A domestic corporation's royalty income derived in connection with business conducted outside the United States is generally eligible for the reduced 13.125% effective tax rate on foreign derived intangible income. To qualify, the licensee must be a foreign person and the intangible property must be used outside the United States for the ultimate benefit of an unrelated foreign person. The reduced tax rate is also available for certain royalties derived from licensing intangible property to related foreign persons.
Department of Justice Principal Deputy Assistant Attorney General Andrew Finch recently stated that the Antitrust Division is re-examining whether, and to what extent, it should recognise pre-existing compliance programmes with some form of credit, including potentially at the charging stage or at sentencing. This might take the form of fine discounts of up to 20% for companies that have a credible and effective compliance programme.
The 2017 Tax Act added a separate foreign tax credit limitation category for income earned in a foreign branch. As a result, certain US groups may be limited in their ability to use foreign income taxes paid or accrued by a foreign branch as a credit against their US federal income tax liability. This new limitation could present a problem for taxpayers with losses in some foreign branches and income in other foreign branches.
A minimum tax has been imposed on domestic corporations with substantial amounts of deductible payments made to related foreign persons, referred to as the 'base erosion and anti-abuse tax' (BEAT). BEAT is particularly onerous if a controlled foreign corporation's income is subject to foreign taxation because, while foreign income taxes can be used as a credit to reduce regular tax liability, no foreign tax credit is permitted to offset the BEAT.
The latest announcement by the Internal Revenue Service (IRS) focuses on the $10,000 cap on the amount of state and local taxes that can be deducted for federal income tax purposes. In a press release and release of guidance in the form of Notice 2018-54, the IRS announced that proposed regulations will be issued to help taxpayers understand the relationship between federal charitable contribution deductions in exchange for a tax credit against state and local taxes owed.
The US Department of Justice Antitrust Division has further intensified its compliance focus by announcing the creation of the Office of Decree Enforcement, which will have the sole goal of ensuring compliance with, and enforcement of, Antitrust Division decrees. Firms that operate under existing decrees should stay ahead of any complaints of violation, as a newly energised and dedicated enforcement office will likely be investigating any claimed default.
The Internal Revenue Service has increased the 2018 maximum deductible health savings account (HSA) contribution for taxpayers with family coverage under a high deductible health plan to $6,900. Employers that previously lowered their plan's contribution limit for HSAs to $6,850 should consider how to address the increased limit and whether any changes or employee communications are necessary.
According to press reports, the Antitrust Division of the Department of Justice (DOJ) is investigating several issues relating to the admission of students to institutions of higher learning. The DOJ expects institutions of higher learning to compete freely for students and faculty much as ordinary businesses compete for customers and employees. In today's high-enforcement environment, college and university counsel should be alert to Sherman Act pitfalls and seek antitrust counsel if close calls arise.
Declining to address whether certain technology licensing royalties should be subject to taxation as income or capital gains, the US Court of Appeals for the Third Circuit found that a patentee-taxpayer had waived his claim on appeal and affirmed the Tax Court's decision that the royalties should be treated as income. The Third Circuit acknowledged that a patentable invention may be subject to capital gains treatment even without a patent or patent application.
The New Mexico Administrative Hearings Office recently issued an opinion that addressed the following questions: under what circumstances can a state constitutionally impose tax on a domestic company's income from foreign subsidiaries, including Subpart F income; and when is factor representation required? Since many state income taxes are based on federal taxable income, inclusion of these new categories of income at the federal level could potentially result in their inclusion at the state level.
The International Trade Commission (ITC) has issued an opinion dismissing US Steel Corporation's antitrust claim made under Section 337 of the Tariff Act 1930 against several Chinese steel manufacturers and distributors, ruling that a complainant must show an antitrust injury even in a trade case. The case demonstrates that a complainant with a Section 337 antitrust claim before the ITC must satisfy the same antitrust pleading requirements that a plaintiff in a federal court is required to satisfy.
The Oregon Supreme Court has rejected a business taxpayer's constitutional challenges to a 1993 Oregon statute that eliminated the right to utilise a three-factor apportionment formula in calculating Oregon income tax. The Oregon Supreme Court joined courts in Texas, Minnesota, California and Michigan in rejecting taxpayer arguments that states which have enacted Article IV of the Multi-state Tax Compact have entered into a binding contractual obligation which may not be overridden.
Taxpayer Advocate Nina E Olson recently testified before a congressional oversight committee regarding ongoing challenges to the administration of an efficient and effective tax system. Her testimony echoes many tax professionals' concerns that the tax system is not being implemented in the most effective and efficient manner. With the advent of tax reform and the government's struggle to implement its sweeping changes, it is hoped that many of these issues will be addressed.
A shrinking Internal Revenue Service (IRS) budget has meant that fewer agents are available to make sure that the tax laws are being enforced. In 2017 the audit rate fell to its lowest levels in 15 years, with the chance of being audited falling to 0.6%. There has been movement to get the IRS more funding in the wake of tax reform, but it remains to be seen whether some of those funds will be used to increase its enforcement functions.
Tax controversy practitioners are undoubtedly aware of the gradual movement over the years to conform certain Tax Court procedure rules to those of the Federal Rules of Civil Procedure. A few important areas of divergence between the different rules, as well as situations where the Tax Court rules do not address a particular matter, were discussed at the recent Tax Court Judicial Conference.
The recently enacted tax reform legislation significantly expanded the application of Subpart F, adding a new inclusion rule for non-routine controlled foreign corporation (CFC) income, termed global intangible low-taxed income (GILTI). The GILTI rules apply higher tax rates to GILTI attributed to individuals and trusts that own CFC stock than to C corporation shareholders. There are several steps which individuals and trusts may take to defer or reduce the effect of the GILTI rules on individuals and trusts.
Recent broad tax reform legislation which applies to both US and non-US multinationals with cross-border operations has, among other things, reduced the corporate income tax rate and reformed the US international tax system. Several of the provisions could increase a foreign multinational entity's (FMNE's) US tax liability and compliance and administrative burdens. As such, FMNEs should thoroughly review their US operations, paying particular attention to cross-border payments to non-US related parties.
The 2017 tax reform act is now law, leaving private equity and M&A professionals to digest these significant changes and reconcile the new provisions with how they do business. Among other things, the act provides for a permanent reduction of the corporate tax rate to a flat rate of 21% and repeals the corporate alternative minimum tax. The act will be subject to corrections by and guidance from the US Department of the Treasury and the Internal Revenue Service in the coming months.
In an effort to offset the revenue loss associated with proposed tax cuts, both the House of Representatives tax reform bill and the corresponding Senate draft take aim at the tax treatment of several popular employer-provided fringe benefits. At this early stage of the legislative process, it is important to note that these proposals are subject to change. Nevertheless, it is important for employers to know which of their programmes may be cut or eliminated as soon as 2018.
Taxpayers that are not afforded the opportunity to seek review by Internal Revenue Service appeals after a case has been docketed in the Tax Court should seek to elevate the matter up the chain to obtain reconsideration and reversal of such a decision. If that course of action is unsuccessful, taxpayers should consider other options. In this regard, the outcome of Facebook's recent case in the District Court for the Northern District of California may be instructive.