Insights & News

Tax Insights, March 2, 2016
Tracking Tax News You Need to Know

March 02, 2016

Treasury Finalizes Regulations for Domestic Entities Reporting Foreign Financial Assets
The Treasury issued final regulations (T.D. 9752; 81 F.R. 8835-8840) providing guidance regarding the requirements for certain domestic entities to report specified foreign financial assets to the Internal Revenue Service. Under Section 6038D(a) (section references are to the Internal Revenue Code of 1986, as amended), certain individuals are required to report information about specified foreign financial assets. Section 6038D(f) provides that to the extent provided by the secretary in regulations or other guidance, Section 6038D will apply to any domestic entity that is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if the entity were an individual. Under the final regulations, a domestic entity that meets the definition of a specified domestic entity, which is determined without regard to whether the reporting threshold in Treasury Regulation Section 1.6038D-2(a)(1) is met, applies the reporting threshold under Treasury Regulation Section 1.6038D-2(a)(1) once, as part of determining whether it has a filing obligation. The final regulations also eliminate the principal purpose test for purposes of determining whether a corporation or partnership is treated as formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets. However, the 50 percent passive assets or income threshold remains because the Treasury and the IRS believe such a threshold appropriately captures situations in which specified individuals may use a domestic corporation or partnership to circumvent the reporting requirements of Section 6038D. The final regulations also adopt several modifications of the term "passive income," including (1) clarifying that "dividends" includes substitute dividends and expanding "interest" to cover income equivalent to interest, including substitute interest; (2) adding a new exception for certain active business gains or losses from the sale of commodities; and (3) defining notional principal contracts by adding a reference to Treasury Regulation Section 1.446-3(c)(1).

IRS Appeals Tax Court's Decision in Altera
The Justice Department has filed a notice of appeal to the Ninth Circuit Court of Appeals appealing the Tax Court's decision in Altera Corp. (see our prior coverage), in which the Tax Court invalidated the 2003 final cost-sharing regulations in Treasury Regulation Section 1.482-7(d)(2) and determined that there was a deficiency in income tax due from Altera Corp. for the taxable year ended Dec. 30, 2005, in the amount of $5.5 million.

JCT Releases Report on Cross-border Taxation Issues
The Joint Committee on Taxation, in a report released on Feb. 23, describes international principles of taxation and provides an overview of present law related to U.S. taxation of cross-border income. The report also examines selected issues that have arisen as policymakers deliberate U.S. international tax reform, including (1) the competitiveness of the U.S. tax system, (2) economic distortions arising from deferral, (3) shifting of income and business operations, (4) locating deductions in the United States, and (5) inversions. Finally, the report also discusses the Base Erosion and Profit Shifting Project undertaken by the Organization for Economic Cooperation and Development at the request of the Group of Twenty and the recent European Commission State Aid investigations of certain tax rulings of member states of the European Union.

Brazil-U.S. FATCA IGA Competent Authority Arrangement Available
The Brazilian and U.S. competent authorities have signed an arrangement under the two nations' 2014 intergovernmental agreement to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act.

Pennsylvania DOR Releases Final Notice on Add-back Provision
The Pennsylvania Department of Revenue released a notice that interprets, explains and illustrates Pennsylvania's add-back provision (the "add-back"), which was passed in 2013. The add-back disallows deductions for royalties, licenses or other fees paid to an affiliated entity or accrued or incurred by a corporation subject to the Pennsylvania corporate net income tax for tax years beginning after Dec. 31, 2014. The add-back disallows all intangible costs or expenses paid by a Pennsylvania corporate taxpayer to an affiliated entity unless an express statutory exception applies. The notice also includes a discussion of the exceptions to the add-back and explores the application of the credit mechanism.

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.

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