Insights & News

Tax Insights, July 6, 2016
Tracking Tax News You Need to Know

July 07, 2016
Tax Opinion Is Condition Precedent to Merger Closing
In The Williams Companies Inc. v. Energy Transfer Equity LP et al.; Nos. 12168-VCG, 12337-VCG, the Delaware state chancery court found that Williams Companies Inc. was contractually obligated to allow Energy Transfer Equity LP to terminate its obligations under a merger agreement on the basis that Energy Transfer Equity LP’s tax counsel could not issue an opinion that the transaction between the parties “should” be treated as a tax-free exchange under Section 721(a) (section references are to the Internal Revenue Code of 1986, as amended) when such opinion was a condition precedent to close.

IRS Publishes Final Regulations on Country-by-Country Reporting
The IRS published final regulations (TD 9773) that require annual country-by-country reporting by United States persons that are the ultimate parent entity of a multinational enterprise (MNE) group that has annual revenue for the preceding annual accounting period of $850,000,000 or more. Form 8975, Country-by-Country Report (Form 8975 or CbCR) will be the official form for the country-by-country reporting.

The final regulations modify the proposed regulations’ reference to a permanent establishment in the definition of business entity to be more consistent with the 2015 Final Report for Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting) of the Organisation for Economic Co-operation and Development and Group of Twenty Base Erosion and Profit Shifting Project (Final BEPS Report). The phrase “permanent establishment” includes (i) a branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a permanent establishment under an income tax convention to which that tax jurisdiction is a party, (ii) a branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located pursuant to the domestic law of such tax jurisdiction or (iii) a branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owner’s tax jurisdiction of residence. The final regulations also exclude decedents’ estates, individuals’ bankruptcy estates and grantor trusts within the meaning of Section 671, all the owners of which are individuals, from the definition of business entity.

In response to a comment, the final regulations provide that tangible assets do not include intangibles or financial assets consistent with the Final BEPS Report. The Treasury Department and the IRS incorporated a recommendation into the final regulations that the term “revenue” exclude dividends from other constituent entities and such exclusion be extended to all forms of imputed earnings or deemed dividends; therefore, imputed earnings and deemed dividends that are taken into account solely for tax purposes should be treated the same as dividends for purposes of the CbCR.

The Treasury Department and the IRS failed to adopt multiple comments to change the phrase “total income tax paid on a cash basis to all jurisdictions” in proposed Treasury Regulations Section 1.6038-4(d)(2)(iv). The Treasury Department and the IRS explained that the language of the proposed regulation requires the total income tax paid on a cash basis to any tax jurisdiction by constituent entities that have a tax residence in a particular tax jurisdiction to be reported on an aggregated basis for that particular tax jurisdiction of residence, but not the aggregation of taxes paid by constituent entities that have different tax residences. An example is provided: “For instance, if a constituent entity pays income tax in its tax jurisdiction of residence on its earnings from operations in that country and is subject to withholding taxes on royalties received from licensees in another country, taxes paid with respect to the income and the taxes withheld with respect to the royalties should be reflected on an aggregated basis on the CbCR in the row for the constituent entity’s tax jurisdiction of residence.”

While the Treasury Department and the IRS did not adopt a recommendation to change how and when the Form 8975 is filed, i.e., the CbCR for a taxable year must be filed with the ultimate parent entity’s income tax return for the taxable year on or before the due date, including extensions, for filing that person’s income tax return, the final regulations do provide that Form 8975 may prescribe an alternative time and manner for filing.

Consistent with the proposed regulations, the final regulations are not applicable for taxable years of ultimate parent entities beginning before June 30, 2016, the date of publication of the final regulations in the Federal Register. Specifically, the final regulations apply to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after the first day of a taxable year of the ultimate parent entity that begins on or after June 30, 2016. As requested in numerous comments, the Treasury Department and the IRS intend to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. territory ultimate parent entity to file CbCRs for reporting periods that begin on or after Jan. 1, 2016, but before the applicability date of the final regulations, under a procedure to be provided in separate, forthcoming guidance.

The final regulations note that U.S. MNE groups whose ultimate parent entity’s taxable year begins before the applicability date will not have a CbCR filing requirement for their tax year beginning in 2016, but no specific waiver of penalties is provided for U.S. MNE groups whose ultimate parent entity’s taxable year begins on or after the applicability date.

Tax Sections of NYSBA and D.C. Bar Comment on Section 385 Proposed Regulations
The New York State Bar Association Tax Section has submitted a report on proposed regulations under Section 385 on the tax treatment of debt instruments issued between related parties, stating that they “represent a substantial change from settled law, with far-reaching implications, that may not be grasped by taxpayers, or the government, for some time to come.” The District of Columbia Bar Taxation Section has also submitted comments on the proposed regulations and noted that the proposed regulations “represent a significant departure from long-standing principles regarding the classification of debt and equity, and if finalized, would result in dramatic consequences -- both anticipated and unanticipated -- for a wide range of taxpayers.”

IRS Updates Requirements for Substitute Tax Forms, Schedules
The IRS has updated (Rev. Proc. 2016-34, 2016-26 IRB 1072) the guidelines and general requirements for the development, printing and approval of substitute tax forms. Rev. Proc. 2015-55 is superseded.

IRS Corrects Temporary Regulations on C-Corp-to-REIT Conversions
The IRS has corrected final and temporary regulations (TD 9770) that were published in the Federal Register on June 8, 2016 (81 FR 36793), to impose corporate-level tax on certain transactions in which property of a C corporation becomes the property of a REIT. The correction provides effective date relief for conversions that occur presently but relate back to a spinoff distribution that occurred before Dec. 7, 2015.

IRS Releases Publication on LLC Taxation
The IRS has released Publication 3402 (rev. Jun. 2016), Taxation of Limited Liability Companies, which discusses various types of LLC classifications and tools and resources to assist owners of LLCs in filing their taxes.
Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest. 

Copyright © 2016 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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