Tax Talks

The Proskauer Tax Blog

Extended tax liabilities for directors in insolvencies linked to tax avoidance

By Stephen Pevsner and Philip Gilliland on Posted in UK Tax

Draft legislation included in the Finance Bill 2019-2020 will potentially make directors and certain other individuals closely connected to a company jointly and severally liable for a company’s tax liabilities that arise from avoidance, evasion or repeated insolvency and non-payment of tax debts or tax-related penalties of the company.

The legislation is targeted at individuals closely connected to companies that:

  1. exploit the insolvency regime to avoid or evade tax payments or conceal the gains arising from tax avoidance or evasion;
  2. repeatedly accumulate tax debts without payment by passing these through a succession of corporate entities which are then made insolvent (so-called phoenixism); and/or
  3. seek to get avoid penalties under certain tax avoidance or evasion provisions by going into insolvency.

The new rules will be effective in respect of accounting periods that have not closed before the Finance Bill receives Royal Assent or tax-related penalties incurred after that date. Continue Reading

IRS provides very modest relief from downward attribution resulting from the repeal of section 958(b)(4)

By David S. Miller, Martin T. Hamilton and Sean M. Webb on Posted in Corporate Taxation, In the news, International Taxation, IRS, Tax Reform

On October 2, 2019, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury (the “Treasury”) issued Revenue Produce 2019-40 (the “Revenue Procedure”) and proposed regulations (the “Proposed Regulations”) that provide guidance on issues that have arisen as a result of the repeal of section 958(b)(4) by the tax reform act of 2017.[1] The repeal of section 958(b)(4) was intended to prevent certain taxpayers from “de-controlling” their controlled foreign corporations (“CFCs”) and avoid paying current tax on earnings of those CFCs. However, the repeal has inadvertently caused a number of foreign corporations to be treated as CFCs for U.S. federal income tax purposes. As a result, U.S. persons who directly or indirectly own between 10% and 50% of the voting stock or value of foreign corporations that are now treated as CFCs are subject to tax on income (“subpart F income”) and 951A (globally intangible low-taxed income, or “GILTI”). The repeal has had other unintended consequences. For example, if a foreign corporation receives U.S.-source interest from a related person, the repeal of section 958(b)(4) may cause the interest to be subject to U.S. withholding tax (i.e., the interest would fail to qualify for the “portfolio interest exemption”).[2]

The Proposed Regulations “turn off” certain special rules that arise solely as a result of the repeal of section 958(b)(4). However, the Proposed Regulations do not prevent foreign corporations from being treated as CFCs as a result of the repeal of section 958(b)(4), do not limit the subpart F or GILTI income required to be reported as a result of the repeal of section 958(b)(4), and do not reinstate the portfolio interest exemption for foreign corporations affected by the repeal of section 958(b)(4).

The Revenue Procedure provides safe harbors for certain U.S. persons to determine whether they own stock in a CFC and to use alternative information to determine their taxable income with respect to foreign corporations that are CFCs solely as a result of the repeal of section 958(b)(4) if they are unable to obtain information to report these amounts with more accuracy.

The Proposed Regulations are generally proposed to apply on or after October 1, 2019. However, a taxpayer may rely on the Proposed Regulations for taxable years prior to the date they are finalized. The Revenue Procedure is effective for the last taxable year of a foreign corporation beginning before January 1, 2019. Continue Reading

Change to IR35 tax obligations from April 2020 for medium- and large-sized companies

By Stephen Pevsner and Philip Gilliland on Posted in In the news, UK Tax

New rules to be introduced from April 2020 will make certain companies who engage workers through intermediaries (the “client”) subject to:

  1. assessing whether the workers should be treated as employees of the company; and
  2. operating employment tax (PAYE and NICs) in respect of payments made to the workers or their intermediary.

Currently these obligations rest with the worker’s intermediary and not with the client organisation.

The off-payroll worker tax rules (known as IR35) were introduced in 2000 to ensure that an individual working for an organisation through an intermediary (often that individual’s personal services company (“PSC”)) who would be an employee if engaged directly by the client is taxed like an employee. Under the rules, the employment tax liability is the responsibility of the PSC (or other intermediary) and not of the client. The difficulties of determining whether or not the individual providing their services should be taxed as an employee under the rules has been highlighted recently with a number of cases involving well-known British television and radio personalities which have come to different conclusions.

The rules were changed for individuals providing their services to public sector bodies in April 2017, so that the responsibility for determining the individual service provider’s employment status and operating PAYE and NICs, if applicable, falls on the public sector body and not the PSC.

Draft legislation has been published in the Finance Bill 2020 which sets out changes to the rules to apply from April 2020 for individuals providing their services to medium- and large-sized organisations in the private sector. These changes are designed to increase compliance with the existing IR35 rules under which HMRC estimate that only one in ten workers currently operates the rules correctly. HMRC’s assessment is that the new rules will generate an additional £3 billion of tax over the next four years.

While the new rules are not retrospective, they will apply to payments made from April next year under existing arrangements. Continue Reading

Democratic Tax Policy Proposals

By David S. Miller, Bowon Koh and Sean M. Webb on Posted in In the news, Tax Policy, Tax Reform

Recently, several of the presidential candidates and other prominent Democrats have suggested a number of different tax policy proposals, including wealth taxes, mark-to-market taxation, a VAT, additional taxes, increased income tax rates, and increased gift and estate taxes. This chart illustrates the various proposals, and this blog summarizes them.[1]

Wealth Taxes Mark-to-Market Tax VAT Increased Taxes Financial Transaction Tax Additional Taxes Increased Gift & Estate Tax
Bernie Sanders Cory Booker

 

 Andrew Yang Alexandra Ocasio-Cortez

 

 Bernie Sanders

 

 Beto O’Rourke (War Tax)

 

 Bernie Sanders

 
Elizabeth Warren Ron Wyden

 

 Bernie Sanders Kamala Harris

 

 Bernie Sanders (CEO Pay Tax)

 

 Julián Castro
Julián Castro Andrew Yang Elizabeth Warren (Social Security Tax and Lobbying Tax)

Continue Reading

IRS answers some, but not all, questions in long-awaited cryptocurrency guidance

By Michael Fernhoff, Jeremy Naylor and Kathleen R Semanski on Posted in Cryptocurrency, IRS

The first official guidance on the taxation of cryptocurrency transactions in more than five years has been issued.

The guidance includes both a Revenue Ruling (Rev. Rul. 2019-24, 2019-44 I.R.B. 1) and answers to Frequently Asked Questions on Virtual Currency Transactions (the “FAQs,” together with Revenue Ruling 2019-24, the “Guidance”) was issued on October 9, 2019 by the U.S. Internal Revenue Service (the “IRS”).  The Guidance provides much sought information concerning the tax consequences of cryptocurrency “hard forks” as well as acceptable methods of determining tax basis for cryptocurrency transactions.  The Guidance also reasserts the IRS’s position, announced in Notice 2014-21, 2014-16 I.R.B. 938, that cryptocurrency is “property” for U.S. federal income tax purposes and provides information on how the rules generally applicable to transactions in property apply in the cryptocurrency context.  However, important questions remain unanswered.  It remains to be seen whether more definitive regulatory or administrative guidance is forthcoming.

The Guidance comes amidst an ongoing campaign by the IRS to increase taxpayer compliance with tax and information reporting obligations in connection with cryptocurrency transactions.  In 2017, a U.S. district court ordered a prominent cryptocurrency exchange platform to turn over information pertaining to thousands of account holders and millions of transactions to the IRS as part of its investigation into suspected widespread underreporting of income related to cryptocurrency transactions.  Earlier this year, the IRS sent more than 10,000 “educational letters” to taxpayers identified as having virtual currency accounts, alerting them to their tax and information reporting obligations and, in certain cases, instructing them to respond with appropriate information or face possible examination.  Schedule 1 of the draft Form 1040 for 2019, released by the IRS shortly after publishing the Guidance, would require taxpayers to indicate whether they received, sold, sent, exchanged, or otherwise acquired virtual currency at any time during 2019.[1]

Taxpayers who own or transact in cryptocurrency or other virtual currency should consider carefully any tax and information reporting obligations they might have.  Please contact the authors of this post or your usual Proskauer tax contact to discuss any aspect of the Guidance.  Read the following post for background and a detailed discussion of the Guidance. Continue Reading

Tags: Blockchain, Cryptourrency, IRS Guidance, Virtual Currency

LIBOR Transition: U.S. Tax Guidance From the IRS

By Martin T. Hamilton, Malcolm Hochenberg, Stuart Rosow and Christine N. Sherman on Posted in financial products, In the news, IRS

The U.S. tax authorities have issued substantial guidance related to the phase-out of LIBOR – relevant to lenders, borrowers and parties to financial instruments of virtually every type.

In proposed regulations (“the Proposed Regulations”) released on October 9, 2019, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury (the “Treasury”) addressed market concerns regarding the U.S. tax effect of the expected transition from LIBOR and other interbank offered rates (“IBORs”) on debt instruments (e.g., loans, notes and bonds) and non-debt contracts (e.g., swaps and other derivatives). The key tax concern to date has been whether the replacement of an IBOR-reference rate in a debt instrument or non-debt contract with a different reference rate would result in a taxable exchange of the debt instrument or contract, potentially triggering a current U.S. tax liability to one or more of the parties.

The core of the Proposed Regulations provide some comfort – they detail the requirements for the rate replacement to not result in a taxable event (either in respect of the instrument itself or to certain integrated hedging transactions). The Proposed Regulations also contain transition guidance on other matters potentially impacted by the rate change, such as maintenance of REMIC status and the calculation of interest expense of a foreign bank with a U.S. branch.

While the Proposed Regulations are broadly taxpayer favorable – and indeed draw heavily on input from the Alternative Reference Rates Committee (“ARRC”),[1] which was charged with facilitating voluntary acceptance of alternative reference rates, as well as comments from other industry groups – their scope is limited enough that affected taxpayers should take care to ensure that amendments to their loans and other financial instruments are tailored to conform to the Proposed Regulations. In particular, in order to avoid a taxable event, affected taxpayers substituting an IBOR-referencing rate for a new rate, such as SOFR, will need to satisfy several tests, including a test of whether the fair market value of the affected loan or financial instrument is substantially equivalent both before and after the rate is changed, taking into account any lump-sum payment made.

Taxpayers may generally rely on the Proposed Regulations until final regulations are published, provided that the rules are applied consistently by taxpayers and their related parties. Read the rest of this post for background on the LIBOR transition, and a more complete description of the Proposed Regulations. Please contact any of the authors listed above or your usual Proskauer contact to discuss any aspect of the Proposed Regulations applicable to your specific circumstances.

Continue Reading

Tags: Finance, IRS, LIBOR, Proposed Regulations, Section 1001, SOFR, Tax

Proposed Regulations on Built-in Gains and Losses under Section 382(h)

By Richard M. Corn, Alan Parnes, Martin T. Hamilton and Muhyung (Aaron) Lee on Posted in Corporate Taxation, IRS, Mergers & Acquisitions, Restructuring

On September 10, 2019, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury (the “Treasury”) issued proposed regulations (the “Proposed Regulations”) on calculation of built-in gains and losses under Section 382(h) of the Internal Revenue Code of 1986, as amended.[1] In general, the Proposed Regulations replace the existing guidance on the calculation of net unrealized built-in gains (“NUBIG”), net unrealized built-in losses (“NUBIL”), realized built-in gains (“RBIG”) and realized built-in losses (“RBIL”) under Section 382(h). This guidance had largely taken the form of Notice 2003-65[2] (the “Notice”), which had been the key authority relied upon by taxpayers for purposes of the various calculations required under Section 382(h).

By eliminating the Notice’s 338 Approach and by making certain other changes, the Proposed Regulations, if finalized in their current form, could significantly cut back on a loss corporation’s ability to use pre-change losses and therefore could substantially diminish the valuation of this tax asset in M&A transactions and could hamper reorganizations of distressed companies. In fact, these proposed changes could put more pressure on companies in bankruptcy to attempt to qualify for the benefits of Section 382(l)(5) or to engage in a “Brunos-like” taxable restructuring transaction, and, when those options are not available, could lead to more liquidations rather than restructurings.

The Proposed Regulations are another factor in a series of changes and circumstances that affect the value of tax assets such as net operating losses for corporations. Both the current low applicable federal long-term tax-exempt rate (1.77% for October 2019)—which creates relatively small Section 382 limitations—and the new rule from the 2017 tax reform that limits the usability of net operating losses arising in tax years beginning after December 31, 2017 to 80% of taxable income are developments that, in conjunction with the Proposed Regulations, put downward pressure on the expected value of this tax asset.

The Proposed Regulations are not effective until they are adopted as final regulations and published in the Federal Register, and will apply only with respect to ownership changes occurring after their finalization. Until that happens, taxpayers may continue to rely on the Notice for calculations of NUBIG, NUBIL, RBIG and RBIL. Continue Reading

Tags: IRS, Mergers and Acquisitions, Notice 2003-65, Proposed Regulations, Restructuring, Section 382, Tax
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