In this section, we provide a summary of brief updates from the previous quarter on legislative, judicial, and administrative developments in tax that may impact Japanese companies operating in the United States.
KPMG tax professionals have received questions about possible "technical corrections" to the 2017 Tax Act (Pub. L. No. 115-97)—the tax legislation that is commonly known as the "Tax Cuts and Jobs Act."
To address some of the most frequently asked questions, KPMG has prepared a report that looks at whether technical corrections to certain provisions of the 2017 Tax Act might be enacted this year and what could be the process for moving such possible technical corrections legislation through the U.S. Congress.
The IRS issued a release reminding qualified intermediary, withholding foreign partnership, and withholding foreign trust (QI / WP / WT) entities with a certification due date of July 1, 2019—including entities with an effective date later than January 1, 2015, and earlier than January 2, 2016—that they must select the periodic-review year of their certification period by July 1, 2019.
This guidance applies to those entities selecting 2018 as their periodic review year, but does not apply to termination certifications.
The IRS release further explains if a QI / WP / WT entity is applying for a waiver of the periodic review when making its periodic certification, it must:
The entity will not be required to perform a periodic review if its waiver application is approved.
The U.S. Treasury Department and IRS yesterday issued a version of proposed regulations as guidance providing additional details about investment in qualified opportunity zones.
Read the proposed regulations [PDF 962 KB] (169 pages)
Read a May 2019 report [PDF 708 KB] providing a summary and observations about the proposed qualified opportunity zone regulations.
Highlights of proposed regulations
Qualified opportunity zone business ("QOZB") property ("QOZBP") is tangible property used in a trade or business of the QOF if the property was purchased after December 31, 2017. The proposed regulations permit tangible property acquired after December 31, 2017, under a market rate lease to qualify as "qualified opportunity zone business property" if during substantially all of the holding period of the property, substantially all of the use of the property was in a qualified opportunity zone.
A key part of the newly released proposed regulations clarifies the "substantially all" requirements for (1) the holding period, and (2) the use of the tangible business property as follows:
The guidance notes there are situations when deferred gains may become taxable if investors transfer their interest in a QOF. For example, if the transfer is done by gift, the deferred gain may become accelerated. However, inheritance by an heir is not a taxable transfer, nor is a transfer, upon death, of an ownership interest in a QOF to an estate or a revocable trust that becomes irrevocable upon death.
If related-party services meet certain eligibility requirements for the use of the services cost method (SCM), U.S. taxpayers could qualify for an exception to the base erosion and anti-abuse tax (BEAT).
However, determining the scope of the new BEAT SCM exception can be a complex undertaking. The good news is that mark-ups, commissions, and combined service prices alone do not preclude eligibility for the exception.
The BEAT provisions under section 59A provide an exemption for certain amounts paid or accrued for services that meet (with one exception) the requirements for eligibility for SCM use—the BEAT SCM exception. The section 59A proposed regulations would allow the BEAT SCM exception even if a mark-up is paid, assuming the other applicable requirements for the BEAT SCM exception were satisfied. Much has been written about the availability of the BEAT SCM exception for services that meet the relevant SCM-eligibility requirements but for which the transfer price equals the sum of the total costs of providing the services and a mark-up. This report:
The staff of the Joint Committee on Taxation (JCT) released a presentation that provides an overview of the base erosion and anti-abuse tax (BEAT)—section 59A.
Read the JCT report: Overview of the Base Erosion and Anti-Abuse Tax: Section 59A (April 2019)
State lawmakers continue to enact economic nexus legislation to take advantage of the authorization contained in the U.S. Supreme Court’s decision in "South Dakota v. Wayfair, Inc."
In addition, certain states are imposing the tax collection obligation on what they are terming marketplace facilitators or marketplace providers. The definitions of "marketplace facilitator" or "marketplace provider" vary from state to state, but as a general matter, they include persons and entities that provide a forum for displaying and advertising for sale the products of multiple sellers, and either directly or by contract or affiliation, provide payment processing services for transactions conducted via the marketplace.
In addition, many of the bills provide extensive details on the obligations of marketplaces and marketplace sellers and the protections provided to marketplaces should they collect and remit the wrong amount of tax. Marketplace sellers need to consider and review these bills, and also examine the bills carefully to determine any documentation that may relieve them of the obligation to collect tax, among other issues.
Taxpayers should be aware of important—but sometimes overshadowed—domestic provisions changed by tax reform.
The U.S. tax law—Pub. L. No. 115-97—included a number of "headliner" provisions. However, there are quite a few other provisions of which taxpayers should at least be aware. Among them, changes to the tax treatment of government grants, like-kind exchanges, specified liability losses, small business provisions and employee benefits. Although these provisions do not have the sweeping breadth of some others, they can be equally important for those taxpayers to whom they do apply
What’s News in Tax: In case you missed it: "Other" provisions of the TCJA – April 1, 2019 (PDF)
The IRS has posted new "frequently asked questions" (FAQs) as guidance for foreign financial institutions under the FATCA regime.
The new FAQs are listed below and generally concern compliance items for foreign financial institutions. The FAQs are available on the IRS website:
FAQ 20 - Sponsoring entities with certification periods ending on December 31, 2017
FAQ 20 provides that the IRS recently published an FAQ providing that Sponsoring Entities with certification periods ending December 31, 2017, may rely on rules provided in the notice of proposed rulemaking (REG-103477-14) published on January 6, 2017 in the Federal Register (82 FR 1629).
FAQ 17 - FATCA registration updates
FAQ 17 explains that the IRS has reminded financial institutions (FIs) that incomplete FATCA registration applications will not remain unprocessed indefinitely. Specifically, such accounts will be placed in "Registration Rejected/Denied" status, and financial institutions in this status will still have access to respective message boards although they will not have any other account options. They are, however, able to complete and submit a new FATCA Registration.
FAQ 7 - IRS continues to remind financial institutions to keep person of contact and responsible officer contact information current
FAQ 7 is another reminder recently sent to financial institutions on the continued need to keep person of contact and responsible officer contact information updated because these contacts are the primary way through which the IRS contacts financial institutions.
The staff of the Joint Committee on Taxation (JCT) released a presentation that provides an overview of section 163(j)—the limitation on deduction of business interest.
Pub. L. No. 115-97 added new section 163(j) to the Code, and section 163(j) generally limits the amount of a taxpayer’s business interest deduction.
The IRS today announced that effective May 13, 2019, only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the "responsible party" on the application. An EIN is a nine-digit tax identification number assigned to sole proprietors, corporations, partnerships, estates, trusts, employee retirement plans and other entities for tax filing and reporting purposes.
As noted in today’s release—IR-2019-58 (March 27, 2019)—entities will not be able to use their own EINs to obtain additional EINs. The new requirement will apply to both the paper Form SS-4, Application for Employer Identification Number, and online EIN application. By making this announcement weeks in advance, the IRS anticipates entities and their representatives will have time to identify the proper responsible official to comply with the new policy.
There is no change for tax professionals who may act as third-party designees for entities and complete the paper or online applications on behalf of clients.
The new requirement is intended to provide greater security to the EIN process by requiring an individual to be the responsible party and improve transparency. If there are changes to the responsible party, the entity can change the responsible official designation by completing Form 8822-B, Change of Address or Responsible Party. Form 8822-B must be filed within 60 days of a change.
Recent developments—including the prosecution of high-profile individuals and ongoing global efforts to promote financial and tax transparency—suggest no pause in the energetic campaign by the United States and other countries to ferret out hidden assets and tax noncompliance related to offshore accounts.
An important part of current efforts remains the requirement that taxpayers and others annually file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). While the principal focus of FBAR enforcement activities is indisputably money laundering and tax evasion, taxpayers who fully report income from foreign financial accounts but who inadvertently neglect to satisfy technical reporting requirements can potentially be ensnared.
The Trump Administration last week transmitted to Congress its FY 2020 budget recommendations. The budget contains the administration's recommendations to Congress for spending and taxation for the fiscal year that begins on October 1, 2019.
Today, the administration released "Analytical Perspectives, Budget of the United States Government, Fiscal Year 2020," providing analyses designed to highlight specified subject areas or provide other significant presentations of budget data to place the budget in perspective.
Delaware's Secretary of State in February 2019 sent new unclaimed property voluntary disclosure agreement (VDA) invitations.
Companies that received these invitations and that do not enroll within 60 days of receipt of the letters will be immediately eligible for selection for an unclaimed property audit by the state. This is evidenced by the audit examination notices sent by Delaware's Department of Finance in early January 2019 to companies that did not respond to letters sent last fall.
Companies that receive a VDA invitation letter or an audit notice from Delaware or other states need to consider evaluating what will be their next steps and risk areas related to unclaimed property non-compliance. Companies that are incorporated in Delaware, but are not in compliance and have not yet received an invitation, may want to consider proactively enrolling in Delaware's unclaimed property VDA program.
Exam teams are now required to confer with competent authority for audits that could end up in the mutual agreement procedure because of transfer pricing adjustments with a country that is a U.S. treaty partner. This is a positive development for taxpayers because the consultation might eliminate or narrow potential transfer pricing adjustments.
The Large Business and International ("LB&I") division recently issued guidance mandating collaboration between transfer pricing (TP") field teams and advance pricing and mutual agreement ("APMA") personnel.1 The LB&I directive requires teams in the Transfer Pricing Practice, Cross Border Activities, and the Geographic Compliance Practice to consult with APMA on any exams that may generate transfer pricing adjustments with a country that is a U.S. treaty partner. Taxpayers and their advisors can use this directive to ensure the LB&I TP exam team, early in the process, has considered how the competent authority process will affect any potential adjustment, which may eliminate or narrow adjustments.
Prior to this directive, KPMG has suggested, on behalf of clients, that LB&I TP exam team confer with APMA on whether a proposed adjustment would be consistent with APMA's current negotiation strategy. In several instances, KPMG's suggested consultation occurred and resulted in the withdrawal of the proposed adjustment. However, KPMG had no authority to compel this consultation. With mandatory consultations, taxpayers and their advisors now have a mechanism to ensure the LB&I TP exam team's proposed adjustment is considered under the competent authority lens early in process, which will potentially save taxpayer resources and curtail adjustments that are inconsistent with the treaty and APMA's negotiation approach. We recommend taxpayers query their LB&I TP exam team on both the timing and results of the consultation.
The U.S. Treasury Department and IRS on March 4, 2019, released proposed regulations (REG-104464-18) relating to the deduction for "foreign-derived intangible income" (FDII) and "global intangible low-taxed income" (GILTI) under section 250.
Applicability dates and reliance
The applicability dates for the proposed rules generally fall into three categories:
Nevertheless, taxpayers would not be required to follow the documentation requirements in the proposed regulations (discussed below) for tax years beginning on or before March 4, 2019. Instead, the proposed regulations allow a taxpayer to use any reasonable documentation maintained in the ordinary course of the taxpayer’s business that establishes, with respect to property transactions, that a recipient is a foreign person and that the property is for a foreign use, or with respect to services, that a recipient of a general service is located outside of the United States. This documentation must still satisfy the reliability requirements set forth in the proposed rules.
Significantly, taxpayers are permitted to rely on the proposed regulations for tax years ending before March 4, 2019, without any explicit requirement to consistently apply all of the proposed rules.
The tax rules for parking expenses have changed for taxable and tax-exempt entities.
The U.S. tax law originally named the "Tax Cuts and Jobs Act" (TCJA) made several sweeping changes to both section 274, curtailing many common benefit deductions for taxable entities, and similar provisions for tax-exempt entities, increasing unrelated business taxable income (UBTI) under section 512(a)(7) for qualified parking benefit expenses. In particular, the TCJA reduces or eliminates deductions related to expenses for meals, entertainment, amusement, or recreation activities, and qualified transportation fringe benefits (including parking) for expenses paid or incurred on or after January 1, 2018 (irrespective of the tax year).
The IRS issued Notice 2018-99 as initial guidance on the potential limitations and increased UBTI related to qualified parking expenses.
Eight months after the U.S. Supreme Court’s landmark decision in "South Dakota v. Wayfair," states continue to enact legislation and issue guidance in response to the decision.
In Wayfair, the U.S. Supreme Court overruled the physical presence nexus standard of Quill and National Bellas Hess with respect to state and local taxation of remote sales.
The final section 263A regulations impose considerable complexity to inventory computations.
The new rules will place significant burdens on taxpayers that have no practical alternatives to accounting for negative adjustments under the simplified methods.
It is time to brush up on two basic tax concepts—realization of income and recognition of income. Accrual method taxpayers are learning that the old fundamentals are important when applying new book-tax conformity rules.
In imposing a new book-conformity requirement for recognizing income, the 2017 tax reform legislation (commonly referred to as the "Tax Cuts and Jobs Act") might make an already murky area even more so, presenting both opportunities and challenges for accrual method taxpayers. Under new section 451(b)(1), accrual method taxpayers must treat an item of income as satisfying the "all events test" (and hence include in taxable income) no later than the tax year in which that item is included in the taxpayer’s revenue for financial accounting purposes. As such, most accrual method taxpayers now must accrue income for tax purposes upon the earlier of: (1) the taxpayer’s right to the income becoming fixed and determinable; or (2) inclusion of the item in book revenues.
1 Interim Guidance on Mandatory Issue Team Consultations with APMA for Examination of Transfer Pricing Issues Involving Treaty Countries, IRS Large Business and International Division (Feb. 19, 2019).
For more information, please contact:
Tai Kimura | +1 408 367 2204 | firstname.lastname@example.org
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.