Tax Talks

The Proskauer Tax Blog

Conservative Legislative Agenda Set Out in Queen’s Speech

Following the UK general election on 8 June 2017, at which Theresa May’s Conservative party won the largest number of seats but lost its overall majority, the Queen’s Speech setting out the now minority Conservative government’s legislative programme for the next two years was delivered on 21 June 2017 at the state opening of Parliament. As expected, some of the less popular Conservative manifesto pledges were omitted but 27 bills were still proposed (of which eight related to Brexit).

From the tax perspective, we consider that the following are of particular significance:

  • Customs Bill: the implementation of legislation to enable the UK to have standalone VAT and customs and excise regimes after Brexit. Some provisions are likely to depend on whether the UK will stay in the EU customs union.
  • National Insurance Contributions Bill: the implementation of legislation previously in the draft Finance Bill 2017 abolishing self-employed Class 2 NICs and reforming Class 4 NICs to include self-employed individuals. These provisions were only removed from FB 2017 when the snap election was called. It is considered very unlikely that the controversial proposed increase to NICs for self-employed individuals from 9% to 10% from 6 April 2018 and then to 11% from 6 April 2019 will be legislated for.
  • Finance Bill (or Bills): it is understood that one or more Finance Bills will include a range of measures including new tax avoidance provisions and other matters in relation to the EU and Brexit.

Further details in relation to the above can be found in the Queen’s Speech background briefing notes, which can be accessed here. We will provide further updates in due course.

Proposed Partnership Audit Regulations Reissued in Substantially Identical Form

On June 13, 2017, the U.S. Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) re-released proposed regulations (REG 136118-15) that provide guidance on the new centralized partnership audit regime. The centralized partnership audit regime was enacted in November 2015 by Section 1101 of the Bipartisan Budget Act of 2015, P.L. 114-74, and amended in December 2015 by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113 (altogether “the BBA rules”).

The BBA rules assess and collect tax at the partnership level, replacing the audit procedures that were enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and the electing large partnership rules. Under the TEFRA rules, audit adjustments related to partnership items were determined at the partnership level, but enforced at the partner level while adjustment related to partner-level items were determined and enforced at the partner level. On the other hand, the BBA rules provide that tax on any adjustment in a partnership audit that results in additional partnership income is assessed and collected at the partnership level. The partnership can elect under the BBA rules to “push out” the adjustment to its partners. The BBA rules replace the tax matters partners under TEFRA for a “partnership representative,” who will serve as the only point of contact between the partnership and the IRS. The new partnership audit rules apply to partnership tax years beginning after December 31, 2017. The new rules’ effective date is based on the partnership’s reporting year that is under audit regardless of when the audit itself is conducted. The BBA rules did not include significant details but it provided the Secretary of Treasury with deference as to how some provisions would be implemented; therefore taxpayers have been awaiting Treasury regulations.

During the final days of the Obama administration in January 2017, the IRS and the Treasury issued proposed regulations for the BBA rules. However, those proposed regulations were withdrawn after the incoming Trump administration issued an executive order on January 20, 2017, ordering all executive departments and agencies to freeze new and pending regulations.

As expected, the new proposed regulations issued in June 2017 are substantially identical to the withdrawn proposed regulations. The proposed regulations include guidance on the scope of the new partnership audit regime; procedural rules on electing out of the regime; the requirement that a partner’s treatment of items on its tax return must be consistent with the treatment of such items on the partnership’s return; details regarding the partnership representative; and details regarding the imputed underpayment, among other things. A public hearing on the proposed rules will be held in Washington, DC on September 18, 2017 at 10:00 AM.

We will follow up with more detailed discussion of the proposed regulations and its effects.

BEPS Update: OECD Multilateral Instrument Signed

On June 7, 2017, ministers and high-level officials of 68 jurisdictions convened to formally sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), originally published on November 24, 2016 (the “Multilateral Instrument,” or “MLI”). The Multilateral Instrument is the product of ongoing efforts by the Organisation for Economic Co-operation and Development (“OECD”) to prevent perceived abuse by certain taxpayers and improve coordination between taxing authorities, including through enhanced dispute resolution. The Multilateral Instrument was designed as a mechanism for implementing widespread treaty reform and coordination within the existing network of bilateral double tax treaties – without requiring separate bilateral negotiations between each pair of contracting jurisdictions. (For more background, please see our prior blog post on the MLI here.) The June 7 event was an important intermediate step towards the effectiveness of the MLI, and is a major step forward in providing multinational coordination to the historically bespoke bilateral tax treaty network.

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IRS Issues Guidance on “North-South” Transactions

On May 3, the Internal Revenue Service (the IRS) issued Revenue Ruling 2017-09 (the “Ruling”), which helpfully clarifies that the separate steps of a typical “north-south” spinoff transaction will be respected, and announced that it would once again issue private letter rulings on north-south transactions.

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Trump Administration Announces Outline of Its Tax Proposal

Yesterday the Trump Administration announced the outline of its tax reform proposal. The proposal combines elements of President Trump’s original tax reform proposal announced during the campaign and of the House Republicans’ tax reform proposal (which is sometimes referred to as the “Blueprint”).

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Tax Court Rules that Extensions of Variable Prepaid Forward Contracts Do Not Result in Taxable Exchanges

Last week, in McKelvey v. Commissioner¸[1] the U.S. Tax Court held that the extension of a typical variable prepaid forward contract (“VPFC”) did not give rise to a taxable exchange to the obligor because a VPFC is solely an obligation, and not property, within the meaning of section 1001 of the Internal Revenue Code. The Tax Court also noted this result is consistent with the usual treatment of a VPFC as an “open transaction”. This decision is very good news for an obligor under a VPFC (that is, the party required under the contract to deliver cash or stock at the end of the term of the VPFC), that wishes to extend a VPFC without tax consequences. If the decision is upheld on appeal under the Tax Court’s reasoning, the case would seem to apply equally an obligor that extends a conventional option, and could even provide a basis for debtors to argue that a modification of their debt does not give rise to an exchange (and thus, does not give rise to cancellation of indebtedness income) notwithstanding Treasury regulations section 1.1001-3. However, the Tax Court’s reasoning in McKelvey is in some tension with other authorities and, if taken at face value, could create opportunities for significant tax deferral on a wide variety of financial products.

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