U.S. Tax Seminar Updates & Developments
November 2013
Ron Mazurik, Senior Tax Manager
Alon Sherer, Senior Tax Manager
PwC
Agenda
Recent Legislation
Recent Cases
Proposed Legislation
Points for Attention
State Tax Developments
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November 2013 U.S. Tax Seminar
PwC
Recent Tax Legislation Medicare Tax
• From 2013 – up to 3.8% Medicare tax
• Applies only to U.S. citizens / tax residents
• Applies to Net Investment Income and QDI of U.S. high income earners (>US$ 200k)
• Illustration of Tax Rates Applicable to Long Term Capital Gains:
20% Federal + 3.8% Medicare tax + ~7.8% State tax (NY) ≈ 31.8%
20% Federal + 3.8% Medicare tax ≈ 23.8%
Israel – 25%/30%
• Generally creditable against Israeli tax (but Israeli tax is not creditable against the 3.8% Medicare tax)
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November 2013 U.S. Tax Seminar
PwC
Treaty Qualification for Qualified Dividend Income (QDI) Purposes
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November 2013 U.S. Tax Seminar
• “Qualified Dividends” received by U.S. citizen / resident are eligible under certain conditions for a reduced tax rate (currently 15/20% + Medicare tax 3.8%)
• In case of a foreign company, QDI treatment applies only if either:
- Publicly traded; or
-“Good” treaty resident
• IRS recently published a ruling agreeing to apply QDI to dividends from a Cyprus company where facts indicated that the Cyprus company’s establishment was not driven by treaty benefits.
• Note: LOB under other treaties(including Israel) is much less relaxed than the Cyprus treaty!
PwC
Subpart F Income
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November 2013 U.S. Tax Seminar
• Subpart F Income = Ordinary Income
- Tax Court recently confirmed that so-called Subpart F Income inclusions are treated for U.S. tax purposes as Ordinary Income
- Result - marginal rates apply
- no QDI treatment U.S.
Citizen / Resident
Foreign
Subsidiary Interest
Dividends Certain Service Income
Certain Sales Income
Income inclusion under Subpart F
PwC
Royalties Services
Recent Cases Classification of Income
Sergio Garcia – The Golfer Case
• Characterization by Garcia (a Swiss resident): 15% personal services (ordinary tax rates), 85% royalties (no withholding under the U.S.- Swiss Treaty)
• Court – 35% personal services, 65% royalties
• Sale / License classification should be considered (exclusivity, restrictions on use, etc)!
Payments
?
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November 2013 U.S. Tax Seminar
PwC
• STARS Transaction (BB&T)
Barnes Group Case
• Repatriation of cash was held to be a dividend
• Application of “Inter-dependence Test” of the Step Transaction Doctrine
Recent Cases Step Transaction Doctrine & Economic Substance
Singapore
Barnes (US)
Bermuda
U.S.
$
$
$
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November 2013 U.S. Tax Seminar
PwC
Recent Cases Creditable Windfall Profits Tax
PPL Case
• Special tax imposed by the U.K. government (Windfall Profits Tax) is creditable for U.S. tax purposes, even though it is technically levied on a gross basis!
• U.S. / Israel Treaty – creditability of “Profit Tax” under the VAT regime.
Purchase price
Creditable Windfall Profits
Deemed Sale price
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November 2013 U.S. Tax Seminar
PwC
U.S.
Recent Cases Transfer Pricing - Secondary Adjustments
BMC Software Case
• Secondary Adjustment due to Transfer Pricing compliance might have adverse implications
Secondary TP Adjustment
TP Adjustment
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November 2013 U.S. Tax Seminar
Royalties
Israel IP
PwC
Legislation (Pending & Proposed) Transparency and Fairness Initiatives
1) Dodd Frank Act – U.S. (currently in legislation process)
• Oil, gas and mining (Extractive Industries)
• Listed companies (SEC)
• Disclosure of payments to governments by project (e.g. royalties, dividends, etc.)
2) Stop Tax Haven Abuse Act 2013 - U.S. (proposed legislation) – Senator Levin
• Applicable to SEC registrants
• Public disclosure of taxes paid per legal entity
3) Other major transparency initiatives worldwide
• BEPS Action Plan (by OECD)
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November 2013 U.S. Tax Seminar
PwC
Recent Tax Legislation IRC Section 304 - Anti-abuse Regulations
• Re-characterization of sales transactions between related corporations as a redemption of stock => often treated as equivalent to a dividend distribution
• Intended as an anti-abuse provision but often serves as a powerful planning
tool!
• Potential abuse:
Distribution (dividend)
sale
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November 2013 U.S. Tax Seminar
No E&P
Israel
Subsidiary #1
(U.S.)
Subsidiary #2
(U.S.)
Subsidiary #2
(U.S.)
New Co (U.S.)
Positive Earnings
and Profits (E&P)
No E&P
PwC
Points for Attention
Alternative #1: Distribution
Functions
Alternative #2: Services
Employees / Executives
Stock Options
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November 2013 U.S. Tax Seminar
Transfer Pricing Considerations
Deferred Revenue
Stock Option Compensation
Israel
U.S. Customer Cash
PwC
Points for Attention
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November 2013 U.S. Tax Seminar
• FBAR – Electronic filing
• FATCA update
• New IDR
• Increase audit to partnerships
State Tax Developments
www.pwc.com
PwC
State Tax Developments “Amazon Law” - Sales Tax
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November 2013 U.S. Tax Seminar
PwC
Trends – Click-Through Nexus
Amazon Law
Overstock.com vs. New York Department of Taxation & Finance - New York Appeals Court upheld Amazon decision
Solicitation vs. advertising?
Roughly 20 states have proposed similar type laws, so NY’s ultimate decision can have a significant impact
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U.S .Tax Seminar November 2013
PwC
Trends – Higher Rates, Higher Burden
Sales Tax Rate Increase
• The city rate increased from 1.68 percent to 1.75 percent.
• The county rate rose from 1.15 percent to 1.245 percent.
• The state rate went from 5.48 percent to 5.615 percent.
Marketplace Fairness Act
• Sales tax collection requirement for remote (i.e. out of state) sellers
• Major impact on internet sales
• Passed by Senate, awaiting House review
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November 2013 U.S. Tax Seminar
PwC
Sales and Use Tax Technical Aspects: Acquisitions
• Stock Purchase – Generally, the term ‘tangible personal property’ shall not include stocks, bonds, notes, insurance or other obligations or securities.
• Asset Purchase - Sales and use tax is imposed on the retail sale of tangible personal property and certain enumerated services.
• 338(h)(10) election – Florida, New York, Virginia, Wisconsin are the only states to date which have explicitly exempted the transaction from tax
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November 2013 U.S. Tax Seminar
PwC
Income Tax Trends - Market-Based Sourcing
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Benefit Received
Services Received
Services Delivered
Other
DC
AK
HI
ME
VT NH
NY C
T
PA NJ
DE
VA WV
NC
SC
GA
FL
IL OH
IN
MI WI
KY
TN
AL MS
AR
LA TX
OK
MO KS
IA
MN ND
SD
NE
NM AZ
CO UT
WY
MT
WA
OR
ID
NV
CA*
MA
• States are gradually moving towards market-based sourcing
• Double Taxation
November 2013 U.S. Tax Seminar
PwC
Popular State Tax Credits
New Hire Credits
• California, New Jersey, New York, North Carolina
Investments in qualified property
• New Jersey, New York, North Carolina
R&D Credits
• Massachusetts, New Jersey, New York
Enterprise Zone Credits
• California, New York, North Carolina
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November 2013 U.S. Tax Seminar
PwC
State of the States – Proposed Legislation
Business Activity Tax Simplification Act of 2013
• Expand definition of Public Law 86-272
• Protected activities would include services (currently only tangible property is covered)
• Restrictions would be expanded to include business activity taxes (currently only net income taxes are included)
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November 2013 U.S. Tax Seminar
PwC
Points of Attention
Points to consider when determining PE vs. nexus:
• State adoption of U.S. income tax treaties
• Worldwide Income vs. Water’s-Edge Income
Example:
Co. ABC domiciled in Israel holds inventory on consignment in NY
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Israel Co. Israel Co.
Federal Tax Effectively Connected
Income
NY/NYC Tax Worldwide
Income
November 2013 U.S. Tax Seminar
PwC
Local Taxes to Consider
Many companies overlook taxes imposed by local jurisdictions as well as other non-income based (i.e. transaction taxes):
• New York City Commercial Rent Tax (tax on rented office space in Manhattan)
• San Francisco Gross Receipts Tax (replacing the city payroll tax which is being phased out beginning in 2014)
• City Income Taxes in Ohio (several hundred taxing jurisdictions), Kentucky, Michigan, and Oregon
• Use Tax due on purchases made from companies which are not required to charge sales tax
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November 2013 U.S. Tax Seminar
PwC
Tips & Considerations
Be prepared for audits!
• Sales Tax compliance (reseller/exemption certificates on file)
Minimize franchise taxes!
• Par-Value Capital Method allowed for Delaware Franchise Tax (gross assets-based instead of authorized shares)
Avoid worldwide profits from being taxed in California!
• Does Israel Co. generate revenues from sales to U.S.? Israeli Co. may not have nexus in the U.S. but it might be taxable in California if all of its sales are to the U.S.
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November 2013 U.S. Tax Seminar
PwC
Scope and Limitations
The information contained in this presentation is for general guidance on matters of interest only. As such, it should not be used as a substitute for consultation with professional tax advisors.
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding any U.S. federal, state or local tax penalties.
Circular 230: this document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on the taxpayer.
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November 2013 U.S. Tax Seminar
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This publication has been prepared for general guidance on matters of interest only ,and does not constitute professional advice. You should not act upon the information
contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of
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liability ,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for
any decision based on it.
©2013 Kesselman & Kesselman. All rights reserved.
In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers Internationa l Limited, each member firm of which is a
separate legal entity.
Thank you!
Ron Mazurik, Senior Tax Manager, PwC Israel
03-7954471
Alon Sherer, Senior Tax Manager, PwC Israel
03-7954520
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