Wednesday, December 9, 2009

Protocol to the Income and Capital Tax Treaty Between the United States and France

On December 3, 2009, the U.S. Senate ratified the protocol, originally signed on January 13, 2009 (the “Protocol”), to the Convention Between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the “Treaty”). That same day, French Law Number 2009-1471 was published in the French official journal, approving the Protocol. The Protocol has not entered into force.

The Protocol makes several significant changes to the Treaty. First, it eliminates source country withholding tax on royalty payments and certain dividends. In particular, the Protocol provides for an exemption from withholding tax on dividends received by a French company if it has owned for a 12-month period shares representing 80 percent or more of the voting power of its U.S. subsidiary, or, in the case of a U.S. company, 80 percent or more of the capital of its French subsidiary. The Protocol does not change the general 15 percent withholding tax rate and the reduced 5 percent withholding tax rate for dividends received from a 10 percent owned subsidiary in either case. Second, the Protocol clarifies the application of the Treaty to French qualified partnerships and fiscally transparent entities and replaces the current limitation of benefits provision. Third, the Protocol contains a mandatory arbitration procedure, similar to those contained in recent tax treaties between the United States and Belgium, Germany and Canada.

If the Protocol enters into force before the end of the 2009, it would become effective in three different stages: (1) provisions relating to withholding taxes would be effective as of January 1, 2009 and apply retroactively for payments made in 2009; (2) provisions relating to the mutual agreement and arbitration procedures would be effective on the date of entry into force; and (3) other provisions would be effective beginning on January 1, 2010.

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Thursday, December 3, 2009

House Passes Estate Tax Bill and Sends It to the Senate

On December 3, the House passed H.R. 4154 by a vote of 225-200, sending the Bill to the Senate for consideration. H.R. 4154 would make permanent the current marginal estate tax rate of 45% and provide that the applicable exclusion amount would remain at the 2009 level of $3.5 million per person, which amount would not be indexed for inflation. However, House Ways and Means Committee member Rep. Kevin Brady (R-TX) stated that it is unlikely that the Senate will break from the health care debate and other issues already on its agenda to take up the Bill.

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Wednesday, December 2, 2009

House and Senate Prepare Proposals for Estate Tax Reform

On November 25, House Majority Leader Steny Hoyer (D-Md.) announced plans to bring H.R. 4154 (the Bill) to the House floor during the week of November 30, 2009. The Bill, introduced by House Ways and Means Committee member Rep. Earl Pomeroy (D-N.D.) would make the 2009 estate tax rates permanent, extending the current marginal tax rate of 45% rather than allowing the estate tax rate to sunset in 2010 and return to the marginal rate of 55% in 2011, as provided in the current law. It also repeals the carryover basis rules that were introduced in the Economic Growth and Tax Relief Reconciliation Act of 2001 and scheduled to go into effect on January 1, 2010, thereby retaining the step-up in basis at death.

The Bill further provides that the applicable exclusion amount (that amount which is exempt from the federal estate tax) would remain at the 2009 level of $3.5 million per person, which amount would not be indexed for inflation. The Bill does not address portability of the applicable exclusion amount between married couples. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. The Bill could be brought to the House floor by December 3, but it appears that there may be enough opponents of the House bill to block action in the Senate, including Republicans and several Democrats who favor lowering or abolishing the estate tax. The text of the Bill can be found here.

In the Senate, Senators Carper (D-DE) and Voinovich (R-OH) introduced bipartisan legislation (S.2784) on November 17, 2009 that would freeze the estate tax at 2009 levels, providing for a 45% marginal tax rate, which would remain constant, and a $3.5 million applicable exclusion amount, which would be indexed for inflation. The Senate bill would unify the gift and estate tax exemptions and would also provide for portability of any unused applicable exclusion amounts between spouses. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. There is no timetable for bringing the bill to the Senate floor. The text of the Senate bill can be found here.

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Monday, November 9, 2009

Foreign Account Tax Compliance Act of 2009

On October 27, 2009, Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, and Congressman Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, introduced bill H.R. 3933 titled the Foreign Account Tax Compliance Act of 2009 (the “Bill”).

If enacted in its current form, the Bill would:

  • Require a 30% withholding on all "withholdable payments" (generally, U.S. source dividends, interest or other “fixed and determinable income”, as well as gross proceeds from the sale of assets that can produce U.S. source dividends or interest) to a "foreign financial institution", unless such foreign financial institution enters into an agreement with the IRS under which it agrees to comply with certain verification and reporting procedures with respect to "United States accounts." For purposes of this provision, a “foreign financial institution” would include not only a bank or securities firm , but also a “foreign investment vehicle” such as a hedge fund or private equity fund.

    A “United States account” would include any financial account held directly by (i) one or more United States persons (other than publicly traded corporations, certain tax-exempt organizations, a government, government agency or instrumentality, a bank, a real estate investment trust and certain trusts) or (ii) foreign entities that have one or more "substantial United States owners." A “substantial United States owner” means (i) with respect to a corporation, any United States person which owns directly or indirectly more than 10% of the stock of such corporation (by vote or value) and (ii) with respect to a partnership, any United States person which owns directly or indirectly more than 10% of the profits or capital interests in such partnership, and (iii) with respect to an investment vehicle, a U.S. person which owns any portion of such entity.

    The agreement that a foreign financial institution would have to enter into with the IRS would require the institution, among other things, to comply with verification and due diligence procedures with respect to identifying United States accounts; annually report certain information with respect to any United States account, including the account balance or value, and the gross receipts and gross withdrawals or payments from the account; comply with requests by the IRS for additional information with respect to any United States. account; and attempt to obtain a waiver in any case in which any foreign law would prevent the reporting of the information required under the provision, and if the waiver is not obtained, to close the account. Alternatively, the foreign financial institution could elect to be subject to the same reporting requirements as a U.S. financial institution. The proposed provision would apply in addition to any requirement imposed under a Qualified Intermediary or similar agreement.

  • Repeal the exemption for interest non-deductibility and treatment as portfolio interest for foreign-targeted obligations. Under current law, a taxpayer may not deduct interest paid on obligations in bearer form. Furthermore, interest on obligations in bearer form does not qualify for the portfolio interest exemption. However, an exception to these general rules is provided for obligations that are issued under arrangements reasonably designed to ensure their sale to non-U.S. persons. The Bill would eliminate the foreign-targeted obligation exception for obligations issued more than 180 days after the Bill is enacted.

  • Amend the U.S. tax rules applicable to foreign trusts to: (1) broaden the scope of existing rules that treat a U.S. person who transfers property to a foreign trust that has U.S. beneficiaries, as an owner of the foreign trust by (a) expanding the circumstances in which a foreign trust is treated as having a U.S. beneficiary and (b) creating a presumption that a foreign trust to which a U.S. person transfers property has U.S. beneficiaries, unless information proving otherwise is provided to the IRS; (2) treat as a trust distribution, the permitted use of trust property (e.g., a house, apartment, yacht) by a U.S. grantor, U.S. beneficiary, or U.S. person related to such grantor or beneficiary, unless the trust receives the fair market value of the use of the property within a reasonable amount of time; and (3) permit the U.S. Treasury Department to impose additional reporting requirements on a U.S. person who is treated as an owner of a foreign trust; and (4) change the penalties for the failure to file certain information returns related to foreign trusts.

  • Introduce a new (30%) U.S. withholding tax on "dividend equivalent payments”, i.e. payments made under swaps or other derivative contracts that are contingent on, or determined by reference to, the payment of U.S. source dividends. A limited exception is provided for payments with respect to contracts the IRS determines does not have the potential for tax avoidance.

  • Introduce FBAR-type obligations requiring individuals who hold an interest in "specified foreign financial assets" to report such interest with their income tax return if the aggregate value of the assets exceeds $50,000. A "specified foreign financial asset" would include (i) any financial account (such as depositary and custodial accounts) maintained by a foreign financial institution, and (ii) if not held by a financial institution, (a) foreign stocks or securities, (b) any financial instrument or contract held for investment that has a foreign issuer or counterparty, and (c) any interest in a foreign entity.

  • Introduce reporting requirements for "material advisors" who assist a U.S. person in a "foreign entity transaction." The Bill would define a “material advisor” as any person who provides material aid, assistance or advice concerning a foreign entity transaction and who earns gross income in excess of $100,000 in a calendar year for its services. A “foreign entity transaction” would be defined as the direct or indirect acquisition of any interest in a foreign entity (including any interest acquired in connection with the formation of such entity) if any citizen or resident of the United States is required to file a report in connection with the acquisition under certain specified Internal Revenue Code sections.

  • Provide penalties for the violation of the obligations imposed by the Bill.

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Monday, October 12, 2009

Interest From Loan Origination by Foreign Corporations May Constitute Effectively Connected Income

On September 22, 2009 The Internal Revenue Service (the "IRS") issued an internal memorandum which concludes that interest income earned by a foreign corporation, engaged in loan origination activities through an agent operating in the United States, constitutes income which is effectively connected with a U.S. trade or business. The agent’s activities included solicitation of U.S. borrowers, negotiation of terms, credit analyses, and all other activities relating to loan origination other than final approval and signing of loan documents. The memorandum concludes that the agent’s activities are attributable to the foreign corporation regardless of whether the agent is dependent or independent.

Currently, the IRS memorandum is only accessible through subscription websites, but we will post a link when the IRS makes it publicly available.

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Friday, September 25, 2009

New York State and New York City Voluntary Disclosure and Compliance Programs

Taxpayers are generally aware of the IRS' Voluntary Compliance Program for those who have not filed FBAR reports or have not reported on their FBARs all foreign bank and financial accounts. In fact, New York State and New York City have established Voluntary Disclosure and Compliance Programs (the “VDCP”) that are not limited to unreported income from foreign bank and financial accounts.

The New York VDCP applies with respect to any underreported state or city taxes, e.g., income and sales tax, and there is currently no ending date for the New York programs. Under the New York VDCP, neither New York State nor New York City will impose penalties on delinquent taxpayers, who are required to pay only back taxes and interest. Taxpayers who participate in the New York VDCP will not be criminally prosecuted for underpayment of taxes. They will be required to sign a compliance agreement, promising to correct past behavior, comply with the tax laws in the future, and pay past due tax obligations.

Eligible taxpayers can participate even if their tax liability is the result of fraudulent or criminal conduct. However, the New York VDCP does not apply to underpayments due to participation in tax avoidance transactions that are federal or New York State reportable or listed transactions, i.e., tax shelters.

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Monday, September 21, 2009

IRS Announces One-Time Extension on Deadline for Acceptance Into VCP

The Internal Revenue Service ("IRS") announced this morning a one-time extension of the deadline for taxpayers seeking to be accepted into its Voluntary Compliance Program ("VCP") for disclosure of offshore bank and financial accounts. The IRS extended the original deadline of September 23, 2009 to October 15, 2009.

The IRS also announced that there will be no further extensions of the date to seek entry into the VCP.

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Monday, August 10, 2009

IRS Extends FBAR Filing Deadline For Signatories and Foreign Fund Investors

On August 7, 2009, the IRS issued Notice 2009-62 to extend the deadline of filing Form TD F 90-22.1 (“FBAR”) in two limited situations. The extension applies to U.S. persons who have signature authority over, but no financial interest in, foreign financial accounts, and to U.S. persons with respect to investment in foreign “commingled funds” such as hedge funds. Under the Notice, these signatories and investors have until June 30, 2010 to file the FBAR for 2008 and prior years. A U.S. person not eligible for the extension under the Notice generally must file the FBAR by June 30, but if such person was unaware of the filing obligations until recently, the extended September 23, 2009 deadline announced by the IRS earlier this year may apply.

The IRS has recently indicated that “commingled funds” that are treated as “financial accounts” include mutual funds, hedge funds, and even private equity funds. However, there is no official guidance as to whether and under what circumstances an equity interest in a foreign entity should be treated as a “financial account” subject to FBAR reporting. The Treasury Department now intends to issue regulations to provide clarification. Such regulations may address when an interest in a foreign entity should be subject to FBAR reporting, whether the principles of “passive foreign investment company” should apply, and whether duplicative filing should be exempt. Similarly, such regulations may also address whether a signatory should be exempt from an FBAR obligation when the owner of the account files the FBAR, and whether officers and employees with only signature authority should not be required to file duplicative FBAR forms. Interested persons can submit comments and suggestions to the IRS and the Treasury Department by October 6, 2009.

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Monday, August 3, 2009

Treasury Begins Accepting Applications for Grants With Respect to Certain Renewable Energy and Innovative Energy Technology Projects

On July 31, 2009, the Treasury Department announced that it is now accepting applications for cash grants (the “Grant”) which will essentially monetize tax credits that would otherwise be available to certain renewable energy and innovative energy technology projects. Generally, properties eligible for the Grant are depreciable properties that are, among others, part of an electricity production facility using wind, biomass, geothermal or solar energy, or certain power plants using fuel cells or microturbines. Earlier, on July 9, 2009, the Treasury Department has issued the much anticipated guidance titled “Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009”. This guidance sets forth in detail the procedures and requirements of applying for the Grant.

The Grant will be in an amount equal to 10% or 30% of the tax basis of the eligible property, depending on the types of the property. It is available only to an eligible property (1) that is placed in service in 2009 or 2010, in which case the application must be submitted before October 1, 2011; or (2) the construction for which began in 2009 or 2010 and is placed in service before the end of the applicable tax credit period, in which case the application must be submitted after the construction commences but before October 1, 2011. The applicant must be the owner (or the lessee if certain conditions are met) of the property and must have originally placed the property in service. Tax-exempt organizations, governmental bodies and certain cooperative lenders or electric companies, as well as pass-through entities that have any such person as a direct or indirect partner (collectively, the “Disqualified Persons”), are not eligible for the Grant. However, a taxable corporation would be eligible even if it is owned by one or more Disqualified Persons. Disqualified Persons can also own indirect interest in a pass-through entity through such taxable corporations (“Blocker Corporations”).

Under the guidance, some or all of the Grant would generally have to be repaid to the Treasury Department if the property is disposed of (or deemed to be disposed of when a direct or indirect interest in the applicant is sold), or ceases to be eligible property, within five years from the date the property is placed in service. Importantly, however, the trigger of the recapture provided in the guidance is narrower than the rules applicable to investment tax credits. With respect to a Grant, a property can be sold to any entity that is not a Disqualified Person without triggering the recapture, provided that the buyer agrees to be jointly liable with the applicant for any recapture. Therefore, a sale to any Blocker Corporation, or to any pass-through entity in which Disqualified Persons only have indirect interest through Blocker Corporations, could avoid the recapture.

The guidance issued by the Treasury Department is extensive and addresses many other procedural as well as substantive issues. For example, under the guidance, generally a Grant payment would not constitute income to the applicant, but a lessee who receives the Grant must include ratably in gross income over the five year recapture period an amount equal to 50 % of the Grant. Taxpayers who are interested in the program should carefully consider all benefits and consequences with respect to their particular circumstances.

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Sunday, August 2, 2009

Germany to Require Disclosures of Offshore Business Relations

Both houses of Germany's Parliament have passed a law to "combat tax fraud and other harmful tax practices." Under the law, German taxpayers that do business with a "tax haven" country or jurisdiction must disclose their business relations to Germany's tax authorities. In addition, the tax authorities may require such taxpayers to provide an affidavit confirming the completeness and correctness of their disclosure. The law allows German tax authorities to (1) deny withholding tax relief, application of the "flat tax" regime for certain interest income or exemptions for dividends paid to and capital gains realized by residents of tax haven countries or jurisdictions and (2) under certain circumstances, limit deductibility of business expenses for payments made to businesses that reside in tax haven countries or jurisdictions.

For purposes of the law, "tax haven" countries or jurisdictions are those (1) with which Germany has entered into a treaty for the avoidance of double taxation (or concluded a treaty but the treaty is not yet in force), but the treaty does not contain an exchange of information article comparable in scope to Art. 26 of the OECD Model Tax Convention (2005) or (2) with which Germany has not entered into a treaty and that do not otherwise provide for an exchange of information comparable in scope to Art. 26 of the OECD Model Tax Convention (2005).

The law entered into force on August 1, 2009.

Link (text in German)

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Court of Claims Considers Whether a Limited Liability Company Interest is a Limited Partnership Interest For Purpose of Passive Activity Rules

On July 20, the Court of Federal Claims, in a question of first impression, addressed the issue of whether a member's interest in a limited liability company ("LLC") taxed as a partnership for U.S. federal income tax purposes is treated as a limited partnership interest for purposes of the passive activity rules under section 469. If a member's interest in an LLC is treated as a limited partnership interest, certain limitations apply in determining whether such member's share of the LLC's losses are "passive activity" losses.
Link

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NYSBA Recommends One-Year Delay for Certain FBAR Filings

In a letter dated July 17, the New York State Bar Association's ("NYSBA") Tax Section urged the IRS and Treasury Department to provide a one-year postponement for the FBAR reporting requirement for filers with "non-traditional financial accounts." A non-traditional financial account includes investments in offshore hedge funds and private equity funds. Alternatively, the NYSBA Letter suggests that the IRS not require FBAR filings in connection with non-traditional accounts for previous years and reconsider the conditions for qualifying for the September 23 filing deadline extension.
Link

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Monday, June 8, 2009

IRS Suspends FBAR Filing Requirements for Foreign Persons with Respect to the Year 2008

As we reported earlier this week, the Internal Revenue Service (the “IRS”) issued guidance requiring nonresident aliens and foreign entities that are “in, and doing business in, the United States” to report all their foreign accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Account (commonly known as the “FBAR”) for each of 2008 and future years during which the aggregate value of the accounts exceeds $10,000 at any time during the year. A civil penalty of up to $100,000 or 50% of the account balance, as well as criminal penalties and prosecutions, may apply to each violation of the FBAR filing obligation each year.

Today the IRS announced that it suspended the FBAR filing obligation with respect to the year 2008 for those persons who are not U.S. citizens, U.S. residents or domestic U.S. entities. Therefore, for the June 30, 2009 filing due date, only persons who are U.S. citizens, U.S. residents or domestic U.S. entities are required to comply. The IRS stated that it decided to suspend the filing obligation after receiving a number of questions and comments. As to the years after 2008, the IRS announced that it will issue additional guidance regarding the FBAR filing obligations of foreign persons.

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Wednesday, June 3, 2009

Foreign Persons May Be Required To Report Foreign Bank Accounts To The U.S. Treasury Department By June 30

Nonresident aliens and foreign entities doing business in the United States will almost certainly have financial interests in or signature or other authority over financial accounts outside the United States. Until recently, these non-U.S. persons were not required to report those foreign accounts to the U.S. Treasury Department (the “Treasury”). However, due to a recent change to the Form TD F 90-22.1, Report of Foreign Bank and Financial Account (commonly known as the “FBAR”), these foreign persons are now required to file the FBAR annually to report those foreign accounts for 2008 and future years during which the aggregate value of the accounts exceeds $10,000 at any time during the year. The deadline for filing an FBAR is June 30 of the following calendar year, and can not be extended. A civil penalty of up to $100,000 or 50% of the account balance, as well as criminal penalties and prosecutions, may apply to each violation of the FBAR filing obligation each year.

The FBAR filing obligation resulted from the Bank Secrecy Act of 1970 (the “Act”), which intended to help the U.S. government in carrying out criminal, tax and regulatory investigations. The Act requires the Treasury to impose an obligation on a resident or citizen of the United States, or a person in and doing business in the United States, to report transactions or relationships with foreign financial agencies. However, the Treasury’s instructions accompanying the FBAR only required “U.S. persons” to file the FBAR. For filings made after 2008, the Treasury now defines “U.S. person” to include any person (i.e., individual or entity) “in and doing business in” the United States. A person subject to the FBAR filing obligation must disclose all relevant foreign accounts whether or not the accounts relate to any trade or business in the United States. In addition, a “U.S. person” can be deemed to have a financial interest in a foreign account indirectly through certain entities owned by that person. As a result, the new definition of “U.S. person” in the instructions could have far-reaching impact.

A person will not be considered to be “in and doing business in” the United States unless, based on all the facts and circumstances, the person conducts business in the United States on a regular and continuous basis. Merely visiting or sporadically conducting business in the United States does not trigger the FBAR filing obligation. Examples provided by the Internal Revenue Service (the “IRS”) of persons who are not “in and doing business in” the United States include:

  • Nonresident aliens who only occasionally visit the United States to meet customers or business associates.
  • Nonresident artists, athletes and entertainers who only occasionally come to the United States to participate in exhibits, sporting events or performances.
  • Nonresident aliens who visit the United States to manage personal investments, such as rental property, and conduct no other business.
Under the new standard, foreign entities conducting business through a branch in the United States would generally be subject to the FBAR filing obligation. It also appears likely that a foreign person deemed to be engaged in a U.S. trade or business for U.S. federal income tax purposes (such as holding an interest in a partnership or other pass-through entity) would generally be treated as “in and doing business in” the United States for FBAR reporting purposes. In addition, while the IRS examples all involve physical presence in the United States, it may not be always clear whether “in and doing business in” the United States requires any physical presence. We understand that there may be more guidance that may be issued before June 30, 2009. Despite the uncertainty, however, it should be noted that a failure to comply with the FBAR filing obligation would, as discussed above, result in severe penalties.

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To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Tuesday, May 19, 2009

Treasury Department Provides Details of The Obama Administration’s Tax Change Proposals Affecting Individuals

On May 4, 2009, the Obama Administration released a summary of its tax change proposals. On May 11, 2009, the Treasury Department issued the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (the “Green Book”) to provide details of the Administration’s tax change proposals. The proposed changes summarized below, if enacted, would have significant impacts on individuals with higher income and individuals who have interest in or authority over foreign financial accounts.

  • Sunset of the 2001 Tax Cuts. Several tax cuts enacted in 2001 will sunset after 2010. The Obama Administration proposed to allow the tax cuts to expire as scheduled and permanently extend the prior tax provisions affected by those tax cuts. For example:
  • The highest two marginal income tax rates (35% and 33% at present) would return to 39.6% and 36% beginning in 2011. The proposal would apply the 36% rate to taxable income above $250,000 for married taxpayers filing jointly (or $200,000 for single filers) less standard deduction and two (or one for single filers) personal exemptions, indexed for inflation from 2009.
  • Currently, itemized deductions for 2009 would be subject to a reduction by 1% of a threshold amount (the amount by which the adjusted gross income exceeded a statutory floor), and no reduction for 2010. Under the proposal, after 2010 the reduction would revert to 3% for married taxpayers filing jointly with a threshold of $250,000 (or $200,000 for single taxpayers), indexed from 2009 for inflation. In addition, the Obama Administration’s proposal would limit all itemized deductions to offset income only at 28%.
  • The tax rate on long-term capital gains and qualified dividends, currently at 15%, would revert to 20% for taxpayers with income above $250,000 for married couples filing jointly (or $200,000 for individual filers) less standard deduction and two (or one for single filers) personal exemptions, indexed from 2009 for inflation.
  • Reporting of Foreign Financial Accounts. The Obama Administration’s proposal would seek to strengthen the information reporting obligations regarding foreign financial accounts. Under current law, U.S. persons who have an interest in or authority over one or more foreign financial accounts must report that interest on a Report of Foreign Bank and Financial Account (“FBAR”) for each year during which the aggregate value of all such accounts exceeds $10,000. U.S. persons who directly or indirectly own more than 50% of a corporation, partnership, or trust that owns a foreign financial account are also required to file the FBAR. The proposal would require reporting on income tax returns any transfer to or from a foreign financial account, as well as disclosing on income tax returns certain information if the taxpayer must file an FBAR.
The proposal would also establish certain evidentiary presumptions when the taxpayer fails to file the FBARs. The Obama Administration’s proposals described in the Green Book are far-reaching. It is difficult to predict what measures would eventually be enacted as proposed by the Administration.

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To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Treasury Department Provides Details of The Obama Administration’s Tax Change Proposals Affecting Multinational Corporations

On May 4, 2009, the Obama Administration released a summary of its tax change proposals. On May 11, 2009, the Treasury Department issued the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (the “Green Book”) to provide the details of the proposed changes. The proposed changes summarized below, if enacted, would have a profound adverse impact on U.S. multinational companies. These changes would generally be effective for taxable years beginning after December 31, 2010.

  • Deferral of Expense Deduction. Under current law, a U.S. corporation generally may deduct expenses allocated to foreign sources before repatriating and paying U.S. taxes on the associated foreign earnings. The Obama Administration’s proposal would require a U.S. corporation to defer deductions (other than research and development expenses) allocated or apportioned to foreign earnings until the associated earnings are repatriated. This proposal was previously introduced in 2007 by House Ways and Means Chairman Charles Rangel (H.R. 3970). If enacted, it could severely limit the benefits of keeping earnings offshore.
  • Foreign Tax Credits. Under current law, a U.S. corporation is not required to aggregate foreign taxes and earnings and profits of all of its foreign subsidiaries. The Obama Administration’s proposal would require both computations be made on a consolidated basis in determining available foreign tax credits, thus largely eliminating the benefits of repatriating highly taxed foreign earnings while keeping other foreign earnings offshore. A similar provision was also in H.R. 3970. Further, the proposal would prevent the separation of creditable foreign taxes from the associated foreign income. Such inappropriate separation could occur, for example, by having a foreign group of entities that are characterized in the United States differently from the treatment in foreign jurisdictions. This proposed change is similar to that in a proposed Treasury regulation issued in 2006. In addition, under the proposal, certain taxpayers subject to foreign levy (such as levy imposed only on oil income) may not be able to claim credit for the levy if the foreign country has no generally imposed income tax.
  • Check-the-Box Election. Under the entity classification rules, a wholly owned foreign entity can be disregarded for U.S. tax purposes by making a check-the-box election. The Green Book states that this election has been used to migrate foreign earnings to low-tax jurisdictions, thereby avoiding current income inclusion by the U.S. parent company. Under the Obama Administration’s proposal, generally a second- or lower-tier wholly owned foreign entity may be treated as a disregarded entity only if the single owner and that entity are created or organized in the same foreign country. The change would treat single-member entities that had made the check-the-box election prior to 2011 as being converted into corporations.
The Obama Administration’s proposals described in the Green Book are far-reaching. It is difficult to predict what measures would eventually be enacted as proposed by the Administration.

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To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Treasury Department Provides Details of The Obama Administration’s Tax Change Proposals Affecting Certain Investment Funds and Their Managers

On May 4, 2009, the Obama Administration released a summary of its tax change proposals. On May 11, 2009, the Treasury Department issued the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (the “Green Book”) to provide details of the Administration’s tax change proposals. The proposed changes summarized below, if enacted, would have adverse impacts on certain investment funds or their managers. These proposals generally would be effective after December 31, 2010.

  • Substitute Dividend Payments in Equity Swaps. Investment funds often enter into equity swaps. These swaps usually provide substitute dividend payments to the funds. Under current law, while dividends paid to a foreign person by a domestic corporation generally are subject to a 30% withholding tax, dividend substitute payments to a foreign person on equity swaps are generally treated as foreign source income not subject to the withholding tax. Concerns of withholding avoidance have been raised for certain transactions, for example, where an offshore hedge fund sells stock before dividend payment but also enters into an equity swap and buys back the stock after the dividend payment. Senator Carl Levin recently proposed legislation to impose withholding tax on dividend substitute payments. The Obama Administration adopts a similar proposal, with a limited exception applicable if the equity swap does not require posting more than 20% of the value of the underlying stock as collateral, the underlying stock is publicly traded, no sale or buy-back takes place in connection with the swap transaction, and certain other requirements are met.
  • Substitute Payments in Securities Lending Transactions. Under the Treasury regulations and guidance issued in 1997, substitute interest and dividend payments in a securities lending transaction or sale-repurchase transaction with respect to an instrument of a domestic issuer can be subject to withholding tax under certain circumstances. Concerns of withholding avoidance have been raised regarding situations where, for example, an offshore hedge fund lends the stock of a domestic corporation to a foreign financial institution in the same country which then sells the stock to, and enters into a total return swap with, a related U.S. person. The Green Book indicates that the Treasury Department will issue new guidance that would prevent avoidance of withholding tax through the use of securities lending transactions.
  • Carried Interest. Under current law, service partners may be taxed at the capital gain rates, rather than the ordinary income tax rates, on their shares of partnership income and gain allocated to them pursuant to their carried interests in the partnership. This tax treatment has attracted extensive attention and publicity, and several bills have been introduced in recent years to change this result. The Obama Administration proposal would require a service partner to pay tax at ordinary income tax rates as well as self-employment tax on his share of partnership income and gain attributable to his carried interest. In addition, any gain recognized on the sale of the carried interest would also generally be taxed as ordinary income.
The Obama Administration’s proposals described in the Green Book are far-reaching. It is difficult to predict what measures would eventually be enacted as proposed by the Administration.

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To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Monday, May 18, 2009

IRS Clarifies Voluntary Disclosure Process For Taxpayers With Undisclosed Offshore Assets

In our April 2009 Client Alert, we described an Internal Revenue Service (“IRS”) initiative to encourage taxpayers who hold assets in foreign financial accounts to disclose the holdings through the IRS voluntary disclosure process (“Initiative”). On May 6, 2009, the IRS published frequently asked questions and answers (“FAQ”) that clarify issues raised by the Initiative.

One issue of particular interest to many taxpayers is the effect of the Initiative on a taxpayer who failed to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”). Generally, a taxpayer is required to disclose foreign accounts by filing the FBAR. Failure to file an FBAR may subject a taxpayer to an annual penalty of up to 50% of the account balance for each FBAR that is not filed. Under the Initiative, the 50% annual FBAR penalty is replaced with a single penalty of 20% of the account balance. However, in many situations, taxpayers actually have reported and paid taxes on the income derived from foreign accounts but, being unaware of the FBAR requirement, never filed the FBAR. A taxpayer in such situation should not use the voluntary disclosure process, according to the FAQ. Instead, the taxpayer should, by September 23, 2009, file the delinquent FBARs along with copies of their tax returns for all relevant years and a statement explaining why the FBARs were filed late. The IRS will not impose a penalty on such taxpayer for the failure to file the FBARs.

In other situations, some taxpayers with undisclosed foreign accounts have belatedly filed amended returns to report and paid tax on the income generated by such accounts, without otherwise notifying the IRS. The FAQ encourages taxpayers who made such “quiet disclosures” to come forward under the voluntary disclosure process by September 23, 2009 to take advantage of the penalty framework under the Initiative. Taxpayers who wish to use the voluntary disclosure process should send a letter to the appropriate IRS agent stating the desire to make voluntary disclosure and providing other required information. A taxpayer is expected to file correct delinquent or amended tax returns for tax year 2008 back to 2003.

The FAQ also provides clarification on other issues in connection with the Initiative and the voluntary disclosure process. Taxpayers who seek to take advantage of the Initiative should consult tax advisors in regard to its requirements and implications.

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To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Tuesday, April 7, 2009

IRS Announces Six-Month Voluntary Disclosure Program For Taxpayers With Undisclosed Offshore Assets

IRS Announces Six-Month Voluntary Disclosure Program For Taxpayers With Undisclosed Offshore Assets On March 26, 2009, the Internal Revenue Service (the “IRS”) announced that it has adopted a program to encourage taxpayers who have assets located offshore to voluntarily disclose both the assets and any income earned thereon (the “VDP”). The VDP is available for the six-month period which began on March 23, 2009.

A United States taxpayer who has assets offshore: (i) generally must report, each year, information relating to the foreign financial accounts in which the assets are held on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”); and (ii) must pay federal income tax on income earned in such accounts. An FBAR must be filed each year in which the aggregate value of the taxpayer’s foreign financial accounts exceeds $10,000. Taxpayers who fail to file an FBAR are subject to significant penalties that may equal or even exceed the value of the accounts. For each failure to file an FBAR, there are civil and, potentially, criminal penalties. A non-willful failure to file an FBAR may give rise to a civil penalty of up to $10,000 per year. In other situations, a taxpayer will be subject to a civil penalty equal to the greater of $100,000 or 50 percent of the value of the accounts. Under certain circumstances, an additional criminal penalty of up to $500,000 or 10 years in prison (or both) may be assessed.

In addition to the penalties for failure to file an FBAR, a United States taxpayer who fails to report and pay income tax on offshore income may be subject to penalties under the Internal Revenue Code. Such penalties include, among others, a delinquency penalty of up to 25 percent of the unpaid tax, and an accuracy penalty of 20 percent of the unpaid tax (which may be increased up to 75 percent for any part of the underpayment attributable to fraud).

Under the VDP, taxpayers may limit their exposure to the various penalties (as summarized below). To be eligible for the program taxpayers must, prior to September 24, 2009, (i) file an FBAR or amend any deficient FBAR for each of the last six years to report all foreign financial accounts, (ii) file a tax return or amend any deficient tax return for each of the last six tax years to report all income earned in such foreign financial accounts, and (iii) pay all taxes and interest due on income generated by assets held offshore during the last six years.

Provided that the taxpayer complies with the VDP requirements, the IRS may reduce the applicable penalties to the following:

  1. A penalty equal to 20 percent of the amount in the foreign accounts in the year with the highest aggregate account value. This penalty will be assessed in lieu of all other penalties that might apply, except for the accuracy or delinquency penalty. This 20 percent penalty may be reduced to 5 percent in situations where (i) the taxpayer did not open the foreign account; (ii) no activity (e.g., deposits and withdrawals) took place while he or she controlled the account; and (3) all applicable United States taxes have been paid on the assets in the account; and

  2. An accuracy penalty of 20 percent or a delinquency penalty of 25 percent for failure to file and pay the income tax will be assessed with respect to the underpayment or reporting of tax without any exception.
However, there is no assurance that the IRS will grant these reduced penalties even if the taxpayer complies with the VDP requirements. A taxpayer whose name has been provided to the IRS by outside sources (e.g., a foreign bank) apparently may still qualify under the VDP if the IRS has not opened a criminal investigation of such taxpayer. Taxpayers will not be eligible for the VDP if they are currently under criminal investigation. Moreover, according to the IRS, “a voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.” See Internal Revenue Manual 9.5.11.9(2).

Taxpayers who seek to take advantage of this program should consult experienced tax advisors in regard to the requirements and implications of the voluntary disclosure program.

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Tuesday, March 17, 2009

Incorporation Transparency and Law Enforcement Assistance Act

On March 11, 2009, Senator Carl Levin (D-Mich.) introduced a bill that would radically affect persons organizing corporations and limited liability companies in the United States. Entitled the “Incorporation Transparency and Law Enforcement Assistance Act” (S. 569), the bill, co-sponsored by Senators Chuck Grassley (R-Iowa) and Claire McCaskill (D-Mo.), would require identifying the beneficial owners of corporations and limited liability companies organized in the United States. As the sponsors note, “[a]ll 27 countries in the European Union are already required to obtain beneficial ownership information for the corporations they form.” It also should be noted that, like the Stop Tax Haven Abuse Act introduced by Senator Levin earlier this month (see Curtis Alert on the Stop Tax Haven Abuse Act dated March 11, 2009), S. 569 is the same as a bill that Senator Levin and then-Senator Obama sponsored in the last Congress.

The salient features of S. 569 are as follows:

  • All States would have to maintain, by October 2012, a list (including names and addresses) of the ultimate beneficial owners of each corporation and limited liability company formed under their laws and ensure that the information is updated periodically. The information would have to be provided to civil or criminal law enforcement authorities upon receipt of a subpoena or summons or upon written request of a federal agency acting for another country pursuant to international treaty or agreement. A beneficial owner is any individual who has a level of control over, or entitlement to, the funds or assets of an entity that, as a practical matter, enables the individual directly or indirectly to control, manage or direct the entity.
  • A formation agent, resident in the State of formation, would have to certify for each such entity with beneficial owners who are not U.S. citizens or permanent residents that the agent has verified the owner’s identity and has obtained a copy of each such owner’s passport page on which the owner’s photograph appears. A formation agent is any person who for compensation assists in the formation of a corporation or limited liability company.
  • For corporations and limited liability companies already in existence, beneficial ownership information would be provided for each entity’s regular annual filing with the State or, if no filing is required, when there is a change in beneficial ownership.
  • Establishes civil and criminal penalties for persons who knowingly provide false information or intentionally fail to provide information to a State.
  • Requires that the beneficial owner information be maintained by a State and by the formation agent for five years after the entity terminates.
  • Public corporations and entities they form generally would be exempt.
  • The Secretary of Treasury, within 90 days of enactment of the bill, would be required to publish rules requiring any persons involved in forming a corporation, limited liability company, partnership, trust or other legal entity to establish anti-money laundering programs.
  • The United States General Accounting Office would be required to complete a study of the State beneficial ownership requirements for partnerships and trusts organized within all of the States in the United States.
The full text of the Act is available at:
http://thomas.loc.gov/cgi-bin/query/z?c111:s569:

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Wednesday, March 11, 2009

Select U.S. Tax Proposals Affecting Funds and Individuals

On February 26, 2009, President Obama introduced the 2010 budget proposal (the “Obama Budget”). The Obama Budget contains a number of tax provisions that are far-reaching, including the following, all of which would be effective by 2011:

  • Income from “carried interest” would be treated as ordinary income from the performance of services.
  • The Bush tax rate cuts would be allowed to expire at the end of 2010, resulting in the 2011 highest marginal individual tax rate increasing from 35% to 39.6% and the top long-term capital gains rate increasing from 15% to 20%. The top tax rates would apply to taxpayers earning more than $250,000 in the case of married filers and $200,000 in the case of individual filers.
  • The maximum tax on “qualified dividend income” would increase from 15% to 20%.
  • The benefit of itemized deductions would be limited to 28% for married couples earning over $250,000 (and individuals earning above $200,000). This proposal has already been criticized by Congressional leaders from both parties.
  • Estate tax, as in effect in 2009, would be permanently extended and indexed to inflation. In 2009, the estate tax exemption is $3.5 million ($7 million for a couple) and the top estate tax rate is 45%.
  • The judicially developed “economic substance doctrine” would be codified.
Following the introduction of the Obama Budget, on March 2, 2009, Senator Carl Levin (D-Mich.) introduced proposed legislation (S. 506, the “Stop Tax Haven Abuse Act”) in the Senate, and Representative Lloyd Dogget (D-Texas) introduced an identical bill (H.R. 1265) in the House of Representatives (collectively referred to as the “STHAA”). Treasury Secretary Geither on March 3, 2009, confirmed that the administration endorsed the STHAA. The STHAA is essentially an expanded version of a 2007 bill introduced in the Senate by Senator Levin and then Senator Obama, and in the House of Representatives with the support of 47 cosponsors by Lloyd Doggett and then Representative Rahm Emanuel, who is now President Obama’s Chief of Staff. In addition, on March 11, 2009, the Senate Finance Committee circulated a discussion draft of legislation for a hearing scheduled for March 17, 2009 regarding issues on offshore tax noncompliance. Considering that the Obama Budget provides for implementation of international tax enforcement by 2011, this area could be one of the top priorities in the near future. The STHAA contains the following provisions:
  • Several rebuttable evidentiary presumptions in tax and securities legal proceedings would be established with respect to non-publicly traded entities located in “tax haven” jurisdictions. For example, any funds or assets a taxpayer transfers to or receives from an offshore entity or account would be presumed to have failed to be reported to the IRS if the entity or account is in a tax haven jurisdiction. There are 34 “tax haven” jurisdictions initially listed in the proposal, including Cayman Islands, Hong Kong, Jersey, Lichtenstein, Singapore, Switzerland, and certain members of the European Union (Cyprus, Gibraltar, Luxembourg and Malta). A significant number of the jurisdictions listed have tax treaties with the United States.
  • A foreign corporation would be treated as a domestic corporation for U.S. federal income tax purposes and would be fully subject to U.S. corporate income tax if the corporation (i) has at least $50,000,000 in gross assets or is publicly traded and (ii) is “managed and controlled” primarily from the United States. “Managed and controlled” would include control by U.S.- based investment managers. This provision would be effective two years after the date of enactment.
  • Effective 90 days after enactment, a 30% U.S. dividend withholding tax would generally be imposed on dividend equivalent and substitute dividend payments (including through the use of swaps, derivatives, and securities lending transactions) made to non-U.S. persons in respect of domestic corporations.
  • Hedge funds, private equity funds and “fund formation agents” generally would be subject to anti-money-laundering procedures under rules to be promulgated by the Treasury within 180 days after the date of enactment.
  • The STHAA would increase the maximum fine on tax shelter promoters to 150% of their promoter fees, and limit penalty protection of legal opinions on transactions involving tax haven jurisdictions.
  • Also included are measures that would (i) extend from three years to six years the amount of time the IRS has to investigate and assess additional tax when involving a tax haven jurisdiction; (ii) increase disclosure requirements relating to offshore accounts, transactions, and entities; (iii) authorize special measures against foreign jurisdictions, financial institutions, and others that impede U.S. tax enforcement; (iv) prevent misuse of foreign trusts for tax evasion; and (v) expand reporting requirements for passive foreign investment companies.
  • The judicially developed “economic substance doctrine” would be codified to invalidate transactions that have no meaningful economic substance or business purpose. The Obama Budget also proposed this codification.

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