulate why all CSAs should be treated identically, and failed to respond to significant comments from the industry received during the regulatory drafting process. Thus the Court held that Treasury’s final CSA regulations invalid because these failed to satisfy the U.S. Administrative Procedural Act required ‘reasoned decision making’ standard.
The Court in Altera reported the following regarding 3rd party transactions:
Several of the commentators informed Treasury that they knew of no transactions between unrelated parties, including any cost-sharing arrangement, service agreement, or other contract, that required one party to pay or reimburse the other party for amounts attributable to stock-based compensation.
AeA provided to Treasury the results of a survey of its members. AeA member companies reviewed their arm's-length codevelopment and joint venture agreements and found none in which the parties shared stock-based compensation. For those agreements that did not explicitly address the treatment of stock-based compensation, the [companies reviewed their accounting records and found none in which any costs associated with stock-based compensation were shared.
AeA and PwC represented to Treasury that they conducted multiple searches of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system and found no cost-sharing agreements between unrelated parties in which the parties agreed to share either the exercise spread or grant date value of stock-based compensation.
Several commentators identified arm's-length agreements in which stock-based compensation was not shared or reimbursed. For example, (1) AeA identified, and PwC provided, a 1997 collaboration agreement between Amylin Pharmaceuticals, Inc., and Hoechst Marion Roussel, Inc. (Amylin-HMR collaboration agreement), that did not include stock options in the pool of costs to be shared; (2) PwC identified a joint development agreement between the biotechnology company AgraQuest, Inc., and Rohm & Haas under which only "out-of-pocket costs" would be shared; (3) PwC identified a 1999 cost-sharing agreement between software companies Healtheon Corp. and Beech Street Corp. that expressly excluded stock options from the pool of expenses to be shared. Additionally, in written comments, and again at the November 20, 2002, hearing, Ms. Hurley offered to provide Treasury with more detailed information regarding several agreements involving AeA member companies, provided that the companies received adequate assurances that their proprietary information would not be disclosed.
FEI submitted model accounting procedures from the Council of Petroleum Accountant Societies (COPAS) for sharing costs among joint operating agreement partners in the petroleum industry. FEI noted that COPAS recommends that joint operating agreements should not allow stock options to be charged against the joint account because they are difficult to accurately value.
AeA, SoFTEC, KPMG, and PwC cited the practice of the Federal Government, which regularly enters into cost-reimbursement contracts at arm's length. They noted that Federal acquisition regulations prohibit reimbursement of amounts attributable to stock-based compensation.
AeA, Global, and PwC explained that, from an economic perspective, unrelated parties would not agree to share or reimburse amounts related to stock-based compensation because the value of stock-based compensation is speculative, potentially large, and completely outside the control of the parties. SoFTEC provided a detailed economic analysis from economists William Baumol and Burton Malkiel reaching the same conclusion.
Finally, the Baumol and Malkiel analysis concluded that there is no net economic cost to a corporation or its shareholders from the issuance of stock-based compensation. Similarly, Mr. Grundfest asserted that a company's "decision to grant options to employees * * * does not change its operating expenses" and does not factor into its pricing decisions.
AeA, SoFTEC, KPMG, and PwC cited regulations that prohibit contractors from charging the Federal Government for stock-based compensation. Treasury responded to this evidence by stating that "[g]overnment contractors that are entitled to reimbursement for services on a cost-plus basis under government procurement law assume substantially less entrepreneurial risk than that assumed by service providers that participate in QCSAs". ... However, this distinction rings hollow in the face of other evidence submitted by commentators that showed that even parties to agreements in which the parties assume considerable entrepreneurial risk do not share stock-based compensation costs.
AeA, Global, and PwC explained that, from an economic perspective, unrelated parties would be unwilling to share stock-based compensation costs because the value of stock-based compensation is speculative, potentially large, and completely outside the control of the parties. SoFTEC submitted Baumol and Malkiel's detailed economic analysis reaching the same conclusion. We found similar evidence to be relevant in Xilinx. See Xilinx Inc. v. Commissioner, 125 T.C. at 61. Treasury never directly responded to this evidence. Instead, Treasury construed these comments as objections to Treasury's selection of the exercise spread method and the grant date method as the only available valuation methods. ... Treasury responded that these methods are consistent with the arm's-length standard and are administrable. See id. Treasury, however, never explained how these methods could be consistent with the arm's-length standard if unrelated parties would not share them or why unrelated parties would share stock-based compensation costs in any other way.
The Baumol and Malkiel analysis also concluded that there is no net economic cost to a corporation or its shareholders from the issuance of stock-based compensation. Treasury identified this evidence in the preamble to the final rule but did not directly respond to it. ... Instead, the preamble states that "[t]he final regulations provide that stock-based compensation must be taken into account in the context of QCSAs because such a result is consistent with the arm's length standard." Treasury, however, never explained why unrelated parties would share stock-based compensation costs--or how the commensurate-with-income standard could justify the final rule--if stock-based compensation is not an economic cost to the issuing corporation or its shareholders.
History of Cost Sharing Arrangement Regulations
Multinational groups share intellectual property (“IP”) within the group through license agreements or a cost sharing arrangement. A cost sharing arrangement involves related parties (the “controlled participants”) sharing among themselves the costs and risks associated with efforts to develop intangible property in return for each having an interest in any intangible property that may be produced (referred to in the 1995 QCSA Regulations, amended in 2003, as covered intangibles and in the 2009 Temporary Regulations and 2011 Final Regulations as cost shared intangibles. The QCSA Regulations were issued in 1995 and liberalized in 1996. The QCSA regulations were tightened with respect to stock-based compensation in 2003, proposed regulations to replace the QCSA Regulations were issued in 2005, and a CSA-Audit Checklist was issued for existing CSAs which effectively required increased buy-in payments for pre-existing intangibles. The tightening process continued with the CSA-CIP issued in September 2007 (withdrawn), the Temporary Regulations effective January 5, 2009, and the Final Regulations effective December 16, 2011. The CSA-CIP provided that certain transfer pricing methods (the Income Method and the Acquisition Price Method) which are similar to the specified transfer pricing methods, set forth in the Temporary Regulations and the Final Regulations would typically be the best methods under the QCSA Regulations, even though they constituted unspecified methods under the QCSA Regulations.
 Amazon.Com, Inc. v. Comm’r, No. 17-72922 (9th Cir. Aug. 16, 2019). Available at http://cdn.ca9.uscourts.gov/datastore/opinions/2019/08/16/17-72922.pdf (accessed Aug. 16, 2019).
 Altera Corp. v Commr, __ F.3d. __ (9th Cir., June 7, 2019) (case no. 16-70496) [hereafter “Altera II”] reversing Altera Corp. v. Commr, 145 TC No 3 (July 27, 2015) [hereafter “Altera I”]. Available at http://cdn.ca9.uscourts.gov/datastore/opinions/2019/06/07/16-70496.pdf (accessed Aug. 16, 2019).
 Amazon.Com, Inc. v. Comm’r, 148 T.C. No. 8, Docket No. 31197-12, (March 23, 2017). Available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11148 (accessed March 23, 2017). (Hereafter Amazon.com Inc. (2017)).
 Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009).
 Xilinx v. Comm’r, 598 F.3d 1191 (9th Cir. 2010).
 Altera v. Comm’r, 145 T.C. No. 3, Docket Nos. 6253-12, 9963-12 (July 27, 2015).
 Medtronic v. Comm’r, T.C. Memo. 2016-112, Docket No. 6944-11 (June 9, 2016).
 Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009).
 Amazon.com Inc. (2016) at 84.
 Amazon.com Inc. (2017)) at 84 referring to Sec. 1.482-1(f)(2)(ii)(A).
 Motor Vehicles Manufacturers Association v. State Farm, 463 U.S. 29 (1983).
Friday, August 2, 2019
Individual High Income Tax Returns OneSheet, 2010 (PDF)
The OneSheet presents a project description, highlights of the data, and selected figures.
The Tax Reform Act of 1976 requires annual publication of data on individual income tax returns reporting income of $200,000 or more, including the number of such returns reporting no income tax liability and the importance of various tax provisions in making these returns nontaxable. The bulletin articles and related statistical tables present detailed data for these high income returns.
The following are available as Microsoft Excel® files. A free Excel viewer is available for download, if needed.
The tables are grouped into the following categories:
- Returns With and Without U.S. Income Tax
- Returns With and Without Worldwide Income Tax
- Returns With and Without U.S. Income Tax and With Income of $200,000 or More Under Alternative Concepts
- Returns Without U.S. Income Tax and With Income of $200,000 or More Under Alternative Concepts
- Returns With and Without Worldwide Income Tax and With Income of $200,000 or More Under Alternative Concepts
- Returns Without Worldwide Income Tax and With Income of $200,000 or More Under Alternative Concepts
Table 1 -- Number of Returns Classified by: Size of Income Under Alternative Concepts Tax Years: 2016 (XLS) 2015 (XLS) 2014 (XLS) 2013 (XLS) 2012 (XLS) 2011 (XLS) 2010 (XLS) 2009 (XLS) 2008 (XLS) 2007 (XLS) 2006 (XLS) 2005 (XLS) 2004 (XLS) 2003 (XLS) 2002 (XLS) 2001 (XLS) 2000 (XLS) 1999 (XLS) 1998 (XLS) 1997 (XLS) 1996 (XLS) 1995 (XLS) 1994 (XLS) 1993 (XLS)
Table 11 -- Number and Percentages of Returns Classified by: Effective Tax Rate and Size of Income Under Alternative Concepts Tax Years: 2016 (XLS) 2015 (XLS) 2014 (XLS) 2013 (XLS) 2012 (XLS) 2011 (XLS) 2010 (XLS) 2009 (XLS) 2008 (XLS) 2007 (XLS) 2006 (XLS) 2005 (XLS) 2004 (XLS) 2003 (XLS) 2002 (XLS) 2001 (XLS) 2000 (XLS) 1999 (XLS) 1998 (XLS) 1997 (XLS) 1996 (XLS) 1995 (XLS) 1994 (XLS) 1993 (XLS)
Table 2 -- Number of Returns Classified by: Size of Income Under Alternative Concepts Tax Years: 2016 (XLS) 2015 (XLS) 2014 (XLS) 2013 (XLS) 2012 (XLS) 2011 (XLS) 2010 (XLS) 2009 (XLS) 2008 (XLS) 2007 (XLS) 2006 (XLS) 2005 (XLS) 2004 (XLS) 2003 (XLS) 2002 (XLS) 2001 (XLS) 2000 (XLS) 1999 (XLS) 1998 (XLS) 1997 (XLS) 1996 (XLS) 1995 (XLS) 1994 (XLS) 1993 (XLS)
Table 12 -- Number and Percentages of Returns Classified by: Effective Tax Rate and Size of Income Under Alternative Concepts Tax Years:
Table 3 -- Distribution of Returns Classified by: Ratio of Adjusted Taxable Income to Income Per Concept Tax Years:
Table 5 -- Income, Deductions, Credits, and Tax Classified by: Tax Status Tax Years:
Table 7 -- Number of Returns and Percentages Classified by: Item With the Largest Tax Effect and Item With the Second Largest Tax Effect Tax Years: 2016 (XLS) 2015 (XLS) 2014 (XLS) 2013 (XLS) 2012 (XLS) 2011 (XLS) 2010 (XLS) 2009 (XLS) 2008 (XLS) (XLS) 2007 (XLS) 2006 (XLS) 2005 (XLS) 2004 (XLS) 2003 (XLS) 2002 (XLS) 2001 (XLS) 2000 (XLS) 1999 (XLS) 1998 (XLS) 1997 (XLS) 1996 (XLS) 1995 (XLS) 1994 (XLS) 1993
Table 9 -- Number of Returns with Itemized Deductions, Credits, and Tax Preferences, as Percentages of Income Tax Years:
Table 4 -- Distribution of Returns Classified by: Ratio of Adjusted Taxable Income to Income Per Concept Tax Years:
Table 6 -- Income, Deductions, Credits, and Tax Classified by: Tax Status Tax Years:
Table 8 -- Number of Returns and Percentages Classified by: Item With the Largest Tax Effect and Item With the Second Largest Tax Effect Tax Years:
Table 10 -- Number of Returns with Itemized Deductions, Credits, and Tax Preferences, as Percentages of Income Tax Years:
The Bulletin articles are in PDF format. A free Adobe® reader is available for download, if needed.
Thursday, July 25, 2019
- New leak reveals how multinational companies used Mauritius to avoid taxes in countries in Africa, Asia, the Middle East and the Americas
- Law firm Conyers Dill & Pearman and major audit firms, including KPMG, enabled corporations operating in some of the world’s poorest nations to exploit tax loopholes
- A private equity push into Africa backed by anti-poverty crusader and rock star Bob Geldof benefited from Mauritius’ treaties that divert tax revenue away from Uganda and elsewhere
- Multi-billion dollar U.S. companies Aircastle and Pegasus Capital Advisers cut taxes through confidential contracts, leases and loans involving Mauritius and other tax havens
- Officials from countries in Africa and Southeast Asia told ICIJ that tax treaties signed with Mauritius had cost them greatly and that renegotiating them was a priority
Wednesday, July 24, 2019
Where does the residual value for "Just Do it" and the 'cool kids' retro branding of All Stars belong? I have received several requests in the U.S. about my initial thoughts on the EU Commission’s 56-page published (public version) State Aid preliminary decision with the reasoning that The Netherlands government provided Nike an anti-competitive subsidy via the tax system. My paraphrasing of the following EU Commission statement [para. 87] sums up the situation:
The Netherlands operational companies are remunerated with a low, but stable level of profit based on a limited margin on their total revenues reflecting those companies’ allegedly “routine” distribution functions. The residual profit generated by those companies in excess of that level of profit is then entirely allocated to Nike Bermuda as an alleged arm’s length royalty in return for the license of the Nike brands and other related IP”
The question that comes to my mind is: "Would I pay $100 for a canvas sneaker designed the 20's that I know is $12 to manufacture, distribute, and have enough markup for the discount shoe store to provide it shelf space?" My answer is: "Yes, I own two pair of Converse's Chuck Taylor All Stars." So why did I spend much more than I know them to be worth (albeit, I wait until heavily discounted and then only on clearance). From a global value chain perspective: "To which Nike function and unit does the residual value for the 'cool kids' retro branding of All Stars belong?"
U.S. international tax professionals operating in the nineties know that The Netherlands is a royalty conduit intermediary country because of its good tax treaty system and favorable domestic tax system, with the intangible profits deposited to take advantage of the U.S. tax deferral regime that existed until the TCJA of 2017 (via the Bermuda IP company). Nike U.S., but for the deferral regime, could have done all this directly from its U.S. operations to each country that Nike operates in. No other country could object, pre-BEPs, because profit split and marketing intangibles were not pushed by governments during transfer pricing audits.
The substantial value of Nike (that from which its profits derive) is neither the routine services provided by The Netherlands nor local wholesalers/distributors. The value is the intangible brand created via R&D and marketing/promotion. That brand allows a $10 – $20 retail price sneaker to sell retail for $90 – $200, depending on the country. Converse All-Stars case in point. Same $10 shoe as when I was growing up now sold for $50 – $60 because Converse branded All-Stars as cool kid retro fashion.
Nike has centralized, for purposes of U.S. tax deferral leveraging a good tax treaty network, the revenue flows through NL. The royalty agreement looks non-traditional because instead of a fixed price (e.g. 8%), it sweeps the NL profit account of everything but for the routine rate of return for the grouping of operational services mentioned in the State Aid opinion. If Nike was an actual Dutch public company, or German (like Addidas), or French – then Nike would have a similar result from its home country base because of the way its tax system allows exemption from tax for the operational foreign-sourced income of branches. [Having worked back in the mid-nineties on similar type companies that were European, this is what I recall but I will need to research to determine if this has been the case since the nineties.]
I suspect that when I research this issue above that the NL operations will have been compensated within an allowable range based on all other similar situated 3rd parties. I could examine this service by service but that would require much more information and data analysis about the services, and lead to a lesser required margin by Nike. The NL functions include [para 33]: “…regional headquarter functions, such as marketing, management, sales management (ordering and warehousing), establishing product pricing and discount policies, adapting designs to local market needs, and distribution activities, as well as bearing the inventory risk, marketing risk and other business risks.”
By example, the EU Commission states in its initial Nike news announcement:
Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.
Nike’s internal Advertising, Marketing, and Promotion (AMP) services can be benchmarked to its 3rd party AMP providers. But by no means do the local NL AMP services rise to the level of Nike’s chief AMP partner (and arguably a central key to its brand build) Wieden + Kennedy (renown for creating many industry branding campaigns but perhaps most famously for Nike’s “Just Do it” – inspired by the last words of death row inmate Gary Gilmore before his execution by firing squad).
There is some value that should be allocated for the headquarters management of the combination of services on top of the service by service approach. Plenty of competing retail industry distributors to examine though. If by example the profit margin range was a low of 2% to a high of 8% for the margin return for the combination of services, then Nike based on the EU Commission’s public information falls within that range, being around 5%.
The Commission contends that Nike designed its transfer pricing study to achieve a result to justify the residual sweep to its Bermuda deferral subsidiary. The EU Commission states an interesting piece of evidence that may support its decision [at para 89]: “To the contrary, those documents indicate that comparable uncontrolled transactions may have existed as a result of which the arm’s length level of the royalty payment would have been lower…”. If it is correct that 3rd party royalty agreements for major brand overly compensate local distributors, by example provide 15% or 20% profit margin for local operations, then Nike must also. [I just made these numbers up to illustrate the issue]
All the services seem, on the face of the EU Commission’s public document, routine to me but for “adapting designs to local market needs”. That, I think, goes directly to product design which falls under the R&D and Branding. There are 3rd parties that do exactly this service so it can be benchmarked, but its value I suspect is higher than by example ‘inventory risk management’. We do not know from the EU document whether this ‘adapting product designs to local market’ service was consistent with a team of product engineers and market specialists, or was it merely occasional and outsourced. The EU Commission wants, like with Starbucks, Nike to use a profit split method. “…a transfer pricing arrangement based on the Profit Split Method would have been more appropriate to price…”. Finally, the EU Commission asserts [para. 90]: “…even if the TNMM was the most appropriate transfer pricing method…. Had a profit level indicator been chosen that properly reflected the functional analysis of NEON and CN BV, that would have led to a lower royalty payment…”.
But for the potential product design issue, recognizing I have not yet researched this issue yet, based on what I know about the fashion industry, seems rather implausible to me that a major brand would give up part of its brand residual to a 3rd party local distributor. In essence, that would be like the parent company of a well-established fashion brand stating “Let me split the brand’s value with you for local distribution, even though you have not borne any inputs of creating the value”. Perhaps at the onset of a startup trying to create and build a brand? But not Nike in the 1990s. I think that the words of the dissenting Judge in Altera (9th Cir June 2019) are appropriate:
An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.
The EU Commission obviously does not like the Bermuda IP holding subsidiary arrangement that the U.S. tax deferral regime allows (the same issue of its Starbucks state aid attack), but that does not take away from the reality that legally and economically, Bermuda for purposes of the NL companies owns the Nike brand and its associated IP. The new U.S. GILTI regime combined with the FDII export incentive regime addresses the Bermuda structure, making it much somewhat less comparably attractive to operating directly from the U.S. (albeit still produces some tax arbitrage benefit). Perhaps the U.S. tax regime if it survives, in combination with the need for the protection of the IRS Competent Authority for foreign transfer pricing adjustments will lead to fewer Bermuda IP holding subsidiaries and more Delaware ones.
My inevitable problem with the Starbucks and Nike (U.S. IP deferral structures) state aid cases is that looking backward, even if the EU Commission is correct, it is a de minimis amount (the EU Commission already alleged a de minimis amount for Starbucks but the actual amount will be even less if any amount at all). Post-BEPS, the concept and understanding of marketing intangibles including brands is changing, as well as allowable corporate fiscal operational structures based on look-through (GILTI type) regimes. More effective in the long term for these type of U.S. IP deferral structures is for the EU Commission is to spend its compliance resources on a go-forward basis from 2015 BEPS to assist the restructuring of corporations and renegotiation of APAs, BAPAs, Multilateral PAs to fit in the new BEPS reality. These two cases seem more about an EU – U.S. tax policy dispute than the actual underlying facts of the cases. And if as I suspect that EU companies pre-BEPS had the same outcome based on domestic tax policy foreign source income exemptions, then the EU Commission’s tax policy dispute would appear two-faced.
I’ll need to undertake a research project or hear back from readers and then I will follow up with Nike Part 2 as a did with Starbucks on this Kluwer blog previously. See Application of TNMM to Starbucks Roasting Operation: Seeking Comparables Through Understanding the Market and then My Starbucks’ State Aid Transfer Pricing Analysis: Part II. See also my comments about Altera: An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.
Want to help me in this research or have great analytical content for my transfer pricing treatise published by LexisNexis? Reach out on firstname.lastname@example.org
Prof. William Byrnes (Texas A&M) is the author of a 3,000 page treatise on transfer pricing that is a leading analytical resource for advisors.
Monday, July 22, 2019
Tuesday, July 2, 2019
This bill revises requirements for the Internal Revenue Service (IRS) regarding its organizational structure, customer service, enforcement procedures, cybersecurity and identity protection, management of information technology, and use of electronic systems.
The bill includes provisions that
- establish the IRS Independent Office of Appeals to resolve federal tax controversies without litigation;
- require the IRS to develop comprehensive customer service and IRS personnel training strategies;
- exempt certain low-income taxpayers from payments required to submit an offer-in-compromise;
- modify certain tax enforcement procedures and requirements;
- establish requirements for responding to Taxpayer Advocate Directives;
- establish a Community Volunteer Income Tax Assistance Matching Grant Program;
- require the IRS to give public notice of the closure of taxpayer assistance centers;
- modify procedures for whistle-blowers;
- establish requirements for cybersecurity and identity protection;
- provide notification to taxpayers of suspected identity theft;
- require the appointment of a Chief Information Officer who shall develop and implement a multiyear strategic plan for IRS information technology needs;
- modify requirements for managing IRS information technology;
- expand electronic filing of tax returns;
- prohibit the rehiring of certain IRS employees who were removed for misconduct;
- require mandatory e-filing by tax-exempt organizations and notice before revocation of tax-exempt status for failure to file; and
- increase penalties for failure to file tax returns.
The bill also requires the IRS to implement
- an Internet platform for Form 1099 filings,
- a fully automated program for disclosing taxpayer information for third-party income verification using the Internet, and
- uniform standards and procedures for accepting electronic signatures.
Friday, June 28, 2019