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Tax Update

Tax Update

In this section of Jnet, we provide brief updates on legislative, judicial, and administrative developments in tax that may impact Japanese companies operating in the United States.


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Fiscal year U.S. corporations to pay "blended" income tax rate

April 16, 2018

The IRS today released an advance version of Notice 2018-38 as guidance for fiscal year corporate taxpayers concerning the federal income tax rates available under the new tax law (Pub. L. No. 115-97). The IRS noted that many U.S. corporations that use a fiscal year (and not a calendar year) for federal income tax purposes will pay a “blended” rate of federal income tax under the new tax law.

Notice 2018-38

Under the new tax law, the rate of corporate income tax was reduced to a flat rate of 21%, effective for tax years beginning after December 31, 2017. The new law also repealed the application of the alternative minimum tax (AMT) imposed under section 55 to corporations, effective for tax years beginning after December 31, 2017.

Notice 2018-38 [PDF 22 KB] addresses the income tax rates under section 11(b) and the AMT for corporations under section 55 as well as the application of section 15 in determining the federal income tax (including the AMT) of a corporation with a fiscal or tax year that begins before January 1, 2018, and ends after December 31, 2017. The IRS notice explains that a corporation with a tax year that includes but does not start on January 1, 2018, must apply section 15(a) to determine the amount of federal income tax imposed under section 11 for that tax year. The notice further explains that certain taxpayers—e.g., life insurance companies and regulated investment companies—are not subject to the tax imposed under section 11(a), but are taxed under other Code provisions that use the rates of tax set forth in section 11(b). Examples are provided in the IRS notice to illustrate application of these measures.

A related IRS release—IR-2018-99—notes that with the new tax law, fiscal year corporate taxpayers will determine their federal income tax for fiscal years that include January 1, 2018, by:

  • First calculating their income tax for the entire tax year using the tax rates in effect before the new tax law
  • Second calculating their tax using the new 21% rate
  • Next assigning the portion of each tax amount based on the number of days in the tax year during which the different rates were in effect
  • Finally adding the sum of these two amounts to determine the corporation’s federal income tax for the fiscal year that includes January 1, 2018

The IRS release states that fiscal year taxpayers that already filed their federal income tax returns for the tax year that includes January 1, 2018, and that did not show the blended rate, may want to consider filing an amended return.

As noted in the IRS release, the federal sequester law remains in effect for the 2018 fiscal year, and corporations need to be mindful how these rules may affect their tax credits and refunds.

Read an IRS release on the effect of sequestration on the alternative minimum tax credit for corporations:

IRS release

Page Last Reviewed or Updated: 28-Mar-2018

Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments issued to, and credit elect and refund offset transactions for, corporations claiming refundable prior year minimum tax liability, are subject to sequestration. This means that refund payments and credit elect and refund offset transactions processed on or after Oct. 1, 2017, and on or before Sept. 30, 2018, will be reduced by the fiscal year 2018 6.6 percent sequestration rate, irrespective of when the IRS received the original or amended tax return. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise affects the sequester, at which time the sequestration reduction rate is subject to change.

For taxable years beginning before Jan. 1, 2018, a corporation that can claim an additional first-year depreciation deduction under section 168(k) can choose instead to accelerate the use of its prior year minimum tax credits, treating the accelerated credits as refundable credits. Corporations making this section 168(k)(4) election and claiming a refund of prior year minimum tax credits should complete Form 8827.

For taxable years beginning after Dec. 31, 2017, section 53 provides that the alternative minimum tax credit may offset the regular tax liability for any taxable year. The amount of the refundable credit is equal to 50 percent (100 percent in taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability.

Corporations claiming refundable credits under section 168(k) or 53 will be notified that a portion of their requested refund was sequestered.

Initial impressions on Notice 2018-28, computing business interest expense limitation

April 2, 2018

The IRS today released an advance version of Notice 2018-28 that states that the U.S. Treasury Department and IRS will issue proposed regulations as guidance to assist taxpayers in complying with section 163(j) as amended by the new tax law (Pub. L. No. 115-97, enacted December 22, 2017).

Notice 2018-28 [PDF 183 KB] describes the rules that the future proposed regulations will include, and describes the rules as interim guidance until more comprehensive guidance is developed. Today's notice also states that before the proposed regulations are issued, taxpayers may rely on Notice 2018-28.

Future regulatory guidance

Today's notice states that the future proposed regulations will include rules providing that the calculation of the business interest expense limitation will be made at the level of a consolidated group of corporations. Other rules will clarify certain aspects of new section 163(j).

The IRS today also explained that Notice 2018-28:

• Permits interest disallowed under "old section 163(j)" to be carried forward from the taxpayer's last tax year beginning before January 1, 2018, to the taxpayer's first tax year beginning after December 31, 2017. Such interest will be subject to potential disallowance under "new section 163(j)" in the same manner as any other business interest otherwise paid or accrued in a tax year beginning after December 31, 2017.

• States that regulations will address the interaction of section 163(j) with the Base Erosion and Anti-Abuse Tax (BEAT) in section 59A. In particular, the regulations will provide that business interest carried forward from a tax year beginning before January 1, 2018, will be subject to section 59A in the same manner as interest paid or accrued in a tax year beginning after December 31, 2017, and will clarify how the BEAT will apply to that interest. Notice 2018-28 thus effectively provides that such interest will not be grandfathered for BEAT purposes despite being paid prior to the effective date of section 59A.

• Clarifies that partners in partnerships and S corporation shareholders cannot interpret the newly amended section 163(j) to inappropriately "double count" the business interest income of a partnership or S corporation.

Notice 2018-29, withholding on transfers of non-publicly traded partnership interests

April 2, 2018

The IRS today released an advance version of Notice 2018-29 to provide interim guidance regarding withholding of U.S. tax related to transfers of interests in non-publicly traded partnerships under Code section 1446(f), under the tax law signed by the president on December 22, 2017 (Pub. L. No. 115-97) (the 2017 Act).

Notice 2018-29 [PDF 188 KB] (22 pages) confirms that section 1446(f)(1) withholding on dispositions of non-publicly traded partnership interests is effective as of January 1, 2018, but waives penalties and interest if all forms and payments due on or before May 31, 2018, are filed with and paid over to IRS on or before May 31, 2018.

Withholding agents must use FIRPTA procedures, pay over withheld amounts within 20 days of transfer, and modify FIRPTA withholding forms until forms and other guidance are issued under section 1446(f)(1). The IRS temporarily suspended section 1446(f)(4) withholding.


Withholding under section 1446(f) relates to the rules codified in section 864(c)(8), also added to the Code by the new tax law, that treat as "effectively connected" with a trade or business in the United States a foreign person's gain or loss from a disposition of an interest in a partnership that is engaged in a trade or business in the United States. The new withholding rules under section 1446(f) apply with respect to dispositions of certain partnership interests occurring after December 31, 2017, although the new substantive tax rules under section 864(c)(8) apply to transfers of interests in certain partnerships occurring on or after November 27, 2017.

Previously, on December 29, 2017, the IRS announced in Notice 2018-08 that the rules of section 864(c)(8) were currently in effect, and also that the application of withholding under new section 1446(f) as to interests in publicly traded partnerships (within the meaning of section 7704(b)) was temporarily suspended.

Notice 2018-29

Notice 2018-29, which addresses interests in non-publicly traded partnerships, does not affect a transferor's liability under section 864(c)(8), although Notice 2018-29 contains rules that modify or suspend withholding under section 1446(f).

The 2017 Act creates two new, alternative withholding regimes under new section 1446(f) that are triggered if a portion of the gain (if any) on any disposition of an interest in a partnership would be treated under section 864(c)(8) as effectively connected with the conduct of a trade or business in the United States.

• The primary new withholding rule in new section 1446(f)(1) requires a transferee to deduct and withhold a tax equal to 10% of the amount realized in such a disposition that occurs after December 31, 2017.

• A secondary new withholding rule added by new section 1446(f)(4) applies if the transferee fails to withhold under the primary new withholding rule, and requires the partnership whose partnership interest was transferred to deduct and withhold from any distributions to the transferee/new partner the amount of tax that the transferee should have withheld under the primary new withholding tax, plus interest.

Notice 2018-29 provides guidance on how to comply with the primary section 1446(f)(1) withholding obligations, and temporarily suspends the secondary section 1446(f)(4) withholding obligation.

Reporting and paying over section 1446(f)(1) withholding

Notice 2018-29 (Section 5) announces that persons required to withhold under section 1446(f)(1) must use the FIRPTA-related rules in section 1445 and the regulations thereunder for purposes of reporting and paying over the section 1446(f)(1) tax, except as otherwise provided, including:

  • Using Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. The transferee must:
    • Include the statement "Section 1446(f)(1) withholding" at the top of both the relevant Form 8288 and Form 8288-A.
    • Enter the amount subject to withholding under section 1446(f)(1) on line 5b of Part I of the Form 8288 and on line 3 of Form 8288-A and enter the amount withheld on line 6 of Part I of Form 8288 and on line 2 of Form 8288-A.
  • Reporting and paying over withholding within 20 days of a transfer of a partnership interest.

At present, the IRS will not issue withholding certificates under section 1446(f)(3), such as those provided on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests.

Notice 2018-29 generally applies to section 1446(f) withholding the general Code rules that impose liability for tax, penalties, and interest for failure to withhold and timely pay over withheld amounts.

Notice 2018-29 (Section 5) effectively waives penalties and interest if withholding is properly reported and paid over to IRS on or before May 31, 2018, stating:

The Treasury Department and the IRS intend to issue regulations providing that with respect to any forms that were required to be filed, or amounts that were due, under section 1446(f) on or before May 31, 2018, no penalties or interest will be asserted if these forms are filed with, and such amounts are paid over to, the IRS on or before May 31, 2018.

More specifically, Notice 2018-29 provides:

  • Definitions [Section 3 of Notice 2018-29]
  • Rules of general applicability [Section 4 of Notice 2018-29] including when a transferor must have a U.S. taxpayer identification number (TIN), and that certifications must be signed under penalties of perjury
  • Interim guidance on reporting and paying over the amount required to be withheld under section 1446(f)(1), and generally adopting the forms and procedures relating to dispositions of U.S. real property interests under section 1445 and the regulations thereunder
  • Effective date [Section 5 of Notice 2018-29]
  • Guidance on affidavits of non-foreign status by generally adopting the rules in section 1445 [Section 6 of Notice 2018-29]
  • An exemption from withholding if the transferee receives a certification from the transferor that: (1) the disposition will not result in gain [Section 6.02 of Notice 2018-29]; or (2) the transferor's effectively connected taxable income from the partnership for each of the prior three years was less than 25% of the transferor's total income from the partnership (this does not require a partnership level computation under section 864(c)(8) or other determination) [Section 6.03 of Notice 2018-29]; or (3) the transferor obtained from the partnership a record certifying that the partnership's effectively connected gain under section 864(c)(8) would be less than 25% of the total gain on the deemed sale of all its assets [Section 6.04 of Notice 2018-29]
  • No withholding is required in a transaction in which no gain is recognized, pending future guidance on nonrecognition transactions (including coordination with rules under section 897) [Section 6.05 of Notice 2018-29]
  • That, in computing the amount realized and generally subject to 10% withholding under section 1446(f)(1), a transferee may generally rely on: (1) a transferor's most recently issued Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., [Section 7.02 of Notice 2018-29] or (2) a certification from the partnership providing the transferor's share of partnership liabilities [Section 7.03 of Notice 2018-29]
  • The total amount required to be withheld generally is limited to the total amount of cash and property to be transferred, although this limitation may cease to apply after future guidance is provided [Section 8 of Notice 2018-29]
  • That section 1446(f) withholding applies to certain partnership distributions that result in gain under section 731, but that the partnership may generally rely on its books and records, or on a certification from the distributee partner to determine if the distribution exceeds the partner's basis [Section 9 of Notice 2018-29]
  • Guidance on the interaction of section 1446(f) and section 1445 [Section 10 of Notice 2018-29]
  • That withholding under section 1446(f)(4) will not apply until regulations or other guidance has been issued under that section [Section 11 of Notice 2018-29]
  • Future regulations will address tiered partnerships, including to clarify that section 1446(f)(1) withholding will apply to the sale of an upper tier partnership owning a lower tier partnership that would have effectively connected gain under section 864(c)(8) [Section 12 of Notice 2018-29]
  • A request for comments and IRS contact information [Section 13 of Notice 2018-29]

KPMG observation

Tax professionals have observed the following:

  • The IRS is not forgiving withholding on pre-Notice 2018-29 sales but is only allowing until May 31 to remit the amount of withholding to the IRS.
  • The IRS guidance is quite clear that any purchaser that paid out the full purchase price without withholding the section 1446(f) amount is clearly "on the hook" for those amounts, even though the seller has possession of the cash.
  • Under the nonrecognition exception (described above), there is a requirement that the transferee (although not the IRS, until further guidance is provided) must receive a notice that satisfies (with appropriate substitutions) the requirements of Reg. section 1.1445-2(d)(2).


United States: APMA program, APA statistics for 2017

March 30, 2018

The IRS today released an advance version of Announcement 2018-08 providing the annual report on the advance pricing and mutual agreement (APMA) program for 2017 that contains advance pricing agreement (APA) statistics for 2017.

Announcement 2018-08 [PDF 1.43 MB] reports that:

• The number of executed APAs in 2017 was 116—compared to 86 in 2016. Of the 116 APAs executed in 2017, 40% were new APAs (and not renewals of a prior APA).

• The number of executed APAs (116) surpassed the number of applications filed (101) during 2017.

• The median completion time for new APAs and renewed APAs combined was 33.8 months (unilateral and bilateral APAs).

• The number of pending APAs has continued to decline since 2015. Japan, India, and Canada accounted for more than half of all pending bilateral APAs.

APA statistics for 2017

  Unilateral Bilateral Multilateral Total
Applications filed 14 86 1 101*
APAs executed 30 85 1 116
APAs pending 57 321 8 386
Renewals executed in 2017 22 48 0 70
Renewals pending 29 133 2 164
Revoked or cancelled 0 0 0 0
Applications withdrawn 1 6 1 8

The total of 101 include the number of complete applications filed per year. As of December 31, 2017, the IRS reports that the APMA program had also received 37 user fee filings that were not yet accompanied by substantially complete APA applications, in addition to the 101 complete APA applications.

KPMG observation

Some initial impressions of these APA statistics are:

  • There is a notable increase in the number of APA closures (compare 86 in 2016 to 116 in 2017).
  • There is a substantial increase in “dollar filings”—there were 17 in 2016, but 37 in 2017.
  • Japan still dominates for closures—54% in 2016 and 57% in 2017.
  • India filings have dropped from 34% in 2016 to 21% in 2017.

IRS offshore voluntary disclosure program to close, taxpayers with undisclosed foreign assets

March 13, 2018

The IRS today announced that the 2014 Offshore Voluntary Disclosure Program (OVDP) will close on September 28, 2018. The OVDP has been available for U.S. taxpayers with undisclosed foreign financial assets to comply voluntarily.


The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012 (that followed voluntary programs offered in 2011 and 2009). Under the OVDP, U.S. taxpayers have been able to resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns on a voluntary basis.

For more information, please contact:

Mie Igarashi | +1 404 222 3212 |

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.

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