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.
Delaware's Secretary of State in late September 2019 sent new unclaimed property voluntary disclosure agreement (VDA) invitations to companies.
Companies in receipt of these invitations that do not enroll within 60 days of receipt of the letters will be immediately eligible for selection for an unclaimed property audit by Delaware state officials. Companies that did not respond to earlier notices within 60 days may have received audit examination notices from the Delaware Department of Finance.
Companies at risk of receiving this outreach range from middle-market companies up through Fortune 100 companies, both privately and publicly held. In addition to the industries historically targeted for audits (such as oil and gas, retail, banking, utilities, manufacturing, pharmaceutical, and consumer products industries), real estate investment trusts (REITs), alternative investment companies, companies that have engaged in significant merger and acquisition (M&A) transactions, newer but faster growing technology companies, and companies with high volumes of transient customer bases such as online marketplaces, online universities, payment processors, and web content streaming service providers may be targeted.
The holder's state of incorporation or formation (often Delaware) is able to assess and claim estimated amounts for any periods when complete accounting books and records are not available. For an unclaimed property audit by Delaware, the lookback period is 10-report years, plus the five-year dormancy period for most property types, which equates to a 15-year “lookback.” Most companies are unable to produce complete accounting books and records for the entire lookback period due to system limitations and record retention policies, so—in most instances—there is risk that estimation will be necessary.
Companies that receive a VDA invitation letter or an audit notice from Delaware or other states need to consider what steps to take 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 need to consider proactively enrolling in Delaware's unclaimed property VDA program.
The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-118784-18) as guidance concerning the tax consequences of the transition to the use of reference rates other than "interbank offered rates" (IBORs) in debt instruments and non-debt contracts.
The proposed regulations [PDF 355 KB] address a number of topics, several of which are briefly described below.
1001 events. The proposed regulations generally provide that, if the terms of a debt instrument are altered, or the terms of a non-debt contract (e.g., a derivative like an interest rate swap) are modified, to replace (or to provide a fallback to) an IBOR-referencing rate with a "qualified rate," and if the modification does not substantially change the fair market value of the debt or non-debt contract, the modification does not cause a realization event under section 1001. The proposed regulations list various qualified rates and provide two safe harbors regarding the substantially-equivalent-fair-market-value requirement.
Legging-out of integrated transactions. The proposed regulations provide flexibility to avoid legging-out of synthetic debts under Treas. Reg. section 1.1275-6. For example, if a taxpayer integrates a USD-LIBOR debt with an interest rate swap to create a synthetic fixed-rate debt, the taxpayer does not leg-out of the integrated transaction if the terms of the debt are altered and the swap is modified to replace USD LIBOR with a qualified rate.
One-time payments. Under the proposed regulations, if a taxpayer makes a one-time payment when changing an IBOR rate to a qualified rate, the source and character of the one-time payment will be the same as the source and character that would otherwise apply to a payment made by the payor with respect to the debt or non-debt contract that is altered or modified. For example, a one-time payment made by a counterparty to an interest rate swap is treated as a payment with respect to the leg of the swap on which the counterparty making the one-time payment is obligated to perform. Accordingly, under Reg. section 1.863-7(b), the source of that one-time payment would likely be determined by reference to the residence of the recipient of the payment.
Proposed applicability dates and reliance on the proposed regulations. The proposed regulations generally provide for an applicability date of the date the proposed rules are published as final regulations. However, taxpayers can choose to apply the rules to alterations and modifications that occur before that date, provided that the taxpayer and its related parties consistently apply the rules before that date.
Taxpayers may also rely on the proposed regulations for any alteration of the terms of a debt instrument or modification of the terms of a non-debt contract that occurs before final regulations are published, provided that the taxpayer and its related parties consistently apply the rules of the proposed regulations before that date.
Comments requested. Treasury and IRS have requested comments on any other complications under TaxNewsFlash No. 2019-486 (PDF)
The IRS today released in advance of being released for publication in the Federal Register two sets of final regulations concerning partnership liabilities. These final regulations were released by the U.S. Treasury Department and IRS to the Federal Register late in the day on October 4, 2019.
The Internal Revenue Service ("IRS") and the Department of the Treasury (collectively, "Treasury") on October 1, 2019, released Revenue Procedure 2019-40 (the "Revenue Procedure") and proposed regulations (REG-104223-18) (the "proposed regulations") relating to the repeal of section 958(b)(4).
This report provides initial impressions and observations about the Revenue Procedure and the proposed regulations.
The 2017 U.S. tax law (Pub. L. No. 115-97, enacted December 22, 2017, and often referred to as the "Tax Cuts and Jobs Act") modified the stock attribution rules under section 958(b) that apply for subpart F purposes, including determining whether a person is a U.S. Shareholder under section 951(b) ("U.S. Shareholder") of a controlled foreign corporation ("CFC"), and whether a foreign corporation is a CFC. Specifically, the Tax Cuts and Jobs Act repealed the statutory rule under section 958(b)(4) that had prevented "downward attribution" of stock from a foreign person to a U.S. person under section 318(a)(3), effective beginning with the last tax year of foreign corporations that began before January 1, 2018.
The repeal of section 958(b)(4) in the Tax Cuts and Jobs Act increased the number of U.S. persons that are U.S. Shareholders and, therefore, the number of foreign corporations that are CFCs. U.S. Shareholders are required to include amounts in income under the provisions of subpart F, including the global intangible low-taxed income ("GILTI") rules, based on the CFC's income, but only if they own stock in the CFC directly or indirectly under section 958(a), which, unlike constructive ownership under section 958(b), is determined without regard to downward attribution. In addition, the change in law significantly increased compliance burdens due to the information reporting provisions that are triggered by U.S. Shareholder or CFC status, including the requirement for U.S. Shareholders to file a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Further, the repeal of section 958(b)(4) also affected a number of rules outside of subpart F, including rules that apply based in part on the CFC status of a foreign corporation or cross-reference ownership under section 958.
The role of U.S.-based cross-border business traveler is growing with today's increasingly mobile business environment. Consequently, the ability of multistate employers and their third-party providers to proactively manage the overall compliance issues associated with domestic, state-to-state, and short-term travel is vital to bringing together both business and regulatory demands. Add to the equation various types of income—including base compensation, bonus payouts, and equity compensation—and the job of accurately tracking and taxing mobile employees can quickly become onerous and technically challenging.
Properly managing and tracking a mobile workforce can further complicate the already difficult payroll tax reporting processes dictated by a large geographic footprint. With a wide variety of complex rules governing state withholding—including varying de minimis treatment, reciprocal relationships, and specific reporting methodologies—it is not surprising that many employers have found compliance on a state-by-state basis particularly challenging. Layer onto that the increasingly common position of telecommuters and work-at-home employees, and the employment tax diligence requirements continue to expand.
So what happens when a state taxing authority walks in the door looking to audit on these issues? If an organization is not "multistate compliant," the company could be liable for unpaid individual (personal) income taxes, as well as penalties and interest.
Read an October 2019 report or listen to a related podcast from KPMG LLP.
The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-136401-18) intended to:
Read the proposed regulations [PDF 406 KB] (20 pages) as published in the Federal Register on September 30, 2019.
The IRS today released an advance copy of Notice 2019-55—an annual notice providing the 2019-2020 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home.
Notice 2019-55 [PDF 31 KB] provides:
The IRS issues an annual update of the rules for determining when the amounts of ordinary and necessary business expenses of an employee for lodging, meal, and incidental expenses incurred while traveling away from home are deemed substantiated under Reg. section 1.274-5, and when a per diem allowance under a reimbursement or other expense allowance arrangement is provided.
Notice 2019-55 is effective for per diem allowances for lodging, meal and incidental expenses—or for meal and incidental expenses only—that are paid to any employee on or after October 1, 2019, for travel away from home on or after October 1, 2019. For purposes of computing the amount allowable as a deduction for travel away from home, Notice 2019-55 is effective for meal and incidental expenses or for incidental expenses only paid or incurred on or after October 1, 2019.
The U.S. Trade Representative (USTR) today issued a release about on-going trade negotiations between the United States and Japan.
The USTR release states that the United States and Japan "have reached agreement on early achievements from negotiations" in the areas of market access for certain agriculture and industrial goods and digital trade.
Further negotiations are anticipated to address remaining tariff and non-tariff trade barriers.
According to the USTR, the negotiations provide for liberalizing market access between the United States and Japan. The countries have reached an agreement by which Japan would eliminate or lower tariffs for certain U.S. agricultural products. For other agricultural goods, Japan would provide preferential U.S.-specific quotas. Once the agreement is implemented, over 90% of U.S. food and agricultural products imported into Japan would either be duty-free or receive preferential tariff access. Read a USTR release on agricultural-related provisions.
The United States would provide tariff elimination or reduction on 42 tariff lines for agricultural imports from Japan, including products such as certain perennial plants and cut flowers, persimmons, green tea, chewing gum, and soy sauce. The United States would also reduce or eliminate tariffs on certain industrial goods from Japan such as certain machine tools, fasteners, steam turbines, bicycles, bicycle parts, and musical instruments.
The USTR release further states that the United States and Japan have reached a separate agreement on a high-standard and comprehensive set of provisions addressing priority areas of digital trade. These areas include:
The Protocol to amend the income tax treaty between Luxembourg and the United States has been ratified, according to a release from the government of Luxembourg.
The Protocol [PDF 548 KB] was signed in May 2009, and provides for broad exchange of information between competent authorities for tax purposes.
The U.S. Department of Defense, General Services Administration, and National Aeronautics and Space Administration today jointly issued for publication in the Federal Register a proposed rule that would amend the Federal Acquisition Regulation (FAR) to withhold a 2% tax on contract payments made by the U.S. government to foreign persons pursuant to certain contracts.
The proposed rule [PDF 338 KB] would apply with regard to federal government contracts for goods or services that are awarded to foreign persons.
The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9874) and proposed regulations (REG-106808-19) under section 168(k) relating to the 100% additional first-year depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service by the business.
The final regulations [PDF 486 KB] (43 pages as published in the Federal Register) and related proposed regulations [PDF 398 KB] (20 pages as published in the Federal Register) provide guidance concerning changes made by 2017 U.S. tax law (Pub. L. No. 115-97, or the law that is often referred to as the "Tax Cuts and Jobs Act" (TCJA)). The regulations are scheduled to be published in the Federal Register on September 24, 2019.
The U.S. Treasury Department and IRS this week released proposed regulations (REG-125710-18) (the "Proposed Regulations") that address items of income and deduction that are included in the calculation of built-in gains and losses under section 382(h).
If finalized, the Proposed Regulations [PDF 364 KB] (19 pages) would significantly change the landscape of current law in ways that have almost universally adverse implications for affected taxpayers.
Section 382 seeks to prevent loss trafficking by imposing a limitation on the use of pre-change losses to offset post-change income after a loss corporation undergoes an ownership change. In general, a section 382 limitation is equal to the value of the stock of the loss corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate in effect on the change date, with certain potentially significant adjustments.
One such adjustment is contained in section 382(h). Section 382(h) provides rules for the treatment of built-in gain or loss recognized during the five-year period beginning on the change date (the "recognition period") with respect to assets owned by the loss corporation immediately before ownership change. Generally, if an old loss corporation has net unrealized built-in gain ("NUBIG") immediately before the ownership change, the section 382 limitation for any recognition period tax year is increased by the recognized built-in gain ("RBIG") for such tax year, up to the amount of the NUBIG (reduced by NUBIG absorbed in prior years). If, on the other hand, an old loss corporation has net unrealized built-in loss ("NUBIL") immediately before the ownership change, any recognized built-in loss ("RBIL") for any recognition period tax year is treated as a pre-change loss for purposes of the section 382 limitation, up to the amount of the NUBIL (reduced by NUBIL absorbed in prior years). These rules reflect a neutrality principle, which aims to treat built-in gains and losses of a loss corporation recognized during the recognition period in the same manner as if they had been recognized before the ownership change.
In 2003, the IRS issued Notice 2003-65 to provide interim guidance regarding the identification of built-in items for purposes of section 382(h). Notice 2003-65 provides two alternative approaches on which taxpayers can rely in making such determinations.
Generally, the 338 Approach provides taxpayer favorable rules for taxpayers that are in a NUBIG position. Also generally, the 1374 Approach provides taxpayer favorable rules for taxpayers that are in a NUBIL position.
State taxing authorities continue to issue guidance for remote sellers and marketplace facilitators concerning recently enacted remote seller and marketplace nexus laws—generally enacted in response to the U.S. Supreme Court’s decision in "United States v. Wayfair, Inc."
In addition to state reactions, localities are also responding to the Wayfair decision.
The City Council in Nome, Alaska (a city with a population of less than 5,000 people) adopted an ordinance in late August 2019 providing that a seller will be required to collect Nome local tax if it lacks a physical presence in the city, but in the current or previous calendar year, has gross revenue of $100,000 or more and at least 100 separate transactions from sales of property, digital products or services delivered into the state. The ordinance extends the economic nexus provisions to marketplace facilitators and has an effective date of September 1, 2019 (the first day of the first calendar month following the date the ordinance was passed).
The U.S. Treasury Department and the IRS on September 5, 2019, issued proposed regulations addressing amendments made to section 451 by the 2017 tax reform legislation commonly referred to as the "Tax Cuts and Jobs Act" (TCJA).
The guidance takes the form of two sets of proposed regulations.
The guidance is proposed to be effective for tax years beginning on or after the date the final regulations are published in the Federal Register, except in the case of specified fees, for which there is a one-year deferral. Each proposed regulation may be "early adopted" on an "all or nothing" basis.
The following discussion provides a high-level summary of each of the proposed regulations. A more comprehensive analysis will be provided in a future KPMG report.
The instruments of ratification for the Protocol amending the income tax treaty between Japan and the United States have been exchanged between the two governments.
The date of the Protocol's entry into force is 30 August 2019.
The Protocol amends the existing income tax treaty (2003) and provides for:
Read an August 2019 report prepared by the KPMG member firm in Japan
The IRS today released an advance version of Notice 2019-46 announcing that the Treasury Department and IRS intend to issue regulations that will permit a domestic partnership or S corporation that is a U.S. shareholder of a controlled foreign corporation (CFC) to apply Prop. Reg. section 1.951A-5—related to the treatment of domestic partnerships and S corporations for determining the amount of the global intangible low-taxed income inclusion (GILTI)—for tax years ending before June 22, 2019.
Notice 2019-46 [PDF 53 KB] also addresses the applicability of certain penalties for a domestic partnership or S corporation that acted consistently with Prop. Reg. section 1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under Reg. section 1.951A-1(e).
Today’s notice provides that to apply the rules in Prop. Reg. section 1.951A-5 or for penalties not to apply under the notice, a domestic partnership or S corporation must satisfy certain notification and reporting requirements. Notice 2019-46 states that the to-be-issued regulations will be effective for tax years ending before June 22, 2019, and that domestic partnerships and S corporations may rely on the guidance provided in today’s notice in advance of those future regulations, provided the partnerships and S corporations satisfy the requirements under the notice.
This report provides initial impressions and observations about Notice 2019-46.
Non-life insurance companies need to carefully consider their tax return presentation if they plan to treat claims payments as offsets to income under section 832(b)(3)—rather than deductions under section 832(c)(4)
Losses of non-life insurance companies
Insurance companies that are not life insurance companies and are therefore taxable under section 831 have two statutory options for taking certain losses incurred into account.
Rules for overlapping treatment
The preamble to the proposed regulations under section 59A (REG-104259-18 (December 21, 2018)) recognized the overlapping treatment of certain claims payments and concluded that, in the case of an insurance company other than a life insurance company that reinsures foreign risk, certain of the claims payments may be treated as reductions in gross income under section 832(b)(3), which are not deductions and also not the type of reductions in gross income described in sections 59A(d)(3). The Treasury Department and IRS requested comments on the appropriate treatment of these items under subchapter L.
As noted above, the Treasury Department and IRS have asked for comments on the treatment of certain insurance payments under the BEAT regulations. Final regulations may provide additional guidance on the interaction of the subchapter L provisions and the BEAT.
The U.S. Treasury Department and the IRS on Friday, August 9, 2019, released for publication in the Federal Register proposed regulations (REG-130700-14) that modify and expand the scope of the rules in Reg. section 1.861-18 for classifying transactions involving computer programs, and address the classification of cloud transactions.
Like the old rules under Reg. section 1.861-18, these new rules would apply only for purposes of the international provisions of the Internal Revenue Code, though their principles may be applied in other contexts.
Read the proposed regulations [PDF 352 KB] (13 pages as published in the Federal Register)
Comments and requests for a public hearing must be received by November 12, 2019.
New proposed regulation section 1.861-19 provides rules for classifying cloud transactions solely as either services or leases. Cloud transactions are defined broadly to include all transactions through which a person obtains more than de minimis on-demand network access to computer hardware, digital content, or other similar resources. They do not, however, include the download of digital content for use on a person's own device.
While a cloud transaction must be assigned only a single character, the preamble notes that in some cases, facts and circumstances may indicate that an arrangement consists of multiple transactions. In such a case, each non-de minimis transaction must be separately classified. The proposed regulations include as an example the provision of downloadable software (which would be classified under Reg. section 1.861-18) combined with access to online data storage (which would be classified under Reg. section 1.861-19).
The proposed regulations specify that all factors must be taken into account in classifying a cloud transaction as a lease or as a service, including the new list of non-exclusive factors specified in Reg. section 1.861-19, which the preamble indicates is based on the statutory factors set forth in section 7701(e)(1), as well as factors that have been applied by courts in determining whether a transaction is a service or a lease. The preamble notes that this analysis must take into account inherent differences between transactions involving physical access to property and transactions involving on-demand network access.
The preamble acknowledges that the application of the proposed regulations is expected to result in a broad range of cloud computing transactions being classified as services, and solicits comments on whether there are realistic examples of cloud transactions that would be treated as leases under the proposed rules. The preamble notes, however, that Treasury and the IRS believe that the principles underlying the proposed regulations reflect current industry practice for characterizing cloud transactions.
It is notable that while, as discussed in more detail below, the proposed regulations address the source of sales of digital content, they do not address the source of income from cloud transactions. The preamble requests comments on administrable rules for sourcing such income.
The proposed regulations also modify the rules under Reg. section 1.861-18 for classifying transactions involving computer programs, including by expanding the scope of those rules to cover transfers of digital content.
Digital content includes, in addition to computer programs, any content in digital format that is protected by copyright law (or is not protected solely due to passage of time), including in particular books, movies, and music in digital formats. The focus on copyrighted content means that items such as customer data and databases generally would remain outside the scope of Reg. section 1.861-18, though taxpayers and the IRS may still look to Reg. section 1.861-18 as analogous authority. Comments are requested as to whether a broader definition of digital content should apply. The requirement of the existing regulations to bifurcate transactions that consist of more than one (non-de minimis) category of transaction has been retained.
The proposed regulations also would modify the existing rules under Reg. section 1.861-18 to provide that the transfer of a right to publicly perform or display digital content solely for purposes of advertising its sale should not be treated as the transfer of a copyright right.
Finally, the proposed regulations would modify the source rules for transactions classified as sales or exchanges of copyrighted articles, by providing that for sales and transfers through electronic media, the sale is deemed to occur at the location of download and installation to the end-user's device. In the absence of such information, however, the sale is deemed to occur at the location of the customer, determined based on recorded sales data for business or financial reporting purposes.
Change in method of accounting
The proposed regulations note that complying with the rules prescribed therein may require a change in method of accounting, which must be done in accordance with the applicable procedures under section 446(e) for obtaining the Commissioner's consent.
The California Franchise Tax Board (FTB) in July 2019 held its fourth "interested parties meeting" to discuss proposed amendments to the market-based sourcing provisions under California Code of Regulations, title 18, (CCR) section 25136-2. Only amendments proposed by the FTB since the third interested parties meeting (May 2018) were discussed.
The currently proposed changes to CCR section 25136-2 include, but are not limited to:
Two FTB representatives conducted the meeting, and the FTB will continue to solicit public comments on the proposed changes until August 19, 2019.
The proposed regulations do not specify an application date, and it is unclear whether the FTB will allow taxpayers to elect to apply the rules retroactively.
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.