u.s. tax seminar updates & developments - pwc...u.s. tax seminar november 2013 . pwc firms...

U.S. Tax Seminar Updates & Developments

November 2013

Ron Mazurik, Senior Tax Manager

Alon Sherer, Senior Tax Manager

PwC

Agenda

Recent Legislation

Recent Cases

Proposed Legislation

Points for Attention

State Tax Developments

2

November 2013 U.S. Tax Seminar

PwC

Recent Tax Legislation Medicare Tax

• From 2013 – up to 3.8% Medicare tax

• Applies only to U.S. citizens / tax residents

• Applies to Net Investment Income and QDI of U.S. high income earners (>US$ 200k)

• Illustration of Tax Rates Applicable to Long Term Capital Gains:

20% Federal + 3.8% Medicare tax + ~7.8% State tax (NY) ≈ 31.8%

20% Federal + 3.8% Medicare tax ≈ 23.8%

Israel – 25%/30%

• Generally creditable against Israeli tax (but Israeli tax is not creditable against the 3.8% Medicare tax)

3


PwC

Treaty Qualification for Qualified Dividend Income (QDI) Purposes

4


• “Qualified Dividends” received by U.S. citizen / resident are eligible under certain conditions for a reduced tax rate (currently 15/20% + Medicare tax 3.8%)

• In case of a foreign company, QDI treatment applies only if either:

- Publicly traded; or

-“Good” treaty resident

• IRS recently published a ruling agreeing to apply QDI to dividends from a Cyprus company where facts indicated that the Cyprus company’s establishment was not driven by treaty benefits.

• Note: LOB under other treaties(including Israel) is much less relaxed than the Cyprus treaty!

PwC

Subpart F Income

5


• Subpart F Income = Ordinary Income

- Tax Court recently confirmed that so-called Subpart F Income inclusions are treated for U.S. tax purposes as Ordinary Income

- Result - marginal rates apply

- no QDI treatment U.S.

Citizen / Resident

Foreign

Subsidiary Interest

Dividends Certain Service Income

Certain Sales Income

Income inclusion under Subpart F

PwC

Royalties Services

Recent Cases Classification of Income

Sergio Garcia – The Golfer Case

• Characterization by Garcia (a Swiss resident): 15% personal services (ordinary tax rates), 85% royalties (no withholding under the U.S.- Swiss Treaty)

• Court – 35% personal services, 65% royalties

• Sale / License classification should be considered (exclusivity, restrictions on use, etc)!

Payments

?

6


PwC

• STARS Transaction (BB&T)

Barnes Group Case

• Repatriation of cash was held to be a dividend

• Application of “Inter-dependence Test” of the Step Transaction Doctrine

Recent Cases Step Transaction Doctrine & Economic Substance

Singapore

Barnes (US)

Bermuda

U.S.

$

$

$

7


PwC

Recent Cases Creditable Windfall Profits Tax

PPL Case

• Special tax imposed by the U.K. government (Windfall Profits Tax) is creditable for U.S. tax purposes, even though it is technically levied on a gross basis!

• U.S. / Israel Treaty – creditability of “Profit Tax” under the VAT regime.

Purchase price

Creditable Windfall Profits

Deemed Sale price

8


PwC

U.S.

Recent Cases Transfer Pricing - Secondary Adjustments

BMC Software Case

• Secondary Adjustment due to Transfer Pricing compliance might have adverse implications

Secondary TP Adjustment

TP Adjustment

9


Royalties

Israel IP

PwC

Legislation (Pending & Proposed) Transparency and Fairness Initiatives

1) Dodd Frank Act – U.S. (currently in legislation process)

• Oil, gas and mining (Extractive Industries)

• Listed companies (SEC)

• Disclosure of payments to governments by project (e.g. royalties, dividends, etc.)

2) Stop Tax Haven Abuse Act 2013 - U.S. (proposed legislation) – Senator Levin

• Applicable to SEC registrants

• Public disclosure of taxes paid per legal entity

3) Other major transparency initiatives worldwide

• BEPS Action Plan (by OECD)

10


PwC

Recent Tax Legislation IRC Section 304 - Anti-abuse Regulations

• Re-characterization of sales transactions between related corporations as a redemption of stock => often treated as equivalent to a dividend distribution

• Intended as an anti-abuse provision but often serves as a powerful planning

tool!

• Potential abuse:

Distribution (dividend)

sale

11


No E&P

Israel

Subsidiary #1

(U.S.)

Subsidiary #2

(U.S.)

Subsidiary #2

(U.S.)

New Co (U.S.)

Positive Earnings

and Profits (E&P)

No E&P

PwC


Alternative #1: Distribution

Functions

Alternative #2: Services

Employees / Executives

Stock Options

12


Transfer Pricing Considerations

Deferred Revenue

Stock Option Compensation

Israel

U.S. Customer Cash

PwC


13


• FBAR – Electronic filing

• FATCA update

• New IDR

• Increase audit to partnerships

State Tax Developments

www.pwc.com

PwC

State Tax Developments “Amazon Law” - Sales Tax

15


PwC

Trends – Click-Through Nexus

Amazon Law

Overstock.com vs. New York Department of Taxation & Finance - New York Appeals Court upheld Amazon decision

Solicitation vs. advertising?

Roughly 20 states have proposed similar type laws, so NY’s ultimate decision can have a significant impact

16

U.S .Tax Seminar November 2013

PwC

Trends – Higher Rates, Higher Burden

Sales Tax Rate Increase

• The city rate increased from 1.68 percent to 1.75 percent.

• The county rate rose from 1.15 percent to 1.245 percent.

• The state rate went from 5.48 percent to 5.615 percent.

Marketplace Fairness Act

• Sales tax collection requirement for remote (i.e. out of state) sellers

• Major impact on internet sales

• Passed by Senate, awaiting House review

17


PwC

Sales and Use Tax Technical Aspects: Acquisitions

• Stock Purchase – Generally, the term ‘tangible personal property’ shall not include stocks, bonds, notes, insurance or other obligations or securities.

• Asset Purchase - Sales and use tax is imposed on the retail sale of tangible personal property and certain enumerated services.

• 338(h)(10) election – Florida, New York, Virginia, Wisconsin are the only states to date which have explicitly exempted the transaction from tax

18


PwC

Income Tax Trends - Market-Based Sourcing

19

Benefit Received

Services Received

Services Delivered

Other

DC

AK

HI

ME

VT NH

NY C

T

PA NJ

DE

VA WV

NC

SC

GA

FL

IL OH

IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR

ID

NV

CA*

MA

• States are gradually moving towards market-based sourcing

• Double Taxation


PwC

Popular State Tax Credits

New Hire Credits

• California, New Jersey, New York, North Carolina

Investments in qualified property

• New Jersey, New York, North Carolina

R&D Credits

• Massachusetts, New Jersey, New York

Enterprise Zone Credits

• California, New York, North Carolina

20


PwC

State of the States – Proposed Legislation

Business Activity Tax Simplification Act of 2013

• Expand definition of Public Law 86-272

• Protected activities would include services (currently only tangible property is covered)

• Restrictions would be expanded to include business activity taxes (currently only net income taxes are included)

21


PwC

Points of Attention

Points to consider when determining PE vs. nexus:

• State adoption of U.S. income tax treaties

• Worldwide Income vs. Water’s-Edge Income

Example:

Co. ABC domiciled in Israel holds inventory on consignment in NY

22

Israel Co. Israel Co.

Federal Tax Effectively Connected

Income

NY/NYC Tax Worldwide

Income


PwC

Local Taxes to Consider

Many companies overlook taxes imposed by local jurisdictions as well as other non-income based (i.e. transaction taxes):

• New York City Commercial Rent Tax (tax on rented office space in Manhattan)

• San Francisco Gross Receipts Tax (replacing the city payroll tax which is being phased out beginning in 2014)

• City Income Taxes in Ohio (several hundred taxing jurisdictions), Kentucky, Michigan, and Oregon

• Use Tax due on purchases made from companies which are not required to charge sales tax

23


PwC

Tips & Considerations

Be prepared for audits!

• Sales Tax compliance (reseller/exemption certificates on file)

Minimize franchise taxes!

• Par-Value Capital Method allowed for Delaware Franchise Tax (gross assets-based instead of authorized shares)

Avoid worldwide profits from being taxed in California!

• Does Israel Co. generate revenues from sales to U.S.? Israeli Co. may not have nexus in the U.S. but it might be taxable in California if all of its sales are to the U.S.

24


PwC

Scope and Limitations

The information contained in this presentation is for general guidance on matters of interest only. As such, it should not be used as a substitute for consultation with professional tax advisors.

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding any U.S. federal, state or local tax penalties.

Circular 230: this document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on the taxpayer.

25


PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 162,000 people in 154 countries in firms across the PwC

network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

“PwC” is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC

network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients.

PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

This publication has been prepared for general guidance on matters of interest only ,and does not constitute professional advice. You should not act upon the information

contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of

the information contained in this publication, and, to the extent permitted by law, Kesselman & Kesselman, its members, employees and agents do not accept or assume any

liability ,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for

any decision based on it.

©2013 Kesselman & Kesselman. All rights reserved.

In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers Internationa l Limited, each member firm of which is a

separate legal entity.

Thank you!

Ron Mazurik, Senior Tax Manager, PwC Israel

03-7954471

[email protected]

Alon Sherer, Senior Tax Manager, PwC Israel

03-7954520

[email protected]

mailto:[email protected]

mailto:[email protected]

u.s. tax seminar updates & developments - pwc...u.s. tax seminar november 2013 . pwc firms...

Documents