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Extension of FBAR Filing Deadline for Certain Filers

On December 9, 2020, the Financial Crimes Enforcement Network (“FinCEN”) issued Notice 2020-1, extending the filing deadline for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (FBAR), for certain individuals with signature or other authority over (but no financial interest in) employer-owned foreign financial accounts to April 15, 2022. FinCEN has provided similar extensions over the previous nine years.[1] This new extension applies to reporters with signatory authority during the 2020 calendar year and to those individuals whose reporting deadline was extended under prior notices.[2] All other filers must still file by April 15, 2021, although FinCEN will grant an automatic extension until October 15, 2021.

As reported in our prior client alerts,[3] the FBAR must be filed by a U.S. person that holds a financial interest in, or signature or other authority over, a foreign financial account if the aggregate value of all such U.S. person’s foreign financial accounts exceeds $10,000 at any time during the year. FBAR proposed regulations released in March 2016 and referenced by Notice 2020-1 would expand and simplify the category of persons exempted from filing an FBAR who have signature or other authority over, but no financial interest in, a foreign financial account where another U.S. filer is filing an FBAR with respect to the same account. These FBAR proposed regulations will not take effect until and unless they are adopted in final form. Until such time, the existing procedures for FBAR filings remain in effect, subject to the extension provided in Notice 2020-1.

Potential filers should note that the scope of individuals covered by Notice 2020-1 is broader than that of the FBAR proposed regulations. As described above, the FBAR proposed regulations exempt certain persons with signature or other authority over, but no financial interest in, certain foreign financial accounts from filing an FBAR only if another U.S. filer is filing an FBAR with respect to the same account. Under Notice 2020-1, however, these individuals are not obligated to file an FBAR, regardless of whether another U.S. filer is filing an FBAR with respect to the same account. It is unclear whether the final regulations, when issued, will only excuse an individual with signature or other authority over, but no financial interest in, a foreign financial account where another U.S. filer is filing an FBAR with respect to the same account or will eliminate this requirement to qualify for the exception. As a result, since the Notice grants an extension only until 2022, employees of registered investment advisors with signature or other authority over, but no financial interest in, a non-U.S. account could have to file an FBAR if the FBAR proposed regulations are finalized in their current form.

 

[1] The previous notices granted extensions to (1) officers and employees of covered entities with signature or other authority over, but no financial interest in, a foreign financial account of a controlled person (a controlled person is a United States or foreign entity more than 50 percent owned, directly or indirectly, by a covered entity), (2) officers and employees of a controlled person of a covered entity with signature or other authority over, but no financial interest in, a foreign financial account of the entity, the controlled person, or another controlled person of the entity, and (3) officers and employees of investment advisors registered with the Securities and Exchange Commission with signature or other authority over, but no financial interest in, the foreign financial accounts of persons that are not registered investment companies.

[2] See Notices 2019-1, 2018-1, 2017-1, 2016-1 2015-1, 2014-1, 2013-1, 2012-1, 2012-2, 2011-1, and 2011-2.

[3] June 16, 2011: “Delayed FBAR Filing For Signatory Authority” (http://www.proskauer.com/publications/client-alert/delayed-fbar-filing-for-signatory-authority) and March 14, 2011: “FinCEN Issues Final Rules on FBAR.” (http://www.proskauer.com/publications/client-alert/fincen-issues-final-rules-on-fbar).

IRS issues new FAQs on the interaction between the employee retention tax credit and PPP loans in M&A transactions

On November 17, 2020, the U.S. Internal Revenue Service (“IRS”) posted new FAQs providing that an acquisition of the stock or assets of a company that has received a loan under the Paycheck Protection Program (the “PPP”) generally will not cause the acquirer and members of its aggregated employer group (as defined below) to jeopardize their employee retention tax credits (“ERTCs”).  While the FAQs expressly provide that they cannot be relied upon by taxpayers, and could be withdrawn at any time, the posting of these FAQs is a very welcome development after months of requests for guidance.  Although not specifically addressed by the FAQs, the approach taken in the FAQs would presumably be applied to transactions regardless of whether they occurred before or after the posting of the new FAQs.

First, the FAQs provide that if a target company has repaid a PPP loan or submitted a PPP loan forgiveness application and established an interest-bearing escrow account prior to the date the stock of the target is acquired by an unrelated acquirer, the acquirer will not be treated as having received a PPP loan, and, therefore, the acquirer (and any member of its aggregated employer group, including the target) may claim ERTCs for wages paid after the closing date, and the acquiring employer’s ERTCs for wages paid before the closing date will not be subject to recapture.[1]

Moreover, a target that has not repaid a PPP loan or established an escrow account prior to the date of the acquisition will not jeopardize ERTCs of the acquirer or its aggregated employer group, whether taken before or after the acquisition date.  However, the target will be ineligible for ERTCs before and after the acquisition date.

The FAQs also confirm that an acquirer that acquires the assets of a target that has received a PPP loan will not be treated as having received a PPP loan for purposes of the ERTC by reason of the asset acquisition if the acquiring employer does not assume the target’s obligations under the PPP loan.  In this case, the acquiring employer (including any member of its aggregated employer group) may claim ERTCs for wages paid after the closing date, and the acquiring employer’s ERTCs for wages paid before the closing date will not be subject to recapture.

Finally, the FAQs provide that an acquirer that acquires the assets of a target that has received a PPP loan and assumes the target’s obligations under the PPP loan will not be treated as having received a PPP loan for purposes of the ERTC.  However, wages paid to employees that were employed by the target (and, presumably, members of the target’s aggregated employer group, as described below) on the closing date will not qualify for the ERTC.  Otherwise, the acquirer and any member of its aggregated employer group may claim ERTCs for wages paid after the closing date, and the acquiring employer’s ERTCs for wages paid before the closing date will not be subject to recapture.

The FAQs do not address whether a target that is acquired by an acquirer that has received a PPP loan may claim the ERTC.  However, it would be entirely consistent with the FAQs to conclude that such a target may claim the ERTC.

Background

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748) provides certain employers with an ERTC equal to 50% of certain qualified wages paid to employees from March 13, 2020 through December 31, 2020.[2]  The ERTC can be used to offset federal payroll taxes such as federal wage withholding tax and the employer’s and employee’s share of social security tax and Medicare, but not the federal unemployment tax.  While the ERTC is capped at $5,000 per employee, it can be significant in the aggregate: for a company with 1,000 employees, the ERTC may be as much as $5 million.

The CARES Act also provides for PPP loans and provides that PPP loans may be forgiven if certain conditions are satisfied.  However, to prevent double tax benefits, the CARES Act provides that an “employer” (including members of its aggregated employer group, as described below) cannot claim the ERTC if it has received a PPP loan (unless it repaid the loan by May 18 as part of the “safe harbor” for withdrawal from the PPP program).  This is so regardless of when the loan was granted.

Corporations related through greater than 50% ownership (by vote or value) are treated as members of an aggregated employer group.  Also, chains of organizations (whether or not incorporated) conducting trades or businesses may be treated as an aggregated employer group if they are under common control.  The test for common control depends on the types of organizations in the chain of ownership, but generally requires that corporations be connected through ownership of greater than 50% of the vote or value of each corporation and partnerships be connected through ownership of more than 50% of profits or capital.[3]  Importantly, constructive (or deemed) ownership rules apply, so there may be affiliation even where not readily apparent from the face of a cap table.[4]

Without further guidance, the statutory rules described above suggest that an acquisition by an employer could result in the denial and forfeiture (i.e., recapture) of the ERTC for the acquiring employer (including any member of its aggregated employer group).  For example, if a target has taken out a PPP loan, the statute appears to prohibit an acquiring employer (including any member of its pre-transaction aggregated employer group) from claiming the ERTC if it acquires a greater than 50% ownership stake in a target with a PPP loan, and to recapture any ERTCs it has already claimed.  The converse also appears to apply – for example, if the acquirer has taken out a PPP loan, the target employer may be required to forfeit its ERTCs if the transaction causes the target employer to become a member of the acquirer’s aggregated employer group.

Thus, while the FAQs provide taxpayers with helpful guidance, they may not be relied upon by taxpayers, and the statute itself is unhelpful for acquirers acquiring stock of a target that has taken out a PPP loan and not repaid it by May 18.  Similarly, employers that acquire the assets of a target that has received a PPP loan and assume the target’s obligations under the PPP loan cannot be certain under the statute that the assumption of the PPP loan will not cause them to be prohibited from claiming ERTCs and/or subject to recapture on any ERTCs that they have already claimed.

Although there have been multiple legislative proposals to permit an employer that receives a PPP loan to receive the ERTC by electing either to exclude qualified wages from “payroll costs” for purposes of determining its loan forgiveness under the PPP or to exclude qualified wages for purposes of calculating the ERTC, none of these proposals have directly addressed the interaction of PPP loans and the ERTC in the context of mergers and acquisitions.[5]

Conclusion

The approach taken in the IRS FAQs is taxpayer-friendly and provides some relief to ease taxpayer concerns that an acquisition of a target with a PPP loan would cause an employer to jeopardize its ERTC.  However, the FAQs may not be relied on by taxpayers, and, therefore, are of limited use.  Also, the FAQs do not address the treatment of a target with ERTCs that is acquired by an acquirer with an outstanding PPP loan.

[1] The IRS notes that the target must fully satisfy (i.e., repay) the PPP loan in accordance with paragraph 1 of the Small Business Administration Notice, effective October 2, 2020 (the “SBA October 2 Notice”), or submit a forgiveness application to the PPP lender and establish an interest-bearing escrow account in accordance with paragraph 2.a of the SBA October 2 Notice.

[2] Please see our blog post for more information on the ERTC.

[3] There are three ways common control is established: (i) a parent-subsidiary controlled group, where one or more chains of organizations are connected with a common parent through more than 50% ownership, (ii) a brother-sister controlled group, where two or more organizations are owned by 5 or fewer persons who are individuals, estates or trusts that own 50% or more of each organization, and more than 50% of the ownership of each organization is identical with respect to each organization, and (iii) a group of three or more organization, each of which is a member of a group of organizations described in (i) or (ii) above, in each case, the ownership percentage is based on vote or value of each corporation or profits or capital of each partnership. For this purpose, “common control” is determined based on this technical 50% ownership test, rather than the broader notion of “control” or “affiliate” from a corporate perspective or as used in the CARES Act for PPP loan purposes.

[4] In addition, even if there is minimal or no ownership overlap between entities, they could be treated as an aggregated employer group under the “affiliated service group” rules.  An affiliated service group can arise if there is a service organization that regularly performs services for another organization.  For example, organizations may be treated as part of an affiliated service group if the principal business of one organization is to regularly and continuously perform management services to another organization (or certain of its related organizations).  Accordingly, a fund manager may be treated as part of an aggregated employer group with the portfolio companies it manages.

[5] For a summary of these proposals, please see our blog post.

New OTS report recommends changes to UK’s capital gains tax regime

The Office of Tax Simplification (OTS) has published its first report following its review of certain aspects of the UK’s capital gains tax regime requested by the Chancellor in July this year with the specific purpose of identifying opportunities relating to technical and administrative issues as well as areas where the present rules can distort behaviour or do not meet their policy intent. This report is the first of two. The second will focus on key technical and administrative issues and is expected to follow early in 2021. The report contains a number of recommendations for the government to consider.

The report makes a number of recommendations to the government, including:

  • Aligning the capital gains tax and income tax rates more closely, since the OTS considers that the current disparity can distort decision-making, delay business sales for tax-motivated reasons and create an incentive for taxpayers to arrange their affairs in ways to try to recharacterise income as capital gains. In connection with this, the OTS recommends that the government considers reintroducing reliefs for inflationary gains and allowing more flexibility in the use of capital losses, as well as looking at how such changes will interact with taxation of capital gains for companies.
  • Alternatively, if the capital gains tax and income tax rates are not more closely aligned:
    • looking to reduce the number of “boundary issues” between capital gains and income. Specifically, the report examines rewards from personal labour as the driver behind capital growth in the value of an asset (or a business) and whether such amounts are taxed consistently. The report places particular focus on the question of whether more employee share-based rewards should be taxed at income tax rates; and
    • considering reducing the number of capital gains tax rates from four to two (the four existing because of the higher rates applied to certain gains). The report does not expressly set out which rates might be abolished, but the context suggests that the two basic rates might be removed.
  • Reducing the annual exempt amount to ensure that it operates effectively as an “administrative de minimis” rather than as a form of relief.
  • Removing the capital gains uplift on death and instead providing that the recipient is treated as acquiring the relevant assets at the historic base cost of the deceased. This particular recommendation relates to the interaction between capital gains tax and inheritance tax and how it can mean that business owners are encouraged to hold onto their businesses until death rather than selling them (something also raised in the OTS inheritance tax report from July 2019).
  • Considering how effective certain reliefs are, including Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) and Investors’ Relief and whether such reliefs should be amended and/or abolished.

While the report can be considered a part of the government’s and OTS’s long running process of reviewing the UK’s tax system, the particular discrepancy between capital gains tax and income tax rates for individuals and the government’s likely focus on ways to fill the hole in public finances caused by the ongoing Covid-19 pandemic mean that certain recommendations that could lead to increasing the tax take (rather than, say, just simplifying and focusing the capital gains tax regime) might be attractive and lead to change. Having said this, the publication of this initial report gives little insight into the reality of any future changes to the capital gains tax regime in the UK as the government must now review the OTS’s input, wait for its further recommendations and consider which, if any, of its recommendations it will look to implement. Any proposal to make changes to the rules would then be likely to be subject to a detailed consultation process.

The sensitivity of making wholesale changes to the capital gains tax regime is highlighted by the immediate response of Lord Leigh of Hurley, senior treasurer of the Conservative Party (and a senior partner at Cavendish Corporate Finance), who is reported to have said that “Proposals to simplify tax by equating income and capital don’t reflect the differences between the two. Capital gains are rewards for a risk taken by investing in an asset which might become worthless. Income involves no risk at all. If you want people to move from a comfortable salary to invest in a new business, take a risk, employ people, as I did, they have to feel that tax on any success reflects that risk”. Other commentators have warned against increasing tax rates with the effect of discouraging business development, employment and so, ultimately, the overall tax take to the Exchequer.

COVID-19: UK Chancellor announces significant extension of support packages

The UK Chancellor has today announced that the Coronavirus Job Retention Scheme (the furlough scheme) and the Self-Employment Income Support Scheme (SEISS) will be extended against “a worsening economic backdrop”.

Earlier this week we reported on the UK Prime Minister’s reintroduction of the furlough scheme until 2 December 2020 (the scheduled end date of the national lockdown) and an extended SEISS grant for the self-employed to 80% of average trading profits for November (https://www.proskauertaxtalks.com/2020/11/covid-19-extension-of-economic-support-ahead-of-national-lockdown/).

Today’s announcement goes further: the furlough scheme will now be extended until the end of March 2021 (with a review in January 2021) and the SEISS grant for the self-employed will now be 80% of average trading profits for November to January 2021 (up to £7,500).

COVID-19: Extension of economic support ahead of national lockdown

Ahead of England’s return to national lockdown this Thursday, the UK Prime Minister has announced the extension of support packages for both employed workers and for the self-employed.

As reported by us previously (https://www.proskauertaxtalks.com/2020/09/uk-chancellor-announces-winter-economy-plan/) the Coronavirus Job Retention Scheme (the furlough scheme) was due to end and its replacement, the Job Support Scheme, was to commence on 1 November. In conjunction with the Prime Minister’s announcement of this month’s national lockdown, the furlough scheme is being extended until 2 December 2020 and the Job Support Scheme is being postponed until that date.

The extended furlough scheme will broadly mirror its previous incarnation:

  • The government will pay 80% of an employee’s usual salary for hours not worked, up to a maximum of £2,500. This marks a return to the original scope of the scheme (as the level of government contribution was reduced in September and October) and a recognition of the difficulties of a second lockdown.
  • Employers are required to cover employer National Insurance Contributions and pension contributions for the hours the employee does not work (and wages for the hours worked).
  • To be eligible to claim the grant for its furloughed employees an employer has to report and claim for a minimum period of seven consecutive calendar days.
  • Employers can bring furloughed employees back to work on a part time basis.
  • The extended scheme is available regardless of whether an employer or employee has previously used it.
  • The Treasury has confirmed that businesses will be paid in arrears for the period required for the legal terms of the scheme and the system to be updated. Further guidance is expected to be announced.

In addition to the reintroduction of the furlough scheme, the Prime Minister announced further support for self-employed individuals with the Self-Employment Income Support Scheme (SEISS) being extended:

  • In November the government will pay 80% of the average trading profits of self-employed individuals. As we previously reported (https://www.proskauer.com/blog/covid-19-further-extension-to-the-uks-job-support-scheme), the UK Chancellor announced last month that the taxable grants to the self-employed were to cover 40% of average monthly trading profits over a three month period. Yesterday’s announcement means that, as the SEISS grants are calculated over three months, the total level of the grant works out as 55% of trading profits for November to January (with 80% in November and 40% in December and January).
  • The period for claiming the grant opens on 30 November (two weeks earlier than previously announced).
  • For self-employed individuals to be eligible for the grant extension, they must have been eligible for the two previous grants under the scheme (but did not have to actually claim the previous grants) which means that individuals who have recently become self-employed will be frozen out of this support package.

Please get in touch with any member of our UK Tax group or UK Labour & Employment group to discuss how the above will affect you or your business.

SEC Continues to Scrutinize Disclosure of Perks and Personal Benefits

Over the past few months, the Securities and Exchange Commission (the “SEC”) has imposed civil penalties in the hundreds of thousands of dollars against multiple publicly traded corporations in connection with their failure to disclosure certain perquisites and personal benefits provided to senior executive officers, including travel, lodging and entertainment fringes and expenses. Continue Reading

COVID-19: Further extension to the UK’s Job Support Scheme

As coronavirus infection rates rise and restrictions tighten across the UK, the UK Chancellor has extended the Job Support Scheme (again). Last week we reported on the extension of the Scheme to businesses legally required to close under tier 3 of the alert system (https://www.proskauertaxtalks.com/2020/10/covid-19-extension-of-the-uks-job-support-scheme/). Yesterday (22 October) the UK Chancellor announced the following updates:

  • Employees must work a minimum of 20% of their usual hours per month (previously 33%) and the employer’s contribution for non-worked hours is 5% (previously 33%), capped at £125 per month.
  • The government will pay 61.67% of hours not worked, up to a cap of £1,541.75 per month (for businesses in tier 3 forced to close the government will pay 67%) so that employees will earn at least 73% of their usual salary (based on the cap of a monthly reference salary of £3,125).
  • The support available to the self-employed (previously reported by us https://www.proskauer.com/blog/uk-chancellor-announces-winter-economy-plan) has been increased with the taxable grants now covering 40% of average monthly trading profits over a three month period (previously 20%) with a maximum grant of £3,750.
  • Additional funding is being provided to Local Authorities to support businesses in tier 2 areas which have been severally impacted (but are not legally required to close) by the restrictions on household mixing. The level of funding received by the Local Authorities will depend on the number of hospitality, hotel, B&B and leisure businesses in their area and it is assumed that such businesses receive grants equivalent to 70% of the grants which tier 3 businesses required to close are eligible.

 

COVID-19: Extension of the UK’s Job Support Scheme

As lockdowns loom across the land with the introduction of a three-tier system of restrictions based on local COVID-19 alert levels, at the highest alert level (tier 3) certain businesses will be forced to close, including pubs and bars (unless they serve substantial meals).

To support businesses that are legally required to close as a result of the restrictions, the Job Support Scheme announced as part of the UK Chancellor’s Winter Economy Plan (reported by us https://www.proskauertaxtalks.com/2020/09/uk-chancellor-announces-winter-economy-plan/) is extended. Below are the key points:

  • The government will pay two-thirds of each employees’ salary up to a maximum of £2,100 a month.
  • Employers will still have to pay employer national insurance contributions and pension contributions; however, they are otherwise not required to contribute towards wages but can top up employee pay if they wish to do so.
  • For the extended support to be available, employees have to be off work for at least seven consecutive days.
  • The extended scheme commences on 1 November and will last for six months (with a review in January).
  • Payments to eligible businesses will be made in arrears via the HMRC claims service that is expected to be available at the beginning of December.
  • The extended scheme will apply in England and each of the devolved regions and is available for businesses that were required to close before 1 November, including premises that are restricted to delivery or collection only services.
  • Alongside the extended Job Support Scheme, the Local Restrictions Support Grant is being increased so that eligible businesses may now receive up to £3,000 per month (rather than up to £1,500 per three weeks) and businesses can now receive the grant after closure for two weeks (rather than the previous position of three). This grant supports businesses that are required to close due to local lockdown restrictions and that pay business rates on their premises.

As mentioned in our post on the Winter Economy Plan, the Job Support Scheme (including the extensions discussed above) only applies to jobs which are considered “viable” and will not be available if an employee is made redundant or put on notice of redundancy during the period the employer is claiming the grant for that employee.

Section 1446(f) Final Regulations: Key Changes to Guidance on Non-Publicly Traded Partnership Interest Transfers by Non-U.S. Persons

On October 7, 2020, the U.S. Internal Revenue Service (“IRS”) and Treasury Department released final regulations[1] providing guidance on the rules imposing withholding and reporting requirements under the Code[2] on dispositions of certain partnership interests by non-U.S. persons (the “Final Regulations”). The Final Regulations expand and modify proposed regulations[3] that were published on May 13, 2019 (the “Proposed Regulations”), and which we described in a prior Tax Talks post.[4] Unless otherwise specified, this post focuses on the differences between the Proposed Regulations and the Final Regulations affecting transfers of interests in non-publicly traded partnerships.

Enacted as part of the “Tax Cuts and Jobs Act,” Section 1446(f) generally requires a transferee, in connection with the disposition of a partnership interest by a non-U.S. person, to withhold and remit ten percent of the “amount realized” by the transferor, if any portion of any gain realized by the transferor on the disposition would be treated under Section 864(c)(8) as effectively connected with the conduct of a trade or business in the United States (“Section 1446(f) Withholding”).[5]

Prior to issuing the Proposed Regulations, the IRS had issued Notice 2018-08 and Notice 2018-29 to provide interim guidance with respect to Section 1446(f) Withholding.

Continue Reading

Cayman Islands removed from the EU blacklist of non-cooperative jurisdictions for tax purposes

The European Council has announced its decision to remove the Cayman Islands from the EU list of non-cooperative jurisdictions for tax purposes. In February we reported on Cayman’s inclusion on the list and our expectation that Cayman would make every effort to ensure its removal from the list in cooperation with the EU (https://www.proskauertaxtalks.com/2020/02/cayman-islands-added-to-the-eu-blacklist-of-non-cooperative-jurisdictions-for-tax-purposes/).

The Council yesterday (6 October 2020) announced that “[the] Cayman Islands was removed from the EU’s list after it adopted reforms to its framework on Collective Investment Funds last month”. The framework addresses economic substance in relation to collective investment vehicles in accordance with the OECD’s requirements. The Cayman government responded to its inclusion on the list in February by stating that it was added because of a delay in enacting legislation relating to the oversight of collective investment vehicles. This legislation has now been enacted, extending the regulatory reach of the Cayman Islands Monetary Authority, Cayman’s financial services regulator, by bringing particular funds under its jurisdiction. One impact of Cayman’s removal is that it will no longer be a “blacklisted” country for the purposes of the EU tax avoidance disclosure regime known as “DAC 6”.

The Council also announced yesterday that Oman was removed from the EU blacklist and that Anguilla and Barbados have been added.

Please contact any member of our UK Tax group if you have any queries about how the above will affect your business.

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