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The Proskauer Tax Blog

IRS Proposed Regulations Under Section 305(c)

In April, the IRS issued proposed regulations interpreting deemed distributions under Section 305(c). Specifically, the proposed regulations would clarify the amount and timing of deemed distributions that result from an adjustment to the right to acquire stock. These regulations will generally apply to deemed distributions occurring after they are finalized, but may be relied upon for deemed distributions occurring on or after January 1, 2018.

Section 305 governs situations where a corporation distributes its own stock or rights to acquire such stock. Although stock dividends are generally not taxable to the shareholders of such a corporation, Section 305(b) includes five exceptions to this general rule. Under Section 305(c), Congress specifically provided the Treasury Department the ability to promulgate regulations to expand the exceptions to the general rule to certain changes to warrants, options, instruments convertible into stock and other rights to acquire stock. Although the Treasury Department believes the current regulations are clear as to what constitutes a change that will be considered a taxable deemed distribution, it felt that they are unclear as to the amount and timing of the deemed distribution. The proposed regulations address these two areas. In addition, the proposed regulations provide guidance as to when and how a withholding agent must withhold on the deemed distribution.

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New Public Country-by-Country Reporting of Financial Information Proposed by European Commission

Country-by-country reporting (“CBCR”) is one of the OECD BEPS deliverables (under Action 13). It is expected to be a significant tool used by tax authorities’ auditors in evaluating a multinational group’s transfer pricing policies. CBCR will present significant challenges to multinationals groups’ internal tax departments, as the tax departments must reconcile public financial reports to their legal entities’ books and accounts and to local tax returns and country-by-country template reports. CBCR is also expected to be used by journalists and politicians to challenge the tax positions of multinational groups, where information can be accessed publicly.

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California “Waiting Time Penalties” Are Not Wages For Federal Income Tax Purposes

Our colleagues over at Proskauer’s ERISA Practice Center Blog have noted that a recent IRS information letter confirms that “waiting time penalties” paid under California law are not wages for federal income tax withholding purposes. Please click here for the full post and please see Chief Counsel Advice Memorandum 201522004 and IRS Information Letter 2016-0026 for additional information and guidance on this matter.

Proskauer Enhances Transactional Tax Capabilities with Addition of Partner David S. Miller

The Proskauer Tax Department is pleased to announce that David Miller has joined as a partner in our New York office.

Miller-David-2385-Web-195x230David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers and acquisitions, multinational corporate groups and partnerships, private equity and hedge funds, bankruptcy and workouts, high-net worth individuals and families, and public charities and private foundations. He advises companies in virtually all major industries, including banking, finance, private equity, health care, life sciences, real estate, technology, consumer products, entertainment and energy.

David has been consistently recognized by leading industry publications, such as Chambers Global, Chambers USA, Best Lawyers and The Legal 500, and in 2008 was the chairman of the Tax Section of the New York State Bar Association. David is strongly committed to pro bono service, and has been recognized by a number of leading legal public interest organizations.

David’s complete biographical and contact information may be accessed by clicking here.

Sun Capital Court Finds Co-Investing Funds Part of Controlled Group and Liable for Portfolio Company’s Pension Liabilities

In a decision that could have far-reaching implications for private investment funds, a District Court held that co-investing funds were part of a portfolio company’s controlled group and that the funds were thus liable for that portfolio company’s multiemployer plan withdrawal liability.

  • The District Court essentially substituted the statutory 80% ownership threshold for controlled group liability with a facts-and-circumstances analysis that could establish controlled groups among separate independent entities with ownership interests below 80% in a common subsidiary.
  • In addition, the District Court took an expansive view of what constitutes an “economic benefit” that will satisfy the “investment plus” test articulated by the First Circuit for whether a private investment fund is a “trade or business.” In particular, the District Court found that management fee offsets could constitute an “economic benefit” even if the offsets are carried forward and potentially never used.

Please see our recently published client alert here for a full analysis, and our previous coverage on the Sun Capital case here.

Tax Announcements in the UK’s Budget 2016

The UK’s 2016 budget was announced on Wednesday 16 March 2016. Although we are waiting for detailed legislation for most of the tax-related announcements, below is a brief summary of some tax points which have caught our attention.

Capital gains tax (CGT) rates for individuals have been reduced from 28% to 18% (for higher and additional rate taxpayers) for gains “accruing” on or after 6 April 2016. But there are two important exceptions: gains on residential property to which the principal private residence relief does not apply and “carried interest”, both of which will continue to be taxed at 28%. In the latter case we assume this relates to the new charge to CGT introduced in July last year, although this is by no means clear and it will be necessary to see the detail of this legislation as well as the expected “income-based carried interest” legislation to see how this fits into the new landscape for carried interest taxation. We anticipate both sets of legislation when the Finance Bill is published at the end of next week. Another important point which the legislation should clarify is whether this is a simple rate change for gains on disposals on or after 6 April 2016 (which seems to be the overall intention) or whether there is some kind of apportionment between gains accruing before 6 April and those accruing after (which could be inferred from some of the specific terminology used in the announcement), and if so how will that apportionment work.

There were a couple of other important CGT announcements for individuals (one good, one not so good). First, CGT entrepreneurs relief will be extended to “long-term” external investors for shares issued on or after 17 March 2016 which are (broadly) held for at least three years. Second, a £100,000 lifetime cap on gains which are exempt from CGT under the Employee Shareholder Status (ESS) rules is being introduced. Gains on shares issued under Employee Shareholder Agreements entered into from midnight on 16 March 2016 will not be exempt to the extent they exceed this new £100,000 lifetime limit.

For UK companies, the headline-grabber is that corporation tax rates are coming down to 17% in 2020. The government had already announced a reduction in the main rate of corporation tax from 20% to 19% for the financial years beginning 1 April 2017, 1 April 2018 and 1 April 2019 and to 18% for the financial year beginning 1 April 2020. Today’s announcement reduces the rate for financial year beginning 2020 further to 17%.

Behind that headline lie various other corporation tax changes. In particular it was announced that corporation tax loss relief will be reformed with effect from 1 April 2017. In short, the intention is to create more flexibility to relieve losses by allowing group relief for carried forward losses and enabling carried forward losses to be set against any profits rather than being restricted to certain types of income. But the sting in the tail is that carried forward losses will only be able to be offset against 50% of profits for profits in excess of £5 million.

Another important corporation tax development is the reform to corporate debt and deductibility. In response to the OECD’s BEPS project, a new restriction on interest deductibility will apply from April 2017. As yet there is little detail, but it has been confirmed that a new fixed rate rule will restrict corporation tax deductions for net interest expense to 30% of a group’s UK EBITDA, with a group ratio rule based on net interest to EBITDA ratio for the worldwide group. It appears that the new rules will only apply where the group has at least £2 million of UK net interest expense. The current worldwide debt cap legislation will be repealed. As always the devil will be in the detail, and we await the draft legislation.

If you would like to discuss any of these proposed changes, please contact Robert Gaut or Catherine Sear, tax partners in our London office, or your usual Proskauer contact.

IRS Proposes Country-by-Country Reporting Regulations

On December 21st, 2015 the IRS proposed Country-by-Country (“CbC”) reporting rules requiring certain U.S. multinational companies to provide extensive information about business operations (including their revenue, number of employees, taxes paid or withheld, etc.) that may be shared with other taxing authorities under Information Exchange Agreements. The exchange of information is reciprocal; the IRS will expect to receive information regarding the operations of foreign multinational companies conducting business in the United States. This information may be used by the IRS or another country’s competent authority as a basis for making inquiries into potential tax avoidance arrangements. Unsurprisingly, the proposed regulations (and the OECD model on which these rules are based) have garnered criticism among some members of Congress and commentators. The key concerns are confidentiality and the potential for misuse of the information by competent authorities, which are heightened by the unprecedented amount and nature of the information to be disclosed. For a more detailed discussion of the proposed regulations, the confidentiality concerns and the potential concerns about how competent authorities might use such information, please continue reading.   Continue Reading

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