The recently enacted 2017 tax reform act imposes a new “base erosion and anti-abuse tax” (BEAT) on large corporations. The BEAT operates as a limited-scope alternative minimum tax, applied by adding back to taxable income certain deductible payments made to related foreign persons. Although positioned as an anti-abuse rule, the BEAT presents challenges for a wide range of common business structures employed by both non-US-based and US-based multinationals.
Jonathan Lockhart focuses his practice primarily on international tax planning and controversies. Jonathan helps clients structure international acquisitions and reorganizations in a tax-efficient manner, as well as with foreign earnings repatriation, foreign tax credit planning and intellectual property migration. Read Jonathan Lockhart's full bio.
The Internal Revenue Service (IRS) currently offers non-compliant US taxpayers several different relief programs in which to report foreign assets and/or income and become compliant with US rules related to the disclosure of foreign assets. One option is the Offshore Voluntary Disclosure Program (OVDP). Another is the Streamlined Filing Compliance Procedures (SFCP). SFCP is further bifurcated into two sub-programs—one for US residents (Streamlined Domestic Offshore Procedures or “SDOP”) and one for non-US residents (Streamlined Foreign Offshore Procedures or “SFOP”). Each program has its own set of tailored procedures and eligibility requirements.
The critical differences between OVDP and SFCP are: (1) the non-willfulness requirement; (2) the look-back period; and (3) the amounts of penalties the US taxpayer must pay. Specifically, OVDP does not require the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful. On the other hand, SFCP requires the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful and to also include a narrative explaining such non-willful conduct. The incentive to demonstrate non-willfulness can be significant. In general, US taxpayers who enroll in OVDP must pay a 27.5 percent penalty (and in some cases a 50 percent penalty) of the highest aggregate value of undisclosed foreign assets for the OVDP disclosure period (eight years). However, US taxpayers who enter SDOP must only pay a five percent penalty of undisclosed foreign assets during the disclosure period (three years), and US taxpayers who enter SFOP pay no penalty. Continue Reading Offshore Voluntary Disclosure Update
As we discussed here, and in our recent article in The Federal Lawyer, deference to Internal Revenue Service (IRS) pronouncement is an important issue for taxpayers and their advisors. Our prior writings dealt generally with the three levels of deference in tax cases and how they have been applied by the courts. A recent Tax Court case looks at the level of deference owed to statements in preambles to tax regulations.
In Estate of Morrissette v. Commissioner, 146 T.C. No. 11 (Apr. 13, 2016), the taxpayer cited to the preamble to regulations dealing with split-dollar life insurance arrangements. Those regulations dealt with two mutually exclusive regimes for taxing these types of arrangements entered into after September 17, 2013. The preamble to the regulations included an example that was structurally identical to the arrangements at issue in the Tax Court case. In reviewing the preamble, the court noted that while it had previously been unpersuaded by a preamble, it believed that the preamble was a statement of the IRS’s interpretation of the statute and therefore should be judged under the “power to persuade” standard in Skidmore v. Swift & Co., 323 US 134, 140 (1944). The Tax Court found that the preamble was consistent with the taxpayer’s interpretation of the statute and contrary to the IRS’s position, and found the logic of the preamble to be sound.
The Tax Court’s statements regarding Skidmore deference are important for taxpayers, both in planning and defending transactions. In prior cases, the Tax Court has held that the IRS is “obligated to follow” its “published administrative position” and treated such positions as a concession as to the proper result, e.g., Dixon v. Commissioner, 138 T.C. 173, 188 (2013). A preamble to a regulation could be viewed as a published administrative position, given that it is part of a Treasury Decision that is published in the Internal Revenue Bulletin and the IRS’s position is that the Internal Revenue Bulletin is the “authoritative instrument of the Commissioner.” Treas. Reg. § 601.601(d). It is unclear whether the taxpayer in Estate of Morrissette argued that the IRS was obligated to follow the preamble.
Taxpayers that wish to rely on preambles to regulations, or that are defending against an IRS position based on a preamble, need to be aware of these arguments in planning and defending their transactions. To the extent the preamble is supportive of a position and contains a persuasive and sound analysis, one could argue that Skidmore deference applies. Under this argument, the IRS should not be able to disavow its interpretation of a statute or regulation. Additionally, taxpayers may wish to argue that under the principle announced in Dixon and prior Tax Court cases, the statements in a preamble constitute a concession by the IRS to which it is bound. A similar analysis should be undertaken if the preamble is contrary to the taxpayer’s position.
On April 3, 2016, the International Consortium of Investigative Journalists (ICIJ) indicated that it acquired sensitive documents that belonged to the Panamanian law firm, Mossack Fonseca & Co., about the offshore holdings of some of the world’s most prominent and wealthy individuals. The leak has received substantial mainstream media coverage due to the identity of the individuals named.
To date, the ICIJ has not released the identities of all of the hundreds of thousands of offshore entities or the persons related to those entities, which were referenced in the leaked documents. The ICIJ indicated that it would wait until May 2016 to release the full list. By waiting to May, the ICIJ is putting certain US persons on notice that they should consider starting the process to disclose previously undisclosed foreign assets to the Internal Revenue Service (IRS).
The United States subjects US persons to worldwide income taxation. As part of this taxing system, the IRS requires US persons to fulfill certain information reporting obligations related to foreign assets. For example, US persons must report a financial interest or signature authority over a foreign financial account on FinCEN Form 114, Report of Foreign Bank and Financial Account (FBAR). Non-compliance may result in a penalty of up to 50 percent of the highest aggregate value of the foreign financial account as well as criminal sanctions if done so willfully.
The IRS has implemented programs to encourage previously non-compliant US persons to disclose foreign assets and become compliant. One such program is the Offshore Voluntary Disclosure Program (OVDP). OVDP is designed for taxpayers who may have willfully failed to disclose foreign assets to the IRS. The primary benefits of participating in the OVDP are that the IRS will not recommend criminal prosecution to the Department of Justice (DOJ) for non-compliance up to the date of the disclosure and the taxpayer will no longer be subject to civil examination for the years covered by the OVDP disclosure. Continue Reading Release of “Panama Papers” May Encourage New Wave of OVDP Submissions
The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP). One requirement under the SFCP is that that the taxpayer certify that his or her failure to disclose foreign assets was not due to willful conduct. Before the recent change, the IRS only provided minimal direction, which caused it to receive non-willfulness narratives that did not provide adequate information. This resulted in certifications that were either questioned or rejected.
On February 16, 2016, the IRS revised the certification forms to include more robust direction and instructed the taxpayer to draft his or her non-willfulness narrative to include the whole story including favorable and unfavorable facts. A more detailed analysis of the recent changes can be found here.