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Tax Update

Tax Update

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.

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Tax treaty update: U.S. Senate approves Protocols with Switzerland, Luxembourg, Japan

July 17, 2019

The U.S. Senate today approved Protocols amending the existing income tax treaties with Switzerland, Luxembourg, and Japan.

Summary of provisions in Protocols

Switzerland:

The Protocol to amend the income tax treaty with Switzerland was signed in September 2009. The Protocol provides for: 

  • Exemption from source-country withholding tax cross-border dividends beneficially owned by certain pension funds or other retirement arrangements (or individual retirement savings plans) that are approved by the competent authorities of both countries
  • Broad exchange of information between competent authorities for tax purposes
  • Mandatory binding arbitration of unresolved competent authority cases

Luxembourg:

The Protocol to amend the income tax treaty with Luxembourg was signed in May 2009, and provides for broad exchange of information between competent authorities for tax purposes.

Japan:

The Protocol to amend the income tax treaty with Japan was signed in January 2013. The Protocol provides for: 

  • Exemption from withholding taxes on interest (subject to certain exceptions)
  • Expansion of the scope of dividends eligible for exemption from withholding tax (allowing 50%-owned companies to qualify, and reducing the required holding period from 12 months to six (6) months)
  • Amendments to the capital gains article for consistency with the Foreign Investment in Real Property Tax Act (FIRPTA)
  • Mandatory binding arbitration of unresolved competent authority cases
  • Provisions to enable the competent authorities to assist each other in the collection of taxes
  • Broad exchange of information between the competent authorities for tax purposes

Spain:

Last evening, the Senate approved a Protocol to amend the income tax treaty with Spain. Read TaxNewsFlash. The Protocol with Spain was signed in January 2013, and provides for: 

  • Exemption from withholding taxes for interest (subject to certain exceptions), royalties, and capital gains
  • Exemption from withholding tax for dividends paid to certain pension funds, or to companies holding shares representing 80% or more of voting power in the subsidiary and meeting certain other requirements (and a parallel exemption from branch profits tax)
  • A new comprehensive limitation on benefits (LOB) article
  • A new provision addressing income earned through fiscally transparent entities
  • Mandatory binding arbitration of unresolved competent authority cases
  • Broad exchange of information between competent authorities for tax purposes

TaxNewsFlash No. 2019-365 (PDF)

Proposed passive foreign investment company (PFIC) regulations; initial impressions and observations

July 12, 2019

Proposed regulations (REG-105474-18) from the U.S. Treasury Department and IRS relating to passive foreign investment companies (PFICs) were published in the Federal Register on July 11, 2019.

Proposed passive foreign investment company (PFIC) regulations; initial impressions and observations (PDF)

Final regulations: Advance payments for goods, long-term contracts

July 11, 2019

The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9870) that "streamline" existing regulations by removing rules that are no longer necessary after the enactment of the U.S. 2017 tax law (Pub. L. No. 115-97)—the law that is often referred to as the "Tax Cuts and Jobs Act."

The final regulations [PDF 314 KB] adopt "without modification" regulations that were proposed in October 2018.

With the 2017 tax law changes, section 451(c) generally requires an accrual method taxpayer that receives any advance payment described in section 451(c)(4) during the tax year to include the advance payment in income in the tax year of receipt or make an election to: (1) include any portion of the advance payment in income in the tax year of receipt to the extent required under new section 451(b); and (2) include the remaining portion of the advance payment in income in the following tax year. Section 451(c) and its election to defer advance payments override the deferral method provided by Reg. section 1.451-5.

Accordingly, the final regulations remove Reg. section 1.451-5 (and its cross references), and thus allow for the new deferral rules of section 451(c) to apply uniformly and consistently to all taxpayers.

The final regulations are scheduled to be published in the Federal Register on July 15, 2019.

TaxNewsFlash No. 2019-354 (PDF)

Initial impressions of final regulations under section 951A (GILTI) and certain guidance related to foreign tax credits, as well as new proposed regulations under sections 951A and 958 (rules for determining stock ownership)

June 19, 2019

The U.S. Treasury Department and IRS ("Treasury") on Friday, June 14, 2019, released for publication in the Federal Register final regulations (T.D. 9866) and proposed regulations (REG-101828-19) (the "final rules" and "proposed rules," respectively) relating to global intangible low-taxed income ("GILTI"), as well as certain final rules relating to the foreign tax credit ("FTC") and the section 965(n) election.

Read the final regulations [PDF 666 KB] (83 pages) and proposed regulations [PDF 422 KB] (20 pages) as published in the Federal Register on June 21, 2019.

TaxNewsFlash 2019-318 (PDF)

Initial impressions of temporary regulations under section 245A; denial of dividends received deduction for certain dividends from current or former CFCs

June 14, 2019

The U.S. Treasury Department and IRS (collectively, "Treasury") on Friday, June 14, 2019, released long-promised temporary regulations that claw back into the U.S. tax net certain earnings of controlled foreign corporations ("CFC") that otherwise would have escaped U.S. taxation under a literal application of the 2017 tax law (Pub. L. No. 115-97)—the law that is often referred to as the "Tax Cuts and Jobs Act" (TCJA).

In particular, the temporary regulations limit the application of the new section 245A dividends received deduction in the case of dividend income recognized by corporate U.S. shareholders as a result of certain transactions with respect to CFCs and, somewhat unexpectedly, limit the application of the section 954(c)(6) "look-thru" exception to subpart F income in the case of dividends received by a CFC that are attributable to earnings resulting from certain lower-tier transactions. The temporary regulations are limited in scope to these issues and do not provide general guidance under section 245A. The preamble to the temporary regulations ("Preamble") notes that additional regulations will be issued at a later date to address other issues raised by section 245A, including specifically the treatment of partnerships under section 245A and whether and to what extent section 245A applies to foreign corporations.

Read the text of the temporary regulations [PDF 335 KB] (27 pages) as published in the Federal Register on June 18, 2019.

This report provides initial impressions and observations about these temporary regulations.
Read a printable version [PDF 1.3 MB] of this report: Initial impressions of temporary regulations under section 245A; denial of dividends received deduction for certain dividends from current or former CFCs

TaxNewsFlash 2019-317 (PDF)

Final regulations: Income, currency gain or loss of "qualified business unit" (section 987)

May 10, 2019

The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9857) concerning the taxable income or loss of a taxpayer with respect to a "qualified business unit" (QBU) subject to section 987.

Today’s final regulations [PDF 358 KB] revise and adopt as final regulation, 2016 temporary regulations under Reg. sections 1.987-2T and 1.987-4T (relating to combinations and separations of QBUs) and Reg. section 1.987-12T (which requires the deferral of foreign currency gain or loss with respect to certain transactions), and withdraw Reg. section 1.987-7T (which provides a liquidation value methodology for allocating assets and liabilities of certain partnerships).

TaxNewsFlash 2019-229 (PDF) 

Proposed regulations: Tax withholding, information reporting concerning partnerships with foreign partners (text of regulations)

May 7, 2019

The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-105476-18) concerning tax withholding and information reporting with respect to certain dispositions of interests in partnerships engaged in the conduct of a trade or business within the United States.

The proposed regulations [PDF 409 KB] reflect measures enacted by the 2017 tax law (Pub. L. No. 115-97, that is often referred to as the “Tax Cuts and Jobs Act”) and affect certain foreign persons that recognize gain or loss from the sale or exchange of an interest in a partnership that is engaged in the conduct of a trade or business within the United States, and persons that acquire those interests.

The proposed regulations also affect partnerships that, directly or indirectly, have foreign persons as partners.

In brief, these proposed regulations (according to the preamble):

  • Provide rules for withholding, reporting, and paying tax under section 1446(f) upon the sale, exchange, or other disposition of an interest in a partnership described in section 864(c)(8) and Prop. Reg. section 1.864(c)(8)-1
  • When finalized, would adopt many of the rules that were described in Notice 2018-29, with certain modifications provided in response to comments
  • Provide reporting rules relating to section 864(c)(8) and rules implementing withholding under section 1446(f)(4)
  • Contain rules clarifying the reporting rules applicable to transfers of partnership interests subject to section 6050K
  • Provide rules implementing withholding by brokers on transfers of certain interests in publicly traded partnerships subject to section 1446(f)(1), and make related changes to the reporting rules and procedures for adjusting withholding under sections 1461, 1463, and 1464
  • Make changes to the rules regarding withholding on distributions by publicly traded partnerships under Reg. section 1.1446-4, including the rules that apply to qualified notices and nominees
  • Provide rules coordinating withholding under section 1446(f) with other withholding regimes to prevent over-withholding of tax

The proposed regulations are scheduled to appear in the Federal Register on May 13, 2019. Comments and requests for a public hearing are due 60 days after May 13, 2019.
The purpose of this report is to provide text of these proposed regulations. Initial impressions about these proposed regulations will be provided in a future edition of TaxNewsFlash.

TaxNewsFlash 2019-220 (PDF)

For more information, please contact:

Tai Kimura | +1 408 367 2204 | tkimura@kpmg.com

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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